Is Aid More Beneficial Than Trade?

December 4th, 2008 | economics -

Readers Question: Discuss the circumstances where you feel aid is more beneficial than trade?

It’s fashionable for economists to say ‘trade is better than aid’, but, there are times when aid is more beneficial than free trade.

1. Static Comparative Advantage.

A developing country may find its comparative advantage is in the production of raw materials or agricultural products. The theory of comparative advantage states that the country should specialise in this good. However, specialising in producing these goods has numerous disadvantages

Prices can be volatile
Potential for growth is limited. Higher growth does not lead to people buying more potatoes (low income elasticity of demand)
Raw materials may run out.

Therefore, there is a strong case for the country to diversify and develop new industries. In the beginning these may need tariff protection as the industry develops. In this process of diversification, a developing country may need Aid, in the form of capital or skilled labour.

It is argued by some that giving Aid to develop industries is a mistake because developing countries often lack the infrastructure to benefit from capital investment and industrialisation. e.g. attempts to industrialise Sub Saharan Africa had a low return in terms of investment put in.

However, aid could be targetted at the lack of infrastructure. e.g. aid to build better roads and communication

Dealing With Disaster.

A famine or temporary disaster could leave a country short of food and water, and lacking in money to buy it. Therefore, the temporary solution requires Aid to avoid huminatarian disaster.

Type of Aid.