Foreign aid, blessing or a curse??

Many studies have shown a negative correlation between economic growth and natural resources, a finding often dubbed “the curse of natural resources. ” However, oil and other minerals may not be the biggest curse in developing countries. In many of them, the amount of foreign aid is a far larger share of government revenues. In Burkina Faso, for example, aid accounted for two-thirds of the government budget and 8% of GDP over the period 1985-89. In Mauritania, it accounted for 60% and 22%, respectively, for the period 1980-84.

In Rwanda, Vanuatu, Gambia, Niger, Tonga and Mali, foreign donors provided over a third of the government budget during some 5- year periods between 1960 and 1999. Some countries are chronically dependent on aid. Aid accounted for 40% of the government budget and 6. 2% of GDP in Burkina Faso during 1960-1999. In Mauritania, for 37% and 12%, respectively. In “The curse of aid”, The World Bank scholars Simeon Djankov, Jose G. Montalvo and Marta Reynal-Querol surveyed data from more than 100 countries over four decades. They also found that aid tends to supplant growth and makes countries quantifiably less democratic.

They compared aid with petroleum wealth. Based on their research, they determined, “aid is a bigger curse than oil. It is a well known fact that foreign aid, granted and channeled through the IMF, World Bank, USAID and similar organizations, comes with strings attached. A huge portion of such loans goes back to donor countries in form of remuneration for various consulting and support services provided by companies and firms, commonly known as the Corporatocracy. The News reported about Federal Bureau of Revenue (FBR) hiring 89 foreign consultants of IMF, each paid $30,000 per month (Rs2.41 million).

Consultancy cost might go up as two foreign consultants already working at the FBR since January 2007 have been given extension after they were paid Rs40 million by March 2009. The consultancy fee is expected to increase by Rs20 million. The inability of these consultants to give positive results was first discussed in whispers by the senior FBR staff but later a female executive mustered the courage to raise voice and sent a letter dated April 23 to the chief of FBR’s Tax Policy and Reforms Wing as well as its chairman.

The letter discussed contract agreement of Hugo Hanisch, Programme Manager and Obed Santisteban, Tax Intelligence Consultant, who were given extension up to December 2009. However, the complainant lady has now been quietly transferred to Lahore. On one hand, government of Pakistan is complaining about shortage of funds, deducting from development expenditure to meet expenses and on the other offering exorbitant salaries to foreign consultants. Such high salaries are not even offered to top-notch executives in the US. The World Bank has stated its intent to provide foreign aid of up to $6.

5 billion to Pakistan over the next four years. This amount, the largest single award ever by the Bank to Pakistan, is more than twice the amount that the Bank has provided during the past four years. In fact, it is almost half of the entire amount that the Bank has lent since independence. John Wall, the Bank’s man in Islamabad, said the country had laid “the groundwork for sustained economic growth and significant poverty reduction. We will substantially ramp up support to Pakistan and focus on the areas that are most critical for the country’s poor and most vulnerable.

” The Bank’s director for South Asia, Praful Patel, cautioned that sustained growth in Pakistan is not assured, noting that it “will require continued sound macroeconomic management along with further improvements in the investment climate and faster progress in improving the quality of life for all Pakistani citizens, especially women. ” While there is some evidence that foreign aid equivalent to one percent of GDP that is given to a poor but well-managed country can help in increasing its growth rate by a sustained 0.

5 percentage points, the economics profession is divided on the long-term merits of foreign aid. Advocates maintain that it allows nations to climb out of poverty by overcoming the “financing gap” between domestic savings and investment needs. This position, argued persuasively by Jeffrey Sachs in “The End of Poverty,” hearkens back to Walt Rostow’s thesis in “The Stages of Economic Growth. ” Writing in 1960, he asserted that aid could launch an economy that would otherwise stay trapped in poverty into the stage where it would “take off” toward prosperity.

Indeed, Rostow’s theorizing provided the underpinning for the early work that was carried out at General Ayub Khan’s Planning Commission under the guidance of Harvard economists. One of the chestnuts in development planning is the incremental capital-output ratio. If the ratio is 4 and the rate of domestic investment is 20 percent of GDP, then GDP will grow at 5 percent a year. If the country wishes to grow at a faster rate of 8 percent, it will need an investment rate of 32 percent. Foreign aid can help bridge some of the difference in investment rates, with the rest coming from personal remittances (from expatriates) and foreign direct (private) investment (FDI).

In addition to World Bank aid, Pakistan is expected to receive some $600 million of US aid annually, split equally between economic and military applications. According to the US Congressional Research Service, Pakistan has received a total of $15 billion in US foreign aid since independence. Between 2002-05, it also received $3. 6 billion in US aid for counter-terrorism operations, most probably as a grant requiring no repayment of principal or interest. Between 2001-07, Pakistan is estimated to receive $4. 4 billion in US aid, of which 29 percent will be for financing military supplies.

In the coming years, Pakistan is also likely to get additional aid from the Asian Development Bank, the Islamic Development Bank and other sources. All things considered, it is likely to add $2 billion a year to its foreign debt. Just in the past three years, foreign debt has grown by $5 billion. How much will it cost to service the debt? That depends on the terms of the loan. For example, if the term is 20 years and the interest rate is 8 percent, every billion dollars of foreign aid will require $100 million in annual debt servicing. Over the life of the loan, Pakistan will have returned $2 billion to the lender.

For aid to be cost-effective, Pakistan would have to generate productive revenues that far exceed the cost of debt servicing. Can this be assured? Hardly, since Pakistan received 20 “structural adjustment” loans from the World Bank and the IMF with the explicit requirement to lower the budget deficit between 1980 and 1999. But this never happened. Neither did aid eliminate year-to-year fluctuations in the rate of economic growth. It is lackluster results such as these that lead critics of foreign aid to argue that it simply represents a waste of resources in the donor countries and promotes dependency in the recipient country.

William Easterly lays out this position in “The White Man’s Burden,” which builds on arguments that he first marshaled in his 2001 book, “The Elusive Quest for Growth. ” A former Bank economist, Easterly says that despite the disbursement of $2,300 billion of foreign aid over the last five decades, almost half of the world lives in poverty. Aid has even failed to deliver a basic necessity such as mosquito netting costing four dollars to poor families in Africa. When aid agencies hand these out, they are often diverted to the black market or wind up being used as fishing nets or wedding veils.

Only rarely do they get to the recipients. Easterly recommends that the West stop “coddling the warlords and kleptocrats” by bestowing them with the gift of foreign aid. At the minimum, it needs to do a much better job of seeing what happens once the big checks are cut. Since independence, Pakistan has received more than $30 billion in aid just from the Bank and the US and billions more from other sources. Despite this “embarrassment of riches,” it has failed to become an Asian tiger. This is evidenced by the continuing presence of five structural problems in the economy.

First, as the economy grows, imports grow faster than exports, leading to rising deficits on the current account. Second, consumer goods rather than capital goods dominate the growth of imports, reflecting a bias toward consumer spending and fueling inflation. Third, domestic investment rates remain low, thus requiring continuing infusions of foreign aid to bridge the non-vanishing “financing gap. ” Fourth, as growth occurs, the government begins to rack up rising budget deficits to placate special interest groups, most notably the military.

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