What is better trade vs aid?

Answer

For developing nations a little bit of both is needed but especially trade.

Let us assume the country in need is X

Trade is better because trade will help the economy of X in many different ways, trade will increase the exports of X which will in turn help create jobs and these jobs will generate and income. Eventually part of these incomes will be saved and domestic investment will rise leading to growth (repeats its self) . Other than the living standards of the people of X increasing the firms in X will also gain experience and become more efficiant and will grow, this will create political stability as well.

Aid on the other hand is usefull, aid in the form of capital or funds to create infarstructure in donor nations are very helpfull indeed. However, It can create high levels of inflation (if the aid is used to fund the current account budget deffict)it can cause the nations to become heavily dependent on foreign aid, aid does not create a sustainable growth or development (the country may be able to spend on development only as long as the aid comes in.)it will also depress the prices in the domestic market of X ( large amounts of aid will bring prices down in X and this will cause further problems) Aid will also bring about social problems like general idleness. Tied aid (aid with certain conditions ) will limit the sovergnity of nations like X and could cause resentment.

Most developing nations like X don't have the necessary funds to build good infarstructure thus aid could help create the infarstructure necessary to build up the economy and from there onwards through trade donor nations can open up their markets for imports from X which will help it further in terms of developing an export market (firms capable of competing in the international market) and diversification of the economy, achiving growth and development. It is said that if rich nations opened up thier economies to poorer nations they could drastically cut down on the aid necessary to help them.

First answer by Nav.etc. Last edit by Nav.etc. Contributor trust: 240 [recommend contributor]. Question popularity: 14 [recommend question]