Foreign Aid, Defence Expenditure and Public Investment in Pakistan

Salim Chishti, M. Aynul Hasan


The government schemes in many develqping economies are, in
general, financed through internal borrowings, generating taxes
domestically and increased foreign capital resources from public or
private donor agencies. While the need for the public sector in
planning, operation and implementations process of the government
schemes, in developing economies is now well recognised [e.g., Weisskopf
(1972); Papanek (1973); Heller (1974, 1975)], there still seems to be
some controversy prevailing, at least for some developing nations, so
far as, the ability of the public sector in channelling these scarce
resources to the most productive use is concerned. In this context,
[Heller (1975), p. 429] writes: ... the effectiveness of the govemment's
development efforts have been cast in doubt. {It has been] argue{d] that
foreign capital inflows have resulted in increased public or private
consumption rather than increased investment, and contributed less to
growth than was anticipated... the higher tax burden has been squandered
on non-productive fonns of public consumption. It is also important to
note that foreign inflows come under two dominant categories, namely,
grants and loans. The first type (grants) can be viewed as inflows
intended to provide temporary and immediate relief of the developing
economy in situations of emergencies. On the other hand, the second
category of transfers by the donor agencies are for long-term
developmental purposes and are expected to be used for public
investments. Based on a panel data on developing countries, [Levy
(1987), p. 456] argued that:

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