The question concerning the most effective measure among these two in promoting the economic development of less developed countries remains to be very significant. Because of donor conditions and policies that can be imposed on these countries, the receipt of aid can significantly alter their economic and political policies.
This paper sheds light on the controversy of aid versus trade in promoting the economic development of less developed countries. Also, it highlights the role that should be played by developed countries to enhance the growth prospects for developing economies.
The ever-widening gap between the developed and underdeveloped countries in the world led the developed and industrialized countries to assist the less developed countries economically and financially either by means of foreign aid or open trade so as to accelerate their economic development. The fact is evident that most industrialized countries have been reluctant in using trade as a measure to enhance the economic growth of developing countries. Developed countries support the provision of aid to developing countries more than they opt for openness of trade. ...
Adam and O'Connell suggest that, " tariff preferences unambiguously deliver higher welfare than the equivalent pure grant" (157). However, advanced countries prefer aid to freeing of trade policies for developing countries in order to protect their domestic companies from foreign competition. Also, on the other hand, provision of aid protects several other interests of the donor country that will be touched upon later in this paper.
Effectiveness of aid over trade and vice versa for bringing out economic development in the less developed country depends upon a number of factors. For instance, increase in the exports of developing counties happens to be the most important element for the rapid growth in economy as it improves other economic indicators such as National Income, GDP and savings etc. Aid, on the other hand enhances consumption and reduces savings in the recipient economy (Papanek 948). Intrinsically, openness of trade policies on the part of developed countries put a positive impact on the growth of developing countries' exports that works as a driving force for the development of a country's economy. Adam and O'Connell indicate this point as " the form in which foreign transfers are provided affects the recipient's export incentives. Open preferences drive exports up; grants drive exports down" (165). The negative impact of aid on exports and savings consequently does not tend to put positive impact on the overall economic growth of the developing countries.
Significance of aid for economic development is although arguable on the grounds that much of the growth demonstrated on the part of the less developed