Optimal Patterns of Growth and Aid The Case of Pakistan

Abstract

One of the principal means for poor countries to accelerate their develop¬ment is by using external resources to supply additional imports and to finance a higher level of investment. While this policy offers substantial benefits, it also requires that the structure of the economy be adapted to accommodate the expected resource inflow over a substantial period of time. For this reason, the extent of reliance on external capital—public and private—becomes one of the critical elements of development strategy. There has been relatively little theoretical study of the benefits and costs of using a controlled inflow of resources to promote development. Formal growth models typically either ignore this variable or take it as fixed. In the formulation of development programmes by planning organizations, the projected inflow of aid and private capital is determined largely on a historical and political basis rather than through a systematic evaluation of alternatives. This is true in Pakistan as well as in most countries receiving foreign assistance. This paper explores the properties of optimal growth strategies in which the total amount and time pattern of the resource inflow can be varied within limits. The problem is studied both from the point of view of the borrowing country trying to make the best use of its domestic and foreign resources and from that of the lender trying to assess the productivity of additional amounts of public assistance in different recipient countries. These different viewpoints are reflect¬ed in alternative forms of the objective function which is maximized to determine the optimal policy.

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