Pakistan Institute of Development Economics



Foreign Aid, Defence Expenditure and Public Investment inPakistan

The government schemes in many develqping economies are, ingeneral, financed through internal borrowings, generating taxesdomestically and increased foreign capital resources from public orprivate donor agencies. While the need for the public sector inplanning, operation and implementations process of the governmentschemes, in developing economies is now well recognised [e.g., Weisskopf(1972); Papanek (1973); Heller (1974, 1975)], there still seems to besome controversy prevailing, at least for some developing nations, sofar as, the ability of the public sector in channelling these scarceresources to the most productive use is concerned. In this context,[Heller (1975), p. 429] writes: … the effectiveness of the govemment’sdevelopment efforts have been cast in doubt. {It has been] argue{d] thatforeign capital inflows have resulted in increased public or privateconsumption rather than increased investment, and contributed less togrowth than was anticipated… the higher tax burden has been squanderedon non-productive fonns of public consumption. It is also important tonote that foreign inflows come under two dominant categories, namely,grants and loans. The first type (grants) can be viewed as inflowsintended to provide temporary and immediate relief of the developingeconomy in situations of emergencies. On the other hand, the secondcategory of transfers by the donor agencies are for long-termdevelopmental purposes and are expected to be used for publicinvestments. Based on a panel data on developing countries, [Levy(1987), p. 456] argued that:

Salim Chishti, M. Aynul Hasan

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