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Foreign Aid: Does it promote growth or is it ineffective in promoting growth - Essay Example

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 This paper examines whether foreign aid promotes socio-economic growth and development. It presents the argument that it does promote growth as well as the argument that it is ineffective in promoting growth. The short case study of Pakistan to illustrate the points raised.  …
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Foreign Aid: Does it promote growth or is it ineffective in promoting growth
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Download file to see previous pages The donors are usually wealthy countries or multilateral institutions such as the International Development Association and the World Bank and NGOs, and the recipients are usually less developed countries that need external help for supporting their growth. A significant and influential study that showed foreign aid to have a positive impact on growth in LDCs was conducted by Burnside & Dollar (2000). However, they also mentioned the need for good fiscal, monetary and trade policies for the impact to be effective. On the other hand, its inability to impact positively on growth is usually given as the main reason for not recommending the practice. The rationale for giving foreign aid The traditional rationale behind giving foreign aid has been that it helps to close the ‘finance gap’. This gap is the difference between the amount of investment required for a specific economic growth rate, and the amount of domestic resources available from savings and private financing (Rao, 2003: 102), or put simply, between planned investment and available savings. The situation in which a finance gap exists is created when there is a lack of physical and human capital. The finance has therefore mainly been directed at large-scale infrastructural projects, as recommended in the Harrod-Domar model for promoting economic development (Picard et al., 2007: 10). Furthermore, the assumption made is that the aid takes the place of the gaps in investment the magnitude of which is directly proportional to economic growth (Rao, 2003: 102), which is questionable. The giving of foreign aid also promotes social interaction between nations. It is a useful means for the redistribution of wealth so the practice has an ethical dimension too. The surplus generated by richer economies can be used to help the poorer economies as a moral responsibility. For the latter, it could be a very important source of finance “to tide over financial crises, enhance economic development, [and] promote economic integration with the global economy” (Rao, 2003: 97). Foreign aid, therefore, deals with the problem of poverty with the aim of helping to generate growth in struggling economies. The Millennium Development Goals announced by the U.N. in 2000 had this specific objective of overcoming poverty to encourage foreign aid flows (Isard, 2006: 219). The idea is therefore benevolent but it only works if the aid is firstly channeled properly and secondly only if it is utilized efficiently. The alternative to foreign aid for recipient countries would normally be to acquire foreign debt or else linger with the financial deficiencies. Foreign aid can, therefore, prevent or alleviate the long-term problems associated with debt financing. Countries with lack of finance can thus continue to engage in developmental projects without the worry over affording the costs. At the same time, the giving of foreign aid could also benefit the donors as a means of marketing their products and services. It can, therefore, be a mutually beneficial practice to promote growth in both the donor and recipient countries. Objections and complications with giving foreign aid, On the other hand, others view the giving of foreign aid negatively.   ...Download file to see next pages Read More
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