As the paper outlines a significant and influential study that showed foreign aid to have a positive impact on growth in LDCs was conducted by Burnside & Dollar. However, they also mentioned the need for good fiscal, monetary and trade policies for the impact to be effective. On the other hand, its inability to impact positively on growth is usually given as the main reason for not recommending the practice. This study highlights that the traditional rationale behind giving foreign aid has been that it helps to close the ‘finance gap’. This gap is the difference between the amount of investment required for a specific economic growth rate, and the amount of domestic resources available from savings and private financing, or put simply, between planned investment and available savings. The situation in which a finance gap exists is created when there is a lack of physical and human capital. The finance has therefore mainly been directed at large-scale infrastructural projects, as recommended in the Harrod-Domar model for promoting economic development. Furthermore, the assumption made is that the aid takes the place of the gaps in investment the magnitude of which is directly proportional to economic growth, which is questionable. The giving of foreign aid also promotes social interaction between nations. It is a useful means for the redistribution of wealth so the practice has an ethical dimension too. The surplus generated by richer economies can be used to help the poorer economies as a moral responsibility. For the latter, it could be a very important source of finance “to tide over financial crises, enhance economic development, [and] promote economic integration with the global economy”.
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