It should be noted at the outset that ‘economic aid for growth’ is needed only by less developed countries. It is not needed by a developed country with adequate export earnings.
Occasionally, of course, it may also face a payments crisis on account of some ‘liquidity crunch’ (such as due to a speculative flight of capital). But the ‘accommodation’ provided by other countries for helping it out of such a crisis is not ‘economic aid for growth’.
1. Increased Availability of Productive Resources:
An underdeveloped economy, by its very nature, suffers from a scarcity of non-labour productive resources—more particularly, a scarcity of capital and technological resources needed for industrialisation and provision of sophisticated services.
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It faces a ‘resource gap’ which has to be met in one of the two ways, namely, (a) reduction in domestic consumption level, or (b) an inflow of resources from rest of the world.
The former course is very difficult to follow because the consumption level of its population is already quite low. And, this makes a case for inflow of resources from abroad in the form of foreign aid.
2. Technology:
Foreign aid facilitates the inflow of improved technology and thus saves the aid-receiving country the resource cost of developing that technology on its own. Moreover, it is quicker to import technology and use it as compared with developing it domestically.
3. Growth Multipliers:
A judicious use of foreign aid helps a country in filling crucial gaps in its demand and supply channels and thus facilitates a balanced growth of its economy.
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This also means creation of added investment opportunities and growth multipliers, as also development of local talent of entrepreneurship. There is greater acceptance of the need to adopt quality standards.
4. Infrastructure:
An underdeveloped country suffers from an insufficient and inefficient infrastructure. Growth economics recognizes the critical importance of infrastructure in enabling a country to achieve and maintain a higher rate of growth.
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However, it is very difficult for an underdeveloped country to provide the type of infrastructure needed to support a modern developed economy. Foreign aid can be a great help in overcoming this deficiency.
5. Management and Work Attitude:
It is expected that foreign aid would bring in newer and more efficient techniques of management and it would also promote a better attitude towards work efficiency. It also makes consumers and producer’s quality, productivity and cost conscious.
6. Economic and Institutional Reforms:
Inflow of foreign aid helps the authorities and the public in understanding the need for reforms in those institutions of the country which obstruct economic efficiency and a better utilisation of its productive resources.
For example, an aid-recipient country, having come in contact with the structure and working of the financial systems abroad, is more likely to understand the need for financial reforms.