Wednesday, October 9, 2019

Factors that boost the impact of foreign aid on economic development in developing countries: a case study of India


Relevant economic theory
In relation to the topic above, the most appropriate economic theory is the linear stages of growth theory. This school of economic thought was developed in the 1960s and remains useful today when it comes to the search for economic development in the developing world (Foster, 2007). This economic thought describes a number of models which aim at outlining the process of economic development which is viewed as a sequential sequence. Rostow’s Stages of Growth Model is one of the models in this theory.
In the first stage, the country is likened to the traditional society which is agrarian based (Foster, 2007). The country then makes efforts to strengthen its institutional infrastructure. Education and understanding of science is also enhanced. In the third stage, economic growth starts backed by organised economic systems and this is followed by incremental diversification of the economy and less dependence on agriculture (Martini, 2010). In the fifth stage, the economic development is realised characterised by better distribution of wealth and higher living standards. Savings and investment are crucial to facilitate this development. Additional resources can also be derived from foreign aid to fast track development of the relevant institutions and spur economic growth.
            The Harrod-Domar Growth Model complements the model above. In terms of the elements that generate economic growth, national savings and investments are the motivating factors (Hussein and Thirlwall, 2000). Foreign aid substitutes or complements national savings. This means that economic growth is spurred by foreign aid, and when the same is accompanied by structural and systemic changes as recommended in Rostow’s model, economic development is realised. The relevance of Harrod-Domar Growth Model is enhanced by the fact that economic development is dependent on economic growth rates (Hussein and Thirlwall, 2000). The model for economic growth is discussed in latter sections of this paper.
Key variables for topic
The dependent factor is economic development. This is because the paper shall focus on evaluating the rate of economic development corresponding to the foreign aid trends for the country under study.
            The independent factors are: foreign aid’s influence on economic growth, foreign aid’s influence on institutional development, and economic focus. The fast factor on economic growth is based on the premise that, since foreign aid substitutes or complements national savings in determining economic growth, it is bound to impact economic growth (Martini, 2010). Sustained economic growth then lays the foundation for economic development.
            The second independent factor relates to institutional strength. According to Rowstow’s model, development of institutional strength is crucial in the process of enhancing development. This variable makes non-financial contributions relevant to the question. For instance, aid can be specific for strengthening certain institutions and this can contribute to economic development (Foster, 2007). This is related to the third factor: focus of the economy. Seeking to diversify economies away from dependence on agriculture is crucial for economic development.

Estimating equation
Economic development depends on sustained high rates of economic growth. The relevant equation is described in Harrod-Domar Growth Model: GDP growth rate (g) depends on the national saving ratio (s) and inversely on national output/capital ratio (k) as adjusted for depreciation (d). The equation is as below:
[g = (s/k)-d]
The relevance of foreign aid in the equation is determined by its ability to reinforce savings (s). Foreign aid either replaces or adds to national savings. This means that there is a direct relationship between GDP growth rate and national saving. Since development is dependent on sustained economic growth, sustained foreign aid can lead to development provided that other non-financial factors are fulfilled.

References
Foster, J.B., 2007. The Imperialist World System: Paul Baran's Political Economy of Growth after Fifty Years. Monthly Review 59(1), pp. 1-16
Hussein, K., Thirlwall, A.P., 2000. The AK model of "new" growth theory is the Harrod-Domar growth equation: Investment and growth revisited. Journal of Post Keynesian Economics 22(3), pp. 427-435
Martini, E.A., 2010. America's Rasputin: Walt Rostow and the Vietnam War. The Journal of American History 97(3), pp. 858-859

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