In the name of Allah,

the most beneficent,

the most merciful.
FOREIGN AID

Ma’am Quairat-ul-Ain Beenish

Group Members

Muhammad Munair
BT-04-07
Kanwer Ahmad Ali
BT-04-30
Foreign Aid (FA)
FA occurs when recipient country receives
additional resources in foreign currency
over and above the capacity to import
generated by exports
The debt which is given by a country on
the concessional rates.The concessional
elements may be:
Lower rate of interest
Longer period of repayments
Grants
Definition in term of officials data.

“All kinds of resources inflows that are publicly

granted and are made either from government
to government or from financial institutions to
a government.”
Resources inflow
Publicly granted
From government to government
From financials agencies to government
Economic aid(used for economic purposes)
Donor: The country which gives
loan/ aid.

Recipient: The country which receives

the loan/aid
Forms of Foreign Aid

Financial Aid
Commodity Aid
Food Aid
Technical Aid
Emergency aid
Double Tied Aid
Financial Aid

Tied Aid
Untied Aid
Grants
Loans
 FINACIAL AID

UNTIED AID TIED AID GRANTS LOANS

NATION TIED PROJECT TIED HARD LOAN SOFT LOAN

Tied Aid

Tied aid means that the donor country

requires the recipient country to spend it
on a specific project or buy resources
from specific country.

Nation Tied
Project Tied
Untied Aid

FA which is not Tied to any project or

nation is untied aid.
Much desired by Recipients.
LDC do more efficient use of financial
resources.
Grants
A grant is that form of FA which does not entail
either the payment of principal or interest.
Free gift from govt. to govt.
Free gift from an institution to govt.
Mostly desired because it increase Expenditure
and generate Income.
Humanitarianism bases
In 1956-65 73%
now only 0.2%
LOANS

It is borrowing of foreign exchange by the

poor country from the rich country to
finance the short term or long term projects.

Hard Loans
Soft Loans
Hard loans

Also called short term loan

Paid in currency borrowed
No concessional element (but interest rate
is usually lower then market rate)
Usually for 5 year duration
Soft Loans

Also called long term loan

Repaid in the currency of recipient
country
Interest on soft loan are lesser than hard
loan and often involve grace period
Usually for 10-20 years
Commodity Aid
A type of tied aid which relates to agricultural
products, raw materials and consumer goods
Advantages
It help in controlling famine.
Tempo of industry is maintained by providing raw material.

Disadvantage
It is not in the form of cash.
Commodity aid has depressing effect on agricultural prices
in recipient country.
Donor country have more Political Influence on the
recipient Country
Food Grain Loan

Loan which is given in the form of Food

Grains
e.g. US give food grain to poor country
under Public Law(PL 480) and fund
obtain from it are used on American
Companies and Agencies working in
Recipient Countries and rest of funds are
Granted
Commodity Aid to Pakistan

Second Largest component in different

types of aid. But ratio decreases from
34% in 1960-65 to 23% in 1979-80
Food Aid

Food is given to countries in urgent need of food supplies,

especially if they have just experienced a natural disaster.

Critics
Increase Dependence
Promote Waste
Availability to Needy
Dampens the local food production
Food Aid to Pakistan

Third largest Component of aid

Provided by USA Govt. to Pak Govt.
From Wheat to Edible Oil
Funds Generated by these trade are
control by US Aid Mission in Pakistan
Technical Aid
It is a tied aid in which training facilities are provided
by the donor country and it bears all the expenditures
involved in the training of advisory technocrats

Technical assistance
People are recruited in Donor country for
service overseas.
Scholarships and training facilities provided in
donor country from recipient country
e.g. Army Expertise, Post Office Services
Drawbacks
Heavy influence of Donor Country
Modern technology favor by expertise
whether it is appropriate or not
Indigenous technology may be affected
Creation of Bangladesh due to Influence
of Harvard Advisory Group during
Second Five Year Plan
Emergency aid
This is given to countries in the event of a
natural disaster or human event, like war, and
includes basic food supplies,clothing and
shelter
Double Tied Aid

It is also called as procurement tied aid. It

is the aid which is tied both for projects
and as well as for resources
Foreign Direct Investment (FDI)

It basically refers to the amount of

foreign exchange invested in a particular
country by other countries corporation
and businesses
Foreign investment basically refers to the
amount of money & machinery injected in
a
country market by the multinationals.
 Foreign Direct Investment (FDI)
FDI is much cheaper for recipient country
FDI brings technical know-how and modern technology in
developing countries
Critics
Profit outflow may exceed the amount of repayment for
loans
Technical knowledge can purchased on commercial basis
Examples
Lever Brothers
ICI
Pepsi
FDI CONTROL

It should be licensed.
It should be taxed more than domestic
investment and proper audit.
All abroad payment should be controlled
or limited
Reinvested capital should be considered
as domestic capital.
TYPES OF AID

Bilateral Aid: The aid which is given from

the government of the donor country to the
recipient country is called bilateral aid.
Depends upon political and economic
relationship of various countries and it also
depend upon the will of donor country.
 TYPES OF AID

Multilateral Aid:
Aid given by certain financial institutions,agencies or
organizations to the government of low developed
country (LDC)
e.g. World Bank,IMF, European Development Fund,
United Nations
Usually these organizations are governed by major
donors.
Aid to Pakistan
Why donor give aid
Not without any corresponding benefits

Political motivation
Economic motivation
Economic motivation and self interest
Political motivation

Marshall plan (Reconstruction of western

Europe)
Shift in Cold War toward LDC’s
Security Issue
Shaky Regimes
FA used as political lever to Prop up
Friendly Regimes
Anti Effects

Fidel Castro in Cuba

Threat of Communist in Latin America
Losing importance of Security issue
War against Vietnam,dollar crisis and
increase in domestic violence
People’s view is changing
Economic Motivation
Foreign Exchange Constraints
Two Gap Model
 Saving Gap
 Trade Gap

Growth And Saving

Technical Assistance
Absorptive Capacity
“the ability of a country to absorb the foreign
assistance to use the funds in a wisely and
productive manners”
Economic Motivation & Self-Interest

Shifting in Trend of Grants toward

Loan(80% to 40% )
Debt repayment burdens increase

Biggest Misconception
 US aid Official view
 British Minister View
Why LDC recipient accept Aid
Three reasons(1 major, 2 minor)
Economic Growth
 Taught in University Courses by referencing
Success Examples(Taiwan, Israel. South Korea).
 Conflicts on from of aid not on role of aid.

Political view
 Financial Aid
 Military And Internal Security
 Stop Opposition Resistance
Continue…….

Moral View
 PastExploitation
 Obligation of Rich country to support the
Third World Countries.
The effect of aid

Two views
 Economic traditionalist
 Rationalist view
Economic Traditionalist

Promote Growth
Structural Transformation
Help in BOP, Inflation,
Govt. Deficits
Employment
Rationalist

Substituting effect on Domestic Savings

& Investment
Increase BOP & Debt
Growth of Modern Sector
Change in Living Standard
Increases the Gaps(Saving, Foreign
Exchange, Urban-Rural/Modern-
Traditionalist )
Two Gap Model(TGM)
Hollis Chenery & A. Strout.
Saving & Foreign Exchange Gaps
Foreign Aid as an Instrument to achieve
the target growth rate.
Model Based on three stage toward Growth
Absorptive Capacity
Saving Gap
Trade Gap
Process of Substantial Growth
Absorptive Capacity • Technical Assistance
• Training, Education
• Managerial Ability
FA
• Entrepreneurial Talent

Saving Gap •Funds for Developmental Projects

FA • Aid for Saving Deficits

•Funds for BOP

Trade Gap • Raw Material
FA • Modern Machinery
• Foreign Exchange
 Pledges:
 A pledge is a promise by the donor to
advance a specified amount of FA
Commitment:
 It implies the allocation of FA by the donor
for specific projects or programmes
Disburdenment of Aid:
 It mean the transfer of resources to
recipient from donor
Utilization of Aid:
 The actual implementation of FA financed
projects
Critical Appraisal
TGP doesn’t include the Debt Servicing Charges
& Term and Condition attached to aid.
TGP doesn’t consider the Absorptive Capacity
of the Economy
TG analysis is high aggregative approach which
treats all types of capital investment as
homogenous
LDC’s which have dominant saving constraint
do not need foreign aid
Country cant follow the export promotion and
import substitution policies
Consider the parameters having stable value in
future which is not possible
TGP & Pakistan

Absorptive Capacity is not applicable in

Pakistan
Saving & Net Inflow of Capital has
negative Correlation
Trade Gap is increasing due to imports of
new machinery and other commodity
goods