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Aid for Investment Assignment 2018

Evaluate the following claim: “Savings is not enough for the investment needs of developing countries. As such, if aid agencies and rich countries provide aid to developing countries, it will increase their rate of investment and generate economic growth.” Has such a strategy worked, why or why not?

The aids are offered to help the countries accomplish their development projects. The aids are also helpful in developing the bilateral ties between the countries. Usually, the aids come in different forms such as through budgetary support, debts relief, technical assistance, and support for various investment projects. In some cases, the aids are offered regarding grants thus a country does not have to pay back and at loans offered at lower interest’s rates.  Furthermore, the aids may also be provided through contributions from various institutions such as the World Bank, IMF, and UN. The primary aim of the aids is to help stimulate growth in the developing countries. However, the strategy has not worked over the years as it’s seen as a form of self-enrichment and exploitation. For example, in most developing countries, only the rich benefit from the funds intended for national projects.

Additionally, the aids have been used for extortions of countries resources especially in situations where they are not capable of paying back the debt. Over the years, various conditions that affect the dignity and sovereignty of a state have been introduced to help in dealing with the inefficiency of nations to implement their policies. The conditions are generally regarded as coercive to a country rather than helping generate growth.  The aids are also seen to promote dependency since it requires a state to adopt neo-liberalism economy. The state is necessary to promote good governance and foster democracy through ensuring various political reforms are put in place for them to receive aids. Countries also qualify for aids in case they face security threats that are likely to have an adverse impact on the donor’s interest in the country rather than the general welfare of the country.

 

How is the Harrod-Domar model different from the Solow model we described in class?

The Harrod-Domar model is typically used to explain growth, especially in a capitalist economy. It demonstrates that for a country to achieve growth uniformly there is a need to increase the investment rate at constant rates as capital accumulation will automatically lead to growth. According to the model, the country should maintain full employability as it would eventually lead to a steady increase in the county. Additionally, continues investments and weak demand would result in the capital stocks being underutilized thus detrimental to a countries growth.  On the other hand, the Solow model explains diminishing returns in capital if the country continues investing in foreign aid. The model also considers labor as a critical factor of production.  According to the model, capital investment affected the saving rate of a country thus implying the long-term development of a country.

What role did Rostow’s ideas play for the provision of foreign aid?

Rostow’s developed the five stages of the economic growth model to demonstrate the path taken by countries before they attain full economic development. The stages include the traditional society whereby the state heavily depends on subsistence farming and has little trades due to the limited capital market.  The quality of the products is also low while the surplus is sold in the domestic market.  The preconditions for take-off stage were used to explain a situation where agriculture became mechanized and had increased trade. The country also experiences growth in investment and savings. The external aids are also required to steer growth in a state.  The take-off stage was used to explain manufacturing and the development of social and political institutions. Fourthly, he comes up with the drive to maturity stage to illustrate the diversity of the industry.  The diversity arises in numerous parts due to development of technology. The final stage of development is the age of mass consumption which is characterized by increased consumer expenditure due to the expansion of the middle class.

 

 

 What conclusions would we draw about the impact of foreign aid on economic growth and development if we were to use the Solow model to analyze this question? Please use a diagram to supplement your answer.

 

Figure 1: Solow Model

 

Using the Solow Model, foreign aid has a diminishing return to the economic growth in a country is it’s done beyond the steady state. For instance, any investment exceeding a point where investment = depreciation.  The state should first ensure they fix the fundamentals of the economy before embarking on more foreign aids. This is because by using foreign aid to complete significant investment projects will not yield the intended result. The lack of improvements in basic such as technology, organization, and investment, then increasing foreign aid will lead to increased depression. The model shows that increasing foreign aid does not relate to the essential ingredients that stimulate growth. The external aids, therefore, work only when integrated with good policies. The nations should first consider addressing their fundamentals before embarking on taking aids. Moreover, the aids are also critical especially in helping countries experiencing difficult situations or those in extreme poverty levels. It helps raise basic investment projects that would lead to overall growth.

 

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