International Economics >> Foreign Aid and Economic Development
Foreign Aid and Economic Development
The international financial flows can be grouped under two broad categories: (i) private foreign investment, and (ii) public development assistance, the foreign aid. While foreign private investment is a purely commercial financial flow, public development assistance (foreign aid) is a non-commercial financial flow. Private foreign investment is a commercial flow in the sense that it is based on profit motive and foreign aid is a non-commercial flow in the sense that it is based on non-profit motive. It includes broadly public bilateral and multilateral development assistance, especially to the less developed counties. i.e., 'foreign aid', the non-commercial flow of funds: between the nations. The various aspects covered here include (i) definition of foreign aid-what is and what is not included in foreign aid, (ii) trends in foreign aid, (iii) motives behind foreign aid, (iv) effects of foreign aid on economic de-velopment, and the recent thinking on the issue of foreign aid.
The concept of foreign aid
There are problems in defining foreign aid because all kinds of non-commercial international financial flows cannot be conceptually included in foreign aid. There was a time when 'all real resource transfers' from developed to underdeveloped countries were included in 'foreign aid'. This definition raises several conceptual problems because it includes certain resource transfers which do not qualify for foreign aid. Two such important resource transfers are following.
(i) Preferential tariffs granted by the developed to the less developed countries amounts to "disguised" resource transfer, but it does not qualify for foreign aid;
(ii) Flow of foreign private investment based also on non-commercial considerations does not merit being included in foreign aid.
Flow of capital from developed to less developed countries that meet two criteria: (i) it has non-commercial motive from donor-country's point of view, and (ii) it involves concessions in interest rates and terms of repayment. This definition too is not complete because it includes such aids as military aid, ad hoc financial support in case of natural calamities, and food aid in case of drought, and so on. According to Michael Todaro2 The concept of foreign aid that 'is now widely used and accepted is one that encompasses all official grants and concessional loans, in currency or in kind, that are broadly aimed at transferring resources from developed to less developed nations on development and income redistribution grounds." Foreign aid includes also the resource transfers from OPEC to other Third World countries.
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