Question

“It is to perpetuate difficulties of the South for the North to relate to us as hapless victims to dictate to regarding loans and the employment of aid” (the late Nelson Mandela, United Nations Social Summit, March 1995, cited in Todaro and Smith, 2011, p. 684).

1. (a) How important is foreign aid for developing countries in relation to other sources of foreign exchange?
2. (b) Under what conditions and terms do you think developing countries should seek and accept foreign aid in the future? If aid cannot be obtained on such terms, do you think developing countries should accept whatever they can get? Explain.
3. (c) What are some of the important areas that foreign aid and foreign investment can be used in developing countries to assist the needs of these countries?

Give examples to support your answer.

Answer 1

a) Foreign aid is of immense importance to developing countries in the following ways:

• It helps in increasing the physical capital accumulation in the developing countries resulting in economic growth.
• It helps in filling the saving gap in the developing countries.
• With the help of foreign aid developing countries can import capital goods.
• Foreign aid helps the developing countries in technological advancement and development of managerial skills which result in efficient production and fulfillment of human capital gap.
• Foreign aid helps in providing funds to developing countries which are necessary for economic growth.

b) Aid should be accepted by developing countries on following conditions:

• The transaction costs involving aid should be borne by the donor country.Example There are more than 100,000 foreign advisers resident in Africa , costing aid budgets a little under $10 billion. A lot of expenditure is incurred on meeting the conditions attached to these aids . As a result the overall benefit achieved is much less.
• The other condition is related to consistency in receipt of aids by the recipient country.It is difficult to predict whether aid will be given by the donor every year as promised.Sometimes aid is withheld because the policies or actions of the recipient have deteriorated significantly.Sometimes aids are stopped because certain conditions have not been met or accounts have not been submitted.
• The aid should not be accepted if wrong conditions are imposed. Example The donor country may be interested in constructing a bridge in recipient country. It may ask the country all the construction material will be purchased from donor country only even if it is costly for the recipient country.Other conditions could be like increasing private involvement in the provision of public services, or reducing public sector deficits.
• The aid should not be accepted if it intervenes with the working of government. Sometimes conditions are imposed that resource allocation, accountability and fund allocation will be done by finance ministry and not by government. In that case the donor country may partner with some corrupt finance ministers and misuse the funds.

c) Following areas can be benefited by foreign aid and foreign investment in developing countries:

• Foreign aid can help in fighting dreaded diseases like AIDS, earthquake disasters or other natural calamities.
• It can help in economic growth by boosting saving , investment and increasing capital stock of developing country.
• It can lead to market expansion.Providing aid to a country could mean the expansion of goods and resources that can be shared between the two countries. This can attract new investors into the country.
• FDI help in providing permanent source of employment and raising the standard of living in the company. Example A big industrial unit can be set up which will improve the technology capital as well as provide employment to large number of people.
• Foreign aid helps farmers to teach them how to use resources and cultivate land properly to grow more food and crop.
• It helps in developing healthy political relations between donor and recipient country.
• It helps in removing poverty by providing new sources of income and raising the standard of living of people.