Importance Of Foreign Aid Or Economic Justification Of Foreign Aid:
1. To Remove Paucity Of Capital. The countries like Pakistan are entrapped in vicious circle of poverty. Because of low income, the saving ratio remains low. Because of low savings the investment level remains low. Again because of low income the taxable capacity remains low, and the government earnings also remain low. The deficit financing has to be restored with great care. In such situation a country has to face the shortage of funds. On the other hand, because of greater rise in population, the demand for roads, hospitals, colleges, water, and what not, goes on to increase. Therefore, to meet such all demands and break the vicious circle of poverty the foreign aid becomes necessary.
2. Removal Of Technological Backwardness. In UDCs, there exists technical backwardness. Because of this situation, not only the costs are higher, but the capital – output ratio is also fairly high. Because of foreign assistance not only there will be an inflow of capital but the better technology, technical progress, know • how and advanced knowledge will also move in UDCs. The combination of modern techniques and foreign capital will be helpful in removing economic backwardness.
3.Construction Of Infra — Structure. The roads, the dams, the power houses, the railway tracks etc. serve as the basic infra – structure of the society. To provide infrastructure not only the heavy funds are required but the necessary skill and personnels are also needed. Such becomes possible because of foreign financing. As the case of construction of Super Highway between Karachi and Hyderabad became possible due to the foreign aid. Again, the present construction of Motorway from Lahore to Islamabad has been made with
4. Establishment Of Key Industries . The Countries Like Pakistan do not possess sufficient funds to establish theikey industries like steel and iron, automobiles, light and heavy engineering. Therefore, the need for foreign aid is realized in the establishment of steel, iron and engineering industries. No country has been found exception to it, as in most of the countries the steel and iron industries came into being with foreign assistance. As the case of Pakistan Steels which was set – up with the Russian assistance.
5. Exploration Of Natural Resources . In so many poor countries there exist the deposits of oil, gas, iron and other minerals. But the resources at the disposal of the poor countries are not adequate to explore and extract these resources. Therefore, for the sake of exploration and extraction of natural resources the foreign aid accompanied by technical assistance becomes inevitable. As in case of our country and the Middle East, the oil and gas is being explored with the assistance of international companies and World Bank etc.
6. Raising The Level Of Employment. Because of technical and financial assistance the process of industrialization can be set – up in a country. The increased industrialization will have the effect of raising the level of employment. This is especially true in case of poor countries like Pakistan where the population is rapidly increasing and lands are getting incapacitated to employ the ever—increasing population. Therefore, to enhance employment opportunities, the foreign financing can play an important role. As it is said that recent investment agreements with US, Hong Kong, Korea and UK will have the effect of increasing the employment level in the country.
7. External And Internal Economies Of Scale .The foreign resources will encourage the attainment of internal as well as external economies. The foreign investment will create a competition amongst the domestic producers. In this way, the efforts will be made to reduce the costs and prepare import – substitutes. In the country, the research and development activities will increase. The technical development will take place on the ground of technology transfer. The allied industries will develop and the complementary goods could be produced. In addition to these internal economies, certain external economies like mining, extraction and exploration activities will also take place. These internal and external economies play an important role in eco. development of a country.
8. Economic And Social Changes. Because of foreign inflow of capital, technology, culture and skill, the changes in socio – economic set – up of a country occur. The life – style of the people changes ; educational and technical education gets popular ; the narrow life of the villages comes to an end ; the skills of the people improve ; the export promotion and import substitution activitie; are promoted ; wages and incomes of people increase ; the chances of employment, particularly for women, increase; the standard of living of the people improves and ; the markets are extended etc.
9. Removal Of BOP Deficit. The UDCs like Pakistan have to face a conflicting problem of economic development and removal of deficit in BOP. The craze to develop as soon as possible necessitates the growth of import sector. Accordingly, to make the payments for imports there should be a smooth supply of foreign exchange in the country. But it is not so as far as Pakistan is concerned. Our exports are of agriculture and primary nature ; the quantum of exports is low ; there are heavy fluctuations in the prices of exports and ; the exports comprise of on/ a few goods. In such situation, we have to face deficit in BOP. This has become a very acute problem for our country. Therefore, the developing countries, as
Pakistan have to depend upon foreign assistance for the removal of deficit in BOP. In this context it is the IMF which performs the function of providing credit facilities.
10. Increased Government Revenues. In addition to industrialization, because of foreign assistance and foreign investment, the foreign resource inflow also gives rise to government revenues in the form of customs duties, excise tax, sales tax, income and wealth tax etc. Thus we conclude that foreign aid and assistance plays an important role in a poor country like Pakistan. Next we see the role of foreign assistance from Donor’s point of view and Recipient’s point of view.
Related Economics Topics
- IMPORTANCE OF FOREIGN AID FROM DONOR’S POINT OF VIEW
- Effects of foreign aid on aid receiving countries
- Foreign Resources and Economic Development
- ECONOMIC IMPORTANCE (ROLE) OF CAPITAL FORMATION
- Foreign Exchange Constraints and BOP Deficit