DR MEHMOOD UL HASSAN KHAN
Foreign aid plays very essential role in the overall development of a country provided it is utilized properly. Due to the scarcity of economic resources and others natural constraints every country needs the sufficient amounts of foreign funds in shapes of foreign aid. Generally foreign aid is granted to reduce the budget deficit, trade promotion and strategic considerations. Foreign aid can affect the macro and micro policies of the host country. Pakistan has been receiving foreign aid from many countries and international monetary agencies. It is also living fact that Pakistan has been graveyard of development projects financed by the many international donors.
In principle foreign aid could be a major source of capital, fueling the growth of developing countries and helping to promote human development. To fulfill the two-gap theory developing countries have to rely on foreign aid. These two important gaps are the import-export gap and saving-investment gap. Pakistan like any other developing third world nation has been a recipient of foreign aid during its 50 years of existence. This aid has been in the form of grants, tied aid, project aid and huge inflows intended to keep the foreign exchange reserves at a safe level to cope with industrialization related liberal import policy.
Foreign aid is a post World War II phenomenon. The World War II is supposed to be major point in the evolution of the world economy. Priorities were changed and new regional alliances were emerged in the world. New bitter economic realities were found and ties of friendship were tightened on the scale of loyalty and common interest. Motivating but confronting ideologies i.e. communism and capitalism were going parallel to parallel and waves of integration of the world economy was also affected. All these factors ultimately alter the overall scenario of foreign aids programs, diplomacy, and rules of the power. The motivation for foreign aid has evolved specially in during this period.
In this analytical study many new dimensions of global foreign aid is explored and efforts are made to evaluate the worthiness of foreign aid. Pakistan is receiving foreign aid since the very beginning. But the overall economic stability and industrial growth, financial soundness and infrastructure strength is not good. Due to shortage of sufficient funds for economic development and poverty alleviation most of the countries of Africa, Asia and others parts of the world need foreign aid. In most of the case donors countries or international monetary agencies like IMF, World Bank, Asian Development Bank and Consortium imposed many conditions for foreign aid, which ultimately slow the economic development of these countries.
This study may be useful to policy makers, financial analysts, economists and associates students and teachers of the commerce and public policy.
The two-gap theory suggests that foreign aid plays very important role in the development of developing countries. They have to rely on foreign capital inflows to fill two gaps: the import-export gap and saving-investment gap. However, foreign aid can also be granted for some others determinate like structural adjustment programmes, emergency relief, transformation of economies, political objectives of the donors and recipients etc. Foreign aid has also transformed entire sectors. The agricultural innovations, foreign investments, and policies that created the green revolution improving the lives of millions of poor people around the world-were financed, supported, and disseminated through alliances of bilateral and multilateral donors like World Bank, IMF, and Asian Development Bank The idea of foreign aid / assistance is very old in human history. Famous Marshall Plan was the key program to look after the basic needs of the economies of Western Europe countries. The main aim of that famous plan was to give help in the process of rehabilitation and reconstruction of these destroyed economies.
This plan was very successful in its aims (Bandow, 1985). Initially Bretton Woods conference and the International Bank for Reconstruction and Development [IBRD] made bilateral foreign aid very easy for the developing countries. After that many others financial institutions like International Development Association [IDA], International Finance Corporation [IFC], Inter-American Development Bank [IDB], Asian Development Bank [ADB] and Islamic Development Bank [IDB] were also established for the sake and attainment of economic growth of the poor countries via foreign aid (World Bank, 1992).
There are sharp differences upon the subject of foreign aid to the developing countries. Michael (1999) stressed that foreign aid is essential for resources mobilization and economic growth and development. According to Qudsia (1998) foreign aid promotes a culture of dependency instead of encouraging the recipients countries to explore their own indigenous resources. Pakistan and many countries of the Africa are the prime example. Richard and Robert (1973) concluded that rapid inflows of foreign capital in shape of aid, grant, loan and project assistance can pose numerous problems for developing countries. Foreign aid is a political success; it is an economic and social failure. By increasing government power, destroying economic incentives, promoting unprofitable enterprises, and subsidizing misguided policies, foreign aid increases Third World poverty.
Research scholars and economists are also differing in their opinions on the influences of foreign aid at macro and micro levels of development of the recipients countries. Official development assistance in shape of foreign aid between 1960 and 1985 varied between 1.9 per cent of the GDP of developing countries in 1961 and 1962 and 0.8 per cent in 1985. But with an end of the mutual struggle of supremacy between U.S.A and former USSR the rate of foreign aid has declined (World Bank, 1986)
Foreign aid brought many multidimensional benefits to many countries of the global. Botswana and the Republic of Korea in the 1960s, Indonesia in the 1970s, Bolivia and Ghana in the late 1980s, and Uganda and Vietnam in the 1990s are all examples of countries that have gone from crisis to rapid development due to the contribution of foreign aid from donors countries and agencies (Mosley, 1987, April 17). Foreign aid played a significant role in each transformation, contributing ideas about development policy, and training for public policymakers, and finance to support reform and an expansion of public services. Foreign aid has also transformed entire sectors. The agricultural innovations, investments, and policies that created the green revolution improving the lives of millions of poor people around the world-were financed, supported, and disseminated through alliances of bilateral and multilateral donors (World Bank, 1995).
Foreign aid is also is an unmitigated failure in many countries of the Africa and some countries of the Asia and Latin America. There are many integrated reasons for that inefficacy of the foreign aid. These are corruption, ill intentions of the governing elite, political instability, ethnic violence, dictatorship and inability to command over all the related social, economic and financial issues. In many cases the continuous flows of foreign aid put the burden of massive debt on the host countries and the ratios of debt servicing increases all the time (Bovard, 1986 January 31). The tied loans given to developing country tends to increase the inflation rate, increase the unwanted political exploitation and unsuited economic conditionality within the country. The removal of subsidiaries from health, education, utilities, public services, downsizing of the employees, privatization of many state owned enterprises and corporations, imposition of general sale tax are the some but very strict measures that Government of Pakistan has to take in order to fulfill the conditions imposed by World Bank and IMF (Hassan, Nation)
Many rulers of the Africa like former Zaire’s Mobuto Sese Seko, is just one of several examples where a steady flow of aid ignored. Foreign aid in different times and different places has thus been highly effective, totally ineffective, and everything in between. The checkered history of assistance has already led to improvements in foreign aid, and there is scope for further reform. The development experience of India provides a classic example of the failure of foreign aid. India receives more aggregate aid than any other developing nation on earth. It received a total of 55 billion U.S. dollars over a 43-year period (Kamath, 1995).
Many international economists and prominent international financial analysts demand the greater flows of foreign assistance to deprived regions of the world like Rwanda, Somalia, Zaire, Bosnia, Chechnya; Bangladesh, and the Haiti because all these countries are facing daunting problems of extreme poverty, over-population, under-education, environmental degradation, disease, civil disorder, and crumbling public infrastructures (The Economist, 1994 May 7).
BNEFITS and COSTS FOREIGN AID
Prominent economists and research scholars share different opinions about the impact of foreign aid to host country’s macro and micro policies. According to White (1992), Mosley (1987) and Cassen (1986) foreign aid plays very important role at the micro levels policies of the host countries however, at the macro level the evidence is much more ambiguous. According to Sargent, Thomas (1993), Gang and Khan (1986, 1991), and Khan (1994, 1996), foreign aid plays very little impact on the macroeconomics policies due to the complexity and constraints facing by the host countries.
Foreign aid plays very important role in the development of a country and its benefits are given below:
• According to Chenery and Bruno (1962) and Chenery and Strout (1966) foreign loans and assistances bridge saving gap. Foreign aid/loans supplement domestic saving and help in bridging the resources gap.
• According to Lance Taylor (1993), Bacha (1984) foreign aid pals pivotal role to fulfill internal and external balances.
• Heller (1975) Taylor 1993, pp. 11-12). Increase productivity of various economic sectors
• Cashel-Cordo and Craig, 1986; Booth, (1988) Increase in tax collection Binh, Tran-Nam and Mark McGillivray, (1993). The foreign assistance helps in the establishment of industrialization in the country. The flows of technical knowledge improve the quantity and quality of manufactured goods and makes them available at lower prices to the domestic consumers.
• Foreign aid helps in increasing marginal productivity of labour in the recipient country. The real wages of the workers are increased by the induction of foreign aid.
• Foreign aid stimulates domestic enterprises. The firms avail of the benefits of external economies like that of training of labour, introduction of new technology, new machinery Foreign aid plays very important role in the reduction of poverty and other socio-economic problems and efficient economic institutions and macro economic and fiscal policies in the developing world are the key to utilize the flows of foreign aid properly. Good governance and quality economic policies may increase the chances of bright future the future that will be free from poverty, economic dependency, political exploitation, and scarcity of the resources (Richard, & Robert, 1973).
The Cost of Foreign Aid to Recipient Country
The cost of foreign aid is very heavy on the recipient country if it is not utilized properly. It has been observed that most of the most of the developing countries including Pakistan are not fully utilizing the foreign aid.
• The burden of debt servicing increases all the time.
• The tied loans given to developing country tends to increase the inflation rate
• Increase the unwanted political exploitation
• Unsuited economic conditionality (Kamath, 1995).
Role of Global Foreign Aid in Post Cold War Ear
Political ideology, foreign policy, commercial interests and strategic importance were the main causes for the granting foreign aid in the post and especially after the World War II. In many cases the foreign aid was granted specifically to stop the onward march of the Communism in the world. Similarly, aid from socialist governments was motivated by a desire to promote socialist political and economic systems. Furthermore, a number of donors supported former colonies in order to sustain their former economic domination and political supremacy.
In the beginning or the post cold war period foreign assistance/ aid had twin objectives. These two objectives are given below:
• The first objective was to promote long-term growth and poverty reduction in developing countries; the underlying motivation of donors was a combination of kindness and a more self-interested concern that, in the long term, their economic and political security would benefit if poor countries were growing.
• The second objective was to promote the short-term political and strategic interests of donors. Aid went to regimes that were political allies of major Western powers mostly NATO. Bolivia and Zaire received U.S. aid, partly for strategic reasons.
But after the Cold War, foreign aid was frequently used to maintain or extend the strategic interests of the major powers i.e. U.S.A and USSR. To reduce the budget deficit, trade promotion and strategic considerations. Foreign aid was also granted on the account of environmental spending, humanitarian relief, peacekeeping and the promotion of political transitions to democracy (Alesiana & Dollar, 1998).
Role of Global Foreign Aid after the Cold War Ear
• The fall of communism and the end of the Cold War eroded support for aid given on ideological grounds. National security motives are still relevant in some cases e.g. Israel, Egypt, but aid to countries in Asia and Africa attract less support. It is especially true in case of Pakistan when former USSR left the Afghanistan there was gradually fall in the volume of foreign aid granted by the USA.
• The traditional support of development aid by liberal groups has been eroded by competition from other concerns (notably the environment) and distrust of the bilateral and multilateral aid agencies. These agencies, and more recent institutions such as the World Trade Organisation [WTO], are seen either as instruments of commercial interests in the developed countries, seeking only to exploit cheap labour and natural resources in developing countries, or as self-interested, rent-seeking bureaucracies.
• The widespread perception that aid has been ineffective in fostering growth at the macro level and many anecdotes about failed projects at the micro level have led to “aid fatigue” in many donor countries.
• The increasing awareness of examples of bad governance, corruption, and “crony capitalism” has led to scepticism about the sincerity and credibility of aid receiving governments. The recent Asian financial crisis revealed such problems, and the inability of African countries to attract private capital is another evident reflection of such concerns (Griffin, 1991 October).
During the 1970s and 1980s foreign aid from OECD countries rose steadily. In 1991 official development assistance peaked at $69 billion (World Bank, 1982). In the 1990s, however, three events have lowered the absolute and relative importance of foreign aid: fiscal problems in OECD countries, the end of the Cold War, and the dramatic growth in private capital flows to developing countries (White1992, January).
Incidence of Global Foreign Aid
Name of the Region Year-1993 Year-1998
East Asia & Pacific 9434 8417
Europe &Central Asia 9688 8714
Latin America &Caribbean 5249 5452
Middle East & North Africa 13038 13129
South Asia 5716 5024
Sub-Saharan Africa 17499 14186
Source: World Bank (1999). Geographical Distribution of Foreign Aid
All major donors reduced aid relative to their GNPs between 1991 and 1997. The decline was especially sharp in the United States-aid was a mere 0.08 percent of GNP in 1997 (Bandow, 1985). Sweden and other Nordic countries have traditionally been generous, giving almost 1 percent of GNP. But among large countries, France is the only one that gives more than 0.45 percent. Collectively, OECD countries contributed just 0.22 percent of their GNP in 1997(The Economist, 1994, May 7). The end of the Cold War likely influenced some countries’ decisions. The strategic importance of aid has ebbed; as a result it risks losing its broad support among donor governments. Due to the rapid inflows of foreign direct and portfolio investment the share of foreign aid from governmental and international monetary agencies like IMF and World Bank decreased.
Justification of Global Foreign Aid in the Past and Present
Political ideology, foreign policy, and commercial interests were the main causes for the granting foreign aid the past and especially after the world war II. In many cases the foreign aid was granted specifically to stop the onward march of the Communism in the world. Similarly, aid from socialist governments was motivated by a desire to promote socialist political and economic systems. A number of donors support former colonies in order to sustain their former economic domination and political supremacy. They also pursue a variety of foreign policy and domestic commercial and private sector interests in the provision of aid. Economic development. This justification has been used both as a goal in itself and as a necessary condition for the realisation of other development goals such as: poverty alleviation, the spread of democracy, gender issues, social development, and the expansion of markets in the recipients countries (Kamath, 1995).
The fall of communism and the end of the Cold War era changed the ideas of foreign aid granted on ideological grounds. National security motives are still relevant in some cases e.g. Israel, Egypt, but aid to countries in Asia and Africa attract less support. It is especially true in case of Pakistan when former USSR left the Afghanistan there was gradually fall in the volume of foreign aid granted by the USA and rest of the West
In many countries of the world foreign aid is used and foster political exploitation. There are many examples of Third World governments using foreign aid to enrich the ruling elite at the expense of the general masses. President Sese Seko of Zaire, for instance, used foreign aid money to partly fund the construction of eleven presidential palaces. Foreign aid is also used to build expensive capital cities, such as Brasilia, Islamabad, Abuja in Nigeria, Lilongwe in Malawi, and Dodoma in Tanzania, that benefit few people except the ruling classes (Bovard, 1986 January 31).
Role of Foreign Aid in the Development of Pakistan
Pakistan has been a recipient of foreign aid since its existence. This aid has been in the form of grants, tied aid, project aid and huge inflows intended to keep the foreign exchange reserves at a safe level to cope with industrialization related liberal import policy. Foreign aid has played very important role in the economic development of Pakistan. In the beginning Pakistan received very small aid from the rest of the world and international monetary agencies like World Bank and IMF. Industrialization process began in Pakistan after the late 50s and to fulfill the demand of intense development activity, increased reliance on foreign resources became virtually inevitable. In the economic history of Pakistan five-year planning scenario is also responsible for foreign aid. Government of Pakistan had to request for the foreign aid for the completion of the five years targets and the volume of foreign aid increased with the introduction of every five-year plan.
Many economists share the same views about the foreign aid and economic development. Many third world countries received substantial foreign aid from the developed countries for the economic stability and development but political considerations strategic alliances has been partly responsible for the level of aid flows to different countries at different points of time.
Due to geo-political developments around its borders Pakistan received liberal assistance packages during the decade of 60’s and 80’s. Pakistan has been closed ally of western world in order to stop the onward march of communist menace. There was lavish foreign aid and military assistance to Pakistan due war in Afghanistan. The inflows of generous foreign aid reached its climax in the ear of Zia. With the end of war in Afghanistan, policy of isolation and lesser interests of God Fathers Pakistan could not have economic and materialized aid on softer terms (Kardar, 1995). The composition and terms of foreign aid has changed considerably from grants and grant like assistance to hard term loans over the years. The share of grants and grant like assistance in the total commitments was 80% during the first five-year plan (1955-60). It was dropped to 46% during the second five year plan (1960-65) and continued to decline thereafter, averaging 31% during the third five year plan (1965-70) and 10% in the fourth five year plan (1970-75). There were many geo-political aspects for that down ward trend in foreign aid in shape of grant or grant like (Abbas, Brecher, 1992).
Foreign aid in shape of loans, and credit has been granted on easier conditions during the 1960s and the 1970s. During the 1980s and the first eight years of the 1990s (1990-98) the source and availability of foreign aid has made very harder and difficult for Pakistan. The rate of interest of foreign aid has been on the move during the last 50 years. Furthermore, the repayment period of loans/credit has been reduced by the international monetary agencies and western world (Qureshi, 1997).
Aid Commitments to Pakistan (1960-1965)
Agency 1960-61 1961-62 1962-63 1963-64 1964-65 Total
United States 115.4 95.9 211.9 223.1 252.6 898.9
West Germany 17.4 34.0 94.5 42.0 28.1 216.0
IDA – 21.0 11.5 142.7 32.3 207.5
Japan 20.6 20.0 37.9 30.0 35.0 143.5
United Kingdom 22.4 19.6 32.9
19.2 30.2 124.3
IBRD 15.0 – 43.0 62.0 – 120.0
Canada 17.0 18.8 16.9 14.4 14.6 82.1
France – – – 7.8 17.6 25.4
Switzerland – – – 10.0 – 10.0
IFC – 4.0 – – 5.5 9.5
Denmark – – – – 7.4 7.4
Italy – – – 3.0 1.6 4.6
Yugoslavia – – 4.8 10.3 15.0 30.1
Netherlands – – – 1.1 10.8 11.9
Source: Memorandum for the Pakistan Consortium 1966-67
Due to generous foreign flows of foreign aid there was massive economic growth in Pakistan. But other major economic indicators like balance of payment, foreign exchange reserves, and foreign indebtedness were worsened. The 17-day war with India in September 1965 brought serious dislocation to Pakistan. It diverted scarce resources towards defence procurements, weakened productive capacity and interrupted aid inflows. These problems were further compounded by political disruptions in 1969. The total size of the third plan is Rs 52 billion, with Rs 30 billion for the public sector and Rs 22 billion for the private sector. Domestic resources were to account for Rs 35.5 billion and foreign resources Rs 16.5 billion (Abbas. & Brecher, 1993). The breakup of foreign resources/ assistance was as under:
FOREIGN RESOURCES (1965-70)
Commodity Loan 5500
Project Loan 7000
Loan to Private Sector 2300
Foreign Private Investment 700
Source: Pakistan Planning Commission – The Third Five-Year Plan (1965-70)
Foreign assistance flows during Bhutto years (1971-77)
Source: Economic Survey (1996-97)
Impact of United States Foreign Aid/Assistance on Economic Growth
Both the countries share the long history of mutual and closed economic ties and military cooperation. The CENTO and SEATO pacts are supposed to be the pioneer for economic and military assistance. Pakistan received bountiful economic aid totaling 2,658.9 million during 1951/52 to 1964/65 which was the approximately 61% of the total foreign aid received from all sources. US assistance helped the intercontinental hotels to establish units in Karachi, Dhaka, Lahore and Rawalpindi. The Pakistan Industrial Credit and Investment Corporation [PICIC] was provided assistance for re-lending to the private sector. A role it continued to play well into the ads. Assistance during that period also helped set up Rafhan Maize Products Co. in Faisalabad, Singer Sewing Machine and General Tyre and Rubber Co. in Karachi (Qureshi, 1997).
In 1979 and onward the political history of Pakistan again lost in the darkness of socio-economic depression, isolation and stagnation and the state of uncertainty prolonged for many years. There was very sharp decline in the flows of foreign assistance but to due to the Russian invasion of Afghanistan Pakistan once again in the main stream. Muslim countries and especially USA injected huge foreign assistance and military aid to Pakistan to sustain the communist onslaught. The two countries agreed on a six-year (1982-87) 3.2 billion dollars military sale and economic aid package. This new economic package was granted for the economic revival and to increase the military might. At the same time IMF also extended 1.5 Billion Dollar Extended Fund Facility [EFF], with the pre-condition of import Liberalization for the grant of loan (Kardar, 1994).
Under the new package, the declining trends in US assistance to Pakistan were reversed. The new package of generous foreign assistance was not granted to Pakistan to look after the geo-political and strategic interests of the USA. The Iranian revolution and the Soviet invasion of Afghanistan, it was now the perception of the United States to share mutually closed economic and militarily relationships with Pakistan because a strong and independent Pakistan is in the mutual interest of the United States and Pakistan as well as the entire western world. With the passage of time and ever changing geo-political scenario the flows of foreign assistance from the U.S especially and the rest of the western world generally decreased. The alleged Islamic fundamentalism, nuclear proliferation, Pressler Amendment, political isolation, drugs trafficking and down fall of communism supposed to be the main reasons for the gradual sharp decline in the flows of foreign aid (Rose, Husain, 1997).
U.S. Foreign Aid to Pakistan
1951/52 to 1964/65 1965/66 to 1976/77 1977/78 to 1987/88
1) Grants 1,416.7 594.9 1,147.6
2) Loans & Credits 1,242.2 1,894.1 1,761.9
Total (1+2) 2,658.9 2,489.0 2,909.5
Grants as % of U.S Aid 53.0 24.0 39.0
U.S Aid as % of total world Aid 61.0 33.0 15.0
Source: Economic Survey (1988-89)
Sources of Foreign Aid
The major sources of foreign economic assistance to Pakistan have been the Consortium, non-Consortium, and Islamic countries. The foreign aid to Pakistan consortium consists of 11 countries, Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Norway, Sweden, UK and USA. Consortium is the single largest source, which provides 81% of total foreign aid. It consists of 47% on bilateral and 34% multilateral basis (Nasir, Hyder, 1995).
Sources of Foreign Aid
Year (1997-98) Year (1998-99)
Consortium 1420 1659
Non-Consortium 669 955
Islamic countries 16 82
Source: Pakistan Economic Survey: (1997-98).
Foreign aid may be successful in a good policy environment. Foreign assistance leads to faster growth, poverty reduction, and gains in social indicators in developing countries with sound economic management because sound economic management encourages more foreign aid and foreign direct investment. It is estimated that a $10 billion increase in aid would lift 25 million people a year out of poverty but only if it favors countries with sound economic management.
The Macroeconomic Effects of Foreign Aid
Year Effects (Project Aid)
1960s Key factor for the accelerating growth of the commodity producing sectors.
1970s Provided resources for the development of a capital goods sector
1980s Revival of private sector
1990s Maintenance of an impressive growth momentum.
Moreover, non-project aid helped to overcome food shortage, balance of payment deficit, and Afghan refugee problems.
Foreign aid contributed new ideas about development policy, and training facilities for public policymakers, and finance to support financial and social reforms and an expansion of public services. Foreign aid is granted to reduce the budget deficit, trade promotion and strategic considerations. Foreign aid was also granted on the account of environmental spending, humanitarian relief, peacekeeping and the promotion of political transitions to democracy.
Foreign aid fails as a development policy because it destroys the incentives of the marketplace and extends the power of ruling elites. Because it leads the Third World away from the free market, it actually increases Third World poverty. On the other hand, the alternative policy of free trade will give the private sector of the LDCs an opportunity to expand and flourish.
It must be emphasized that free trade alone will not solve all the problems of Third World poverty. Free trade only increases the opportunities of the less developed nations. It will not eliminate the shackles of government regulation and intervention that dominate Third World economies. That task can only be done by the people of the Third World themselves. Yet, eliminating foreign aid and instituting free trade will at least encourage Third World peoples to develop institutions such as private property rights and free markets which will lead to growth and prosperity.
Unnecessary foreign aid is like a slow poison and beggars have no choice but to live with indignity. Ours is the age of economic salvation and an institutionalized siege. The fate of a nation is changed by the will of its people and political leaders not by the foreign masters. Economic independency is the though goal but not the impassable gulf. There is theft of 600 billions of different taxes in Pakistan and revenue of 143 billion is wasted through smuggling every year. Furthermore corrupted elites of politicians and bureaucrats have at least $ 50 billions in the foreign banks. All these looted money should be regained. Tax system along with the complete abolishment of smuggling should be institutionalized. More emphasis should be made on agriculture sector along with small business industries. Efforts should be made to export high-tech products. Self-reliance and economic stability can be achieved by joint giant effort
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