BCom Notes Part II Economy of Pakistan Foreign Aid and Economic Assistance

If you want to view other notes of this subject. Click Here.

If you want to view other notes of BCom Part II. Click Here. 

Foreign Aid and Economic Assistance

Introduction

Foreign economic assistance is a provision of financial and physical forms of assistance 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 such as World Bank, International Finance Corporation, I.M.F., International Development Agency, Asian Development Bank, Islamic Development Bank, Pakistan Development Forum.
3. Tied aid is given provided machinery or raw material is purchased from loan given 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 installation of heavy projects etc.
7. Grants are given on humanitarian grounds for help in famine, floods and earthquake, 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 industrial and services projects in Pakistan for the sake of profit.

Advantages of Foreign Aid

Foreign economic assistance is very important for economic development of Pakistan. The advantages or benefits of such assistance are as under:

1. Foreign Loan Bridges Saving Gap and Balance of Payments

In Pakistan 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 formation and economic development. Similarly imports are greater than exports therefore there is always deficit in balance of payments. Foreign loan, aid not only bridges domestic savings gap but also helps in overcoming balance of payments problem.

2. Development Requirements are Met

Pakistan wants to develop agriculture, industry, power and natural resources of the country but due to lack of foreign exchange, required technology could not be imported. Foreign aid and loan facilities help Govt. to import the required technology and basic raw material with which different sectors of economy can develop and due to utilization of modern machines productivity is enhanced. Thus productivity 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 essential. These infrastructure facilities require local and foreign capital, which is very limited in Pakistan. Foreign aid helps government to establish 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 project aid, modern machines are used, which produce super quality goods in greater numbers. Hence by using goods of high quality consumers are benefited.

5. Meeting Emergencies

Foreign aid helps Pakistan in emergencies. Whenever there is an earthquake, flood or some other natural calamities, Food Aid program provides Pakistan different types of food items such as wheat, dry milk etc.

6. Defense Modernization

Pakistan wants to modernize its defense capabilities, which can only be possible provided foreign aid is available. Modern Fighter Planes, F-16 and other modern warfare technology can only be secured with the help of foreign aid and loan, as Pakistan do not have sufficient foreign exchange to finance this crucial requirement of the country.

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 is increased, all these factors increase Govt’s income through different tax sources.

Disadvantages of Foreign Aid

Foreign economic assistance and Foreign Aid result in the following disadvantages.

1. Increase in Foreign Aid’s Debt Servicing

Pakistan has already borrowed too much foreign loans and is still borrowing. Now in order to pay interest Pakistan is. Thus debt burden is continuously increasing.

2. Increase in Production Cost

In results in the increase in the cost of project because of interest, heavy remuneration and other fringe benefits, which are given to foreign experts.

3. Habit of Dependence on Foreign Loan and Misuse of Aid

Aid receiving countries including Pakistan do not exert and do not make policies to develop their economy with their own domestic resources. They do not pay attention for development of technology. They just become entirely dependent on others. Major 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 Pakistan. 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 provided at a very nominal price, discourages local production of that commodity because of higher cost of production within the country. This situation discourages local agricultural production.

6. Dependence of Imported Raw Material from Donor Country

If donor country has assisted in establishing imported substitution industry then raw material for the industry will have to be imported from loan given country otherwise industry will not continue its production because particular raw material is not available locally. This causes heavy foreign exchange burden on economy.

7. Project Tied Loans for Less Priority Projects

Sometimes a donor country may give project tied loans for those projects which for the time being may not be on the priority list of borrower and may not be very much feasible. In this way donor can burden the economy of borrower country because principal amount as well as interest has to be paid while project is not needed and is not worth while.

8. Savings Investment and Balance of Payments Gaps

Pakistan is obtaining foreign aid for bridging gap between domestic savings and investment and also to improve balance of payments position but till now it has not been able to accomplish this task, rather both gaps are continuously increasing.

9. Proportion of Tied Aid and Severity of Hard Terms Increased

As the time passes by, it is becoming difficult for Pakistan 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 Pakistan by donor countries.

Foreign Private Investment

Foreign private investment or foreign direct investment is very helpful for the economic development of a host country provided they operate within certain restriction, which are given below:

Advantages of Foreign Trade Investment

1. Limits on profit repatriation should be fixed.

2. Foreign investment should have a joint venture with the local partners.

3. Foreign investors should export certain proportions of their products.

4. Monopoly control/anti-cartel laws should be enforced on foreign investors.

Disadvantages of Foreign Trade Investment

1. Profits/royalties are remitted which increases burden on balance of payment of Pakistan.

2. Foreign companies have superior products dominate local market therefore growth of local enterprises suffer a lot.

3. Foreigners establish their factories in big cities for want of protection but it creates economic disparity between rural and urban areas of the country.

4. Foreigners develop friendship with politician and bureaucrats, they provide respectable jobs to their sons and relatives and then use their economic power in influencing government polices to their advantage.

5. Foreign companies having large capital and modern technology operate on monopolistic situation thus exploit consumers by charging heavy prices.

6. Stimulate inappropriate consumption patterns through advertising, such as KFC. Pepsi Cola and Walls and Mobile phones.

7. Stimulate inappropriate consumptions patterns through advertising, such as KFC, Pepsi cola and Walls and Mobile phones.

8. Foreign private investment increases foreign exchange liability on imported raw material.