Impact of foreign aid

on the economy of
Pakistan

By Zahra Amjad
Content
 Introduction
 why foreign aid?
 Definition of foreign aid
 Types of foreign aid
 Institution
 Origin/ history of foreign aid
 Effectiveness of foreign aid
 Does aid is effective for growth or not?
 Positive as well as negative effect
 Conclusion
 references
Why foreign aid?
 Foreign aid plays very essential role in the
overall development of a country provided it
can be utilized properly.

 Due to the scarcity of economic resources and

other natural constraints every country needs
the sufficient amount of foreign funds in shape
of foreign aid.
 Due to the inequality in income distribution
majority of the people of the world is
passing their lives in miserable condition,
so for making fair income distribution
foreign aid is necessary towards poor
nation
 Foreign aid is granted to reduce the
budget deficit, trade promotion and
strategic consideration.
Why foreign aid? cont…
 Pakistan, a developing country, has been
receiving foreign aid from many countries and
international donor agencies in different form
like economic, technical and project aid.
 Foreign aid could be a major source of capital
formation, to accelerate the process of
economic development and helping to
promote human development.
Hollis Chaunery and Istroud
Origin and history
 After 2nd world war, Europe was almost destroyed

 2nd world war b/w American allies (uk , us ,France and the
German allies Germany, Japan, Italy)

 There was a multicultural society

 America gave a plan for reconstruction of the EUROPE.

 The purpose of the plane is to provide economic assistance to

Europe.

 To meet these objective worlds largest financial institution

IMF and IBRD were established in Breton wood in 1944.
 IBRD
 The largest multilateral agency is the World Bank which began
as the international Bank for Reconstruction and Development
(IBRD)
 After its funding at a conference held in Breton Woods in
July 1944.the world reconstruction in the IBRD describes its
first task, was to finance for the reconstruction of Europe after
world war 2nd

 UN passed a resolution in 1970 NIEO in which he imposed a

condition that every developed country has to give 7% of his
GNP as an economic, technical and financial assistance to
developing countries
 UN passed a resolution in 1970 NIEO in
which he imposed a condition that every
developed country has to give 7% of his GNP
as an economic, technical and financial
assistance to developing countries
The INTERNATIONAL
MONETRY FUND
 IMF was also founded at the 1944 “Breton
Woods conference”
 IMF’s original mission was to reestablish an
international system of stable national
currencies as part of an effort to rejuvenate
world trade after World War II
 it will regulate money market and solve the
problem of balance of payment
Definition of foreign aid
 Any kind of financial flows containing at least
25% concessional from donor country “or
international financial institution to recipient
country for official development purposes is
called Foreign aid”
 Money inflow from developed to none
developing nations for developmental and
other Macro economic purposes
According to Chenery & Bruno
 The various form of inflow of foreign capital
(loans, FDI, grant and portfolio) Was welcome
in developing countries to bridge the gap
between domestic saving and Domestic
investment and therefore, to accelerate
growth.
 Heller (1975) Taylor 1933
 foreign aid increase the productivity of
various economic sectors
Foreign aid
 Foreign aid consist of
 Financial flows,
 Technical assistance and commodities given by the
resident of one country to the resident of another country
either as a grant or subsided loan,
 Foreign assistance depends on
 Who gives it?
 What it is given for?
 Which it is provided?
 Bilateral aid:
 Any aid which will come from Donor country to the
recipient country directly without involving any donor
agency is called bilateral aid.
 USA gives Aid to Pakistan.
 America give aid to Israel
 Germany give aid to turkey.
 Multilateral aid:
 Any aid which comes from institution owned by more
than two countries is called multilateral aid.
 World Bank, IMF, Asian Development Bank, et.
 Disaster management (fund relief programmers)
 Conditional/tied aid
 Commodity aid
 Project aid
 Any aid which is given for a specific purposes it
covers the crust of machinery and equipment of
the projects. Karakorum highway was established
by china.
 Pakistan steel mill was established by USSR.
 Gawadr port was also established by China.
 Technical assistance
 That type of aid which was given to enhance
technical skills
 The government of Japan provided technical
assistance for the establishment of PTV in 1964
Example

 In 1955 swishdish institution of technology

was established in Pakistan for increasing the
technical skill of labor
 In 1955 American institute of development
established central testing laboratories in
Pakistan
 Establishing Pak German training institution for
improving man power skill for Industrial Labor
in Pakistan
Relief aid
 This can be part of ODA if these financial flows
will be invested in recipient economy for building
infrastructure, human resource management.
Pakistan received 6.1 million$ In the earthquake
during 2005. out of this 2.5 million $ is financial
aid, 3.6 billion are soft loans.
 Now in recent situation in Pakistan UN required
2 million $ to resolve the problem of flood
victims
 Effect of aid
Positive effect
 Aid helps in promoting economic growth and
development
 To stimulate economic growth through building
infrastructure, supporting productive sector such as
agriculture or bridging new ideas and technologies.
 To promote other development objectives such as
strengthening education, health,, environmental or
political system.
 To support subsistence consumption of food and
other commodities.
 It helps to overcome the bad effects of natural
calamities such as earth quick and floods.
 To fulfill the military requirement.
Effectiveness of aid

Why we got aid ?

Building
Promote education
infrastructure

Strengthen Aid Supporting

Political system Growth productive
sector
development
New ideas
health technologies

Subsistence
Stabilized
consumption
economy
Of food
 We can take hare an example of problems and relief
activities for earthquake victims in 2005 & flood
victims in 2010.
 The foreign assistance helps in the establishment of
the industrialization in the country
 Foreign aid stimulate domestic enterprise
 Good governance and quality economic policies
may increase the chance of bright future that will be
free from poverty, economic dependency political
instability and scarcity of the resources.
Negative effects
 After getting sovereignty of a country is lost
 Increase unwanted political exploitation.
 Unsuited economic conditionality
 The burden of debt servicing increases all the
time
 The tied loans given to developing country
tends to increase the inflation rate.
 The cost of foreign aid is very high if it is not
utilized properly. Specially in the case of
Pakistan .
 Unnecessary foreign aid is like a slow poison
and beggars have no choice but to live with
indignity.
Fungible source
 Y=C+I+G+(X-M)
 AID is using for none development
expenditure instead of development purposes
 Fungibility means aid is taken for
development and use for non development
purposes it raises the government s non
developmental expenditures
 It also leads to Dutch disease
Negative effects con…..
 There is theft of 600 billions of different taxes
in Pakistan and revenue of 143 billion is
wasted through smuggling every year. Corrupt
elites of politicians and bureaucrats have at
least $ 50 billions in the foreign banks.
 Too much dependency on foreign aid effect
the sovereignty of any country.
 Aid seemed to have substituted for domestic
savings, increase debt burden.
Effectiveness of foreign aid
 Hicks (1975) presented that , it would be stupid to
claim that the effort were purely humanitarian or
disinterested
 In Pakistan aid is not effective in a sense that this aid
is becoming a cause of more debt burden in Pakistan
 Aid= grants + loans
 Earlier
 Grants Loans
 70-80% 20-30%
 Now
 Grants Loans
 20-30% 70-80%
conclusion
 It is estimated that a $10 Foreign aid would
lift 25 million people a year out of poverty but
only if it favors countries with sound
economic management.
 Donors are actually allocating aid to facilitate their
FDI, MNC’s.
 Recipient Colonial Past.
Foreign aid fails as a development policy
it extends the power of ruling elites
recommendations
 It leads the third world away from the free market.
 reductions in non-development expenditures
 reducing the fiscal deficit,
 employment opportunities for the poor in both
rural and urban areas.
 by providing energy at a competitive cost,
 The fate of the nation is changed by the will of
its people and political leaders not by the
foreign masters.
 “mareez ko dawa kay saath saath dua kee bhee zaroorat hai”
Bibliography
 The economy of Pakistan Khawaja Amjad Saeed
Foreign. Aid by Jagdish Bhagwati and Richar and
Seants A. P Thrill Wall,
 Growth and Development with special references to
developing economies.
 Jhingan M.L. International Economies 2nd edition,
Konark Publisher (Pvt) Ltd. Delhi
 Todaro , Michael p.(2001). Economic Development
 Mahmood Azhar, the role of foreign aid in economic
development of Pakistan.