introduction foreign aid

8/10/2019 Introduction Foreign aid

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Introduction Foreign Aid:

Foreign aid means economic, technical, or military aid given by one nation to another for

purposes of relief and rehabilitation, for economic stabilization, or for mutual defense.

Some experts charges that aid has enlarged government bureaucracies, perpetuated bad

government,enriched the elite in poor countries, or just been wasted. Other argues that

although aid has sometimes failed, as they have supported poverty reduction and growth

in some countries and prevented worse performance in other.

MEANING:

What is Aid?

Money or loans at very low interest ratesWorld Bank often gives this.

Goods, food, machinery, technology

Skills, expertise e.g. engineers

All these things help to fill different gaps

The savings gap there is an inability to save enough capital to invest in industry and

infrastructure.

The foreign exchange gapwhere they lack the hard currency to buy essential imports.

The technical gap caused by a shortage of skilled personnel.


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OBJECTIVE:

1. Some on foreign aid: definition, decomposition, the major donors and major recipients.

2.The controversies surrounding foreign aid including its motivations.

3. Three views on aids impact on growth and development.

4.The issue of conditionality & the future of foreign aid.


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What is foreign aid?

The standard definition of foreign aid comes from the Development Assistance

Committee

(DAC) of the Organization for Economic Cooperation and Development (OECD), which

defines foreign aid (or the equivalent term, foreign assistance) as financial flows,

technical

assistance, and commodities that are

(1) designed to promote economic development and welfare as their main objective (thus

excluding aid for military or other non-development purposes); and

(2) are provided as either grants or subsidized loans. Grants and subsidized loans are

referred to as concessional financing, whereas loans that carry market or near-market

terms (and therefore are not foreign aid) are non-concessional financing.

4 According to the DAC, a loan counts as aid if it has a grant element of 25percent or

more, meaning that the present value of the loan must be at least 25 percent below the

present value of a comparable loan at market interest rates (usually assumed by the DAC

rather arbitrarily -- to be 10 percent with no grace period). Thus, the grant element is

zero for a loan carrying a 10 percent interest rate, 100 percent for an outright grant, and

something

in-between for other loans.

The DAC classifies aid flows into three broad categories. Official development assistance

(ODA) is the largest, consisting of aid provided by donor governments to low- and

middleincome

countries. Official assistance (OA) is aid provided by governments to richer countries

with per capita incomes higher than approximately $9,0005 (e.g., Bahamas, Cyprus,

Israel and Singapore) and to countries that were formerly part of the Soviet Union or its

t llit


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Private voluntary assistance includes grants from non-government organizations,

religious groups, charities, foundations, and private companies.

A transfer of resources on concessional terms on terms that is more generous or softer

than loans obtainable in the worlds capital markets from rich countries to poorer

countries.

Aid is Official Development Assistance (ODA) and is monitored and reported on by the

Development Assistance Committee (DAC) of the Organisation for Economic

Cooperation and Development (OECD)

For the DAC, aid qualifies as ODA on three criteria: must be undertaken by official

agencies, such as DFID; must be for economic development and welfare; and must have a

grant element of 25% or morei.e., 100% grant or soft loan.

Who gives aid to India?

Multilaterals, such as the World Bank, just over one third

Bilateralsmainly Japan and the UK, but also Germany, just over one third

Smaller bilaterals

Foundations, such as the Gates Foundation

International NGOs

History of aid to India

Foreign aid has for the most part been used for part-funding Plan development

expenditures.

During the 1980s, external flows covered about 18 percent of Indias total Gross


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assistance to the states, and were around 10% of the total public sector investment per

annum, though this has been declining in the 1990s

Total external aid as a percentage of GDP fell from 1.4% in 1991-2 to less than 0.5% in

2001-2, amounting to USD 3.57 billion.

With the continued rapid growth of the economy, aid had fallen to little more than 0.1%

of GDP by 2006/7.

Accordingly, although aid initially made an important contribution to the governments

investment programme, over the past ten years this has become much less significant, and

in GDP terms its quantum is now tiny.

Aid to Education Priorities

Post-independence and during 1960s and 70s, focus on skillsmanpower development

US and UK support for IITs and Universities

During the 1980s growing recognition that poor quality and partial coverage of basic

education was robbing millions of people in India access even to literacy and numeracy

Changing education aid priorities

World Conference on Education For All in Jomtien, Thailand, 1990 was a watershed for

aid to education and developing countries

It pledged the attainment by 2000 of Universal Primary Education

Following Jomtien, international community, led by World Bank increased emphasis and

funding of primary education, most, but not all, major donors followed suit


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Changing education aid priorities

Dakar EFA, April 2000

Millennium Declaration and Millennium Development Goals, September 2000

Paris Declaration on Donor Harmonisation, 2004

Primary Education in India

National Policy on Education 1986 renews commitment to have all children in school

Operation Blackboard

Jomtien, 1990

Programme of Action in 1992

Aid to education in India increased greatly after 1990 and focused on primary education

GoI changed its views regarding aid for primary education and developed APEP, BPEP

and ultimately DPEP

Primary Education in India

DPEP supported by World Bank, EC, UK and Netherlands focused on the most

educationally backward districts:

- Increased access;

- Improved equitygender, SC and ST

- Improved quality

Elementary Education in India

86th Constitutional Amendment Act (December 2002) making education a fundamental

right for all children aged 6 to 14 years

Sarva Shiksha Abhiyan designed to make the Act a reality

Right to Education Bill (December 2008?) to secure the gains of SSA and make states


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World Bank, DFID and EC $2billion for SSA (10% of the total expenditure 2001/02 to

2009/10)

Why does India want aid for education

In the 1980s and 1990s, India faced real financial constraints

India wanted to learn from other countries

Technical assistance was necessary for key areas such as curriculum, materials

development, assessment

Joint supervision of education programmes, with external scrutiny, helped to increase the

rigour of programme management and implementation

Benefits of aid to education in india

Financial support in the 1990s made expansion of primary education possible

International support for Jomtien, Dakar and MDGs have impacted on priorities in Indian

education

Joint Review Missions are effective vehicles for policy dialogue, supervision and

reflection on what is working, involving the Centre and States

Focus on access giving way to emphasis on quality, technically supported by donors aid

accelerates the pace of change

Changing modalities of aid to education

Early years: stand alone projects, such as development of a single institution (IIT)

Broad-based projects: teacher training and textbooks

Programmes

Sub-sector programmes


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Future of aid to education in India

India is an aid paradox: it has lots of poverty and a low quality basic education system,

having high rates of non attendance and low achievement levels butaid is tiny relative to

the Governments own fiscal effort and economic growth and middle income status will

make it hard for donors to justify aiding the country.

India is a country where aid to education is effective, much more so than many other

developing countries.


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During and after World War II

Foreign aid, as an integral part of U.S. foreign policy, began (1941) during World War II

with lend-lease. In planning for the postwar world, the United States hoped that after a

brief relief program, the international balance would gradually be restored, and long-term

reconstruction projects would be financed by loans from the International Bank for

Reconstruction and Development (IRBD; also known as the World Bank) and the

International Monetary Fund (IMF). Therefore U.S. foreign aid was chiefly in the form of

emergency grants without any kind of central organization. Initially, the United States

provided a large proportion of the funds of the international cost-sharing organization, the

United Nations Relief and Rehabilitation Administration (UNRRA), established in 1943

by the Allied governments to provide a broad range of services to the war-devastated

Allies. UNRRA spent $4 billion, but the actual dimensions of postwar reconstruction had

been greatly underestimated. Conditions in Western Europe, which, unlike Southern and

Eastern Europe, had received little UNRRA aid, became desperate, and in June, 1947, the

Marshall Plan was announced by Secretary of State George C. Marshall. Known formally

as the European Recovery Program, it distributed (194851) over $12 billion through the

Organization for European Economic Cooperation (the predecessor of the Organization

for Economic Cooperation and Development).
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Sources:

Aid from various sources can reach recipients through bilateral or multilateral delivery

systems. Bilateral refers to government to government transfers. Multilateral institutions,

such as the World Bank orUNICEF,pool aid from one or more sources and disperse it .

among many recipients.

Official Development Assistance (ODA):

ODA refers to aid from national governments for humanitarian purposes and for

promoting economic development and welfare in low and middle income countries. ODA

can be bilateral or multilateral. This aid is given as eithergrants,where no repayment is

required, or concessional loans, where interest rates are lower than market rates. Loan

repayments to multilateral institutions are pooled and redistributed as new loans.

Additionally, debt relief, partial or total cancellation of loan repayments, is often added to

total aid numbers even though it is not an actual transfer of funds. It is compiled by the

Development Assistance Committee of theOrganisation for Economic Co-operation and

Development. The United Nations, the World Bank, and many scholars use the DAC's

ODA figure as their main aid figure because it is easily available and reasonably

consistently calculated over time and between countries.[6]The DAC puts foreign aid into

three categories:

Official Development Assistance (ODA): Development aid provided to

developing countries (on the "Part I" list) with the clear aim ofeconomic development

Official Aid (OD): Development aid provided to developed countries (on the "Part

II" list) andinternational organizations

Other Official Flows (OOF): Aid which does not fall into the other two categories,

either because it is not aimed at development, or it consists of more than 75% loan (rather

than grant).
http://en.wikipedia.org/wiki/UNICEFhttp://en.wikipedia.org/wiki/Grant_%28money%29http://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Development_Assistance_Committeehttp://en.wikipedia.org/wiki/Organisation_for_Economic_Co-operation_and_Developmenthttp://en.wikipedia.org/wiki/Organisation_for_Economic_Co-operation_and_Developmenthttp://en.wikipedia.org/wiki/United_Nationshttp://en.wikipedia.org/wiki/World_Bankhttp://en.wikipedia.org/wiki/Scholarhttp://en.wikipedia.org/wiki/Aid#cite_note-6http://en.wikipedia.org/wiki/Aid#cite_note-6http://en.wikipedia.org/wiki/Aid#cite_note-6http://en.wikipedia.org/wiki/Official_Development_Assistancehttp://en.wikipedia.org/wiki/Developing_countrieshttp://en.wikipedia.org/wiki/Economic_developmenthttp://en.wikipedia.org/wiki/International_organizationshttp://en.wikipedia.org/wiki/International_organizationshttp://en.wikipedia.org/wiki/Economic_developmenthttp://en.wikipedia.org/wiki/Developing_countrieshttp://en.wikipedia.org/wiki/Official_Development_Assistancehttp://en.wikipedia.org/wiki/Aid#cite_note-6http://en.wikipedia.org/wiki/Scholarhttp://en.wikipedia.org/wiki/World_Bankhttp://en.wikipedia.org/wiki/United_Nationshttp://en.wikipedia.org/wiki/Organisation_for_Economic_Co-operation_and_Developmenthttp://en.wikipedia.org/wiki/Organisation_for_Economic_Co-operation_and_Developmenthttp://en.wikipedia.org/wiki/Development_Assistance_Committeehttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Grant_%28money%29http://en.wikipedia.org/wiki/UNICEF


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Aid is often pledged at one point in time, but disbursements (financial transfers) might

not arrive until later.

In 2009, South Koreabecame the first major recipient of ODA from the OECD to turn

into a major donor. The country now provides over $1 billion in aid annually.[7]

Private giving

Private giving includes aid from charities, philanthropic organizations or businesses to

recipient countries or programs within recipient countries.

These donors have developed an industry for themselves known as the "Aid Industry".

Private donors to countries in need of aid are a large part of this, by making money while

finding the next best solution for the country in need of aid. These private outside donors

take away from local entrepreneurship leaving countries in need of aid reliant on them.
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Types:

Emergency aid:

Emergency aid or Humanitarian aid is rapid assistance given to people in immediate

distress by individuals, organizations, or governments to relieve suffering, during and

after man-made emergencies (likewars)andnatural disasters.The term often carries an

international connotation, but this is not always the case. It is often distinguished from

development aid by being focused on relieving suffering caused by natural disaster or

conflict, rather than removing the root causes of poverty or vulnerability.

The provision of humanitarian aid or humanitarian response consists of the provision of

vital services (such as food aid to preventstarvation)by aid agencies, and the provision of

funding or in-kind services (like logistics or transport), usually through aid agencies or

the government of the affected country. Humanitarian aid is distinguished from

humanitarian intervention,which involves armed forces protecting civilians from violent

oppression or genocide by state-supported actors.The United Nations Office for the

Coordination of Humanitarian Affairs (OCHA) is mandated to coordinate the

international humanitarian response to a natural disaster or complex emergency acting on

the basis of the United Nations General Assembly Resolution 46/182. The Geneva

Conventions give a mandate to the International Committee of the Red Cross and other

impartial humanitarian organizations to provide assistance and protection of civilians

during times of war. The ICRC, has been given a special role by theGeneva Conventions

with respect to the visiting and monitoring of prisoners of war.

Development aid:

Development aid is aid given by developed countries to support development in general

which can beeconomic development or social development indeveloping countries.It is

distinguished from humanitarian aid as being aimed at alleviating poverty in the long
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India As A Recipient:

Official Development Assistance (ODA), mentioned above, is a commonly used measure

of developmental aid. Development aid is given by governments through individual

countries' international aid agencies and through multilateral institutions such as the

World Bank, and by individuals through development charities. For donor nations,

development aid also has strategic value. Improved living conditions positively effects

global security and economic growth.

Official development assistance (ODA), or aid, to India has been fairly sporadic with dips

in contributions in 2003 and 2004, followed by a rise and then another fall in 2006 and

2007. The 2003 and 2004 low levels are probably linked to Indias request to limit the

number of donors giving aid to just five countries (Japan, the United Kingdom, Germany,

the United States and Russia) and the EU. (After this point other bilateral donors could

only fund projects in India through multilateral mechanisms.) From the relatively low

level of US$1.3 billion in 2007 aid has increased steadily to a record high of US$2.8

billion in 2010.
http://en.wikipedia.org/wiki/Official_Development_Assistancehttp://en.wikipedia.org/wiki/International_aid_agencieshttp://en.wikipedia.org/wiki/Multilateralismhttp://en.wikipedia.org/wiki/World_Bankhttp://en.wikipedia.org/wiki/Category:Development_charitieshttp://www.borgenmagazine.com/10-accomplishments-us-foreign-aid/http://www.borgenmagazine.com/10-accomplishments-us-foreign-aid/http://en.wikipedia.org/wiki/Category:Development_charitieshttp://en.wikipedia.org/wiki/World_Bankhttp://en.wikipedia.org/wiki/Multilateralismhttp://en.wikipedia.org/wiki/International_aid_agencieshttp://en.wikipedia.org/wiki/Official_Development_Assistance


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Even before the decision was taken to limit bilateral aid programmes, the UK funded a

considerable proportion of aid to India, for example 18% in 2002. This proportion rose to

46% and 43% in 2003 and 2004 respectively before settling at figures between 22% and

31% over the next six years. Over the period 2000 to 2010 the UK has given 23% of all

aid.

In 2010 however Japan gave the largest amount of aid to India, US$939.3 million (more

than US$300 million more than the UK), representing 34% of the total for that year.

The majority of aid to India is sector allocable aid of which a large proportion is spent

on social infrastructure and services, notably education. This is the same for all donors

and the UK, although the UK spends a higher proportion of its aid on social infrastructure

and services (70%) compared to all donors (52%) reporting to the OECD DAC.


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Humanitarian aid to India has been fairly low totalling US$627.9 million between 2000

and 2009. Contributions peaked at US$154.5 million in 2001 in response to the Gujarat

earthquake. 2005 saw the Kashmir earthquake, although there was little international

involvement compared to 2001. Humanitarian aid as a proportion of aid averaged at only

4% in the period 2000 to 2009, peaking at 6% in 2001.

The US has been Indias largest humanitarian government donor between 2000 and 2009,

providing US$101.2 million in assistance. The UK has been the second largest, giving

US$89.5 million.

Indias own domestic expenditure on crisis response has been much more significant (at

least in terms of volume). Between 2005 and 2010, the Indian government spent US$4.8

billion through its own State Disaster Response Fund (formerly the Calamity Relief Fund)

and between 2005 and 2009 it spent US$1.4 billion through the National Disaster

Response Fund (previously the National Calamity Contingency Fund). Though not

exactly comparable with humanitarian response from donors, this US$6.2 billion far

outstrips that response in terms of volume.


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A Brief Anatomy of India's Economic Failure

The centrally planned industrialization strategy of India's post-independence period has

resulted in over 60 percent of investment in the industrial sector going into public-sector

enterprises. The private sector has been severely restricted by the banning of private-sector

investment in major industries; a strict regime of industrial licensing; intrusive quantitative,

price, and distribution controls; uneconomic preferences for cottage, village, and other small

industries; extensive labor-market and employment controls; and comprehensive external-

sector controls. Restrictions have included prohibitive tariffs, perhaps the developing world's

most comprehensive and onerous set of quantitative controls and restrictions, an ever-

expanding export control and subsidization scheme, and severe and often prohibitive

restrictions on both direct and portfolio foreign investment.

Over 20 million Indians are on the public payroll, and around 70 percent of all formal, above-

ground employment is in the public sector. Confiscatory tax rates combined with a jungle of

red tape--permission to open a hotel involves 45 in the form of official development

assistance--have set it apart from its neighbors.

Foreign Aid and the Support of Soviet-Style Planning in India

The interaction between a country's economic performance and official foreign economic

assistance (hereafter referred to as foreign aid, in contrast to other voluntary, private foreign

assistance) is difficult to isolate. Attempts to investigate the impact of foreign aid on

economic development using statistical techniques have been inconclusive, although the

statistical evidence seems to indicate on balance that aid has had little or negative impact on

development indicators such as savings, investment, and the growth of national income.[6] It


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is clear, however, that the majority of so-called developing nations that have received large

amounts of foreign aid have failed to develop.

The history of official foreign aid to India is a classic example of the failure of foreign aid

and its systematic facilitation of pervasive central planning. Foreign aid assumed a dominant

role in India when a centrally directed heavy industrialization and "self-reliant" import-

substitution strategy was adopted at the beginning of the Second Five-Year Plan in 1956-57.

The plan's chief architects, Professor P. C. Mahalonobis and Prime Minister Nehru,

patternedtheir socialist framework explicitly after the Soviet heavy-industry planning model.

Nehru, India's prime minister fort he first 17 years after independence, was heavily

influenced by the ideals associated with the Bolshevik Revolution. In his 1936 presidential

address to the Congress party, Nehru said that there was

no way of ending the poverty, the vast unemployment, the degradation, and the subjection of

the Indian people except through socialism [and] the ending of private property, except in a

restricted sense, and there placement of the private profit system by a higher ideal of

cooperative service.

The underlying vision of Nehru and his associates that has molded India's economic policy

since independence is further illustrated in his comments to a prominent Indian journalist in

1960:

We have accepted the socialist and cooperative approach .the planned and scientific approach

to economic development in preference to the individual enterprise of the old laissez faire

school. Planning and development have become a sort of mathematical problem which may

be worked out scientifically.It is extraordinary how both Soviet and American experts agree

on this. If a Russian planner comes here, studies our projects and advises us, it is really


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extraordinary how his conclusions are in agreement with those of, say, an American expert.

The moment the scientist or technologist comes to the scene, be he Russian or American, the

conclusions are the same for the simple reason that planning and development today are

almost a matter of mathematics.[8]

U.S. Aid Officially Promotes Comprehensive Planning

Indeed, in the 1960s India began to be heralded in the West as the epitome of rational,

planned economic development. John P. Lewis, the dean of American foreign aid experts

who had held prominent posts with the Council of Economic Advisers, the UN

Reconstruction Agency, and the U.S. Agency for International Development's mission to

India, argued in his influential 1962 book, Quiet Crisis in India:

There is much less need now for [a] defense of the very concept of comprehensive economic

planning in countries like India. .Today [such] planning is officially viewed as an essential

concomitant of anynational development that merits American assistance, and the United

States government is urging such planning upon Latin American, African, and Asian

governments that do not yet practice it.

American Aid Feeds Appetite for Public-Sector Imports

Before the heavy-industry-oriented Second Five-Year Plan, India had normally run a current

account surplus and had built up substantial reserves of foreign exchange. By 1960-61, at the

end of the second plan, the current account deficit had grown to around 2 percent of net

national product; it was around 4 percent in 1970-71. Over the same period, foreign exchange

reserves declined by almost 95 percent from their 1950-51 level, in spite of huge infusions of

foreign aid.


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India ran a large current account deficit throughout the 1970s and 1980s. Private remittances

from abroad, especially from the Middle East and Europe as a result of increased labor

migration to supply labor shortages in the newly rich members of the Organization of Oil

Exporting Countries, and the government decision to allow nonresident Indians to open

interest-bearing foreign exchange accounts prevented the situation from being worse.

It is important to note that throughout that period the account balance on private accounts

was generally positive (with the exception of a few years), which meant that the current

account deficits were due solely to the steeply rising mports of the government sector and

the stagnation of exports from that sector. Given the decline in foreign exchange reserves, the

prohibitive restraints on foreign investment, and the stagnation of exports, the high level of

official government-sector imports sustained from about 1960 through the mid-1970s was

made possible only by large capitalinflows in the form of foreign aid. Those aid-financed

imports were both largely ineffectual in increasing the rate of growth and responsible for

bloating the inefficient public sector. To the extent that those large inflows of foreign aid

were a painless substitute for the foreign exchange that would otherwise have had to have

been earned through exports, such aid had a major displacing and retarding effect on

economic growth. India was able to achieve a higherrate of unproductive, public-sector

investment than it would have been possible to maintain in the absence of foreign aid.

Thus, throughout the post-independence period, the public sector consistently "dissaved,"

while the private sector and the rest of the world provided the savings needed to finance the

ever-growing public sector. Through the mid-1970sforeign aid remained the primary source

of funds for growth of the public sector; such aid accounted for well over 50


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percent of the government deficit during the second plan. To the extent that it displaced

private savings, foreign aid retarded self-financing growth. In the late 1960s the lack of

domestic savings was cited as one of the reasons for nationalization of the major Indian

commercial banks. Foreign aid thus provided major support for the substantial socialization

of the Indian economy.

U.S. Food Aid as Inflation Machine

Although it repressed relative prices in the agricultural sector, P.L. 480 food aid had a

substantial net inflationary effect on the Indian economy. New money was created as a result

of the peculiarities of P.L. 480 financial procedures. The majority of P.L. 480 food shipments

to India were executed in exchange for Indian rupee funds, which were to be accumulated in

Indian banks and used to cover local U.S. government expenses (with the balance to bere

turned to the Indian government in the form of concessional loans and grants).

To make payments into the local U.S. government account, the Indian central bank in effect

issued securities redeemable on demand to that U.S. account. Subsequent disbursements from

the U.S. account (for loans or grants to the government of India, loans to private firms under

a special U.S. program, or local U.S. government uses) wer emade by a "liquidizing" process

whereby the special securities were first converted into Indian public debt; that debt was then

purchased by the central bank and finally passed on to the U.S. account as newly created

money. The U.S. account, in turn, disbursed that money to the Indian public sector as loans

and grants. One prominent scholar of the Indian economy, B. R. Shenoy, has estimated that

deficit financing (the use of newly created moneys to finance budget disbursements) due to


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P.L. 480 operations accounted for as much as 35 percent of total deficit financing from

1962through 1971 and increased the inflation rate by 9.8 percent a year.

American Food Aid Discouraged Local Production

American food aid under P.L. 480 is a classic example of good intentions gone awry and the

pernicious nature of foreign aid. Before the heavy-industry-oriented second plan, food

production in India had been growing steadily and very little food had been imported to

augment domestic production (except during 1951-52).[13] Food grain prices had been quite

stable before 1956.

The demand for food imports increased sharply, and for good reason, with the advent of the

second plan. Since theI ndian government channeled the majority of U.S. aid--as well as the

majority of aid from all foreign government sources--into public-sector (and some private-

sector) industrial projects, a systematic capital starvation of agriculture occurred. The rate of

net capital formation in farming fell below the rate of population growth, while the

government's industrialization plans induced the migration of farm labor to urban areas. By

the mid-1950s, as food shortages began to develop and foreign exchange reserves fell

sharply, the Indian government entered into an agreement with the U.S. government for

assistance for the import of food grains under P.L. 480. Later, India would become the

recipient of the most aid under that program; India received 50 million tons, or nearly 40

percent of all food grains and 25 percent of all commodities given by the U.S. government

under P.L. 480 from 1955 through 1971.


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Although tracing the economic effects of P.L. 480 food imports is a complex task, a number

of serious negative effects have been identified.[15] One major result was the repression of

the domestic price of wheat and other commodities that were imported under the program.

Farmers reacted to the lower prices and reduced the acreage planted in both wheat and

competing cereals. In fact, the large and escalating shipments of P.L. 480 food aid between

1955 and 1965bankrupted large numbers of Indian farmers. And that happened when India

was a predominantly agricultural country with a significant proportion of uncultivated arable

land and vast potential for expansion of food production, as was demonstrated by India's

yield per acre being one of the lowest in the world.

Another negative effect stemmed from the fact that, under P.L. 480, the Indian government

appeared to receive the U.S. food grains free and it could garner substantial rupee receipts

upon resale of the grain in Indian markets. Funds raised by the Indian government from the

resale of such food aid accounted for 56 percent of the external assistance toI ndia's public

development outlays during the 1960s.[16] In short, the Indian government had a direct

interest in maximizing the quantity of P.L. 480 imports and sales in order to raise funds to

finance its public development schemes.


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Banking on the Poor: The World Bank and India: India has received more World Bank aid

than any other developing country in the postwar period. In fact, India has been the World Bank's

star patient and almost the raison of its burgeoning growth--if one is to believe the following

statement by the bank's semiofficial historians, Edward Mason and Robert E. Asher.

No country has been studied more by the World Bank than India. . . . India has influenced the

Bank as much as the Bank has India. . . . This applies particularly to the Bank's conception of the

development process--the role of government in the process [and] the need for grants, soft loans,

and program assistance. . . . In the eyes of the Bank's management, India (because of its obvious

needs and limited creditworthiness) offered the clearest justification for the creation [in 1961] of

[the International Development Association] as its soft-loan affiliate [which makes zero-interest

loans with 50-year maturities]; without IDA, the Bank could not have continued to be heavily

involved with India.

Indeed, India and the World Bank formed a lasting partnership that promoted centrally directed

and coordinated non market decision making in the Third World. According to one commentator,

that partnership made the World Bank "responsible for the rush to socialism in the Third World."

The relationship between the World Bank and India illustrates all the characteristics of the

foreign aid process that are emphasized by critics of such aid: a preference for national

development plans, a bias toward large projects and unsuitable external models, greater

government control over the economy, imposition of price and other economic controls, and the

politicization of economic life. That is clear in the following observation by Mason and Asher.

The Bank conceived of its task as seeing that India's five-year plans got support, especially since

India's needs for investment in infrastructure (railways, electric power, irrigation) matched the

Bank's availabilities and expertise.


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Indian received its first World Bank loan on August 18, 1949, for development of the

government-owned Indian Railways. That loan was followed by one for agricultural machinery

for a large public-sector reclamation project and for the first stage of a large central government

multipurpose project. With the establishment in 1960 of its "soft-loan," affiliate, the IDA, the

bank began lending to India on highly concessional terms (zero interest and 50-yearmaturities--

terms that in effect made those loans grants). The World Bank's commitments to India expanded

rapidly thereafter.

The majority of the funds received by India from the World Bank "group," which includes three

lending affiliates, has gone into the public sector. Government corporations that have been

directly aided by World Bank funds include firms in the power, coal-mining, irrigation, oil,

petrochemical, telecommunications, fertilizer, steel, mass transit, railway, airline, and cement

sectors. Returns on concessional World Bank loans to projects in the power, coal-mining,

fertilizer ,steel, mass transit, railway, and cement sectors have been dismal; returns in the other

industrial sectors have been positive only because of the nature of the product and the pricing

policies of those industries (for example, oil and petrochemicals). The World Bank's continuing

largesse to the Indian public sector is evidenced by the fact thatcurrently some $16 billion in aid

committed by the bank remains unused because the requisite rupee "matching funds"cannot be

found either by the central government or by the state governments.


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The whole state of Tamilnadu had several private busses running profitably and efficiently

and they were all nationalized with World Bank loans and all the state-run transport

corporations are running in loss. Interestingly, the World Bank loans [were] used only to take

over busses from [the] private sector and not to add new services where[the] private sector

was not operating. In the same way, the World Bank is giving loans to [the

government's]inefficient Railways, Telecomm system, etc. which can be run more efficiently

by the private sector.

The World Bank has given [a] loan to this Madurai town to improve the water supply. Within

a month the money was used by the politicians to sink 100 borewells of which 50 percent of

the amount went as [a] bribe. After a couple of years the World Bank once again gave [a]

loan to improve the water facility. Once again, another 100 bore wells were sunk right next to

the old 100 bore wells which were not in use. The same thing was repeated again. The

corrupt politicians always use the World Bank loan since they can take up any project,

whether they are required or not, just to get bribes from the project. They need not raise the

tax to meet the project expense. The loan has to be repaid only by future taxes by which time

these rascals won't be there.

A substantial part of the World Bank's (as well as the U.S. Agency for International

Development's) concessional loans to India has gone for state projects in irrigation, area

development, infrastructure development, dairy development, rural and urban drinking water

supply, population and nutrition, and agricultural extension and training. The effectiveness of

the loans to infrastructural, agricultural, and tertiary-sector projects can be judged by

examining the World Bank Operations Evaluation Department's review of the bank's


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experience with rural development projects from1965 through 1986. According to that

internal review:

The most conspicuous project failures were in the large group of area development projects.

The audits to date of half of the area development projects judged them to have failed. That

form of are a development project that came to be known as "integrated rural development"

[performed] so poorly as to raise questions about the utility of that approach in many

situations.


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CONCLUSION:

In conclusion, international Aid must have long-term benefit for poor countries. Otherwise, it

is only the question of time when developed countries would not be able to maintain growing

number of people in the third world.

Except for a few cases of alleged foreign aid success-- such as critical food relief when millions

were on the verge of starvation in the early 1950s and again during the mid-1960s--foreign aid to

India has been an unmitigated disaster. It has acted as both a catalyst and an encouragement for

the politicization of the Indian economy. It has supported central planning and facilitated the

growth of the public sector at the expense of the private sector and the establishment of a private-

property-oriented market system. It has also encouraged corruption, rent seeking, and graft in the

Indian economy. Foreign aid has been--and continues to be--predicated on an outdated and false

theory of development economics that assumes that only capital and access to technology are

needed for economic development.


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SUMMARY:

Foreign aid means economic, technical, or military aid given by one nation to another for

purposes of relief and rehabilitation, for economic stabilization, or for mutual defense.

Currently, a lot of third world countries receive Aids from the more developed ones.

To begin with, humanitarian support is vital for Africa and some other continents. As a result

of extremely low standards of living, people in such countries feel a huge lack of food and

medicine. Therefore, the need of international Aid is undoubted. Furthermore, this support

usually comes with education, which helps to prevent from AIDS and from other social

diseases. Also, an Aid is inevitable after earthquakes and hurricanes when certain region

However, there are some serious disadvantages of supporting poor countries. Firstly, most of

governments in such regions do not make much effort to deal with social problems. Instead,

they collect treasure and set strong restrictions for citizens, what even make a situation

worse.

Aid must have long-term benefit for poor countries. Otherwise, it is only the question of time

when developed countries would not be able to maintain growing number of people in the

third world.


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BIBLOGRAPHY:

Website:

Dicky, D.A and W.A Fuller (1981), Like hood Ratio Statistics for Autoregressive Time

Series with a Unit Root, Econometrica, 49, July, PP.1057-72.

Www.Google.Com

http://www.infoplease.com/encyclopedia/history/foreign-aid-during-after-world-war

introduction foreign aid

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