My main purpose of writing this paper is to get an answer of “Can Pakistan survives without a foreign aid” for I will take into account of foreign aid and loans that Pakistan have got from United States, World Bank, Asian Development Bank and MIFF.
This study will include all sectors of Pakistan Economy on the behalf of which we receive such a billion dollars loans or aid that includes military, education, industry, agriculture and infrastructure of Pakistan. All This information will be taken from reports of World Bank, Asian development bank, MIFF, United States Agency for International Development (SAID) in order to evaluate all the government sectors of Pakistan. This paper highlights the theoretical aspects of foreign assistance, different types of foreign aid, the objectives of donors and the applied aspect of foreign aid.
What is the impact of foreign aid, which type of foreign aid should be accepted and how foreign aid can optimally be utilized? To analyze the issue we have divided this paper into a number of sections. To make this meaningful will make a comparisons to see how much of that aid has actually been invested and what was the outcome of that aid and how much that aid was help full in order to make Pakistan economy prosper. This will also discuss what Pakistan is capable of? What will happen if Pakistan does not receives the aid how we can use our own resources to overcome that problems.
All these statistics and reports will be use to reach some conclusion. The Term paper will be nearly consists of 5000 words with a complete list of references consulted in the presentation of term paper. At the end the completed paper will be presented in the class for review and assessment. Introduction Foreign aid is the transfer of resources from developed countries to under-developed countries, either through bilateral donors or multilateral donors. Many countries in the world accept foreign assistance and get different benefits along with a few adverse results. The implication of foreign assistance has made it a debatable issue.
There are different schools of thought on foreign assistance, I. E. Extension School (SE) Ana Non-Extensional cocoons I nee Extensional polls AT flew Is nine Day most f the developed countries, which claim that they give foreign aid to developing countries for their socio-economic and political development at individual as well as societal level. In the case of foreign assistance for Pakistan, a group of economists lead by Hollies Cheyenne and Arthur McCann and followed by Pakistani economists, express the need for foreign assistance to Pakistan for accelerated growth.
Non- Extension School of thought comprising Griffin and Ones (1970), Wooziness (1972), Riddle (1987) and White (1992), followed by Pakistani economist Shark Raff Khan, mint to the existence of a negative relationship between assistance and growth. Foreign aid is normally subject to certain limitations, which reflect the motives of the donors as to how much they are sincere to the development and welfare of the developing countries, or pursue their own overt and covert interests. Both the parties have progressive designs for optimization of their respective utilities.
The underlying motive is not retarding or the ruthless exploitation of any of the parties; rather both the parties have the same direction of development of their local as well as international status. It is in fact a form of generalized reciprocity between two states (the donor and recipient), which leads to transaction of money, goods, and services in lieu of implementation of policies of the donors by the recipient state. However, the unit of exchange for transaction varies from time to time and is highly influenced by the international ego-political scenario and global economic trends.
Similarly, the endogenous factors such as internal political stability, economic strength and public support to government policies also affect the bargaining power of a recipient entry. The more stable a state is, the higher bargaining power it posses. Then the frequency of foreign aid transaction decreases with the increasing stability of the Least Developed Country (OLD) and vice versa. It is an important fact that large-scale flow of funds/foreign assistance is taking place from multilateral and bilateral donors.
Hence we will have to analyze different issues pertaining to actual foreign assistance, such as * How much is the flow of and what role it plays in the overall development of a country? * Whether to accept foreign assistance or not? Which type of foreign aid should be accepted? Currently, it economy of Pakistan is in a bad shape because of mismanagement, corruption and war against terror. According to estimates, Pakistan economy has suffered direct and indirect losses of up to $67. Ban because of its role in the war against terror. In recent times Pakistanis foreign debt has crossed $ban mark.
Our economy is heavily dependent on aid from World Bank, International Monetary Fund (MIFF), Asian Development Bank (ADS), Japan, China and the United States. Pakistan has the potential and meaner for its development and growth. Pakistan is a blessed country; it has skilled manpower, abundance of natural resources and an effective Diaspora abroad. But what we lack is a visionary leadership. As of today 70% of Pakistani population is below the age of 35. This is a blessing that we are the youngest nation on planet earth. We have to utilize this asset.
Our youth is optimistic as far as the future of Pakistan is concerned. Pakistan is sitting on huge coal reserves. 618 billion barrels of crude oil, which is more than Saudi Arabia, Iran, Iraq and Star’s oil reserves. The estimated value of Tar coal is $25 trillion. These resources can change the destiny of Pakistan in next few years. What we need is proper utilization of these resources. Our energy problem will be solved forever. Pakistan also has immense reserves of oil and gas in Appalachians, Kinds, Cyber Buckwheat and other parts of Pakistan.
A few years back in Kara District huge reserves of oil and gas were discovered by the foreign companies. Pakistan is also blessed with a fertile land with the world’s best irrigation system in place. It produces best quality of cotton and rice. Almost 30% Pakistanis land area is under cultivation and is watered y one of the largest irrigation systems in the world. The most important crops are cotton, wheat, rice, sugarcane, maize, sorghum, millet’s, pulses, oil seeds, barley, fruits and vegetables, which together account for more than 75% of the value of total crop output. Pakistan is also blessed with vast areas of forests.
Pakistanis 4% of land is covered with forests, these forests can be a major source of food, lumber, paper, fuel wood, latex, medicine etc. With proper utilization of these resources Pakistan can become a viable and prosperous nation in next few years. Pakistan is also rich in other minerals like Gold and Copper. In Appalachians Reek Dig area, almost $270 billion USED of proven and $3 trillion USED estimated gold and copper reserves are lying. Another important asset of Pakistan is its population living abroad. Pakistanis living in Middle East, Europe and America have sent billions of dollars in last few decades.
According to State Bank of Pakistan, seven million Pakistanis contributed almost $1 1. 2 billion to the Pakistani economy in FYI 2011. Pakistan is not at all a poor country; it has enough natural resources, skilled manpower and strength of character to develop and grow. Pakistan has been mismanaged from the very day of its inception. It needs an honest, sincere, credible, charismatic and visionary leadership. Pakistan has to change its mindset and must have peace with India and other neighbors. Its peaceful relations with India would help it to focus on its economy than defense.
India is an emerging economy; peace with India will open its markets for Pakistani products. Literature Review In this era of globalization, economies have become so dependent on each other that impact of one economy quickly falls upon other economy. That’s why many countries advance to support, one another to avoid any unfavorable situation. That support may come in different forms, which can be Aids, Grants and confessional loans. Many studies are targeted over this issue that what Antecedents that assistance carry for the recipient economy in terms of growth, poverty Alleviation and curtailing income inequality incongruity.
In Pakistan, Khan and Ihram, (1993) analyzed that aid increases the invertible resources thus increase the domestic investment which causes the more rapid rate of growth in economy. Fenny, (1990) evaluates the impact of foreign aid on poverty and human well-being in Papua New Guiana during the sass. They found high level of inequality reduces the impact of growth on poverty. Basin and Been, (2007) also studied to reduce the poverty of Ghana by applying some polices like recalling Import targets, cutting ten export taxes Ana Day compensating these two accounts with the flow of foreign aid.
Bowen, (1995) had research on the official development assistance and its relation to the growth in the sense of both positive and negative and had taken sixty seven less developed countries during the time period from 1970 to 1988. He investigates both the direct and indirect aid growth relationship and stated that the nature of the aid-growth legislation varies across the level of economic development in aid-receiving countries.
Herder and Volume, (1998) found that inequality has a negative long run effect on income, both for the sample as a whole and for important sub-groups within the sample. Collier and Dollar, (1998) work on aid allocation and poverty reduction and state that aid should not to be used to improve the policies of the country but must be used for the Impact of Foreign Aid on Income Inequality reduction of the poverty. Macdonald and Hoodooing, (2002) examined the determinants of the allocation of Canadian bilateral aid over the period 1984-2000 ND concluded that allocations are moderately selfless.
Maxillary, (2003) researched that “whether aid is effective or not” and found that aid is effective to promote the growth but there must also other sources which could help to reduce the poverty and increase the aid flows. Jeffery, (2003) study on aid efforts and its determinants and Aid effort is measured by the ratio of aid given relative to donor GAP. They found that there is evidence of progressively in aid efforts in respect of donor income and some evidence of decline in aid effort relative to donor’s population size. “Peer-pressure” was also detected.
Moslem, (2004) researched on the impact of aid on the reduction of poverty rather on economic growth together with inequality and corruption. They present empirical evidence which suggest positive leverage on aid donors on pro- poor expenditure. Chon, (2004) found some weak evidence that foreign aid is conducive to the improvement of the distribution of income when the quality of institutions is taken into account; however, this result is not robust. Fenny, (2005) researched the impact of foreign aid on the rural sector in Melanesia.
He found that foreign aid has no any impact in these agricultural regions either positively or actively but has increase the economic growth of these countries. Apart from this, most authors have noticed that policies are important in the effectiveness of foreign aid, as the aid has a more positive impact on growth in with good fiscal, monetary, and trade policies Chon, (2009) also supports the presence of good governance. Calenderer, (2006) also finds that aid by itself does not appear to have a statistically significant effect on inequality and poverty reduction.
Other methods suggest that good institutions may be necessary for aid to reach the poor. Loots, (2006) researched n Africa Impact of Foreign Aid on Income Inequality and showed that expected increase in aid flow increases the aid dependency in the low income countries of Africa. Millennia, (2006) studies the impact of globalization on income inequality and focuses on why global inequality matters and proposes a scheme for global redistribution. Raddled, (2006) study about foreign aid suggest that no doubt aid has significantly positively related to growth but as the aid increases, it gives negative impacts.
Poetical, (2007) has researched on aid and income stabilization and found that ODD stabilizes available resources against GAP shocks. Further stabilizing aid is more effective in countries where there are frequent output fluctuations and countries Tanat are malignly dependent on ala Fenny, ) researcher on “want type of economic growth does foreign aid support”. Aid is used for poverty reduction, so as the poor people of poor countries are living in rural areas whose occupation is mostly of agricultural side, therefore, aid has positively significant impact on the growth of the per capita agricultural income as compare to the industrial income.
So the main target of the foreign aid should be agricultural people as they are benefiting from it. Layton and Nielsen, (2009) concluded that the effect of foreign aid on inequality is somewhere between zero and weakly positive and also noticed that the actions and intentions of the government after receiving the aid and also the conditionality have great effect in the impact of aid on inequality. Kankakee and Chatter, (2009) analyzed the effect of foreign aid on economic growth in developing countries. They took 85 developing countries for the period of 1980-2007.
Results indicated that the significance levels of the foreign aid on income levels are different according to the income level, time period and regions of across the countries. Shovelfuls, (2010) found that aid causes small reduction in inequality. Methodology Mamba (1993) studied the relationship between foreign aid and economic growth, and showed that the impact of foreign aid on economic growth was negative for Cameroon. Mamba (1994) estimated the long-term relationship between foreign aid and economic growth for Cameroon during the period 1970 to 1990.
Findings show that foreign aid and domestic savings had contributed to economic growth and thus were complementary inputs. The different results in the 1993 and 1994 studies by Mamba were mainly due to changes in methodology. In order to estimate the long- term relationship between foreign aid and economic growth for Pakistan, I have followed the methodology used in Mamba (1994). In order to test the relationships it is essential that the variables in the model under consideration are of the same order of integration.
The relationships tested were between Pakistanis per capita income measured by real GAP, the ratio of savings to income, grants as a percentage of Gap, technical cooperation grants to Gap and foreign aid as a percentage of Gap. We have seed published time series data since 1972; the source for most of this data is the Federal Bureau of Statistics in Pakistan. Discussion/Analysis Pakistan has a long way to go before it can have a well-established taxation system, instruments for the promotion of private savings and pursuing international markets for capital inflows.
During the sass and sass the tax revenue as a percentage of Gap was 13. 8% and 13. 4% on average, and had fallen to 9. 5% by 2009. Agriculture and many of the services sectors still remain out of the tax net. The large informal economy also poses high tax administration and compliance costs. The tax gap in Pakistan is currently over Risks billion (IIS$10. 4 billion). In order to finance the twin deficits, government has remained dependent on foreign assistance, which in later years was procured on harsher terms. Pakistanis debt stock has also ballooned over time.
In the sass and sass the external debt averaged IIS$8. 7 and IIS$1 5. 2 billion, and domestic debt was IIS$6. 4 and IIS$17. 7 billion. The overall debt stock has shown a rising trend, and there is currently a reported external debt stock at IIS$39. 9 billion and domestic debt at IIS$49. 3 billion in 2009. In recent times the threat to fiscal sustainable y NAS come Trot servicing AT mostly EOT, wanly ten government NAS been obtaining to finance losses of public-sector enterprises, untargeted subsidies and a generous public-sector investment programmers, with a main focus on infrastructure financing.
The external and internal threat to national security forced the government to run a high security and defense budget, which led Pakistan to exceed the fiscal deficit targets set with the MIFF in 2010. This also contributed to higher inflation despite a generally depressed demand for real sectors output. Table shows the debt servicing burden of Pakistan over the past five Years. In The 2005 debt serving as percentage of exports receipts, foreign exchange earnings and GAP increased prominently during 2009 and 2010, reaching a level that now threatens medium-term macroeconomic stability.
Pakistan has recently introduced the 18th amendment to the constitution, which allows provinces to directly secure assistance from donors. However, economic practitioners are of the view that such a system should not be put in place without proper management of national debt by federal government.