International Finance and Trade 3

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International finance and trade

Lecture no. 3

Prof. Mazahir saifee



Foreign aid in economic development



Foreign aid

Transfer of capital, goods, or services from onecountry to another. Foreign aid may be givenin the form of capital transfers or technicalassistance and training for either civilian ormilitary purposes. Foreign aid (capital) enter acountry in the form of private capital and / or

public capital.



Meaning of foreign aid

Foreign aid refers to public foreign capital onhard and soft terms, in cash or kind, andintergovernmental grants.



W hat happens in India, in case of foreign aid?

See what happen?





Types of foreign aid

Private foreign capital may take the form of :-a. Directb. indirect investment.

Public foreign capital may consist of:(a) Bilateral hard loans.(b) bilateral soft loans(C) multilateral loans

(d) Loan also available by various agencies of united nations(IBRD, IFC, IDA, SUNFE D, UNDP)



Role of foreign capital ineconomic development



Case for foreign aid

The following arguments are advanced forforeign aid in LDCs:-

To supplement domestic savingTo overcome deficiency of technologicalbackwardnessTo overcome deficiency of overhead capitalTo establish basic and key industriesTo exploit new areas and natural resources



Cont ..

To obtain social benefitsTo raise the standard of living

To increase state revenuesTo reduce inflationary pressuresTo solve the problem of balance of payments

conclusion



Case against foreign Aid

The following arguments are put forth againstforeign aid in LDCs:-

Foreign aid is not a necessary condition fordevelopmentForeign aid is used for wasteful projectsForeign aid does not increase net investmentForeign aid does not improve income earningcapacity



Cont

Influences policies towards inappropriatedirections

F inances uneconomic enterprises or activitiesForeign aid politicises public lifeForeign aid leads to dependency

Reduction in domestic saving



Tied Vs Untied Aid

T ied AidThe full definition of T ied aid as defined by O ECD[

is:

Tied aid credits are official or officially supportedLoans, credits or Associated F inancing packageswhere procurement of the goods or servicesinvolved is limited to the donor country or to agroup of countries which does not includesubstantially all developing countries (or Centraland Eastern European Countries (C EE Cs)/NewIndependent States (NIS) in transition).



E xample of tied aid: PL480Wh at is PL480?

Ans:-Public Law 480 also known as Food for Peace (and commonlyabbreviated PL 480 ) is a funding avenue by which US food can be used foroverseas aid.

It has four parts, titles 1, 2, 3 and 5. Title 1 is managed by the USDA(U nited States Department of Agriculture ), while titles 2, 3 and 5 aremanaged by the U. S. Agency for International Development (USAID).

The full name for Public Law 480 is the Agricultural Trade DevelopmentAssistance Act, signed into law on July, 10, 1954, by President Dwig h t D . Eisen h ower . In signing the legislation, E isenhower stated that thelegislation's purpose was to "lay the basis for a permanent expansion of our exports of agricultural products with lasting benefits to ourselves andpeoples of other lands.

In 1961, President Jo h n F. Kennedy renamed it as " Food for Peace,"stating, " Food is strength, and food is peace, and food is freedom, andfood is a helping to people around the world whose good will and

friendship we want.



The purpose of PL 480 is to:

Combat world hunger and malnutritionPromote sustainable development includingagriculture developmentExpand international tradeDevelop and expand export market for USagricultural commodities and productsFoster private enterprise and democraticparticipationProfitably supply surplus US commodities toforeign countries



PL 480 can be divided into 4 Titles:Each is administered by different US

agencies.Title 1, Trade and Development Assistance(Managed by USDA)Title 2, Emergency & Development AssistanceProgram (Managed by USAID)Title 3, " Food for Development" (Managed by

USAID)Title 5, " Farmer to Farmer" (Managed byUSAID)



Merits of tied aid

Direct control by the recipient over theselection of projects in certain circumstances.

Greater opportunity of influencing, in boththeir design and implementation, thoseprojects normally financed by donorIncreased case of influencing the recipientspolicies in those sectors of the recipientseconomy for which project aid has been madeavailable



Cont

Incentive for improving the quantity and qualityof projectsBetter opportunities for publishing the donors aidprogrammeIncreased access to information on sectors of therecipients economy in which projects arefinancedLess adverse effect on the balance of payments of the donor when project aid is combined withsource tying



Untied aid

U ntied Aid is assistance given to developingcountries which can be used to purchasegoods and services in virtually all countries. Itis contrasted with tied aid which stipulatesthat goods and services bought with it canonly be purchased from the donor country or

from a limited selection of countries



Merits of Untied aid

It is preferred to tied aid by developing countries becausethey are free to utilize aid in accordance with theirdevelopment programmes-in agriculture, industry, transport,and/or in any other infrastructure.

Programme aid also reduces the real costs of aid as therecipient can buy its requirements at competitive rates fromthe world markets and there are no inter-bureaucraticfrictions as under tied aid.

The recipient country can use an appropriate technology inkeeping with its factor endowments and allocate its resourcesin a much better way than under tied aid.



Cont ..According to Singer, 'Plan aid seems to be more popular

among the receiving countries than project aid. This would beexpected to be considered as an advantage of plan aid, sinceit may Spur the receiving country to 'greater efforts in order toget the aid, apart from smoothing relations between the aid-giver and the receiver, which is presumably also an objective

of aid ... It may be said that aid tied to specific projects is aninducement for receiving countries to think of development interms of concrete projects ... Development is, of course, muchmore than that, and in fact many expenditures classified ascurrent or as consumption are much more developmental

than expenditures classified as "projects" or capitalexpenditure. F rom this latter point of view, plan aid, and evenmore annual budget aid, is clearly preferable if the donoragrees with the recipient on developmental policies andpriorities.



Factors determing the amount of

foreign aid for economic developmentAvailability of fundsCapacity to absorb capital

Availability of resourcesCapacity of the receiptent country to repayloans

The will and effort to develop

International Finance and Trade 3

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