Role of foreign aid in economic growth.

Byline: S. Kamal Hayder Kazmi

International researchers identified that the foreign aid is a significant source of income in developing states and carries potential to play a main role in enhancing economic growth.

The traditional literature on economic growth emphasizes the optimistic role of foreign aid in the process of economic development. It influences the process of growth through reducing the saving-investment gap, growing productivity and transferring the modern technology. However, few economists recorded the advantages of foreign capital inflows are of temporary nature.

It is also identified that the impact of foreign aid on economic development has always been a controversial issue.

During 1950s, 1960s and 1970s rich countries utilized foreign aid to fill the gaps in resources, encouraging local/domestic investment and industrial development under the belief that foreign aid could assist developing states to accelerate the takeoff into self-sustained growth through generating new local investment.

Various famous economists assert that foreign capital inflow is necessary and sufficient situation for economic growth in developing states. They claim that there exist an optimistic correlation between foreign aid and economic growth because it complements local resources and also supplements local savings to bridge saving-investment gap and offers extra financial resources which assists to attain the short-term growth targets.

Studies related to the foreign aid also concluded that foreign aid assists to close the foreign exchange gap, offer excess to modern technology and managerial skills and allow easier excess to world markets. It is also said that every state, mainly the developing states like Pakistan, need foreign aid in one or other form for its development and boosting pace of economic growth and undertaking projects, programmes and strategies for the welfare and well-being of its people. No doubt, external resources or foreign aid chiefly comprise project loans and grants, programme loans and other loans and grants. Project loans and grants are attained from friendly countries and specialized international financial institutions i.e. WB, ADB, Asian Infrastructure Development Bank and the Islamic Development Bank among various others. Sources recorded that project loans and grants so secured are basically utilized for procurement of project equipment, supplies and services, etc.

Programme loans are offered for budgetary...