Research Proposal Khadija Tahir

7/21/2019 Research Proposal Khadija Tahir

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ContentsChapter 1 (Introduction) ................................................................................................................................................... 1

Introduction ............................................................................................................................................................................... 2

Context ......................................................................................................................................................................................... 3

Trends and Composition of Aid: ................................................................................................................................... 5

Chapter 2 ..................................................................................................................................................................................... 7

Generic definitions .................................................................................................................................................................. 8

Literature Review .................................................................................................................................................................. 11

Objective of the study .......................................................................................................................................................... 18

Significance of the study ..................................................................................................................................................... 18

Research Questions .............................................................................................................................................................. 18Chapter 3 ................................................................................................................................................................................... 19

Methodology ............................................................................................................................................................................ 20

Type of study ...................................................................................................................................................................... 20

Inclusion criteria ............................................................................................................................................................... 21

Exclusion criteria .............................................................................................................................................................. 21

Ethical considerations .................................................................................................................................................... 21

REFERENCES ........................................................................................................................................................................... 22


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Chapter 1

Introduction


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Introduction

Controversies about aid effectiveness go back decades. Critics such as Milton Friedman,

Peter Bauer, and William Easterly have leveled stinging critiques, charging that aid has enlarged

government bureaucracies, perpetuated bad governments, enriched the elite in poor countries, or

just been wasted. They cite widespread poverty in Africa and South Asia despite three decades of

aid, and point to countries that have received substantial aid yet have had disastrous records such

as the Democratic Republic of the Congo, Haiti, Papua New Guinea, and Somalia. In their eyes,

aid programs should be dramatically reformed, substantially curtailed, or eliminated altogether.

Supporters counter that these arguments, while partially correct, are overstated. Jeffrey

Sachs, Joseph Stiglitz, Nicholas Stern and others have argued that although aid has sometimes

failed, it has supported poverty reduction and growth in some countries and prevented worse

performance in others. They believe that many of the weaknesses of aid have more to do with

donors than recipients, and point to a range of successful countries that have received significant

aid such as Botswana, Indonesia, Korea, and, more recently, Tanzania and Mozambique, along

with successful initiatives such as the Green Revolution, the campaign against river blindness,

and the introduction of oral rehydration therapy.

This study intends to explore trends in aid, the motivations for aid, its impacts on the

sovereignty of the recipient country (Pakistan), and discloses its interference and influence on the

policy initiations and policy making. It begins by examining aid magnitudes and who gives and

receives aid. It discusses the multiple motivations and objectives of aid, some of which conflict

with each other. It then explores the empirical evidence on the relationship between aid and

growth, which is divided between research that finds no relationship and research that finds a

positive relationship (at least under certain circumstances). It unfolds some of the tricks of using


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aid more effectively to influence the governance of the country, including the principal-agent

problem and the related issue of conditionality, and concludes by examining some of the main

proposals for improving aid effectiveness and keeping the sovereignty of the country intact.

Context

Role of Foreign Aid in the Development of Pakistan:

Pakistan has been a recipient of foreign aid since its existence. This aid has been in the

form of grants, tied aid, project aid and huge inflows intended to keep the foreign exchange

reserves at a safe level to cope with industrialization related liberal import policy. Foreign aid

has played very important role in the economic development of Pakistan.

In the beginning Pakistan received very small aid from the rest of the world and international

monetary agencies like World Bank and IMF. Industrialization process began in Pakistan after

the late 50s and to fulfill the demand of intense development activity, increased reliance on

foreign resources became virtually inevitable. In the economic history of Pakistan five-year

planning scenario is also responsible for foreign aid. Government of Pakistan had to request for

the foreign aid for the completion of the five years targets and the volume of foreign aid

increased with the introduction of every five-year plan.

Many economists share the same views about the foreign aid and economic development. Many

third world countries received substantial foreign aid from the developed countries for the

economic stability and development but political considerations strategic alliances has been

partly responsible for the level of aid flows to different countries at different points of time.

Due to geo-political developments around its borders Pakistan received liberal assistance

packages during the decade of 60s and 80s. Pakistan has been closed ally of western world in


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order to stop the onward march of communist menace. There was lavish foreign aid and military

assistance to Pakistan due war in Afghanistan. The inflows of generous foreign aid reached its

climax in the ear of Zia. With the end of war in Afghanistan, policy of isolation and lesser

interests of God Fathers Pakistan could not have economic and materialized aid on softer terms

(Kardar, 1995).

The composition and terms of foreign aid has changed considerably from grants and

grant like assistance to hard term loans over the years. The share of grants and grant like

assistance in the total commitments was 80% during the first five-year plan (1955-60). It was

dropped to 46% during the second five year plan (1960-65) and continued to decline thereafter,

averaging 31% during the third five year plan (1965-70) and 10% in the fourth five year plan

(1970-75). There were many geo-political aspects for that down ward trend in foreign aid in

shape of grant or grant like (Abbas, Brecher, 1992).

Foreign aid in shape of loans, and credit has been granted on easier conditions during the

1960s and the 1970s. During the 1980s and the first eight years of the 1990s (1990-98) the

source and availability of foreign aid has made very harder and difficult for Pakistan. The rate of

interest of foreign aid has been on the move during the last 50 years. Furthermore, the repayment

period of loans/credit has been reduced by the international monetary agencies and western

world (Qureshi, 1997).


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Trends and Composition of Aid:

Trends and Patterns of Foreign Aid in Pakistan:

In Pakistan almost the earliest dispute, in the cabinet of the first Prime Minister (Liaquat

Ali), was over the principle of foreign aid. Three times in 1950 the Government of Pakistan

refused the proposed American Assistance. The cabinet also split in the same year over the

question of going to World Bank for loans. Ultimately it is the influence of Chaudhri

Mohammad Ali which persuaded the decision in the favour of taking aid and loans. The

Common Wealth aid, promised through the Colombo Plan, was however accepted. (Hasan:

1999)

Accordingly for the first time, Pakistan accepted the Common Wealth Aid under the

Colombo Plan in 1950s. And then in sixties, there was the emergence of the so called Growth

Man-ship, which suggests that there should be a high growth rate (minimum double of the

population growth rate).

In most of UDCs, (including Pakistan) the population growth rate was about 3%. Thus

the growth rate of 6% was assumed as a target for the rapid economic development. And

according to the Harrod-Domar Growth Model, to achieve the target of 6% growth rate the


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savings (investments) must be equal to the 18-20%.


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Chapter 2Literature Review


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Generic definitions

Foreign Aid

Aid (from the French word aide) also known as international aid, overseas aid, or foreign aid Foreign aid is defined as when a country helps another country by: (a)Disater Relief,

(b)Military Support, (c)Education, (d)Economic Development

Foreign aid has been given different meanings by different schools of thought with

respect to its structure, its factors such as interest rate determination, repayment period and other

modalities.

Foreign aid takes place when a recipient country receives additional resources in foreign

currency over and above the capacity to import generated by exports. Foreign aid means those

additional resources, which are used to raise the performance of the recipient country above the

existing level.

Foreign aid is the transfer of resources from a rich country to a poor country. It is subject

to certain limitations, which generate various forms of foreign aid.

Financial Aid

The simplest form of capital inflow is the provision of convertible foreign exchange but

very little foreign capital indeed comes to the under-developed world so conveniently. If any

divergence from this form is described by saying that strings are attached then almost all

foreign public capital has strings. Financial aid is divided into different sub-forms i.e.

Untied Aid


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Foreign aid, which is not tied to any project or nation, is called untied aid. It is in all

respects, better than the tied aid because it offers more efficient use of foreign resources.

Untied aid is much desired because the recipient country is not bound to spend foreign resources

on specific projects in the donor country.

LoansIt is borrowing of foreign exchange by a poor county from a rich country to finance short

term or long term projects. These are sub-divided into two types subject to this criterion:

i. Hard loans

Hard loans are given in order to finance industrial imports and are given usually

for a period of five years or less. It contains no concessional elements but interest rate is

usually lower than the prevailing rate in international market. The grace period is very

much limited, penalty is paid after expiry of stipulated time period.

ii. Soft Loans

Soft loans are normally given for 10-30 years. Interest on these loans is less than

hard loans and often these loans involve a grace period. Concessional elements are

comparatively greater.

Grants

A grant is that form of foreign aid, which does not entail either payment of the principal

or interest. It is a free gift from one government to another or from an institution to a

government. It is much desired because it increases internal expenditure and generates income. It


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is given on a humanitarian basis, especially in times of emergencies, earthquakes, floods, wars or

other special purposes.

Commodity Aid

It is another type of tied aid, which relates to commodities such as agricultural products,

raw materials and consumer goods. It helps in controlling famine and maintaining the tempo of

industries by providing raw materials to the industrial sector. It would be more helpful if it is

provided in cash form because a country can then buy more commodities from cheaper sources.

Commodity aid sometimes has a depressing effect on agriculture prices in a recipient country, so

it serves as a disincentive for the agriculture sector. The donor country may have much political

influence on a recipient country.

There is no unique source of foreign aid. It may be from a single country or from a group

of countries. On the basis of the kind of donor study may divide foreign aid in two types:

Bilateral AidAid that is given from the government of one donor country to a recipient country is

called bilateral aid. It is basically a one to one relationship of two states. It depends upon the

political and economic relationships of the two countries coupled with the will of the donor

country.

Multilateral AidMultilateral aid is given by certain international financial institutions, agencies or organizations

to the governments of developing countries. It is distributed in a fair manner in order to raise the

pace of economic development.


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Literature Review

Researchers coming from the west, the east, and the center (Asia) have all concluded that

aid as traditionally practiced has not had systematic, beneficial effects on institutions and policies

[Mosley, Harrigan, and Toye (1995); Rodrik (1996); Ranis (1995); Collier (1997); Dollar and

Svensson (2000); Devarajan, Dollar, and Holmgren (2000)]. In particular, there is broad

agreement that giving a large amount of financial aid to a country with poor economic

institutions and policies is not likely to stimulate reform, and in fact may retard it. More

generally, study agree with Acemoglu, Johnson, and Robinson (2001) that there is little

agreement about what determines institutions and government attitudes toward economic

progress. Their works, and the work of Engerman and Sokoloff (1997), indicate that

institutions are often quite persistent, but there are historical examples of significant reforms.

Given that institutions and policies are important for growth and that aid has had little

systematic effect on institutions and policies, study introduced the hypothesis that the impact of

aid on growth is conditional on these same institutions and policies. To investigate this

empirically study created a policy index based on several variables used in the empirical growth

literature (and in a follow-up paper, Burnside and Dollar (2000a), study added a rule of law

measure to the index), and found that aid had a positive effect on growth in developing countries

with significantly better than average institutions and policies, whereas aid had no positive effect

in countries with average policies. It is useful for the non-technical reader to provide a simple

graphical representation of these findings, which studyhave updated in Burnside and Dollar

(2003a). Study regress growth, policy, and aid on the other variables (reflecting initial

conditions) on the right-hand side of the growth regression, and extract the unexplained

(residual) component of each variable. Study then sort the data into 9 groups using the 33.3 and


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66.7 percentiles of aid and policy. The average growth rate for each group appears to depend on

the interaction between aid and policy (Figure 1). To us this graph shows that

institutions/policies matter (something that is not in dispute). But the graph also shows that the

effect of aid on growth also appears to depend on the level of policy. When policy is bad, the

level of aid seems to have little impact on growth; if anything, a slightly negative impact. But for

countries with good policies, giving sufficiently more aid seems to have a very positive impact

on growth. The key statistical question is whether the impact of aid on growth is different for the

poor-policy observations than for the good-policy observations.

Foreign aid is an important source of income in developing countries and carries potential

to play a key role in promoting economic growth. The traditional literature on economic growth

emphasizes the positive role of foreign aid in the process of economic development. Foreign aid

inflow influences the process of growth by reducing the saving-investment gap, increasing

productivity and transferring the modern technology. However, in the neoclassical growth

framework the benefits of foreign capital inflows are of temporary nature. Like many other

developing countries, Pakistan has heavily relied on foreign borrowings to finance its economic

development. This strategy increased its dependency on external resources. Pakistan has received

around US$73.14 billion in the form of foreign aid from 1960 to 2002 [Anwar and Michaelowa

(2006)], but the benefits of this aid flows have not stretched to the whole society, which means

that foreign aid has failed to improve the economic conditions in Pakistan. The literacy rate is

still around 50 percent and other social indicators, such as employment, health and education

etc., also do not present an encouraging picture. Saving rates have remained low, and the trade

gap has widened [Husain (1999)]. Foreign aid has not been utilized for development of the

economy; rather aid has served the vested interests of influential people. During 1990s, the


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foreign loans at commercial rate of interest have exacerbated the foreign debt problem of the

country. The overall situation depicted above cast doubts about the effectiveness of foreign aid

as a tool for economic growth.

The impact of foreign aid on economic development has always been a controversial

issue. In 1950s, 1960s and 1970s rich countries used foreign aid to fill the gaps in resources,

encouraging domestic investment and industrial development under the belief that foreign aid

could help developing countries to accelerate the takeoff into self-sustained growth by

generating new domestic investment [Rostow (1960) and Waterson (1965)].

Many economists assert that foreign capital inflow is necessary and sufficient condition

for economic growth in developing countries. They claim that there exist a positive correlation

between foreign aid and economic growth because it complements domestic resources and also

supplements domestic savings to bridge saving-investment gap and provides additional financial

resources which helps to achieve the short-term growth targets. Besides, it is also held that,

foreign aid assists to close the foreign exchange gap, provide excess to modern technology and

managerial skills and allow easier excess to world markets [see for example, Chenery and Strout

(1966); Papanek (1973); Gulati (1975); Roemer (1989); Islam (1992) and Thirlwall (1999);

among others].

Mosley (1980) observes a positive relationship between foreign aid and economic growth

for UK aided countries and negative for French and Scandinavian aided countries. However, he

concludes that aid could not improve the economic conditions in Bangladesh, India and countries

like Korea, Malawi and Kenya.


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Another strand of literature asserts that external capital exert significant negative effect

on the economic growth of the recipient countries. According to this view, foreign aid is fully

consumed and substitutes rather than complements domestic resources. It is argued that foreign

aid is used to import inappropriate technology, distorts domestic income distribution and

encourages a bigger, inefficient and corrupt government in developing countries Foreign aid is

also thought to displace domestic savings, which in turn retards investment and economic growth

[Griffin and Enos (1970); Weisskoff (1972)].

Boone (1996) finds that aid has no effect on investment and growthhis estimates show

that the marginal tendency to consume from foreign aid is insignificant and marginal tendency to

investment was zero. Easterly (2001) finds no empirical relationship between foreign aid and

economic growth and between aid and investment. He concludes that aid has not delivered the

expected results and may create the wrong economic incentives. Many studies confirm negative

correlation between foreign aid and economic growth. Negative correlation between aid and

growth is the outcome of factors such as economic policies, government intervention, business

cycle and instability of foreign aid flows in the recipient countries [Levy (1984)]. Singh (1985)

concludes that state intervention in the economy generate negative impact on economic growth

and makes the aid-growth relationship statistically insignificant. Burnside and Dollar (2000) find

that the relationship between foreign aid and economic growth may depend on whether the

recipient countries have been pursuing sound economic policies. Gounder (2001) and Lloyd, et

al. (2001) find that foreign aid contributes to long-term growth in private consumption and

policy reforms enhance the effectiveness of economic growth.

Mavrotas (2002) finds that policies impact aid effectiveness in case of India. Lensink and

Morrissey (2000) analyze the impact of aid uncertainty on economic growth in developing


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countries. They find that the impact of foreign aid on economic growth depends on the aid levels

and the stability of aid flows. Pallage and Robe (2001) explain empirical regularities in the

foreign aid flows to developing countries. They reveal that aid flow is a major source of income

in the majority of recipient countries and aid flow is highly volatile and overwhelmingly pro-

cyclical. This means that even if foreign aid helps foster economic growth, serious problems

would nevertheless stem from the fact that aid disbursement pattern intensify volatility of

developing countries disposable income which affects growth negatively. Hansen and Tarp

(2001) conclude that aid increases growth via capital accumulation and it does not depend on

good policy. They note that growth regressions are sensitive to choice of control variables and

choice of estimators and that much more theoretical work is needed before drawing policy

insights. Pack and Pack (1994) asserts that foreign aid is fungible. They claimed that because of

the fundability of foreign aid, the increase in government income in the form of aid will be

crowded-out.

On the other hand, Cassen (1994) argues that the relationship between aid and growth is

rather weak, and it can be either positive or negative, depending on the countrys absorption

capacity of aid, economic and political structure and the time period chosen. Studies based on

time series data conclude that foreign aid has been an important determinant of economic

growth. Feyzioglu, et al. (1998) concludes that sectoral concessional loans are highly fungible.

An alternate strand of literature points out that foreign economic assistance displaces

processes of institutional maturation that is essential to promote economic development. Thus,

foreign aid promotes aid-dependency [Friedman (1958) and Bauer (1971)]. Foreign assistance

represents a side payment to elites in recipient countries, design to buy compliance in

maintaining the economic and political dominance of the industrialized countries [Frank (1966)].


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Brautigam and Knack (2004) point out that poor quality institutions, weak rule of law,

absence of accountability, controls over information and high level of corruption have distorted

the benefits of foreign aid in most African countries. Similarly, Wolfensohn the president of

World Bank in 2002 observed that We have learned that corruption; bad policies and weak

governance will make aid ineffective. However, selective foreign aid has helped to improve per

capita income and lower infant mortality rate in under-developed nations [Easterly (2003)].

Selective foreign aid means that donor nations put some conditionalities in the form of low

inflation and budget deficit, non-interference with market prices, privatization and openness to

international trade [Easterly (2003)]. Svensson (1999) concludes that foreign aid has a positive

long-term impact in democratic countries, but in countries with authoritarian regimes, aid has

often dissipated into unproductive activities. Ranis and Mahmood (1992) claims that foreign aid

retard a countrys ability to adhere to responsible economic policies.

The bulk of theoretical and empirical literature has so far produced inconsistent and

elusive results regarding the relationship between foreign aid and economic growth. Empirical

findings are also mixed with respect to the impact of foreign aid in Pakistan. For instance,

Chishti and Hasan (1992) conclude that 28 percent of the domestic borrowings go towards

financing the public sector non-development expenditures. Their results also indicate that foreign

aid in the form of grants has a modest impact on public investment while loans do not seem to

have a significant impact on public investment. Shabbir and Mahmood (1992) conclude that net

foreign capital inflows, disbursement of grants and external loans have a positive impact on

economic growth of Pakistan. Ali (1993) points out that there is no significant relationship

between inflow of foreign aid and economic growth. Khan and Rahim (1993) conclude that

foreign aid has negative relationship with domestic savings and it has no significant impact on


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economic growth. Iqbal (1997) is of the view that foreign capital that flows into the public sector

has strong positive impact on social and non-development expenditures and has little effect on

development spending. He further suggests that foreign loans and aid are largely consumed

rather than invested productively and foreign assistance cause a strong shift of public domestic

resources from development projects to non development expenditures. Khan (1997) has also

pointed out that aid has a robust negative impact on economic growth. Similarly, Ishfaq and

Ahmed (2005) conclude that foreign aid has not contributed favourably to GDP growth rate of

Pakistan. This ineffectiveness of aid is attributed to diversion of aid funds to non-productive

activities and inefficiency in resource allocation especially in the public sector. Husain (1999)

argues that foreign aid exerts positive impact on growth if the macroeconomic policies are

correct, microeconomic incentives are not distorted and the supporting institutions are in place.

In the absence of these preconditions foreign aid helps to postpone the tough decisions required

for prudent economic management. Under these circumstances, foreign aid is curse rather than

blessing and should be avoided.

These conflicting views have motivated study to reinvestigate the role of foreign aid in

determining economic growth. This paper seeks to answer the question whether foreign aid is

affecting the sovereignty of Pakistan? Specifically I hypothesize that Pakistan should concentrate

on those internal resources that are stable, sustainable and are largely within the policy control of

the authorities, rather than continue to depend on those resources which are more volatile, less

stable and controlled by the external policymakers.


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Objective of the study

This study will evaluate the foreign aid policy of Pakistan in terms of public

administration issue rather than an economic issue. This study intends to unfold the reality of

foreign aid and the deep and harsh consequences of foreign agenda and policies on our system

and public administration.

Significance of the study

Over the past half century, the U.S assistance to Pakistan has been transactional and

intermittent. Not surprisingly, this on-again, off-again history of U.S. assistance has left the

Pakistani people and their leaders with serious concerns about the depth and reliability of the

U.S. commitment to their wellbeing. This study will unveil the intention of donors of foreign aid

and will also identify the flaws in the forced policies and agendas attached with the foreign aid

which will lead us to understand the reality of foreign aid and policy of Pakistan regarding aid.

Research Questions

1. Does foreign aid effects the sovereignty of Pakistan?Guiding questions

2. Does it help recipient country or hurt her and in either way what is the impact? Howimportant is foreign aid in fostering economic growth in Pakistan?

3. Does the foreign aid have any impact on the policies implemented in Pakistan?4. Are the policies backed by foreign aid in compliance with the true betterment of Pakistan and

their people?


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Chapter 3Methodology


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Methodology

The purpose of this chapter is to delineate the methodological approach employed in this

research. To recap, the goals of this research are to: 1) analyze the foreign policy in terms of

influencing or damaging the sovereignty of Pakistan; 2) evaluate the foreign aid policy of

Pakistan in terms of public administration issue rather than an economic issue; 3) unfold the

reality of foreign aid and the deep and harsh consequences of foreign agenda and policies on our

system and public administration. Given the primary objectives of the research and the dense

amount of existing research on foreign aid affecting the public policies initiated or implemented

in Pakistan interpretive research methodology will be used utilized. The research methodology

includes a pre-study comprised of secondary data obtained from the history of Pakistan written

or noted by authentic sources and the researches of the researchers of countries like Pakistan

India, America, England and Europe. In each case the data will be interpretively analyzed

First, a discussion of the pre-study, consisting of an analysis of secondary data from above

mentioned sources. This analysis of secondary data supports evolving a priorithemes identified

from earlier research and provides a foundation for the development of the interview guide for

further research.

Type of study

Study will seek if any relationship exists between the foreign aid and the sovereignty and public

policy initiated. For this purpose qualitative secondary data will used which can explore the

reality and then can explain the prevailing situation in terms of what is the dependent and what is

the independent factor. ANOVA will be run on the gathered qualitative secondary data to

analyze the findings of the secondary research.


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Research Proposal Khadija Tahir