This guest blog was written by Duncan Ryan financial and political journalist at www.investing.co.uk. His areas of expertise include foreign policy and international business.
The Role of Foreign Aid in Stimulating Economic Growth
For many major developed countries, foreign aid is a consistent annual expense. As a general rule, foreign aid is presented to the citizens of the nations providing it on a moral or geopolitical basis as either being simply the right thing to do to help the poor and hungry of the world or as securing ties with underdeveloped nations. While there is, without any doubt, merit to both of these arguments for the usefulness of foreign aid investment, there are also economic factors to consider. Contrary to popular belief, foreign aid money is more than a simple expense. Applied wisely and under the right conditions, foreign aid can produce a very real long-term return on investment.
Foreign Aid and Infrastructure
For any economy to develop much beyond a subsistence level, modern infrastructure is absolutely essential. Electrical grids, running water, paved road systems and other such basics are the foundations upon which economic growth can be developed. While some foreign aid is aimed directly at these goals, much more is applied to indirectly help developing nations create infrastructure. An excellent example of this is foreign aid money that is put into the building of homes and the provision of clean drinking water. Since these are factors that must be provided for before major national infrastructure may even be seriously considered, using foreign aid money to provide these basic necessities more rapidly than a developing economy could under its own power can clear the way for the creation of other, more advanced forms of infrastructure that are vital to economic growth.
Using Foreign Aid to Increase and Enhance Labor Forces
Money spent on international development can also stimulate economic growth by both growing and improving the potential labor force in a developing economy. Growing the labor force can be accomplished through the provision of modern medicine and medical facilities, which lowers mortality rates, as well as through helping to improve agricultural methods so as to free up some of the labor force from the subsistence level production of food. Money invested in the development of a country may also be used to provide education that would not otherwise be available, helping to create a more productive workforce.
How Does International Development Investment Generate a Return?
Investing in international development should not be thought of as an expense, but rather as an investment. By acting as a catalyst for economic growth in developing economies, foreign aid money, both publicly and privately funded, has the potential to create great long-term returns. When economies begin to grow from a low baseline, as in an emerging market, jobs can be created quickly and easily. When this begins to happen, a transition can be made away from dependence on foreign aid money. Once a country has developed enough to attract foreign commercial investment, the money needed by that country can be supplied through the free market and the exchange of goods and services, rather than by aid. From the perspective of a country that has given foreign aid to another nation, this is the point at which the investment pays off in the form of a new potential trading partner.
It should also be kept in mind that economic growth resulting from foreign aid can have a regional effect that goes beyond just one nation. When a country's economy begins to grow rapidly, as in the case of a developing economy, it will generally attract workers from the other nations around it. These workers frequently gain valuable skills and knowledge by working in the emerging economy, and then will be able to transfer these skills to use in their own country. This is just one of the many ways that the return on international development investment can spread beyond borders and help the people of many nations at once.
The Role of Private International Development Money
When discussing foreign aid and international development investment, the focus is almost always on the money granted by governments. However, there are many different private organizations that also invest in international development, and it is generally these organizations that are on the ground helping the people of struggling nations, even when governments are providing the funding. Many of these organizations are non-profits, such as The Water Project, which uses its resources to provide access to clean drinking water for people in the least developed countries worldwide. Others, however, are commercial entities which provide funding and support for the construction of electrical grids and other modern infrastructure. In order to reach the end goal of making a country economically independent and introducing it into the global marketplace, both types of investment are critical.
Though the use of public and private funds to help those in impoverished countries is justifiable simply by being the right thing to do, it can also generate very real economic benefits. Countries that can be helped toward sustainability with this type of investment can become valuable trading partners and even global economic forces. These economies, far from being a drain on public funds, can contribute to global trade in the long run. Therefore, foreign aid and development investment, both public and private, should be seen as investments in economic growth for all parties involved, rather than as a one-sided financial proposition.