Foreign aid is meant to do three things, viz., (a) to supplement domestic savings, (b) make available additional supplies of foreign exchange, and (c) facilitate the transfer of technology. The extent to which foreign aid can contribute to the development of the productive capacity of the country depends, on the judicious use of foreign aid; the effort and the total disposable resources of the recipient country. Besides, foreign aid creates growth potential far beyond the point where it is applied. The import of capital goods may release non-aid resources for increasing the current consumption while aiding in terms of consumer goods may, in effect, help release domestic resources for capital formation. Therefore, it is difficult to assess the impact of aid precisely. Consequently, we shall discuss the significance of the participation of aid in creating productive capacity.
1. Foreign aid has helped to raise the level of investment: Foreign aid has helped to increase the rate of investment of the country. Improved roads, sanitation and internet connection may lower business costs, while improved employee health and skills may open up the country to entirely new kinds of investment. Aid may also promote investment by improving the country’s balance of payments, increasing its ability to finance the outflows of profits from FDI projects. Along with FDI and remittances, aid is a major source of external finance and foreign exchange for developing countries. Hence, foreign aid promotes the inflows of foreign direct investment and foreign institutional investment of the country.
2. Foreign aid helps the economy of the developing country to grow: When the recipient country of a foreign aid combines the aid received (if it is in the form of money) with very good economic policies and management, then this will allow for the economy of the country to grow. This is one of the biggest advantages of foreign aid to developing countries. Over the years, some developing countries including India have been able to use the aid they received from donor countries judiciously and have moved themselves out of poverty.
3. Employment avenues are created as a result of foreign aid: Foreign aid makes it possible for more jobs to be created in the country that is receiving the aid. When governments use the funds they receive from foreign countries wisely, they are able to increase the economic activities in their country by setting up industries, construction firms, commercial ventures, etc. And all these businesses end up employing a large number of people who would have been otherwise unemployed.
4. Foreign aid helps in solving the problem of balance of payment: Countries that receive financial aid in the forms of loans, grants, etc are capable of using this aid to supplement their foreign exchange earnings. This plays a very instrumental role in solving balance of payment problems.
5. Foreign aid allows for experts to come into the country and help: Normally when developed countries give out aid to developing countries, they make available certain experts to go into the developing countries to assist them in handling various sectors of their economy. Some of these sectors include the agriculture sector, construction, education, health, etc. Such experts are more often than not in short supply in these countries receiving the aid, so their presence means good news for the development of the economies.
6. Foreign aid is very important in times of disasters: When a country is facing unbearable hardships brought on by natural or man-made disasters, foreign aid is one of the most important things that helps a country to surmount the difficulties of the disaster. Over the years, foreign aid has helped so many developing countries to pull through major disasters or catastrophes such as food shortage and the mass displacement of people as a result of floods or earthquakes. Thanks to foreign aid millions of lives have been saved over the years.
7. Foreign aid helps in rebuilding a country after a disaster: Foreign aid is very important in the rebuilding of a country after a major disaster or catastrophe such as floods or earthquakes. Many countries have been able to recover from major tragedies as a result of the aid they received from richer countries.
8. Foreign Aid has helped to enlarge technical resources: External aid has also helped to enlarge technical resources through (a) the provision of expert services, (b) training of Indian personnel and (c) helping the establishment of new or the development of existing educational research and training institutions in the country.
Conclusion:
Foreign capital can play a vital role in bringing about international economic cooperation for establishing world peace and better harmony. International agencies like United Nations or its subsidiary organization has come forward in a radical way to play a crucial role in enhancing economic cooperation between the developed and the developing.
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