Role of Foreign Aid in Economic Development

Foreign aids assists in the path of economic development in the following ways (1) Filling the Foreign Exchange Gap. The under-developed countries, awakening to the urgent need of rapid economic development, urgently require to import from th

Role of foreign aid in economic development

Foreign aids assists in the path of economic development in the following ways

(1) Filling the Foreign Exchange Gap. The under-developed countries, awakening to the urgent need of rapid economic development, urgently require to import from the already developed countries, machinery and other capital equipment, technical know-how and some essential raw materials to support a programme of large-scale industrialization. Even for agricultural development they may have to import fertilizers and modern machinery like tractors. All this gives rise to a heavy import bill to meet which they have no export surplus, their production capacity being still in infancy-and in the building up stage. Their traditional exports like raw materials and agricultural products cannot be expended quickly and adequately. The income elasticity of demand for such goods in foreign countries being very low. Besides, the advanced countries concentrate on heavy industries and their need for raw materials from under developed countries has diminished. Moreover, the advanced countries have taken to the development of services like shipping, insurance, etc. requiring no imports from the backward countries. They have also developed synthetic raw materials which have replaced the raw material imports from under-developed countries whose exports are thus drastically cut down. Protectionist policies pursued by advanced countries have also hit their exports. The easy imports matched by meagre exports causes a yawning foreign exchange gap and create a serious balance of payments problem. This is a big constraint in economic growth which foreign aid is expected to overcome.

Hence foreign aid plays a crucial role in overcoming the shortage of foreign exchange experienced by under-developed countries and in supplying much-needed funds abroad to finance their development programme.

(2) Filling Savings Gap. Foreign aid can fill up the two gaps viz., the Savings gap and the foreign exchange gap. Foreign aid can help increase domestic savings of the under-developed countries. Foreign aid increases the rate of investment and causes real incomes to rise which in turn will generate additional domestic savings. Thus bringing the savings gap, the under­developed countries will be able to reach a stage of self-sustaining growth.

(3)Availability of Technical Know-how. Generally, the lending countries stipulate that foreign aid will be accompanied by foreign technical exports. In fact, a good deal of foreign aid is supplied in the form of technical know-how. Obviously, if a country imports foreign machinery, it will be helpful if it also imports the services of foreign technicians and other high-level technical personnel. The foreign technical personnel are helpful in training the local technicians who can. In course of time, take over just as Indian engineers and technicians have taken over the steel plants built by foreigners. In this way, the country can achieve self-reliance.

(4) Realizing External Economics. Foreign aid helps in building up of basic heavy or 'key' industries such as steel, machine-making, fertilizers and economic overheads or infrastructure, such as means of transport and communications, irrigation arid power projects. Obviously, this form of economic development is of invaluable assistance in developing other related industries by making available a number of external economies.

Thus, in these and many other ways, foreign aid serves as a catalyst in promoting economic growth of under-developed countries. In course of time, an agarian and under-developed economy is transformed into a modern fully developed economy and takes a rightful place among the advanced nations of the world.

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