A widely held notion is that underdeveloped countries are caught in a vicious circle of poverty. According to P.T. Bauer, this thesis tends to be basis for important policy proposals and for the suggestion that substantial economic progress of poor countries requires drastic sacrifices at home, supplemented by foreign aid.
The cycle starts with the fact that because of economic issues, many are earning low income making it difficult for them to save. Lack of saving prevents the capital accumulation necessary for the income to increase. Other theories mention the narrow markets hinder the emergence and extension of the specialist needed for higher income. The demand is too small to admit productive investment, which helps to alleviate the economy when it is a foreign country investing and prevents opportunities from opening up. The government revenues are not enough for the establishment of effective public services. Low income leads to malnutrition and ill health which leads back to preventing the economy to rise and become productive. (Livingstone 19)
Overall view on aid
Forms of aid
Foreign aid may come in the form of men, money or goods. Men may be there for advising or executive job purposes to help for a days or even years. Grants and loans may be made and can come in a monetary form or may also be goods.
General sources of aid
Governments are the biggest suppliers of aid, then international agencies, then private foundations and individuals. Each has different standards on who does and does not receive aid so there is no co-ordination.
Conditions of aid
Aid costs something always regardless of whethere there is repayment or not. When men are sent over to the underdeveloped country, that country is expected to pay subsistence allowances and travel costs. If the local salaries are low by international standards, these untaxed subsistence, housing and car allowances would probably exceed the cost of emplying a local man. It may be large enough to strain a small department.
Generally, it is easy to get aid for personnel and equipment, buut difficult to find money for construction.
An agency may finance construction, but leave the government to meet recurrent costs. Recurrent costs may end up being more than capital costs over a five year period. Also agencies send men for a limited time period, so when the men leave the government is left to pick up where the agency leaves off.
Implementation of aid
BORROWING MYTHS:
Not true a country should borrow abroad only for investments which would lead to exportable commodities.
What matters is the balance of payment situations such as if imports outrun exports, a country should beware of taking new commitments; but if exports are staying afloat, a country can use additional foreign exchange earnings to meet the debt charges on, for example, the money invested in water supply, rather than on importing more motor cars.
Not true that a Government should borrow (at home or abroad) only for "self-liquidating projects", meaning, produce anything that would be sold to the public.
