The Two-Gap Analysis Of Foreign Aid

ECONOMIC JUSTIFICATION FOR AID
Theories such as the Harrod- Domar and the Two-Gap have been used to support the argument and the need for donors to provide aid for poor countries.
THE TWO-GAP THEORY
The salaries, wages and other benefits of workers in least developed countries are very low and nothing home to write about. This retards the economic growth of the country (Holis, et al. 2005). To fill the vacuum, there is therefore the need to generate enough external help through foreign aid. The two- gap analysis of foreign aid is that loans, grants, credits must be transferred from developed countries to complement the efforts of developing countries in their development process. The two- gap model explains three processes that countries must

This in the long-run affect the investment activities which has an adverse effect on the financial system. A good financial system promotes the growth of stock markets. Foreign aid has impacted positively on the stock markets in developing countries by making it possible for these economies to generate enough savings. (Sach, et al, 2004). Foreign aid has helped to increase investment activities which has helped developing countries to generate more savings and increased income. Developing countries used the aid as a form of foreign exchange to import goods and services. Most government policies in developing countries are not able to increase domestic savings, therefore inflows in a form of foreign aid helps recipient governments to raise the level of investment (Papenek, 1972). In his studies, Papenek (1973) found out that foreign aid coupled with savings was accountable for economic growth. Foreign development assistance has helped to increase the growth rate of developing countries (Papenek 1973, Levy 1998). They established that in controlling for variables such as institutions and policies, geography, political conflicts, there was a positive relationship between aid and

In developing countries access to quality healthcare is very expensive and in some situations healthcare facilities are not accessible to a lot of people. The alternative for governments in these countries is to rely on donor funding to help them provide good quality healthcare to their people. Diseases such as measles, polio which were prevalent in third world countries have been reduced and in some cases eradicated entirely in some countries. All these became possible through the support of donor assistance. (Levine, et al,