Role of foreign capital in developing countries
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1. Solution to the Problem of Capital Deficiency:
The underdeveloped countries are generally designated as ‘capital poor’ or ‘low-saving and low-investing economies. The rate of domestic savings in these countries is highly inadequate to meet the requirement of their economic development. Majority of people are living on the subsistence level. Besides, it is not possible to increase the rate of domestic savings to any significant extent.
It is not possible for these countries to develop rapidly with their domestic resources alone. Foreign aid can help to bridge the gap between the rate of domestic savings and required rate of investments if these countries are to developed at a fairly rapid rate. A modest requirement of development it has been correctly observed, will be to invest at least 10 percent of their national income in these countries. But domestic saving is inadequate to meet the requirements of capital formation. Hence foreign aid capital is indispensable for economically backward areas.
2. Technical Knowledge and Specialized Capital Equipment:
These countries are not only ‘capital poor’ but they are also backward in technology for rapid economic development. They require trained personnel, technical know-how and expert opinion. They also need modern machines and equipment’s. Foreign capital can help to solve the problem of technological backwardness of these countries. Therefore, foreign capital is significant not only as a source of additional savings but also as a supplier of modern technology and specialized capital equipment to underdeveloped countries.
3. To Correct Adverse Balance of Payments:
Foreign aid is also crucial from the point of its favourable effect on the balance of payments of the recipient country. These countries are generally involved in unfavorable balance of payments. Economic development tends to affect the balance of payments adversely as the huge imports of capital goods, technical know-how and raw materials are required to carry on the development programmes. On the other side, the exports from these countries are sluggish because of high cost of production and increased domestic consumption.
In this way underdeveloped countries suffer from a continuous pressure on their balance of payments. Foreign capital can help to solve the foreign exchange crisis to a greater extent in these countries. Thus according to Dr. D. Bright Singh, external assistance becomes unavoidable in mobilization of resources in a country as it gives guarantee of releasing sufficient amount of foreign exchange to carry on the development programmes.
4. Foreign Capital helps to maintain the Production Level:
Another significance is that aid imports can be of immense help in maintaining the level of industrial production in less developed countries by providing essential raw materials, semi manufactured goods, machines, tools and equipment’s. These countries are not in a position to import their requirements out of their own foreign exchange earnings. As a result they have to resort to foreign borrowing in order to maintain the level of production in the country.
5. Helpful in the Development of Economic and Social Overheads:
It is a hard fact that underdeveloped countries lack in the necessary infrastructure for development like rails, roads, canals, power projects and other economic and social overheads. Since their development requires a huge capital investment and a long gestation period, these countries are unable to undertake these heavy projects with the aid of domestic resources. Foreign capital can be very helpful in the pace of economic development. It leads to lay down the foundations of rapid economic development in these countries.
6. To Break Vicious Circle of Poverty:
Foreign aid capital is useful to break the vicious circle of poverty and market imperfections. In the opinion of Prof. Nurkse, “The use of foreign resources is one way of breaking the vicious circle of poverty and low capital formation.
The flow of foreign capital and other resources will provide an increase in productivity fast enough to out run population growth and thus launch a process of cumulative expansion, and will acquire a sufficient portion of this capital in foreign exchange to permit importation of raw materials and equipment needed for development, in addition to essential food stuffs”.
7. Rapid rate of Capital Formation:
As underdeveloped countries have slow rate of capital formation but with the aid of foreign capital, rate of capital formation can easily be speeded up as this imported capital is employed in heavy capital intensive industries such as machinery, steel and fertilizer etc.
.
The underdeveloped countries are generally designated as ‘capital poor’ or ‘low-saving and low-investing economies. The rate of domestic savings in these countries is highly inadequate to meet the requirement of their economic development. Majority of people are living on the subsistence level. Besides, it is not possible to increase the rate of domestic savings to any significant extent.
It is not possible for these countries to develop rapidly with their domestic resources alone. Foreign aid can help to bridge the gap between the rate of domestic savings and required rate of investments if these countries are to developed at a fairly rapid rate. A modest requirement of development it has been correctly observed, will be to invest at least 10 percent of their national income in these countries. But domestic saving is inadequate to meet the requirements of capital formation. Hence foreign aid capital is indispensable for economically backward areas.
2. Technical Knowledge and Specialized Capital Equipment:
These countries are not only ‘capital poor’ but they are also backward in technology for rapid economic development. They require trained personnel, technical know-how and expert opinion. They also need modern machines and equipment’s. Foreign capital can help to solve the problem of technological backwardness of these countries. Therefore, foreign capital is significant not only as a source of additional savings but also as a supplier of modern technology and specialized capital equipment to underdeveloped countries.
3. To Correct Adverse Balance of Payments:
Foreign aid is also crucial from the point of its favourable effect on the balance of payments of the recipient country. These countries are generally involved in unfavorable balance of payments. Economic development tends to affect the balance of payments adversely as the huge imports of capital goods, technical know-how and raw materials are required to carry on the development programmes. On the other side, the exports from these countries are sluggish because of high cost of production and increased domestic consumption.
In this way underdeveloped countries suffer from a continuous pressure on their balance of payments. Foreign capital can help to solve the foreign exchange crisis to a greater extent in these countries. Thus according to Dr. D. Bright Singh, external assistance becomes unavoidable in mobilization of resources in a country as it gives guarantee of releasing sufficient amount of foreign exchange to carry on the development programmes.
4. Foreign Capital helps to maintain the Production Level:
Another significance is that aid imports can be of immense help in maintaining the level of industrial production in less developed countries by providing essential raw materials, semi manufactured goods, machines, tools and equipment’s. These countries are not in a position to import their requirements out of their own foreign exchange earnings. As a result they have to resort to foreign borrowing in order to maintain the level of production in the country.
5. Helpful in the Development of Economic and Social Overheads:
It is a hard fact that underdeveloped countries lack in the necessary infrastructure for development like rails, roads, canals, power projects and other economic and social overheads. Since their development requires a huge capital investment and a long gestation period, these countries are unable to undertake these heavy projects with the aid of domestic resources. Foreign capital can be very helpful in the pace of economic development. It leads to lay down the foundations of rapid economic development in these countries.
6. To Break Vicious Circle of Poverty:
Foreign aid capital is useful to break the vicious circle of poverty and market imperfections. In the opinion of Prof. Nurkse, “The use of foreign resources is one way of breaking the vicious circle of poverty and low capital formation.
The flow of foreign capital and other resources will provide an increase in productivity fast enough to out run population growth and thus launch a process of cumulative expansion, and will acquire a sufficient portion of this capital in foreign exchange to permit importation of raw materials and equipment needed for development, in addition to essential food stuffs”.
7. Rapid rate of Capital Formation:
As underdeveloped countries have slow rate of capital formation but with the aid of foreign capital, rate of capital formation can easily be speeded up as this imported capital is employed in heavy capital intensive industries such as machinery, steel and fertilizer etc.
.
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