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The Role Of Foreign Capital And Aid In Economic Development

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The Foreign Assistance Comes In Three Ways


a. Foreign Grants: The Foreign Grants are free and are not to be returned. These can be in the form of goods or economic grants.

b. Foreign Loans: The Foreign Loans are to be returned. There are two types of loans Soft Loans and Hard Loans. Loans can be bilateral and multilateral.

a) Soft Loans: In soft loans Interest Rate is very low and Time period to return loan is long and also there are no strict instructions interims of usage of these loans.

b) Hard Loans: Where as on the other hand in hard loans The Interest Rate is very high, time to return the loan is short and there are strict policies on the usage of loan.

c. Foreign Investment: The Foreign Investment is brought in to a country for business purposes. Foreign Investment can be Direct and Indirect and it can also be Public Investment and Private Investment.

a) Direct Investment: In Direct Investment the control over the capital lays in the hands of investor.

b) Indirect Investment: Where as in Indirect Investment the investor just has some shares, just like a sleeping partner.

a) Public Investment: In Public Investment the investment is done while considering the needs of the peoples. It is important in accelerating economic development.

b) Private Investment: In Private Investment the investors invest in the fields which they think can yield maximum profit, irrespective of how this investment is going to affect the peoples.


Merits of Foreign Loan:

1) Accelerates Economic Development.

2) Helps in setting up Industry.

3) Helps in Capital Formation.

4) Employment Opportunities Increase.

5) Transfer of Technology & Knowledge takes place.

6) Peoples Purchasing Power Increases.

7) Helps in Industrialization.

8) Helps in Building Economic & Social Overheads.

9) Helps in Exploiting and Taping New Natural Resources.

10) Risk of Loses in the pioneer stage of investment also goes with the foreign investors.

11) It encourages local enterprise to collabourate with foreign enterprise.

12) Inflation pressure decreases.

13) Modernization takes place.

14) The balance of payment is also minimized.

15) Etc.

Demerits of Foreign Loan:

1) First demerit of Foreign Aid or Loan is that one has to return these loans.

2) Strict restrictions are imposed on the usage of these loans.

3) Foreign Aid or Loan leads to dependent economy.

4) The conception that the balance of payment is minimized is a misconceived conception.

5) Foreign Aid or Loan also adds to the vulnerability of the states Sovereignty.



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