This report aims to explore the trade and foreign aid situation of bangladesh by lawjuris

This report aims to explore

the trade and foreign aid situation of Bangladesh.

Introduction Uniquely for a country facing an extremely vulnerable ecology, Bangladesh has established a credible record of sustained growth within a stable macroeconomic framework. At a comparatively low level of development, it has also earned the distinctions of a major decline in population growth rate and of graduating to the medium human development group of countries by UNDP’s ranking. Child mortality was halved during the 1990s, life expectancy has increased to 61 years, net primary enrolment went up significantly as did women’s economic participation, gender parity has been achieved in primary and secondary education, and, depletion of tree cover has been reversed rising from seven to 15 percent through a focus on social forestry. Anti-poverty innovations such as micro-credit have gone on to win world renown. The economy of Bangladesh is predominantly agro-based. But to attain sustainable selfreliance in the modern global economy, Bangladesh needs to shift its dependence from agriculture to industry sector. But Bangladesh lacks the capital to develop an industrial infrastructure which is required at this stage. To develop this capital Bangladesh has to depend upon foreign help – be it in the form of aid or trade. However, the country still doesn’t have the production capacity to be totally reliant on foreign trade to fulfill this need. So it needs to rely on foreign aid. Foreign Aid means any capital inflow or other assistance given to a country which would not generally have been provided by natural market forces. In Bangladesh, foreign aid serves to bridge the gap between savings and investments and make up the deficits in Balance of Payments. Foreign aid is a major means of financing the country's economic development. Objective of the report

This report aims to explore the trade and foreign aid situation of Bangladesh. To attain this broader objective, this report will present information on broadly on the following topics â&#x20AC;&#x201C; 1. An overview of the trade scenario of Bangladesh. 2. Foreign aid situation in Bangladesh 3. Statistics and trends related to external sector 4. Overview of the dangers and benefits of trade and aid 5. Measures that can be adopted Methodology Information from the secondary sources had been used to prepare this report. Due to the time constraints and limitations, most of the literature review was eschewed in favor of a more informative approach. The information provided was collected from the internet and the publications from BBS, CPD and Bangladesh Bank. A more complete list of references will be found at the end of the report. Limitations of the Study The major limitation in preparation of this report had been the time constraint. The report was needed to be finished long before it was planned, and some important aspects of the report had to be left out. Should there have been more time, primary sources of data and a more indepth analysis of the situation couldâ&#x20AC;&#x2122;ve been made. Another limitation had been the lack of information on some of the topic, or the lack of updated information. We tried to utilize the information of 2007 wherever possible, and we did so. However, the Foreign Trade Statistics, a publication of BBS â&#x20AC;&#x201C; has been issued only till 2004-05. Similar issues had been faced throughout the collection of data for the report. Bangladesh: an Overview Bangladesh came into existence in 1971 when Bengali East Pakistan seceded from its union with West Pakistan. About a third of this extremely poor country floods annually during the monsoon rainy season, hampering economic development. Despite sustained domestic and international efforts to improve economic and demographic prospects, Bangladesh remains a poor, overpopulated, and ill-governed nation. Although half of GDP is generated through the service sector, nearly two-thirds of Bangladeshis are employed in the agriculture sector, with rice as the single-most-important product. Economic reform is stalled in many instances by political infighting and corruption at all levels of government. Progress also has been blocked by opposition from the bureaucracy, public sector unions, and other vested interest groups.

Bangladesh has made significant strides in economic sector since independence in 1971. Although the economy has improved vastly in the 1990s, Bangladesh still suffers in the area of foreign trade in South Asian region. Despite major impediments to growth like the inefficiency of state-owned enterprises, a rapidly growing labor force that cannot be absorbed by agriculture, inadequate power supplies, and slow implementation of economic reforms, Bangladesh has made some headway improving the climate for foreign investors and liberalizing the capital markets; for example, it has negotiated with foreign firms for oil and gas exploration, better countrywide distribution of cooking gas, and the construction of natural gas pipelines and power stations. Progress on other economic reforms has been halting because of opposition from the bureaucracy, public sector unions, and other vested interest groups. The especially severe floods of 1998 increased the country's reliance on large-scale international aid. So far the East Asian financial crisis has not had major impact on the economy. World Bank predicted economic growth of 6.5% for current year. Foreign aid has seen a decline of 10% over the last few months but economists see this as a good sign for self-reliance. There has been 18% growth in exports over the last 9 months and remittance inflow has increased at a remarkable 25% rate. Export was $10.5 billion in fiscal year 2005 exceeding the target export of $10.4 billion. Target export for current year is $11.5 billion. An estimated GDP growth of 6.7% was predicted for FY 2006. The 2007 estimated GDP growth rate of the country is 7.0%, GDP-per capita is $2,270. The major import commodities of the country are machinery and equipment, chemicals, iron and steel, textiles, raw cotton, food, crude oil and petroleum products, cement etc. The import partners of the country are (2006-07 July-February information) â&#x20AC;&#x201C; China, India, Singapore, Japan, Hong Kong, Taiwan, South Korea, United States of America, Malaysia â&#x20AC;&#x201C; in that order. Bangladesh is one of the countries in the list of Least Developed Countries (LDCs) of United Nations. Least Developed Countries (LDCs or Fourth World countries) are countries which according to the United Nations exhibit the lowest indicators of socioeconomic development, with the lowest Human Development Index ratings of all countries in the world. A country is classified as a Least Developed Country if it meets three criteriahttp://www.un.org/specialrep/ohrlls/ldc/ldc criteria.htm based on: 1. Low-income (three-year average GNI per capita of less than US $750, which must exceed $900 to leave the list) 2. Human resource weakness (based on indicators of nutrition, health, education and adult literacy) and

3. Economic vulnerability (based on instability of agricultural production, instability of exports of goods and services, economic importance of non-traditional activities, merchandise export concentration, and handicap of economic smallness, and the percentage of population displaced by natural disasters)

The international market background: WTO and regional agreements

Since the establishment of WTO on 1 st January, 1995, Bangladesh has been playing an active role in the ongoing WTO negotiations with a view to protecting the legitimate claim and interests of LDCs in an extremely competitive global trading environment.

South Asia Free Trade Agreement (SAFTA):

With the aim to increase trade and economic co-operation among nations of SAARC, the South Asia Free Trade Agreement was signed on 6th January on Islamabad, during the 12th SAARC summit. According to this agreement, the developing nations of the region (India, Pakistan and Sri Lanka) will reduce the dutys and taxes to 0-5% within 2009 for the less developed countries. On the other hand, Bangladesh and other countries will reduce the dutys on commodities outside of the list of sensitive commodities to 0-5% within 2016. It should be mentioned that Bangladesh has 1254 commodities on its sensitive list. Bangladesh has provided the SAARC nations 5% duty up till March 2007, which will be increased to 10% on 1st January 2008.

Asia-Pacific Trade Agreement (APTA): The Bangkok agreement was made in 1975. Currently the members of this agreement are India, Sri Lanka, China, The Republic of Korea, and Laos Peopleâ&#x20AC;&#x2122;s Democratic Republic. Later it was renamed to Asia Pacific Trade Agreement (APTA). The last round of negotiation under this agreement was completed in 2004. It has been in effect since 1st July, 2006. Under this agreement the member countries will provide duty advantages to each other. There are other regional associations of significance, they are â&#x20AC;&#x201C; The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Co-operation (BIMSTEC), TPS-OIC, D-8; etc.

Trade scenario The prime objective of the trade policy of Bangladesh is to strengthen the economy of the country while sustaining the shocks of rapid changes in global trade regimes, trade liberalisation and export-based development strategy. Consistent with the emerging trends of the market economy, Bangladesh has been pursuing a liberal trade policy. Starting from 1980s, Bangladesh has been pursuing liberal trade policy that opened the economy to a great extent. Extensive reform programmes have been implemented in trade regimes during the last two decades. Reforms have been initiated to dismantle both tariff and non-tariff barriers. With regards to steps towards trade liberalisation government has been pursuing a moderate

protective policy only in consideration of certain sensitive areas like public health, security and religious bindings. Simultaneously, more liberal import and export policies and programmes have been adopted including reduction in tariff slabs. Bangladesh pursued one-year export and import policies in the first half of eighties and twoyear policies in the last half of eighties and the first half of nineties. Since then, five-year export and import policies (1997-2002) were formulated and implemented. After the termination of tenure of these time bound policies, the government has announced three-year export import policies (2003-2006). These policies are consistent with the agreement under Uruguay Round Accord, WTO and the principles of market economy on the one hand and maintaining favorable balance between exports and imports of the country on the other.

Export Policy and Programmes Implemented Expanding global market economy and agreement with the WTO have opened up a wide range of opportunities for exports, on the one hand, and has posed a great challenge for a poor country like Bangladesh with underdeveloped technology and low capital base on the other. In the case of import, following gradual reduction of duty rates, domestic importsubstitute industries have been increasingly facing tough competition. Export industries on the other hand have to survive and expand by competing with other countries. Bearing in mind this unfavorable situation, the Export Policy, 2003-2006 has been formulated. A strategy of export development instead of export promotion has been adopted in the Export Policy. In the Export Policy, export targets for FY 2003-04, 2004-05 and 2005-06 have been fixed at US$ 7,439.00 million, US$ 8,565.78 million and US$ 9,599.00 million respectively. But against the aforesaid export targets, the real export earnings during FY 2003-04 and FY 2004-05 amounted to US$ 7,602.99 million and US$ 8,654.52 million respectively. Considering export target and real export earnings for both the year, the export target for FY 2005-06 has been re-fixed at US$ 10,159.20 million. It is heartening that the export earnings for FY 2005-06 has exceeded the re-fixed target by 3.61 percent. Given that the measures prescribed in the export policy are implemented properly, exports will substantially increase despite all possible constraints.

World Trade Organization (WTO) and Bangladesh Since the establishment of WTO on 1 January 1995, Bangladesh has been playing an active role in the ongoing WTO negotiations with a view to protecting the legitimate claim and interests of LDCs in an extremely competitive global trading environment. Bangladesh also attaches equal emphasis on its bilateral and regional trade.

To protect the interests of LDCs, Bangladesh has been strongly pleading for duty-free and quota-free market access for all products originating from LDCs, exploring employment opportunities for the semi-skilled labour force abroad, enhancing market share for LDCs in the global trade, meaningful and effective trade related technical assistance, exemption of LDCs products from any anti-dumping, countervailing and safeguard measures, implementation of all special and differential (S&D) treatment provisions for LDCs, continuation of domestic support for low income and resource- poor farmers and subsidy for internal and international transport and freight charges with a view to reducing marketing cost, and developing trade remedial measures and compensatory mechanism to address the erosion of trade preferences etc. Along with other WTO members, Bangladesh has been playing an important role to bring WTO negotiations back on track after the Cancun setback in September 2003. The Sixth WTO Ministerial Conference was held in Hong Kong from 13-18, December, 2005. The major negotiating issues were, Agriculture, NAMA (Non-Agriculture Market Access), Services, WTO Rules, Trade Facilitation, Aid for Trade and specific development issues for LDCs. The main demand of LDCs was to get duty-free and quota-free market access to develop and developing countries declaring themselves in a position to do so. The issue was particularly important for LDCs including Bangladesh to raise their market share in the global trade. At present, LDCs' market share in the world export trade is about 0.6 percent. In the Hong Kong Declaration, a time-bound commitment has been made for the first time for duty-free and quota-free market access for products originating from LDCs. The major achievement for the LDCs in the Hong Kong Ministerial Conference is the commitment of duty-free and quota-free market access for at least 97 percent of products originating from LDCs to the developed countries and the developing countries declaring themselves in a position to do so. The duty-free list will be expanded gradually. The modalities in this regards will be worked out by 2006. However, the impact on other developing countries for according duty-free and quota-free market access to all products originating from LDCs will also be taken account. All LDCs including Bangladesh have been exempted from tariff reduction commitments. Besides, some other achievements of LDCs including Bangladesh are as follows:

ď&#x201A;§

Rules of Origin will be simplified so that LDCs can avail of the market access facilities;



LDCs have been given an extension of the transition period until 1 July, 2013 to provide protection for trademarks, copy rights, patents and other intellectual property under the TRIPS Trade Related Aspects of Intellectual Property Rights) Agreement. Earlier, an extension of the transition period for pharmaceuticals products was granted for LDCs until 1 January 2016. This has been extremely helpful for the expansion of exports;



LDCs will not be required to make commitments particularly under Trade Facilitation to the extent consistent with their individual capacities;



LDCs including Bangladesh have been allowed to maintain 'Temporary Investment Measures' up to 2020, if needed. In that case there will no obligations under the TRIMs (Trade Related Investment Measures) Agreement;



LDCs will be given technical and financial support under the Integrated Framework, Technical Co-operation and Aid for Trade Package;

Meanwhile, the government has already spelt out its 'market access strategy' with a view to reaping the meaningful benefit from the Hong Kong Declaration.

Industry and International Trade

Agricultural Products

rice, jute, tea, wheat, sugarcane, potatoes, tobacco, pulses, oilseeds, spices, fruit; beef, milk, poultry

Industries

jute manufacturing, cotton textiles, garments, tea processing, paper newsprint, cement, chemical, light engineering, sugar, food processing, steel, fertilizer

Industrial production growth rate

7.20%

Exports

$11.16 billion (2006 est.)

Exports-commodities

garments, jute and jute goods, leather, frozen fish and seafood

Exports-partners

US 25%, Germany 12.6%, UK 9.8%, France 4.9% (2006)

Imports

$14.75 billion (2006 est.)

Imports-commodities

machinery and equipment, chemicals, iron and steel, textiles, raw cotton, food, crude oil and petroleum products, cement

Imports-partners

China 17.7%, India 12.5%, Kuwait 7.9%, Singapore 5.5%, Hong Kong 4.1% (2006)

Trend in trade situation 

High export growth (20.2%) and record high remittance flow (26.2%) contributed to robust export growth of 20.2% in July-March, 2007.



Higher rate of foreign exchange inflow and relatively lower rates of outflow led to record forex reserves of $4.53 billion (in April ’07).



For the third consecutive year, Bangladesh has been able to successfully cope with the post-MFA challenges.



However, as imports pick up and the sanctions on Chinese apparels come to an end by the end of 2007, Bangladesh’s export sector could come under some pressure.

Export Sector Performance in FY2007 (July-March)



Export earnings of $9065.8 million in July-March FY2007 was one and half billion dollar more than matched period of FY2006.



All major exports posted high growth rates in the first nine months of FY2007

RMG Growth : 21.1%; of which - knitwear : 24.3% - woven-wear : 18.2% 

Frozen food : 15.9%



Leather : 9.1%



However, traditional exports such as raw jute(-5.3%) and jute goods (-8.4%) continued to experience negative growth.

Commodity-wise Decomposition of Export growth in FY2007

Disquieting Feature 

Growth of export earning driven by volume growth, rather than price-growth.



Of the 20.2% growth in export earnings, 19.6% was contributed through rise in volume index and a meager 0.6% by rise in price index. This underpins the need for export diversification and product and process up gradation.



Some positive changes in prices for leather and frozen shrimp, but average prices of both woven and knitwear almost unchanged.

Import Sector Performance Import of Some Selected Commodities (FY2006 vs. FY2007) in Value Terms

•

Total import during July-March of FY07 amounted to $12393.5 million, a 17.2% growth over the corresponding period.

•

Highest import was registered for textiles (11.6% of total) and capital machineries (11.2%), which are closely related to exports and investments.

Trends in import and export sector:

•

Stagnation in L/Cs opened for textile fabrics, fabrics under b/b L/Cs and accessories: $2171.9 mln in FY07 (Jul-Apr) against $2164.82 mln in FY06 (Jul-Apr).

•

Growth of import L/Cs opened for capital machineries, high in recent years, has slowed down (6.7% growth).

•

Overall, growth of L/Cs opened during the first three quarters of FY2007 (14.5%) was lower than export growth (20.2%). This was likely to have positive impact on balance of trade and forex reserves.

•

Trends in both imports and L/C openings indicate higher import growth in coming months.

•

Phase out of quota imposed on Chinese apparels in EU and US and its implications for Bangladesh’s export of apparels.

•

Revised EU Rules of Origin requiring change from stages of production to value addition criteria. GSP utilization rate must increase.

•

The US is currently designing her offer list for the WTO DF-QF initiative for the LDCs (the so-called 97% : 3%). The TRADE Act 2007 (Tariff Relief Assistance for Developing Economies) is also being discussed. Bangladesh should lobby and prepare in view of these.

•

WTO discussions in relation to GATS, particularly GATS Mode-4, are expected to have important implications for Bangladesh. Bangladesh should protect her own

interests in domestic market (defensive interest) and enhance market access in foreign markets (offensive interest).

•

Comprehensive policy required in view of potential market openings under the DFQF initiative, SAFTA, APTA and BIMSTEC-FTA to make these commercially meaningful.

•

The CPD RMG Study has identified a number of key areas for enhancing the competitiveness of Bangladesh’s RMG sector:

(a) Technology requisition and up gradation, (b) Development of clusters, (c) promotion of horizontal integration, (d) compliance assurance, (e) skill up gradation, (f) market promotion and (g) development of logistics and support services.

•

Focused policy interventions required in each of the aforesaid areas.

Balance of Trade and Balance of Payment

Bangladesh’s Terms of Trade: FY2000-FY2006 (Base: FY2000 = 100) Financial Year

Export Price Index

Import Price Index

Commodity Terms of Trade

FY2000

100.00

FY2001

102.40

107.52

95.24

FY2002

104.82

115.61

90.67

FY2003

107.44

124.57

86.25

FY2004

111.80

133.41

83.80

FY2005

115.75

137.77

84.02

FY2006

120.46

143.17

84.14

â&#x20AC;˘

Declining terms of trade: The Tot has come down from 100 in FY2000 to 84.1 in FY2006. Export indeed has lost about 15% of its purchasing power between FY2000 and FY2006.

â&#x20AC;˘

Further fall in Tot in FY2007 expected in the face of stagnating export price in FY2007 (only 0.6% rise) and high global inflation.

Trade balance recorded a smaller deficit of US$ 2,879 million during FY 2005-06 compared to the deficit of US$ 3,297 million during FY 2004-05. Despite large service deficit, the current account balance recorded a surplus of US$ 572 million during FY2005-06 against the deficit of US$ 557 million over previous year. This has happened due to larger current transfers of US$ 5,347 million during the reporting period. Despite a smaller decline in financial account of US$ 24 million, the overall balance recorded a significant surplus of US$ 365 million during FY 2005-06 against the surplus of US$ 67 million during FY 2004-05. This was mainly due to a significant increase in current account balance of US$ 572 million as well as capital account of US$ 242 million. The balance of payment from FY 2002-03 to FY 2005-06 and trade balance and current account balance are shown in table 6.12 and graph 6.3 respectively.

Graph: Trade Balance and Current Account Balance

Table: Balance of Payments (In million taka)

Particulars Trade balance

2001-02

2002-03

2003-04

2004-05

2005-06

-1768

-2215

-2319

-3297

-2879

Particulars

2001-02

2002-03

2003-04

2004-05

2005-06

5929

6492

7521

8573

10422

-7697

-8707

-9840

-11870

-13301

Services

-499

-691

-874

-870

-1110

Receipts

865

887

924

1177

1296

-1364

-1578

-1798

-2047

-2406

Income

-402

-358

-374

-680

-786

Receipts

116

134

Payments

-452

-422

-437

-796

-920

of which official interest payment

-161

-167

-175

-203

-201

Current transfers

2826

3440

3743

4290

5347

Official

Private

2757

3358

3682

4253

5313

of which workers' remittances

2501

3062

3372

3848

4802

Current account balance

157

176

-557

572

Capital account

410

428

196

163

242

Capital transfers

410

428

196

163

242

Financial account

391

413

-31

784

-24

(i) Direct investment 1/

391

376

276

800

675

-6

-313

-16

-731

733

918

544

940

921

-435

-452

-397

-449

-489

Other long-term loans (net)

-42

-20

-41

-46

-58

Other short-term loans (net)

142

241

-256

Exports f.o.b. (including EPZ)1/ Import, c.i.f. (including EPZ)

Payments

(ii) Portfolio investment (iii) Other investment MLT loans MLT amortization payments

Particulars

2001-02

2002-03

2003-04

2004-05

2005-06

Other assets

-87

-125

-182

-245

-253

-499

-321

-320

-805

-200

201

Assets

-90

217

-91

Liabilities

117

-146

-72

-109

145

-550

-202

-279

-323

-425

408

815

171

365

Reserve assets

-408

-815

-171

-67

-365

Bangladesh Bank

-408

-815

-171

-67

-365

Assets

-276

-887

-235

-225

-554

Liabilities

-132

158

189

Trade credit (net) Commercial Bank

Errors and omission Overall balance

Foreign Aid â&#x20AC;&#x201C; Background overview Foreign Aid means any capital inflow or other assistance given to a country which would not generally have been provided by natural market forces. In Bangladesh, foreign aid serves to bridge the gap between savings and investments and make up the deficits in the BALANCE OF PAYMENTS. Foreign aid is a major means of financing the country's economic development. Economic literature generally classifies foreign aid into four main types. First, the long-term loans usually repayable by the recipient country in foreign currency over ten or twenty years. Secondly, the soft loans repayable in local currency or in foreign currency but over a much longer period and with very low interest rates. The softest are the straight grants often given to the less developed countries. Sale of surplus products to a country in return for payment in the country's local currency, e.g., food aid from the USA under PL-480, is the third type and finally, the technical assistance given to the developing countries comprises the fourth type of foreign aid. Foreign aid is essentially economic aid and is provided on a governmental basis. In Bangladesh the standard practice is to treat only the loans received on concessional terms and grants as foreign aid. Excluded from the category are fund transfers in the form of military assistance, aid provided by foreign private agencies, suppliers credit, export credit, foreign portfolio investment, FOREIGN DIRECT INVESTMENT and hard-term borrowing with an interest rate of 5% and above and/or a repayment period of less than twelve years. The donors of foreign aid to Bangladesh include individual countries, multinational financial institutions

and international agencies and organizations. Foreign aid to Bangladesh is classified on the basis of terms and conditions, source, and use. Accordingly, the various types foreign aid are loans and grants, or bilateral aid and multilateral aid, or food aid, commodity aid, project aid and technical assistance. Food aid is the supply of food from the donor countries and organizations or payment to suppliers of food to Bangladesh by them. Donor payments of costs associated with food supply such as transport, storage, distribution, etc. are also considered as food aid. Likewise, commodity aid represents donor funding of the acquisition of commodities including consumer items, intermediate inputs and industrial raw materials. Sale of food and commodities imported under aid arrangements generates a counterpart taka fund in the government treasury. Projects or activities implemented with the help of that fund also fall under food or commodity aid programmes. Major commodities imported into Bangladesh under commodity aid programmes are edible oil, seeds, FERTILISERs and chemicals. Project aid is the provision of grants and loans for the financing of project costs. It also finances the import of equipment and commodities related to projects. In Bangladesh project aid relates to a large extent to the financing of projects included in the ANNUAL DEVELOPMENT PROGRAMMED (ADP). Technical Assistance, often seen as a part of project aid refers generally to foreign aid for the improvement of the institutional capacity, transfer of technology, import of expertise (foreign consultants and technicians), and development of human resources by providing training facilities, including foreign fellowships. Motives for giving aid: Humanitarian motives: Thousands of people in Bangladesh are starving from poverty, malnutrition and natural calamities like cyclone, floods etc. So in order to help these people, western and European countries provides aids considering humanitarian needs. Political motives: The democratic countries like USA, UK, Australia provides aids to win the political alliance as well as communist like Russia to promote communism. Economic motives: If Bangladesh succeed in escaping from the â&#x20AC;&#x2DC;povertyâ&#x20AC;&#x2122; tap and achieves faster rates of economic growth, they will be able to enter more fully into international trade providing growth in international trade. Commercial motives:

Sometimes developed countries provides assistance and aids in the condition that Bangladesh will buy specified technologies and expertise from the donor countries or provide duty free access of their products to Bangladesh which is fully commercial. Forms of Aids: The United Nations considers that economic aid consists of outright grants and long term loans for non-military purposes. The chief aid giving countries, however, take a much broader view and include private capital investment and export credits. In fact, the term ‘aid’ is being increasingly replaced by the term ‘assistance’. Economic assistance is mainly of two terms: •

Foreign private investment: 1. Direct Private foreign Investment 2. Indirect Private foreign Investment

•

Foreign Aid: 1. Technical Assistance 2. Project Aid 3. Commodity Aid 4. Emergency Assistance 5. Loans and Grants 6. Education Aid 7. Specialist Services Foreign Private Investment: This investment is done by non government or businessman of the foreign countries. Here there are two types: Direct Private Foreign Investment: Foreign direct investment or FDI refers to the transfer of financial and intangible corporate assets, including global market links, by non-residents who have an active participation and control in the management of the enterprise in which they invest may also be termed as private foreign capital. The foreign investors can in other countries either in the form portfolio investment or in the form of foreign direct investment. The former type of investment does not provide any voice in the management of the enterprise,

whereas the latter type of investment entails an effective voice in the management of the business. So the investors, who like to have a control in the affairs of the forgoing business, will undertake FDI. Traditionally foreign direct investment FDI, were in the form of whole or majority ownership. In recent times, however, there has been a proliferation of new forms of minority ownership including a variety of non-equity contractual arrangements. The variations forms of FDI are as follows: 1. Green field investment 2. Acquisition 3. Joint venture 4. Licensing/franchising 5. Counter trade 6. Co production agreements 7. Management contracts Indirect Private Foreign Investment: This type of investment is not directly done by the private investors, rather they invest indirectly. This type include portfolio investment where they posses less influence in the management of the business. For example- there so many buying houses in Bangladesh where the investors didnâ&#x20AC;&#x2122;t directly invest rather they are patronizing. Foreign Aid: Foreign aid refers to public foreign capital in cash or kind under provision of nonrepayment. Economists have defined foreign aid as any flow of capital to LDCs whose objective must be non-commercial from the point of view of the donor. Technical Assistance: Technically advanced nations like USA, Japan, Germany, Australia and The Netherlands provides technical experts to advice and assist Bangladesh in her efforts to achieve economic growth. They also provide technical training to the people of Bangladesh so that those trained people can contribute to the development of the country. Technical assistance covers three activities:

•

The provision of experts and advisors

•

Training

•

Supply of equipment associated with a particular training endeavor Project Aid: This type of aid is provided to run a specific designed and developed by the donors. For example- ‘Family planning project’, ‘Surjer Hashi Chinnito Parabarik Shashtho Clinic’ etc. Sometimes project aid also allocated on conditions that Bangladesh will have import from the donor countries. Food Aid:

Food aid consists of agricultural commodities, invariably surpluses, from donor governments and agencies. Major food aid donors are the United state, Canada, the EEC – European Economic Community or “Common Market”, and the United Nations World Food Program as well as a number of private voluntary organizations. Recipients may be either governments or individuals, depending on the program. Food aid to Bangladesh is gradually declining as the country has given priority to increase domestic food grains production. Emergency assistance: Emergency aid is given in response to disaster like floods, earthquakes, droughts, or other natural calamities and to provide for the refugees created by such disasters or as a result of war. Loans and grants: Loans may be arranged on commercial terms i.e. market rates of interest or on concessionary terms i.e. at interest rates well below market rates. Grants and concessionary loans tend to take the form of official assistance, that is, they are supplied on government to government basis (bilaterally) or via multilateral organizations like World Bank, IMF, ADB etc. Education Aid: Most of the wealthier nations provide facilities Bangladeshi students and government employees to attend universities and colleges and provide them with scholarships. For

example â&#x20AC;&#x201C; ADB scholarships, AUSAID scholarship, Commonwealth scholarships, Monobusho scholarships. In addition, they send teachers and instructors overseas. Specialist services: The World Bank, The IMF, ADB and the United Nations as well as individual countries carry out economic surveys for, and offer a variety of financial, technical and advisory services to, Bangladesh.

Aid Donors to Bangladesh The sources of aid to Bangladesh are classified in five broad categories: 1. Development aid committee (DAC) countries Bangladesh receives major portions of its aid from DAC countries. During the period of 1971 to June 1992, the country has received a total aid of $8566.5 million from the DAC countries AC countries are: Australia, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, Netherlands, Norway, Sweden and U.K. & U.S.A. 2. International agencies International agencies are the second largest source of foreign aid to Bangladesh. From 1971 to June 1992, the international agencies provided $2282.6 million as aid to Bangladesh. The agencies include: EEC, UNICEF, UN, IDA, ADB, IDB, OPEC etc. IDA has provided the highest amount of foreign aid ($707 crores) to Bangladesh.

3. Centrally planned countries Another significant source of foreign aid of Bangladesh is the centrally planned countries. During the aforesaid period, the country has received a total aid of $50.8 million. Centrally planned are: Bulgaria, China, Hungary, Poland, Romania, USSR.

4. OPEC countries OPEC countries also provide a large amount of aid to Bangladesh. During the period from 1971 to June 1993. OPEC countries provided $516.9 million aid to Bangladesh. The OPEC donors are: Saudi Arabia, UAE, Iraq, Iran, Kuwait etc. 5. Other sources Bangladesh also gets aid from some other sources. The other sources include: India, Pakistan, Turkey Suppliers Credit, etc. from the above sources, Bangladesh has received $333.3 million during the period from 1971 to June 1993. The roles and benefits of foreign aid

1. Poverty alleviation: Aid helps for the immediate relief of poverty through Food for Work programs. But it can also help to relieve poverty in five other ways: a. By contributing to growth, it can create the conditions for raising the incomes and consumptions of the poor. b. It can achieve those results more directly, through specific projects or sectored activities. c. It can improve poor peopleâ&#x20AC;&#x2122;s welfare through basic services â&#x20AC;&#x201C; education, health, nutrition, housing or family planning program. d. It can assist processes of social change, which gives asset to the poor. e. It can support policy reforms that benefit the poor. 2. Supply capital for development project:

Bangladesh is a country of “capital-poor” or “low-saving” and “low-investment”. Per capita income of people is very paltry. As a result, the rate of savings and capital formation is very low. Due to low rate of capital formation sufficient capital can not be supplied from internal sources to finance development projects such as health or sanitation, education, protection of infant mortality, etc. 3. Development of infrastructure: Foreign aid plays the dominant role for infrastructural development of the country. Construction of road, bridge, school, college, power plan hospital, etc. requires a bulk investment on a long-term basis. Foreign private investors are not interested to make investment in these spheres of economic activities. Moreover, the government also cannot meet the financial needs of these projects since they require very large capital investment and have long gestation periods. Under these circumstances only foreign aid can ensure the supply of required capital. Completion of these projects contributes to economi efficiency and productivity in the long run. 4. Required amount of investment: Bangladesh was under the colonial rule for about 200 years but there was no major investment in this territory. Industrial development and economic emancipation were far away from the country. To get rid of this situation, the country requires huge investment. But the government is unable to make investment from internal sources. So foreign aid is inevitable to overcome the shortage of investment. 5. Technological knowledge: Besides low saving and low investment, Bangladesh also suffers from technological backwardness. Technological backwardness is reflected in high average cost of production and low productivity of labor and capital due to unskilled labor and obsolete capital equipment. Foreign aid overcomes not only capital deficiency but also technological backwardness. It helps the importation of capital equipment and raw materials through project aid. All these accelerate economic development. 6. Industrialization: Bangladesh is not in a position to provide the equipments, raw materials and other capital intensive goods for industrial up gradation. Foreign aid also helps in this

regard. Under commodity aid, Bangladesh receive accessories for jute and textile mills, engineering and shipbuilding industries, raw materials for pharmaceutical industries, etc. 7. Development of natural resources: Private enterprises are reluctant to undertake risky ventures like the exploitation of untapped natural resources and the exploitation of new ideas. Foreign aid assumes all risks and losses that go with the pioneering stage. 8. Agricultural development: The economy of Bangladesh is dependent on agriculture to a great extent. Foreign aid also plays a positive role in agricultural development. Providing agro equipment, seeds, fertilized and other necessary facilities at a concessional rate requires a strong capital base. The government collects the necessary fund for this purpose through foreign aid. 9. Social development: The above discussion brings to the light that foreign aid plays a pivotal role for economic development of Bangladesh. The creation of the countryâ&#x20AC;&#x2122;s infrastructure, the establishment of new industries, the tapping of new resources, the opening of new areas, all tends to increase employment opportunities within the economy. The pressure of population on land is reduced and disguised unemployment may disappear. This is the social gain from aid. 10. Other reasons: Other reasons include: a. To meet the deficiency of consumer and industrial goods in the country b. To curb inflation through import of food and other goods c. To meet the balance of payments Dangers of Foreign Aid After 30 years of the countryâ&#x20AC;&#x2122;s independence, the flows of external resources in the form of foreign aid still remain most critical for development and for attaining self-reliant

Bangladesh. Due to shortage of capital and resources, the country has to rely on foreign aid. But foreign aid is not free from dangers. The dangers of foreign aid are as follows: 1. Influence on internal policy The donors interfere in internal policy formulation of the country which is a threat for our sovereignty. Due to massive aid dependency, not only the external alignments of Bangladesh but also its domestic economic policies remain susceptible to the evergrowing pressures of the donor countries and agencies.

2. Tied up aid Foreign aid leads to dependency because the donors insist on aid tying to the purchase of goods and services at costs much higher than the competitive world prices. 3. Investment in wasteful project Foreign aid is often used for extremely wasteful projects which make large losses year after year. They absorb more local resources of greater value that their net output when the costs of administration, maintenance and replacement of fixed assets originally donated for the projects are taken into consideration. 4. Conflicting attitudes of donors The aim of donors is officially declared to be to strengthen the economy of Bangladesh and in particular, to give away assistance to the poorest section of the population, but it can be very well noticed that there exists a very sharp difference the rhetoric and the practice of the donorsâ&#x20AC;&#x2122; aid policy. The aid rationale of the donor countries are more complex in reality and reflect a mix of both self-interest and altruism. The mix varies extensively among donors, depending on the factor endowments of the particular donor country, and its strategic interest in Bangladesh. Whilst the altruism of the aid policy of the donors emerges from moral and humanitarian considerations, their self interest is dictated primarily by two factors: Strategic interest of global, political and military in the region; and the enhancement of their commercial interest in Bangladesh. 5. Aid serves effluentâ&#x20AC;&#x2122;s interest

It is alleged that the benefits of foreign aid do not reach to the poor constituting the majority of population in Bangladesh. Much of it is siphoned off by the influential interest group. 6. Anti development attitudes Aid dependence has also fostered certain anti-development attitudes. The process of development has become inextricably linked to the search for foreign funds spawning the widely held notion that there can be no significant developments with our external aid 7. Adverse effects on macro economy Economists are also critical to the external aid because of its adverse macro economic effects. In Bangladesh, instead of complementing domestic savings and contributing to raising the rate of investment, foreign aid acted as a substitute for domestic savings and therefore, the gross domestic investment ratio as a percentage of GDP being barely 22% 8. Rations to the defense staff Food aid (grants and loans) was 17% of the total foreign aid. Besides a few strictly poverty focused channels like FFW, VGD, GR etc. a large part of itâ&#x20AC;&#x2122;s has been used for subsidized food supply for the defense, police, BDR, urban middle class and industrial workers. 9. Seasonal and irregular employment The number of jobs created through FFW, roads maintenance projects and the like remained seasonal and irregular. 10. Incurring to dissipate public sector Most of the resources of project aid have been utilized in public sector project in which power development preempted the lionâ&#x20AC;&#x2122;s share of the project aid. 35 to 40 percent of electricity generated is dissipated (better to call stolen) through line loss, the highest in the world.

11. Misuse Different studies on the efficiency of rural infrastructure development projects have shown that misuse was gigantic. 12. Political aim As the analysis suggests that, there were a number of projects that were implemented purely on political consideration in order to muster political support during the undemocratic regimes. 13. Inflationary effect In contrast to favorable impact of these projects on the pore, they had rather pernicious effects on the poor through high rates of inflation triggered by conspicuous consumption of those who were the beneficiaries of these prestige projects. Benefits of depending on Foreign Trade than on Foreign Aid: Western and EEC countries along with other developed nations can help Bangladesh not only by Aid but also by giving free access of Bangladeshi products in their markets. Free access of our products will help growing our industries resulting more export and foreign exchange which will contribute to our economy. The benefits of foreign trades are as follows: 1. If foreign exchange is earned through foreign trade, it can be spent independently for buying necessary quality goods from different countries. 2. If depends on foreign trade, Bangladesh is compelled utilize her own resources properly. 3. Bangladesh can plan development to meet its national interest. Hence, donor countries can not dictate terms and conditions. 4. It becomes possible to set up heavy industries for attaining self-reliance. 5. Foreign trade encourages competition for increasing exports.

Foreign aid scenario in Bangladesh

Total aid disbursement during FY 2005-06 stood at US$ 1241.21 million compared to US$ 1260.00 million during the same period of the preceding year. Net foreign aid during FY 2005-06 stood at US$ 752.21 million compared to US$ 811.00 million during the same period of the last year. According to the budgetary targets, about $1.8 billion of foreign assistance is needed to underwrite the programmed fiscal deficit.

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During July-April of FY07 foreign aid disbursement stood at $ 976 mln, 4.3% less than the corresponding period of FY06. o $ 970.1 mln project aid o $ 5.9 mln food aid

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During Jul-Mar of FY07, payment of principle amounted to $366.3 mln, resulting in $543.1 mln net aid flow in that period.

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Till April about 54% of the target could be met. o World Bank approved disbursement of $ 200 mln under the DSC-IV on 29 May. o Education Sector Support Credit of $104 mln by the World Bank is expected to be disbursed by end of May. o Another $ 40 mln is also expected as Railway Budget Support.

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Total disbursement, according to recent projection of ERD, is to be $1552 mln for FY07 – very unlikely to cross $ 1.2 mln.

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With approximate repayment of $500 mln, net flow of foreign aid in FY07 may hover around $700mln - $800mln ($752.4mln in FY06).

Aid or Trade

Arguments For and Against Aid Ignoring ethical or redistributive considerations, what are the arguments that can be made to support the view against aid? Essentially, these are arguments that aid is not, or has not been, effective in contributing to economic growth (strictly, in the context of this article, the argument is that aid is inherently less effective than trade in supporting and promoting growth). We confine attention to three related arguments. First, most aid goes to the government hence supports the public sector, and may encourage too large a public sector, rather than promoting the private sector (the implicit argument is that trade promotes the private sector, and hence is preferable). Second, and consequently, aid alleviates the need for government to impose fiscal and budgetary discipline: spending can exceed domestic revenue, and the availability of aid encourages corruption and supports governments with ‘bad’ policies. Third, governments will tend to misuse aid. In the extreme, aid funds ‘leak’ into the pockets of corrupt politicians and officials, but more generally aid is fungible (it may not be used for the purposes intended by donors). We will assess each of these in turn, but first consider the broader issue of aid effectiveness in contributing to growth. The ‘aid doesn’t work’ corner is championed by World Bank and rests on a four-step argument: •

Aid has no independent effect on growth— that is, the coefficient on aid is insignificant

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Aid interacted with policy is positive and significant—that is, aid makes a positive contribution to growth only in those countries with high values for the policy indicator

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Conditionality (the policy reforms that donors attach to aid) does not work—that is, donor/aid leverage does not ensure that governments implement good policies and

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Therefore, aid should be given to those recipients already implementing good policies — that is, selectivity or ex post conditionality.

The alternative ‘aid works’ corner challenges all four steps of the argument. Aid itself has a positive effect on growth (the coefficient is positive and significant) and this is independent of policy (in fact, the interaction term is insignificant). Morrissey (2004) argues that conditionality does influence policy: although it is true that conditions are rarely fully met within the (relatively) short period of a specific program, over the past 15 to 20 years most developing countries have implemented significant policy reforms in the direction advocated by conditionality. Consequently, the case for selectivity is much weaker than implied by the

World Bank approach, and more flexible forms of conditionality based on dialogue and partnership offer considerable potential to support policy reform. There have been many contributions to this literature over the past five years, and the major studies are reviewed and reassessed in Rood-man (2004). In general, studies that follow the Burnside-Dollar specification and estimation approach support the World Bank argument (at east the first two steps). However, studies that deviate from the specification, such as by including additional control variables, especially if they use alternative econometric methods, tend to find that aid has a positive impact index-pendent of interaction with policy. A balanced interpretation of the alternative argument is that: •

Aid contributes to growth, but the magnitude of this effect is usually small and may therefore be insufficient to offset growth-retarding features of poor countries.

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Appropriate economic policies (for example, to promote macroeconomic stability and export competitiveness) contribute to growth and can increase the effectiveness of aid.

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Conditionality influences policy, although sustained policy reform is a slow process and external factors such as shocks undermine the effect of policy reform on performance.

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Sustained donor–recipient dialogue with flexible conditionality can promote reform and increase the effectiveness of aid.

Arguably, all contributors to the econometric literature agree that aid is effective, but disagree about whether (i) this is conditional on policy, and (ii) aid conditions influence policy reform. A more extreme criticism is that even if there is a statistical relationship the magnitude is so low that it is not evidence that aid is effective; observation, typically based on anecdotal evidence, shows that aid has done little to fuel growth. Such critics) rely more heavily on the three broad criticisms we outlined at the start of this section, and we now turn to assessing these. First, it is enabling the private sector that promotes growth so aid is wasted because it goes to the government. This is an argument that aid does not support the private sector broadly defined and, furthermore, because aid supports government it undermines the private sector. Critics who adopt this view tend to view government as the source of the problem example, , hence the allocation of aid to government is the source of ineffectiveness (the related arguments about government profligacy and misuse of aid are considered below). While this argument is not without some (historical) merit there are a number of valid counterarguments, all sup-ported by elements of the literature cited above. The evidence that aid conditions do influence policy undermines the critique as many conditions are effectively about enabling the private sector , especially as there is evidence that conditionality has

recently become more effective . The more general argument is that aid finances investment and in the poorest countries public investment is necessary to establish the physical and human capital infrastructure to crowd in private investment. In simple terms, aid finances the provision of public goods and these are required to establish the platform for private sector development. The most direct effect of aid on growth is via effects on public investment, although not all aid is intended for investment (in physical or human capital), and not all investment is financed by aid. The challenge is how to make aid more effective; the evidence does not support that claim that, on average (or in general), aid itself has not been beneficial. The second general criticism of aid is that by reducing the pressure on government to impose economic discipline, especially regarding fiscal policy, aid encourages rent-seeking and corruption and supports governments with ‘bad’ policies. For example, Moore (2004) argues that the quality of governance is higher if countries rely on financing from domestic taxpayers; by implication, large aid revenues undermine accountability and weaken governance. To some extent this problem is inherent in aid: recipients start from a position where domestic revenue is too low to meet expenditure needs (for example, to provide public goods). This does not, however, imply that tax effort is weak—that is, that tax-to-GDP ratios are particularly low (especially given the tax base and structure of such economies). For example, in SSA where aid-to-GDP ratios are high, tax-to-GDP ratios are actually high relative to other developing countries. Domestic revenue mobilization may be as high as is feasible or even desirable, given that poor countries tend to rely on highly distortionary taxes on trade. The counter-arguments again relate to one’s interpretation of the evidence on conditional-ity, especially regarding tax reform and governance. Regarding governance, the evidence is limited as one would expect that political re-form is itself a slow process while political conditionality is itself problematic. Nevertheless, since the 1990s we have witnessed a spread of democratization throughout poor developing countries and political conditionality contributed to this. Whether this has led to a significant improvement in governance is a moot point. Available measures of governance are inherently imprecise but suggest that, if anything, governance declined globally between 1996 and 2002. The deterioration is most evident for measures of ‘political stability’ and ‘rule of law’, whereas there is some suggestion of improvements in ‘regulatory burden’ and ‘government effectiveness’. Arguably, conditionality relates more to the latter so associated policy reforms may have reduced the burdens of regulation and in-creased the effectiveness of government. The third criticism is also related to fiscal policy but focuses on public expenditures; in particular that aid is fungible and therefore not used for the purposes intended by donors. There are two issues: is the aid all allocated to the particular area of expenditure targeted by donors and does expenditure on that area in-crease by the amount of the aid. Even if all the

aid is allocated as intended, domestic resources previously allocated may be redirected so that there is incomplete additionality. The general argument is that recipients divert aid to government consumption spending rather than using it to finance growth-promoting investment. The evidence for this is weak as consumption (recurrent) spending includes wages and equipment, for example for health and education (necessary for human capital), and costs of maintaining infrastructure, so aid is often intended to support recurrent spending (most obviously in the case of budget support), and such spending can contribute to growth. The World Bank (1998) was more concerned with specific fungibility, where total spending in a particular area, such as health, did not in-crease by the full value of aid allocated to that area. Because the data on the areas to which aid is allocated are of poor quality and existing studies adopt a very static analysis, the empirical evidence for fungibility is not strong. Further-more, there are many reasons why, particularly in a given year, spending in a given area may not increase by the amount intended by donors, and overshooting may be as likely as under-spending. The counter-argument is that if one analyses the dynamics of expenditure within the context of the evolution of fiscal aggregates (including taxes and borrowing), it is apparent that over time spending increases in the areas targeted by donors and often total spending increases by more than the value of aid. Fungibility exists, but there is no evidence that it significantly distorts the way in which aid is used. Furthermore, as budgetary and expenditure management methods have improved, donors can be reasonably confident that aid is allocated in an approved manner. Whilst it would be inaccurate to claim that aid has had a significant impact on growth in poor countries, it would be equally if not more misleading to claim that aid is or has been ineffective. Aid has had beneficial impacts and, on average, aid has contributed positively to economic performance and welfare. More importantly, almost all evidence shows that aid is improving and becoming more effective, even if much more needs to be done to assist the poorest countries. The allocation of aid has improved both across countries (more goes to those countries that use it better) and within countries (mechanisms for monitoring and accounting for aid and public expenditure have improved). It is not irrelevant that donors are seriously questioning conditionality and what can be done to improve aid effectiveness: irrespective of the views held, the debate can in-form the design of aid policy in a positive manner. Nevertheless, aid itself is insufficient to ensure growth. The policy environment is among the factors necessary for growth, and trade is one of the more important areas of economic policy. Arguments For and Against Trade The literature on â&#x20AC;&#x2DC;trade and growthâ&#x20AC;&#x2122; is voluminous but, as with the aid-growth literature, the trade effectiveness evidence can be classified into two opposing views.4 In general, the

empirical evidence suggests a positive association between a measure of trade and growth, but this evidence should be interpreted carefully. The ‘optimists’ view is that trade, in particular exports, is an engine of growth. The ‘skeptics’ challenge the same evidence to infer, at least, that there is little support for a causal effect of trade on growth and, more generally, that there is little evidence that trade reform itself has a significant impact on growth. As with the aid literature, the econometric results are not highly robust and measurement and specification are very important. Measurement is a major issue as there is at least three principal conceptions of trade (within each of which specification and estimation technique matter): (i) The conventional export-led growth hypothesis focuses on export-to-GDP ratios as a measure of competitiveness (only efficient producers can compete on the global market) and/or ‘vent for surplus’ (an outlet for production above the volume required for home consumption). The evidence, in particular case studies of the high performing East Asian economies, supports the existence of a positive correlation between exports and growth, although there are competing interpretations of the implications for trade policy. (ii) Measures of openness, typically trade volume [(exports + imports)/GDP], are interpreted as capturing integration with the world economy. The underlying argument is that imports can be as important as exports and more open economies will have higher levels of imports. Countries with lower levels of protection (more open) will be more efficient, hence grow faster. Furthermore, openness to imports can capture the benefit of imported technology. The evidence suggests a strong positive correlation between openness and growth, although the causality is not so evident (Harrison 1996). (iii) Trade advocates argue that openness is ‘good for growth’ and hence advocate liberalization of trade policies. Trade liberalization reduces relative price distortions, increases the return on exportable and promotes economic growth. However, the empirical evidence linking trade liberalization and growth is quite weak. A particular problem with this literature is that it is difficult to measure with accuracy trade policy or liberalization and many studies rely on dummy variables to capture the timing of liberalization episodes. Aid and Trade Our focus is on aid and trade effectiveness in terms of how both contribute to growth, particularly in low-income developing countries such as in SSA. Before considering policy implications, it is appropriate to acknowledge the literature on the correlation between aid and trade flows from a donor to a particular recipient. In many cases aid is contingent on

purchasing goods from the donor and/or given to countries, such as ex-colonies, with strong trading ties with the donor, so that aid engenders trade dependency). In this way, donor aid policies may have contributed to undermining trade effectiveness in recipient countries. Donors typically justified the ‘linking’ of aid and trade on the basis that aid could benefit recipients (by supporting growth) and increase donor exports, so there is a benefit to donors. Lloyd et al. (2000) find that a statistical link between aid and trade is not uncommon (it occurs in almost half of the 104 donor–recipient pairs in their sample). However, only for some 14 per cent of pairs is there any evidence that aid creates trade in a dynamic sense (that is, that aid promotes growth which in turn increases donor exports to recipients). The more common link is that trade relations are a factor influencing donor allocation—donors, especially France, give more aid to trading partners. Osei, Morrissey and Lloyd (2004) extend the analysis and confirm that donors providing a higher share of aid tend to trade more with the recipient: donors allocate relatively more aid (a higher share) to recipients where the donor accounts for a higher share of imports. They find little support for the hypothesis that aid generates trade over and above that explained by control variables. The implication from this literature is that donor aid policy has been concerned with recipient trade from the perspective of what they import from donors, but has not had a specific focus on promoting recipient exports. Some critics would go further to suggest that donor aid policies have encouraged recipients to remain exporters of primary commodities (supplying the donors) rather than supporting export diversification into higher value-added activities (that may compete with donors). Attitudes are now changing, and donors are beginning to accept that growth requires a more dynamic economy, and export diversification is part of this. Some pressure has come from the World Trade Organization: even if rich countries have been woefully slow in eliminating their protection of agriculture, they recognize that they must offer market access to developing countries. Greater pressure has come from recognizing the impediments to growth and the need for aid to be used to finance the measures needed to ensure a more dynamic economy, one that can benefit from trade. Aid finance is needed for investment in physical and human capital, for supporting economic policy and institutional reform and to establish the environment where the private sector can respond to trade reform and avail of market opportunities. Aid can also be used to facilitate trade (‘aid for trade’), for example, paying the costs of meeting commitments under the World Trade Organization, establishing product standard boards and testing facilities, and improving Customs procedures. There is also a link from trade to aid. Increased aid flows imply an increased inflow of foreign exchange and, to prevent exchange rate appreciation (which would reduce competitiveness), this requires increased imports to absorb the foreign exchange. This is a

potential constraint on increasing aid flows to SSA: imports are already relatively high, and increasing imports in conjunction with liberalization implies increased competition for import-competing sectors. However, to argue for aid does not mean that one must argue for increased volumes of aid—all that is necessary is that aid is used more effectively. This is consistent with ‘aid for trade’ and more generally with using aid to finance the provision of public goods, the physical and human capital that increases the productivity of investment and the economy. Similarly, arguing in favor of trade, or more specifically trade liberalization, is not necessarily an argument for more trade, rather it is about the composition of trade. For most SSA countries, current import-to-GDP ratios may be as high as is desirable, especially given persistent trade deficits. Increasing efficiency in the economy, especially in agriculture, could reduce the need to import food but allow an increase in the share of capital goods in imports. If SSA countries can achieve a sustained increase in stable export earnings a further expansion of imports would be justified. In regard to exports, diversification into processed and higher value-added activities is required. Policy reforms in poor countries, while necessary, will not ensure this: developed and other developing countries must grant market access. For poor developing countries it is not a case of aid or trade, nor of more aid or more trade, rather it is a case of more effective aid and a better composition of trade. Aid can support the costs of economic structuring and trade facilitation to improve the composition of trade. Trade can then contribute to growth.

Measures to be taken

For the development of the economy, Bangladesh needs a great amount of capital inflow, but it can only supply a small portion of it on its own trade or internal financing. The rest of it has to come from foreign assistance, but full reliance on foreign assistance can push a country back from development. However, proper utilization of foreign aid can help us develop our economy and become selfreliant, much like many other Asian countries – for example, Malaysia, Singapore, South Korea. In simpler words, Bangladesh needs properly controlled environment for the utilization of foreign aid, and thrift management. Some guidelines for accepting foreign aid would be:

1. Aid should be utilized to increase GDP/GNP: The main goal of a country receiving foreign assistance should be to become self-reliant, and to do that, it needs to increase its GDP/GNP. The primary objective of the expenditure of the resources gained from foreign aid should be exactly that. 2. Expenditure should be in productive fields: The resources from foreign aid should go into fields that are productive, and can bring in positive turnover/results. These fields will later on contribute to the repayment of the loans. 3. Loans should be at reasonable rate or unconditional: Bangladesh should look for loans that are unconditional, and the interest rates should be reasonable. Bangladesh should be careful as not to increase its burden of interest payment further without attaining ways to meet them. 4. Donor countries should not interfere politically: Also, the donor countries should not interfere in the political arena, and neither should attempt to fulfill their own political agenda. Aid is given out to assist, and it shouldnâ&#x20AC;&#x2122;t become a political weapon.

5. More control to the recipient: Bangladesh needs to have more control over how the resources from foreign aid are spent. In many cases, the aid donors dictate how and where should the money go, and regularly a huge amount of it goes into places that are less effective in aiding the economy of the country. This should be changed. 6. Improved co-ordination: It is a great challenge to manage aid flows from different donor sources. And it becomes more complex as each of the donors insist on making the expenditures in their own unique processes. But there should be improved co-ordination so that the pooled resources can be better utilized in a more goal-oriented way. 7. Results based management: To ensure the effectiveness of aid, results based management should be implemented. The development projects financed by foreign aid should be monitored carefully and so should be the results from them. Decisions about renewing or reallocating should be based on these monitoring reports. There would be three basic objectives in this: (1) Helping donors allocate funds towards programs that are working; (2) Detecting problems at an early stage to help modify and strengthen existing programs; and (3) improving the design of future programs.

Concluding words

It can be seen that Bangladesh can not rely on trade alone to meet its need for capital, if it wants to develop the economy and become self-reliant. The gap in the Balance of Payments needs to be met through foreign aid. However, improper use of foreign aid creates greater problems than solving them, and weakens the economy. Bangladesh should keep the major goals of strengthening the economy in focus, and receive and implement foreign aid carefully to ensure their effectiveness. Proper monitoring, scrutiny, thrift management and goaloriented productive projects can bring our country to self-sufficiency. Many Asian developing countries relied on foreign aid to make necessary economic development, and now they are developed. Malaysia, South Korea and Singapore are examples of these. So Bangladesh should strike a careful balance between trade and aid and through careful implementation of its meager resources, go forward towards the goal of attaining self-reliance.