Foreign Aid, Defence Expenditure and Public Investment in Pakistan

Abstract

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: