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The issue of the economic effects of aid, especially public aid, like that of the effects of private foreign investment, is fraught with disagreement. On one side are the economic traditionalists, who argue that aid has indeed promoted growth and structural transformation in many LDCs. On the other side are critics who argue that aid does not promote faster growth but may in fact retard it by substituting for, rather than supplementing, domestic savings and investment and by exacerbating LDC balance of payments deficits as official aid is further criticized for focusing on and stimulating the growth of the modern sector, thereby increasing the gap in living standards between the rich and the poor in developing countries.Some critics on the left would even assert that foreign aid has been a force for antidevelopment in the sense that it both retards growth through reduced savings and worsens income inequalities. Rather them relieving economic bottlenecks and filling gaps, aid - and for that matter private foreign investment - not only widens existing savings and foreign-exchange resource gaps but may even create new ones (e.g.. urban-rural or modern-sector-traditional-sector gaps)....more
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