Foreign aid for development assistance

FOREIGN AID FOR DEVELOPMENT ASSISTANCE

Introduction:

Foreign aid means any aid offered by one nation to another in the form of capital transfers or technical assistance and training for either civilian or military purposes, transfer of capital, goods, or services from one country to another. Foreign aid is often given with conditions attached, such as the requirement that all or part of be used to buy goods from the donor country. Foreign aid means economic, technical, or military aid given by one nation to another for purposes of relief and rehabilitation, for economic stabilization, or for mutual defense.

Discussion:

Foreign aid or (development assistance) is often regarded as being too much, or wasted on corrupt recipient governments despite any good intentions from donor countries. In reality, both the quantity and quality of aid have been poor and donor nations have not been held to account.

There are numerous forms of aid, from humanitarian emergency assistance, to food aid, military assistance, etc. Development aid has long been recognized as crucial to help poor developing nations grow out of poverty.

In 1970, the world’s rich countries agreed to give 0.7% of their GNI (Gross National Income) as official international development aid, annually. Since that time, despite billions given each year, rich nations have rarely met their actual promised targets. For example, the US is often the largest donor in dollar terms, but ranks amongst the lowest in terms of meeting the stated 0.7% target.

Furthermore, aid has often come with a price of its own for the developing nations:

• Aid is often wasted on conditions that the recipient must use overpriced goods and services from donor countries
• Most aid does not actually go to the poorest who would need it the most
• Aid amounts are dwarfed by rich country protectionism that denies market access for poor country products, while rich nations use aid as a lever to open poor country markets to their products
• Large projects or massive grand strategies often fail to help the vulnerable as money can often be embezzled away.

What was to be the form of aid?

Financial aid will, in principle, be untied. While it may not be possible to untie assistance in all cases, developed countries will rapidly and progressively take what measures they can … to reduce the extent of tying of assistance and to mitigate any harmful effects [and make loans tied to particular sources] available for utilization by the recipient countries for the purpose of buying goods and services from other developing countries.

Financial and technical assistance should be aimed exclusively at promoting the economic and social progress of developing countries and should not in any way be used by the developed countries to the detriment of the national sovereignty of recipient countries.

Developed countries will provide, to the greatest extent possible, an increased flow of aid on a long-term and continuing basis.

Countries giving aid could help by providing:

• Greater investment
• Greater debt relief
• Actually practice free and fair trade

Types of Foreign Aid

Foreign aid is the transfer of resources from a rich country to a poor country. It is subject to certain limitations, which generate various forms of foreign aid.

Financial Aid

The simplest form of capital inflow is the provision of convertible foreign exchange but very little foreign capital indeed comes to the under-developed world so conveniently. If any divergence from this form is described by saying that “strings are attached” then almost all foreign public capital has strings. Financial aid is divided into different sub-forms i.e.

Tied Aid

Tied aid is of two types. One is nation tied and the other is project tied. i. Nation Tied: Nation tied aid is given to a recipient country on the condition that it will spend it in the donor country to solve the BOP problems of that country and to stimulate exports. For example, if Pakistan is given aid by US and is asked to import raw material and machinery from US only, then it is nation tied or resource tied aid. ii. Project Tied: Project tied aid is given only for specific projects and the recipient country cannot shift it to another project. iii. Double Tied: When nation tied or resources tied and project tied are combined then it is called double tied aid.

Untied Aid

Foreign aid, which is not tied to any project or nation, is called untied aid. It is in all respects, better than the tied aid because it offers more efficient use of foreign resources. Untied aid is much desired because the recipient country is not bound to spend foreign resources on specific projects in the donor country.

Loans

It is borrowing of foreign exchange by a poor county from a rich country to finance short term or long term projects. These are sub-divided into two types subject to this criterion: i. Hard loans ii. Hard loans are given in order to finance industrial imports and are given usually for a period of five years or less. It contains no concessional elements but interest rate is usually lower than t6 IPRI Journal prevailing rate in international market. The grace period is very much limited, penalty is paid after expiry of stipulated time period. iii. Soft Loans Soft loans are normally given for 10-30 years. Interest on these loans is less than hard loans and often these loans involve a grace period. Concessional elements are comparatively greater.

Grants

A grant is that form of foreign aid, which does not entail either payment of ihe principal or interest. It is a free gift from one government to another or from an institution to a government. It is much desired because it increases internal expenditure and generates income. It is given on a humanitarian basis, especially in times of emergencies, earthquakes, floods, wars or other special purposes. During 1956-65, the grant component of foreign aid to Pakistan was 73%, which has been reduced to only 0.2% in recent years.

Commodity Aid

It is another type of tied aid, which relates to commodities such as agricultural products, raw materials and consumer goods. It helps in controlling famine and maintaining the tempo of industries by providing raw materials to the industrial sector. It would be more helpful if it is provided in cash form because a country can then buy more commodities from cheaper sources. Commodity aid some times has a depressing effect on agriculture prices in a recipient country, so it serves as a disincentive for the agriculture sector. The donor country may have much political influence on a recipient country. A spend type of commodity aid is a food grain loan, which is given in the form of food grains. For example, US gives food grains to a poor country under Public Law (PL 480) and the funds obtained from it are used on American companies and agencies working in the recipient countries. The rest of the aid is granted.

Technical Aid

Technical aid is tied aid and is useful for a recipient country as it increases the pace of economic development by using modern technology in some specific sectors of the economy. Under this aid programme , training facilities are provided by the donor country, which bears all the expenditures involved in the training of advisory technocrats. Technical assistance from donor’s point of view has two main forms. First, people are recruited in the donor country for service overseas partly, often largely, at the expense of the donor government. Secondly, scholarships and training facilities are provided in the donor country.

Conclusion :

From the above discussion we can say that foreign aid is very essential for the growth and development of an economy. Foreign aid, has been responsible for a great deal of the progress in lessening poverty, disease, and illiteracy, indeed may have stopped that gulf from being even wider. Foreign aid promotes and enhances economic and social progress of a country. Foreign aid is a necessity to the developing countries for their socio-economic and political development at individual as well as societal level.

SUBMITTED BY:

Navdeep Hans

( MBA- 1 -b)