EXTERNAL SOURCES OF

ECONOMIC DEVELOPMENT
Rizki Rahmadini Nurika, S.Hub.Int., M.A.
Week 11
Introduction
• What are needed to develop a country’s economy?

Institutional Factors

Capital and Technological

Factors

Human Factors

Natural Factors
• Natural Factors.
• Quantity and/or quality of land or raw materials.
• Singapore provides a good example of maintaining quality of land.
• Countries will generally aim to improve the quality of their natural factors
rather than quality.
• The quality of land may be improved by using fertilizers, better planning
of land usage, and improved agricultural methods.
• Human Factors.
• Quantity and/or quality of human capital (labor).
• Quantity can be increased either by encouraging population growth or
by increasing immigration levels.
• Quality can be increased through health care, education, training, etc.
• Capital and Technological Factors.
• Quantity and/or quality of physical capital.

Factory buildings machinery, shops, offices, motor vehicles, etc.

• The quantity is affected by financial sources.
• The quality can be improved by higher education, research and development,
or access to foreign technology and expertise.
• Institutional Factors.
• Institution  the rules, organizations, and social norms that facilitate
coordination of human action.
• Economic, legal and social institutions that influence economic growth:
• Banking system
• Education system
• Health care
• Infrastructure
• Political stability
• Factors needed to develop country’s economy requires
financial sources.

Domestic
Financial supplementing
Sources domestic
source
External
Domestic Sources

Domestic Sources
Domestic
National Budgets
Investment

Saving Tax
External Sources

External Sources

Foreign Foreign Foreign

Aid Debt Investment
Foreign Aid
• “Foreign aid is defined as the international voluntary transfer of
resources (capital, goods, or services) from a country or international
organization to another country for the benefit of the recipient country
or its population.” (Encyclopedia Britannica)
• Aid can be economic, military, or emergency humanitarian (e.g.,
aid given following natural disasters)

• Capital: money, technology, etc.

Types of Aid
• The most common type of foreign aid is Official
Development Assistance (ODA)  to promote
development and combat poverty.
• The primary source of ODA is bilateral grants and sometimes the
aid is channeled through IGO and NGO.
• As Morrissey (2001) points out, there are a number of
mechanisms through which aid can contribute to
economic growth
• Aid increases investment in physical and human capital
• Aid increases the capacity to import capital goods or technology
• Aid increases the amount of savings.
• Aid is associated with technology transfer.
Foreign Debt
• “Foreign debt is amount that one country owes to other
country or international organization” (Business
Dictionary).
• Sources of foreign debt.
Defici
Loan
t
Government- Negative
to- balance of
government trade

International
organization-
to-
government
• To meet the definition of foreign debt, the debt must be
owed by a resident (debtor) to a non-resident (creditor).
• Residence is determined not by nationality, but by where the
debtor and creditor have headquartered their centers of economic
interest.
• The external debt was an important stimulator of
economic growth and a way to balance the budget.
Foreign Investment
• “Foreign investment involves capital flows from one
country to another, granting extensive ownership stakes in
domestic companies and assets.” (Investopedia)
• Foreign investment denotes that foreigners have an active
role in management as a part of their investment.
• The most common type of foreign investment is capital
stock  Foreign Direct Investment (FDI).
• Developing countries have come increasingly to see FDI as a source
of economic development and modernization, income growth, and
employment.
• FDI contributes to both factor productivity and income growth in host
countries through three channels:
• The linkages between FDI and foreign trade flows.
• The spillovers vis-à-vis the host country business sector.
• The direct impact on structural factors in the host economy.
THANK YOU