DEVELOPMENT THROUGH RESOURCE TRANSFER is explained below

The chief idea here was that (as mentioned previous) poor countries suffered from the savings and foreign exchange gaps which could not be filled domestically, and required to be funded by some sort of international resource transfer from rich countries (former colonial powers known as “donors”) to  the  poor  countries (those which got  their independence in  the  mid-20th   century). Supporters of the model were mostly those who felt that the colonizing west required taking responsibility for the exploitation of colonized Third World. The finest way to do it was to give aid: grants (which never had to be repaid) and concessional loans (which had to be repaid on very soft terms) both to poor countries to assist them in their initial years and to facilitate them their entry into the group of the prosperous nations. For this very reason, the UN charter of 1948 prescribed the annual 0.7% (of GNP) contribution by all the rich countries to the poor countries. Though, aid has not generally been successful in lifting former colonies out of the poverty. Living standards in many of aid-receiving countries have actually declined, indicating a clear failure of aid. There are many reasons why this could have occurred, but the most significant ones are  perhaps  misuse  of  aid  proceeds  by  recipient  country  governments  from side to side misallocation, embezzlement and corruption; the negative role of the donors in forcing recipient countries to use help proceeds for importing the goods and services from only donor country; the politicizing nature of help and its associated conditionality’s; aid fatigue on the part of donors (i.e. tiredness resulting from having to give support year after year without any concrete benefits), the inadequacy of the aid (the aid given has never quite been sufficient, and only about 0.35% of rich country GNP has been allocated as development help); the crowding out of domestic savings (which is as aid comes into the nation the incentive for local citizens to save reduces, thereby compounding low saving rate problem of the poor nations).

Official help is not the only type of the resource transfer. There are private capital movements (portfolio investments  and  bank  lending)  which  can  also  fill  the resource  gaps  in  LICs.  However, the experience with these has not been successful also. The debt crisis of the 1980s in Africa and Asia Latin America, , and the current spate of financial crises in Mexico, Russia,  East Asia, Brazil and Argentina have all give evidence to the dangers of modern day private capital flows. Such flows are extremely reversible and often pro-cyclical accentuating boom-bust cycles in recipient nations.

Due to the crash of the above alternative types of resource flows, attention has, of late, shifted to the foreign direct investment (FDI). This type of resource transfer has been deemed extra successful than others due to its ability to relieve three constraints at the same time: the foreign exchange and savings constraints (mentioned prior), the skills constraint (the fact which LICs do not have the skills – managerial or technical – for industrial upgrading and export market tapping). FDI had been unwelcome in various LICs in the 1950s and 60s as it was seen as the continuation of colonialism. Foreign currency coming into one’s country was one thing, foreign firms coming, operating and tackling control quite another! Indeed there was the perceived danger that foreign firms would take over strategic sectors of the society – financial services, communications and power. Over time, LICs’ aversion to FDI has reduced considerably. Many now know the benefits of irreversible FDI and its skill-transfer related advantages for the countries lacking in stability and human capital, respectively. Indeed, countries which have relied on the FDI more than debt and portfolio investments to integrate into global economy (Chile, China and many of the East Asian tigers are also the part of it), have been the most successful development instances of the last 25 years.