The conclusion deduced from our first assumption is something of a paradox: the value of the foreign aid multiplier is high if the share of the foreign constituent in a piece of investment is relatively low, and vice versa. It thus looks as if the less dependent an under-developed country is on foreign resources for the implementation of its plan, the greater is the significance of foreign aid.
But the paradox is more apparent than real. It is true that the conclusion is unavoidable if we follow our assumption strictly; even a small link, if it is weak, mars the strength of an otherwise stout chain. However, the tyranny of complementarity revealed here is tempered by the possibilities of export surplus envisaged in our second set of assumptions; a country can within limits secure command over foreign resources
through internal measures, and here obviously the smaller the share of foreign resources in a given plan of investment the greater is the ease with which the necessary export surplus can be created. The point may be illustrated with reference to a few hypothetical cases. So foreign aid is important.
The general assumption in all these cases is one of fixed technical coefficient, i.e. to say, a fixed ratio of foreign exchange requirement to the total investment plan. In Case A the ratio is 1:5, and in Case B the ratio is 1:2-5. And yet, in so far as there are possibilities of the creation of export surplus, the multiplier is so damped down that under certain conditions its value becomes less in Case A than in Case B. In Case A(2) for example, the foreign aid surrendered is Rs 200 crores and the consequent loss of investment is also Rs 200 crores, so that the foreign aid multiplier is unity. In the corresponding case under B, the foreign aid surrendered is Rs 400 crores, and the loss of investment is Rs 700 crores, so that the foreign aid multiplier comes up to 1-75. Cases A(3), B(2) and B(3) are specially interesting. They bring out one significant feature of an under-developed economy, namely that the total realized investment may often fall below the internally available finance. The bottle-neck in these economies is not always finance.Even if adequate finance is available, investment may often lag behind schedule on account of the non-availability of necessary technical resources for which these economies have to depend on foreign sources. So foreign aid is important.
The degree of complementarity of various types of technical resources in any investment plan is a function of the period within which the plan is sought to be realized. The shorter the period the greater is the technical rigidity of the investment components. In the context of rapid economic development, which happens to be the aim of the under-developed countries, the proportion of the foreign exchange requirement to an investment plan is likely to be more or less fixed. In the case of India it is supposed to be around 20 per cent, while in the case of the comparatively less developed economies, it would perhaps be 35-40 per cent.
The International Bank, for example, puts the figure at 33-5 per cent for Columbia and at 36 per cent for Ceylon, while Ceylon’s own Colombo Plan estimates a figure of 35 to 40 per cent. The conditions in other under-developed economies would not surely warrant a substantially smaller figure. While, however, in India the import content of the development plan is relatively low, in so far as its economy is more diversified, the scope for the creation of export surplus is also relatively large, particularly when account is taken of the flexibility of the policy of import restrictions. The cases considered above, even though hypothetical in character, may therefore serve as a basis for the measure of the foreign aid multiplier in these countries.
If Case A approximates to the conditions of India and Case B approximates to the conditions of the relatively less developed economies, then, considering their respective scope for the creation of export surplus, the value of the foreign aid multiplier in these countries would in all probability lie between 1 -5 and 2. This is just a guess and should be taken at what a guess is worth; the object of this paper is mainly to indicate the lines on which the gain from foreign aid is to be investigated. So foreign aid is most important.