Pakistan Institute of Development Economics



Eliminating Dependence on Foreign Aid— Some Policy Implications

Author: A.R. Kemal

The domestic resources of the developing countries are usually too limited even to permit a steady maintenance of their per capita income. In their attempt to improve the level of their per capita income, such countries resort to the strategy of increasing their growth rate by relying on foreign resources. In an economy, where population is growing at the rate of 3 percent per annum, and saving capacity is less than 10 percent of the G.N.P., the chances of increasing the per capita income are very low. Capital inflow allows an economy to grow at a higher rate. It is expected that an increasing proportion of increased income will be saved so that the economy would be self-reliant after some years. However, most of the aid to the developing countries is in the form of loans, often on very unfavourable terms, with the result that the debt servicing problem becomes quite serious. The huge burden of debt servicing makes it rather difficult for the developing countries to attain self-reliance. Since a continuous aid inflow means a surrender of national sovereignty to some extent, almost all the developing countries want to eliminate their dependence on aid as soon as possible. To achieve this objective, many developing countries set a time period after which the capital inflow would hopefully be zero. If a time limit is to be set, then we must know the policies that a government will have to follow in order to eliminate aid flows. In particular, we need to know the maximum allowance for consumption out of the increase in national income. Similarly, if there is a limit to the marginal propensity to save, we must determine the period over which a country can realistically hope to do away with the aid.

A.R. Kemal

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