Economic Development of Less Developed Countries - Essay Example

Introduction The endeavors on the part of developed countries to enhance the prospects for economic development in the less developed countries playa crucial role in shaping the direction of these economies. Assistance provided by these countries mostly takes the form of aid or trade openness. While protectionist developed countries are reluctant to open their borders to exports from these developing countries and opt for provision of aid, both of them have a significant impact on the beneficiary's economic condition, albeit not necessarily a positive one. The question concerning the most effective measure among these two in promoting the economic development of less developed countries remains to be very significant. Because of donor conditions and policies that can be imposed on these countries, the receipt of aid can significantly alter their economic and political policies. This paper sheds light on the controversy of aid versus trade in promoting the economic development of less developed countries. Also, it highlights the role that should be played by developed countries to enhance the growth prospects for developing economies. Aid Versus Trade: Economic Development Of Less Developed Countries The ever-widening gap between the developed and underdeveloped countries in the world led the developed and industrialized countries to assist the less developed countries economically and financially either by means of foreign aid or open trade so as to accelerate their economic development. The fact is evident that most industrialized countries have been reluctant in using trade as a measure to enhance the economic growth of developing countries. Developed countries support the provision of aid to developing countries more than they opt for openness of trade. As stated above, the major cause driving the provision of assistance to the less developed countries whether in the form of aid or trade is supposed to be the economic development of the recipient country, however the effectiveness of both these measures in actually doing so remains to be a debatable issue. Developed countries can play a considerable role in the economic development of less developed countries by opening trade or lessening trade barriers for them. Trade preferences are also used by developed countries to encourage imports from less developed countries especially those with poor economic conditions. Adam and O'Connell suggest that, " tariff preferences unambiguously deliver higher welfare than the equivalent pure grant" (157). However, advanced countries prefer aid to freeing of trade policies for developing countries in order to protect their domestic companies from foreign competition. Also, on the other hand, provision of aid protects several other interests of the donor country that will be touched upon later in this paper. Effectiveness of aid over trade and vice versa for bringing out economic development in the less developed country depends upon a number of factors. For instance, increase in the exports of developing counties happens to be the most important element for the rapid growth in economy as it improves other economic indicators such as National Income, GDP and savings etc. Aid, on the other hand enhances consumption and reduces savings in the recipient economy (Papanek 948). Intrinsically, openness of trade policies on the part of developed countries put a positive impact on the growth of developing countries' exports that works as a driving force for the development of a country's economy. Adam and O'Connell indicate this point as " the form in which foreign transfers are provided affects the recipient's export incentives. Open preferences drive exports up; grants drive exports down" (165). The negative impact of aid on exports and savings consequently does not tend to put positive impact on the overall economic growth of the developing countries. Significance of aid for economic development is although arguable on the grounds that much of the growth demonstrated on the part of the less developed countries from 1950-80 had been possible because of foreign aids provided to them on giant projects. An example can be the provision of financial aid by Soviet Union to China during 1950s for training of a great number of the countries' youth and students. The aid called for Chinese students to obtain training in Soviet universities and factories. This sort of aid significantly steered the Chinese economy to the magnificent growth it exhibited during that period because the provision of aid did not intervene into the Chinese economic and political policies (Singh 298). The provision of aid during that period was therefore largely meant to enhance the economic development of less developed countries. Another important point is that the grant by Soviet Union was successful in delivery economic benefits to China because it did not ask the Chinese government to forego its economic and political autonomy. In the post 1980s period, the shift to aid policies had severely unfavorable impact on the economies of developing countries. For instance the debt crisis of sub-Saharan Africa and Latin America that was called forth by the conditional debt policies and monetarism by the United States in 1980s. The shift in aid policies of United States and IMF severely shocked the economic development of developing countries. The demise of Soviet Union in the 1990s further led the United States to aggravate the conditions on the aids provided to the developing countries (Singh 299). Hence, the effectiveness of aid towards economic development is largely dependent on the conditions attached with the aid provision. The interests of donor countries usually determine the extent and direction of conditions that are imposed to the recipient countries. Boyce says that, "On the donor side, the quantity and quality of aid are shaped by the contending economic, political, and institutional objectives of government agencies and their domestic constituents" (239). This is where the aid fails to drive the economy of developing countries towards growth. Traditionally, aid has been used by the developed countries as a means to establish their influence over the recipient countries. For example, three major aid providers about half a century ago i.e., the US, the UK and France exploited their loan provisions to meet their geopolitical interests. The United States allocated most of its aid to Taiwan and South Korea in order to combat Soviet influence at the end of the Korean War. In the same vein, France targeted French speakers and Britain aimed Common wealth members for the provision of loans (Therien 454). Aid becomes ineffective in eliciting the desired economic benefits to the developing countries because it is seldom meant to do so. The notion of national security greatly determines the United States' provision of loan to the developing countries. For instance, on the Middle Eastern instability agenda, countries like Israel, Jordan and Egypt remain as the largest recipient of the US aids. Japan transfers more financial assistance to the Asian countries with commercial interests (Osborne 306-7). Hence, if aid is tied to the fulfillment of certain obligations on the part of the recipient countries rather than the extent of the country's need for funds, it is not supposed to be economically beneficial for the country. Osborne says that, "if aid is particularly not given with an intention to foster economic growth, it is perhaps not surprising that it does not achieve it" (307). Aid therefore does not only serve as a transfer of benefits in the form of cash or resources to the recipient country, rather it acts as a reward to those countries who comply with the policies of donor countries. Hence, it can be said that aid to developing countries is mostly not directed towards specific economic objectives. Boyce propounds that, "instead of viewing aid as a flow of resources from donor countries' to recipient countries', we must reframe the discourse and practice of aid to ask the critical questions: aid from whom, aid to whom, and aid for what ends" (245). For instance, a donor may ask the recipient country to open its borders for free trade while protecting the donor's domestic industries. This will increase imports, which can consequently lead to further deterioration of recipient's economy. Most of the time, aid is tied to such conditions that force the recipient countries to bear costs even higher than what they actually receive from donors. Trade is more effective than aid for the economic growth of developing countries because it makes the aid-receiving country economically dependent on the funds provided by the donor. Therien mentions this point as, " like any state intervention in the economy, aid distorts markets and creates a climate of dependency that inhibits entrepreneurship" (460). Trade, on the other hand, by opening doors of more exports urges the developing countries to promote entrepreneurship and production capabilities so as to earn more foreign exchange. Trading with advanced countries also enhances the quality of the products produced in less developed countries, thus making them economically self-reliant rather than dependent on the aid provided by the developed countries. Aid has also not proved to be efficient for the countries that are heavily dependent on donor funds. For example Africa has been the one of the largest recipients of foreign aid yet it exhibits a poor rate of growth. This demonstrates the ineffectiveness of aids in promoting economic progress in developing countries (Hagen 172). Adam and O'Connell (168) argues that, "for many African countries, donors may be able to improve the development effectiveness of aid by shifting from aid to trade". By enhancing trade capabilities of less developed countries, donors will be able to see their economic growth by means of increased exports, savings and production capabilities. Furthermore, the restricted trade policies and trade barriers on exporting goods to the developed countries bear high costs for the developing countries. Hence, if these countries receive aid to enhance their production capabilities and then export to developed countries, they are likely to confront with trade barriers that aggravate the cost to the extent that it even exceeds the aid provided to them. Therien points out that, "the protectionism of the developed countries entails an annual cost of around US$100 billion for the developing countries, that is, much more than the total volume of aid" (459). Hence, developed countries mostly recover the amount offered in aid through barriers imposed on less developed countries' exports. These countries may also force the recipient country to import goods from donor's country as a condition imposed on the aid. Developed countries also provide assistance to the less developed countries by means of trade preferences. Trade may also not lead to the economic growth of less developed countries if it is not backed by the intentions of developed countries to actually achieve this goal. Panagariya argues that trade preferences might lead to debilitate further the exports of beneficiary countries. Trade preferences allotted to developing countries on the basis of side conditions also come with significant uncertainties for the exporters of developing countries. The author says that, "the benefit may be withdrawn any time on the pretext that a specific standard is not being fulfilled" (1429). For example, the United States ceased to continue the trade preference provided to India on the exports of pharmaceuticals and chemicals on the pretext of a lack of intellectual property protection in the country (Panagariya 1429). Role Of Developed Countries For The Economic development of Less Developed Countries Developed countries can and should play a significant role in the economic development of less developed countries. This calls for advanced countries to realize their duty towards the reduction of poverty in less developed areas of the world through adopting the most effective measure that could enhance these countries' economic development and growth capabilities. In this respect, Osborne comments that, "the most important thing rich countries can do to keep their markets open. Cash and project assistance is at best a distraction and quite possibly be harmful in terms of promoting prosperity" (314). Hence, the most efficient way the developed countries can assist the developing countries is through keeping an open trade policy particularly for developing markets. This will provide them with an opportunity to grow and become self-reliant through increased exports and achieve productive efficiency. Assistance in terms of aid can be ineffective in meeting desired economic objectives because it may reduce entrepreneurship and increase consumption in the economy. Even if a donor genuinely considers the provision of aid to be potentially beneficial for the recipient's economy, it should not tie conditions that are detrimental to the recipient's development. Furthermore aid should be directed towards the countries that are the most in need of it rather than the countries that are supportive of donor's political or economic policies. Degnbol-Martinussen propounds that, "aid should be seen as a catalyst and as co-operation aimed at bringing about the conditions for sustained economic and social development rather than as a reward for compliance with donor-recommended policies" (278). Unless the aid is specifically directed towards the recipient's economic development through proper policies and implementation, it is not likely to achieve these ends. One of the most important obstacles to the effectiveness of aid in delivering economic benefits to the recipient country is that the funds fail to reach the sector or people who should receive the aid. It is because in most of the developing countries, governments fail to allocate the funds received as aid to the most deserving sector. Also, in most of the societies some groups of people get more than they need leaving behind other deserving groups. Boyce mentions that, "the challenge for donors, therefore, is not to select countries that should receive aid, but rather to select who within the recipient countries should receive aid, and what policy objectives the donors should support" (242). It is very important to select to whom in the country should the aid be targeted for the aid to achieve the desired objectives. This can be done by providing proper guidance to the policy makers of less developed countries. Finally, developed countries should also realize that if aid can lead to the economic development of developing countries, it would also provide economic benefits to the donor. Singh (303) says that, "to the extent that aid, whether tied or not, helps to enhance the productive capacities in developing countries, it also benefits advanced countries through a positive feedback loop of increased imports from these economies". As the countries develop rapidly they will export more to the advanced countries so that they could meet any increased demand in these countries. Conclusion This paper discusses the impact of both aid and trade on the beneficiary country's economic development, and endorses the effectiveness of trade in meeting economic goals in less developed countries as compared to aid. Aid can lead to increase in consumption, aggravation of dependence on external funds and reduction of entrepreneurship. On the other hand, if aid is tied to some constraints or specific policies, it might lead the donor country to take undue advantage out of aid provision. Trade openness happens to a more effective measure to enhance the developing countries' economic development and self-reliance through increased exports, enhanced saving and improved production capabilities. It is also important to note that assistance whether in the form of aid or trade will only reap benefits for the recipient's economic development if it intended to do so. It will not achieve the desired outcomes if the donor regards the provision of aid as a means to obtain certain economic and political benefits. Works Cited Adam, Christopher S. and O'Connell, Stephen A., Aid Versus Trade Revisited: Donor And Recipient Policies In The Presence Of Learning-By-Doing, The Economic Journal, January 2004, 114: 150-173 Boyce, James K., Unpacking Aid, Development and Change, 2002, 33(2): 239-246 Degnbol-Martinussen, John, Development Goals, Governance and Capacity Building: Aid as a Catalyst, Development and Change, 2002, 33(2): 269-279 Hagen, Rune J., Marginalization In The Context Of Globalization: Why Is Africa So Poor Nordic Journal of Political Economy, 2002, 28(2): 147-179 Osborne, Evan, Rethinking Foreign Aid, Cato Journal, 2002, 22(2), 296-316 Panagariya, Arvind, EU Preferential Trade Arrangements and Developing Countries, The World Economy, 2002, 25(10): 1415-1432 Papanek, Gustav F., The Effect Of Aid And Other Resources Transfers On Savings And Growth In Less Developed Countries, The Economic Journal, September 1972, 82(327): 934-50 Singh, Ajit, Aid, Conditionality and Development, Development and Change, 2002, 33(2): 295-305 Therien, Jean-Philippe, Debating Foreign Aid: Right Versus Left, Third World Quarterly, 2002, 23(3), 449-466 Read More