12 Disadvantages of Foreign Aid are as follows:
1. A Small Portion of Investment:
It is claimed that even under most favourable circumstances, foreign aid can only contribute a small proportion of the investment needs of a developing country.
The major growth effort has to be its own. It is, therefore, a risky strategy to depend upon foreign aid for growth, particularly because of the risks involved in the form of growing external indebtedness and other possible ill-effects.
Critics claim that with a strong will and adequate effort, a backward country should be able to get out of its state of poverty and backwardness.
2. Aid Dependence and Aid Fatigue:
Growth through foreign aid is a long drawn out process. Therefore, with the passage of time, aid-givers develop an aid-fatigue (that is, they lose interest in giving aid).
Similarly, as we have argued elsewhere also, there is an unsustainable increase in the import- dependence of the aid-receiving countries. Their import needs increase which they are not able to pay for.
3. Misuse of Aid:
There is no guarantee that foreign aid will be used productively and not wasted on unproductive or low-priority projects. It may even go into consumption stream of the aid-receiving country.
Proper and effective utilisation of aid requires a sophistication of its own. For people who argue like this, foreign aid is neither necessary nor sufficient for economic growth.
4. Economic Sovereignty:
In tied aid, the growth priorities and strategies are (at least partly) in the hands of the aid-givers. It can lead to an imposed misallocation of resources with long-term harmful effects.
5. Bureaucratic Ills:
Implementation of projects financed with foreign aid passes through the hands of bureaucrats of both aid-giver and aid-receiving countries. This results in avoidable delays and cost overruns
Even under the best possible circumstances, inflow of foreign aid suffers from an element of uncertainty. This hinders long-term growth plans of an aid-receiving country.
Cases are also known where foreign aid was suddenly withheld by an aid-giving country for political or other non-economic reasons.
7. Maintenance of Aided Projects:
In a number of cases, the governments of the aid-receiving countries accept wrong priorities thrust upon them by the aid-givers.
This frequently leads to a situation where the aided projects include those which cannot be financed and maintained by an aid-receiving country after their completion.
8. Projects Not Requiring Aid:
There is a risk that foreign aid may be taken for those projects for which no imported inputs are needed and which can be implemented with domestically available inputs.
Aid-receiving history of India is full of such examples, which include construction of irrigation canals, forestry projects, sewerage facilities and the like.
All such projects needed only local material and rupees to buy them. Depending upon foreign aid (say US dollars) for such projects retards the social and economic growth of a country and India also suffered on this account. The causes of these ill-effects include the following:
i. The legislators and general public are not aware of the fact that foreign funds for such projects means sanctioning of loans in foreign currencies. And, foreign currencies are not needed for procuring inputs including labour from within the country.
ii. Projects which do not need imported inputs but arc still highly helpful for social and economic development of the country are not taken up unless “foreign aid is available for them.”
Foreign aid, therefore, becomes a barrier to growth rather than a help for it. It becomes a hurdle against domestic growth efforts.
9. External Indebtedness:
There is a strong possibility of an aid-receiving country being unable to add sufficiently to its export earnings. Consequently, there is an inherent tendency for its external indebtedness to increase cumulatively and become unsustainable.
10. Capital Intensity:
It is argued that aided projects use capital-intensive (though obsolete) technology. Consequently, they are not able to provide adequate employment to the labour in the host country.
At the r-me time, compared with the position in the aid-giving countries, the technology used in aid-receiving country is old. As a result the products of the aided projects are not able to compete in international markets.
11. Aims of Aid Givers:
Aid-giving countries have been using it as a means of promoting and protecting their own interests, including political ones. They have been trying to impose highly stringent conditions on the aid- receiving countries.
They have also used their economic strength for imposing unfavourable terms of trade and specific monetary and fiscal policies.
12. Inflationary Pressures:
It has been noticed that projects selected for aid-giving tend to be those which do not immediately add to the supply streams of common consumption goods.
The projects, however, add to the demand streams of such goods. This imbalance, therefore, adds to the inflationary pressures in the economy.