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How Does Aid Affect The Economy

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The firms don 't employ local workers as well, even though hiring them would be more efficient. Besides the fact that infrastructure is provided, there is no other benefits that the recipients enjoy. Looking further economically, the consequences are even worse. First, aid decreases saving and investment. Aid is beneficial only to a small number of people, the 'selected people '. These selected people use this aid money on consumption rather than savings. The decrease in savings lead to a smaller amount of investment, and small level of investment leads to fewer money banks can offer for loans. It has been proven in several economic studies that there is a correlation between increase in aid and decrease in domestic saving level. Furthermore, aid induces a devastating crowding-out effect, where an increase in government expenditures leads to a decrease in private investments. Aid should provide an insurance to loans, reduces investment risk, and support co-financing to private investors in order to increase private investments; yet, it instead prevents foreign capital from coming inside the economy. Aid also induces inflation. For instance, say one corrupted public …show more content…

International aid increases the possibility of the Netherlands disease, the phenomenon in which exporting affluent natural resources results in a higher value of domestic currency. This affects the exports of other products, and eventually negatively affecting the whole economy. The Netherlands disease term has been expanded to all sorts of currency, where a massive influx of a certain currency can potentially induce this type of phenomenon. When this happens, the probability of the country receiving aids increases. As observed earlier, this leads to inflation and the limited amount of production resources, such as labor and capital 's prices increase as well. This lowers the competitiveness of the industries that are heavily dependent on these types of

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