The real economic costs of granting foreign aid

Scholars interested in assessing the comparative economic burdens assumed by advanced nations in their loans and grants to the L.D.C.s have pointed out that adjustments are necessary for many factors such as rate of interest charged (if any), time pattern of repayment (if any), whether or not interest and repayment is in hard or soft currency or in kind, rate of return on capital invested at home, and so forth. Clearly, a loan or grant is more burdensome to the donor, if, for example: the interest charged is low, the rate of return at home is high, and repayment is in soft currency or in kind and extended over a long period of time.

In this paper, an additional important adjustment is suggested. It is argued that a grant or loan involves a social cost to the donor only if the donor is deprived thereby of the use of current output for domestic purposes. To the extent that aid is provided by (i.e. results in) the employment of otherwise unemployed labour and other primary factors, it may be viewed as socially costless to the advanced nation. In fact, by eliminating further unemployment via the multiplier, the granting of aid may (with a lag) leave the donor with more output available for home use than before. This type of analysis would not apply to western nations at or close to full employment, or to the usually fully employed centrally planned economies, since the granting of aid in these instances necessarily reduces the amount of output available for home use. For this reason, the granting of aid generally represents more of a sacrifice to centrally planned than to market economies. This is illustrated by estimates.

Loan repayment must also be evaluated in terms of its employment effects. Analysis shows that the employment effects of loan repayment is likely to be quite asymmetrical to that of disbursement.