The Economic Limitations of Aid.

1) Aid reduced savings and investment

  • studies show increasing foreign aid is correlated with declining domestic savings rates
  • aid causes ‘crowding out’ – it reduces the inflow of foreign money – private investors are less confident in investing in an aid-dependent nation

2) Aid can be inflationary

  • aid stimulates demand for domestic and foreign produce
  • domestic producers cannot keep up with demand rises and therefore prices rise

3) Aid chokes of the export sector

  • aid is converted into local currency, raising its value – this makes exports less competitive
  • also known as Dutch Disease – natural gag revenues flooded into theNetherlandsduring the 1960s devastating Dutch exports and raising unemployment
  • even in fixed currency regimes, inflationary pressure reduces exports
  • this is crucial – these industries are the foundations of growth

4) Aid causes bottlenecks: absorption capacity

  • aid can’t be used effectively as nations lack the skill-base and investment opportunities to put aid flows into effective use
  • governments need to spend the money and are therefore likely to use aid for consumption and not investment