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In the name of Allah,the most beneficent,the most merciful.
FOREIGN AID
Ma’am Quairat-ul-Ain Beenish
Group Members
Muhammad Munair
BT-04-07
Kanwer Ahmad Ali
BT-04-30
Foreign Aid (FA)
FA occurs when recipient country receives additional resources in foreign currency over and above the capacity to import generated by exportsThe debt which is given by a country on the concessional rates.The concessional elements may be:
Lower rate of interestLonger period of repaymentsGrants
Definition in term of officials data.
“All kinds of resources inflows that are publicly granted and are made either from government to government or from financial institutions to a government.”
Resources inflow
Publicly granted
From government to government
From financials agencies to government
Economic aid(used for economic purposes)
Donor: The country which gives loan/ aid.
Recipient: The country which receives the loan/aid
Forms of Foreign Aid
Financial Aid
Commodity Aid
Food Aid
Technical Aid
Emergency aid
Double Tied Aid
Financial Aid
Tied AidUntied AidGrantsLoans
FINACIAL AID
UNTIED AID GRANTS LOANSTIED AID
NATION TIED PROJECT TIED SOFT LOANHARD LOAN
Tied Aid
Tied aid means that the donor country requires the recipient country to spend it on a specific project or buy resources from specific country.
Nation Tied
Project Tied
Untied Aid
FA which is not Tied to any project or nation is untied aid.
Much desired by Recipients.
LDC do more efficient use of financial resources.
Grants
A grant is that form of FA which does not entail either the payment of principal or interest.
Free gift from govt. to govt.
Free gift from an institution to govt.
Mostly desired because it increase Expenditure and generate Income.
Humanitarianism bases
In 1956-65 73%
now only 0.2%
LOANS
It is borrowing of foreign exchange by the poor country from the rich country to finance the short term or long term projects.
Hard Loans
Soft Loans
Hard loans
Also called short term loan
Paid in currency borrowed
No concessional element (but interest rate is usually lower then market rate)
Usually for 5 year duration
Soft Loans
Also called long term loan
Repaid in the currency of recipient country
Interest on soft loan are lesser than hard loan and often involve grace period
Usually for 10-20 years
Commodity Aid
A type of tied aid which relates to agricultural products, raw materials and consumer goods
AdvantagesIt help in controlling famine.
Tempo of industry is maintained by providing raw material.
DisadvantageIt is not in the form of cash.Commodity aid has depressing effect on agricultural prices
in recipient country.Donor country have more Political Influence on the
recipient Country
Food Grain Loan
Loan which is given in the form of Food Grains
e.g. US give food grain to poor country under Public Law(PL 480) and fund obtain from it are used on American Companies and Agencies working in Recipient Countries and rest of funds are Granted
Commodity Aid to Pakistan
Second Largest component in different types of aid. But ratio decreases from 34% in 1960-65 to 23% in 1979-80
Food Aid
Food is given to countries in urgent need of food supplies, especially if they have just experienced a natural disaster.
Critics Increase Dependence
Promote Waste
Availability to Needy
Dampens the local food production
Food Aid to Pakistan
Third largest Component of aid
Provided by USA Govt. to Pak Govt.
From Wheat to Edible Oil
Funds Generated by these trade are control by US Aid Mission in Pakistan
Technical Aid
Technical assistancePeople are recruited in Donor country for service overseas.
Scholarships and training facilities provided in donor country from recipient country
e.g. Army Expertise, Post Office Services
It is a tied aid in which training facilities are provided by the donor country and it bears all the expenditures involved in the training of advisory technocrats
Drawbacks
Heavy influence of Donor CountryModern technology favor by expertise whether it is appropriate or notIndigenous technology may be affected Creation of Bangladesh due to Influence of Harvard Advisory Group during Second Five Year Plan
Emergency aid
This is given to countries in the event of a natural disaster or human event, like war, and includes basic food supplies,clothing and shelter
Double Tied Aid
It is also called as procurement tied aid. It is the aid which is tied both for projects and as well as for resources
Foreign Direct Investment (FDI)
It basically refers to the amount of foreign exchange invested in a particular country by other countries corporation and businesses
Foreign investment basically refers to the
amount of money & machinery injected in a
country market by the multinationals.
Foreign Direct Investment (FDI)
FDI is much cheaper for recipient country
FDI brings technical know-how and modern technology in developing countries
CriticsProfit outflow may exceed the amount of repayment for loans
Technical knowledge can purchased on commercial basis
Examples
• Lever Brothers
• ICI
• Pepsi
FDI CONTROL
It should be licensed.
It should be taxed more than domestic investment and proper audit.
All abroad payment should be controlled or limited
Reinvested capital should be considered as domestic capital.
TYPES OF AID
Bilateral Aid: The aid which is given from the government of the donor country to the recipient country is called bilateral aid.
Depends upon political and economic relationship of various countries and it also depend upon the will of donor country.
TYPES OF AID
Multilateral Aid:Aid given by certain financial institutions,agencies or organizations to the government of low developed country (LDC)
e.g. World Bank,IMF, European Development Fund, United Nations
Usually these organizations are governed by major donors.
Aid to Pakistan
Why donor give aid
Not without any corresponding benefits
Political motivationEconomic motivationEconomic motivation and self interest
Political motivation
Marshall plan (Reconstruction of western Europe)
Shift in Cold War toward LDC’s
Security Issue
Shaky Regimes
FA used as political lever to Prop up Friendly Regimes
Anti Effects
Fidel Castro in Cuba
Threat of Communist in Latin America
Losing importance of Security issue
War against Vietnam,dollar crisis and increase in domestic violence
People’s view is changing
Economic Motivation
Foreign Exchange ConstraintsTwo Gap Model Saving Gap Trade Gap
Growth And SavingTechnical AssistanceAbsorptive Capacity “the ability of a country to absorb the foreign
assistance to use the funds in a wisely and productive manners”
Economic Motivation & Self-Interest
Shifting in Trend of Grants toward Loan(80% to 40% )
Debt repayment burdens increase
Biggest Misconception US aid Official view British Minister View
Why LDC recipient accept Aid
Three reasons(1 major, 2 minor)Economic Growth Taught in University Courses by referencing
Success Examples(Taiwan, Israel. South Korea). Conflicts on from of aid not on role of aid.
Political view Financial Aid Military And Internal Security Stop Opposition Resistance
Continue…….
Moral View Past Exploitation Obligation of Rich country to support the
Third World Countries.
The effect of aid
Two views Economic traditionalist Rationalist view
Economic Traditionalist
Promote Growth
Structural Transformation
Help in BOP, Inflation,
Govt. Deficits
Employment
Rationalist
Substituting effect on Domestic Savings & Investment
Increase BOP & Debt
Growth of Modern Sector
Change in Living Standard
Increases the Gaps(Saving, Foreign Exchange, Urban-Rural/Modern-Traditionalist )
Two Gap Model(TGM)
Hollis Chenery & A. Strout.
Saving & Foreign Exchange Gaps
Foreign Aid as an Instrument to achieve the target growth rate.
Model Based on three stage toward Growth
Absorptive CapacitySaving GapTrade Gap
Process of Substantial Growth
Absorptive Capacity
Saving Gap
Trade Gap
•Funds for Developmental Projects• Aid for Saving Deficits
•Funds for BOP• Raw Material• Modern Machinery• Foreign Exchange
• Technical Assistance• Training, Education• Managerial Ability• Entrepreneurial Talent
FA
FA
FA
Pledges:A pledge is a promise by the donor to
advance a specified amount of FA
Commitment:It implies the allocation of FA by the donor
for specific projects or programmes
Disburdenment of Aid:It mean the transfer of resources to
recipient from donor
Utilization of Aid:The actual implementation of FA financed
projects
Critical AppraisalTGP doesn’t include the Debt Servicing Charges & Term and Condition attached to aid.TGP doesn’t consider the Absorptive Capacity of the EconomyTG analysis is high aggregative approach which treats all types of capital investment as homogenousLDC’s which have dominant saving constraint do not need foreign aidCountry cant follow the export promotion and import substitution policiesConsider the parameters having stable value in future which is not possible
TGP & Pakistan
Absorptive Capacity is not applicable in Pakistan
Saving & Net Inflow of Capital has negative Correlation
Trade Gap is increasing due to imports of new machinery and other commodity goods