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Contents Introduction 1 The Reasons for seeking foreign Aid The Benefits of Receiving Aid 3 Disadvantages of Foreign Aid

5 References: 8

Introduction Foreign Aid assistance is a provision of financial and physical forms of assista nce to the developing countries for strengthening their economies. Different terms of foreign economic assistance/loans are as under: 1. Bilateral aid means when one country provides loan to another country. 2. Multilateral aid, when loans or Aid is provided by international agencies suc h as World Bank, International Finance Corporation, I.M.F., International Develo pment Agency, Asian Development Bank, Islamic Development Bank, Pakistan Develop ment Forum. 3. Tied aid is given provided machinery or raw material is purchased from loan g iven country. 4. United aid is given without any pre-condition, borrower can use it according its needs and requirements and from any country. 5. Food aid is provided in terms of wheat, rice etc to overcome food shortage. 6. Technical Assistance is consultancy services, technical expertise and install ation of heavy projects etc. 7. Grants are given on humanitarian grounds for help in famine, floods and earth quake, which are not to be repaid to donor country. 8. Soft loan is repaid after 25 years and interest rate is from 1% to 3%. 9. Hard loan is paid with 25 years and interest rate is more than 3%. 10. Project Aid/Assistance loan is give for completion on one particular project . 11. Direct foreign investment means foreign countries companies invest in indust rial and services projects in Kenya for the sake of profit The Reasons for seeking foreign Aid There are three main reasons why African countries seek foreign aid: 1. Economic Reasons 2. Political reasons 3. Moral reasons Economic Reasons Clearly the most important reason why countries seek and accept aid is for the p urpose of economic development. There are three several economic reasons why Afr ican countries have accepted aid: To improve the investment climate, develop human capital, promote entrepreneursh ip, as well as provide direct support in fostering trade To enable payment of interest on foreign debt To supplement the lack of domestic resources such as foreign exchange To enable infrastructure changes to be made to the economy such as dams and road s Donors and recipients do not always agree about the purpose of aid. Donor countr ies have based their ideas of economic development on neo-classical models, that

prescribe investment in physical or human capital as a means of producing econo mic growth. For recipient countries, aid is a valuable source of foreign exchang e with which to help reduce balance of payments deficits worsened by debt servic ing and poor terms of trade. In countries like Kenya with a large budget and nar row tax base, foreign aid is also an important addition to government income. Political reasons In some cases foreign aid is seen as being necessary in order to maintain power. Often foreign aid in the form of military goods provides the power base that su ppresses opposition and maintains the existing government in power. The ending o f the Cold War between NATO and the Soviet Union has contributed to the fall in Official Development Assistance (ODA) to the continent of Africa, while Israel a nd Egypt, for example, were the two major recipients of ODA in 2003. Moral reasons Many people within the Less Developed Countries (LDCs) and the More Developed Co untries (MDCs) consider that the MDCs have a moral responsibility to provide dev elopment assistance for the poorer countries. This may be because of basic human itarian reasons or a feeling that the colonial powers such as the UK that occupi ed countries such as Zambia have a responsibility to redistribute resources, hav ing exploited so many of the resources of the LDCs during colonisation. The Benefits of Receiving Aid 1. Foreign Loan Bridges Saving Gap and Balance of Payments In Kenya due to low national income and poverty, per capital income is very low hence rate of savings is very low. Low savings rate cannot help in capital forma tion and economic development. Similarly imports are greater than exports theref ore there is always deficit in balance of payments. Foreign loan, aid not only b ridges domestic savings gap but also helps in overcoming balance of payments pro blem. 2. Development Requirements are Met Kenya wants to develop agriculture, industry, power and natural resources of the country but due to lack of foreign exchange, required technology could not be i mported. Foreign aid and loan facilities help Govt. to import the required techn ology and basic raw material with which different sectors of economy can develop and due to utilization of modern machines productivity is enhanced. Thus produc tivity of various sectors of economy increases. 3. Establishment of Modern Economic and Social Infrastructure Economy of a country cannot grow without the presence of economic infrastructure i.e., availability of gas, power, transport and communication. Similarly social infrastructure (i.e., education, training and health facilities), is also essen tial. These infrastructure facilities require local and foreign capital, which i s very limited in third world countries. Foreign aid helps government to establi sh these infrastructures. When construction and other development activities are started in the country, these generate employment opportunities for the people. 4. Level of Technological Increases With the help of foreign aid which is in the way of technical collaboration or p roject aid, modern machines are used, which produce super quality goods in great er numbers. Hence by using goods of high quality consumers are benefited. 5. Meeting Emergencies Foreign aid helps third world countries in emergencies. Whenever there is an ear thquake, flood or some other natural calamities, Food Aid program provides Pakis tan different types of food items such as wheat, dry milk etc. 6. Defense Modernization Kenya wants to modernize its defense capabilities, which can only be possible pr ovided foreign aid is available. Modern Fighter Planes, F-16 and other modern wa

rfare technology can only be secured with the help of foreign aid and loan, as K enya do not have sufficient foreign exchange to finance this crucial requirement of the country in order to maintain security within her borders and also across borders especially now when the country is fighting the al-shabaab. 7. Increase in Tax Revenue When foreign loan is utilized for established of industries and social overheads then economic activities grow, goods and services are produced, foreign trade i s increased, all these factors increase Govt's income through different tax sour ces. Disadvantages of Foreign Aid Foreign economic assistance and Foreign Aid result in the following disadvantage s. 1. Increase in Foreign Aid's Debt Servicing Most African countries have already borrowed too much foreign loans and is still borrowing. The interest on these loans is high and thus debt burden is continuo usly increasing. 2. Increase in Production Cost In results in the increase in the cost of project because of interest, heavy rem uneration and other fringe benefits, which are given to foreign experts. 3. Habit of Dependence on Foreign Loan and Misuse of Aid Aid receiving countries in Africa do not exert and do not make policies to devel op their economy with their own domestic resources. They rarely pay attention fo r development of technology. They just become entirely dependent on others. Majo r portion of aid particularly commodity aid is misappropriated by the concerned Government officials. 4. Exploitation by Donor Countries Sometimes loan giving countries interfere in the defense and foreign affairs of African countries. That's why it is said that there are always political strings attached to the bilateral loans. 5. Commodity Aid Discourages Domestic Agriculture Output When aid is in terms of commodity such as wheat etc, which many times is provide d at a very nominal price, discourages local production of that commodity becaus e of higher cost of production within the country. This situation discourages lo cal agricultural production. 6. Dependence of Imported Raw Material from Donor Country If donor country has assisted in establishing imported substitution industry the n raw material for the industry will have to be imported from loan given country otherwise industry will not continue its production because particular raw mate rial is not available locally. This causes heavy foreign exchange burden on econ omy. 7. Project Tied Loans for Less Priority Projects Sometimes a donor country may give project tied loans for those projects which f or the time being may not be on the priority list of borrower and may not be ver y much feasible. In this way donor can burden the economy of borrower country be cause principal amount as well as interest has to be paid while project is not n eeded and is not worthwhile. 8. Savings Investment and Balance of Payments Gaps Africa is obtaining foreign aid for bridging gap between domestic savings and in vestment and also to improve balance of payments position but till now it has no t been able to accomplish this task, rather both gaps are continuously increasin g.

9. Proportion of Tied Aid and Severity of Hard Terms Increased As the time passes by, it is becoming difficult for African countries to obtain foreign aid. The donor countries have increased terms of aid by raising rate of interest and the repayment period has reduced. Too much sureties and guarantees are not demanded from third world countries by donor countries.

References: Foreign Aid, Economics- Pakistan- notes www.friendsmania.net Aid Theory, http://www.bized.co.uk/ Foreign Aid Challenges, retrieved from id/foreign/challeges.html

http://finance.mapsofworld.com/a

Hashmi Rafique Aamir (1998) Development Economics, AHP International, Lahore. Hollis B. Chennery and Arthur MacEwan (1966) Optimal Patterns of Growth and Aid: The Case of Pakistan. The Pakistan Development Review 6:2, 209 242. Kieth Griffin and John Enos, Foreign Assistance: Objectives and consequences , Economic Development and Cultural Change, (18 April, 1970) pp. 313-327.

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