Aid on Social & Economic Development

Aid: Voluntary transfer of resources from one country to another

Tied Aid: Loans given on concessionary terms/ contract to import goods from donor country
Most aid are in the form of tied aid

1. Fill savings gap & foreign exchange gap to fund capital investments (Harrod- Domar)
 Fill information gap (transfer of knowledge)
2. Funds for investments in infrastructure (Physical capital)
 Industrialisation (Lewes 2 sector model)
 Increase AD
 Injection into circular flow of income
 Positive multiplier effect
 Sectoral development eg. Services: tourism
3. Improve Human capital
 Promote heath care, education , training
o Prevention& treatment of Aids
 Skills to manufacture high value-added goods
 More productive labour
4. Increased globalisation& trade
 Associated with growth & development
5. Reduced absolute poverty
 Reduced world inequality

Evaluation
1. Opportunity cost of aid
 Repayment of interest
o Less fund for government expenditure
o Higher taxes
2. Creates dependency culture
 No incentive to improve efficiency
 No incentive to pursue sound macroeconomic policy
 Unbalanced growth
3. Corruption
 Misallocation of resources (Government failure)
4. Discourages FDI
5. Aid not effective at poverty reduction
 Trade vs aid