oa Business Management Review - The role of foreign aid in private sector development: some reflections for SME development in Tanzania

Volume 8, Issue 2
  • ISSN : 0856-2253



Literature on the role of foreign aid in the economic development of recipient countries has focused on quantitative as well as qualitative models assessing either the impact of the lows on savings, investment or growth or the effectiveness of aid in attaining stated objectives. In both accounts available evidence tends to suggest that the performance of aid where the economic development of recipients is concerned has been, in general terms, below expectations. Studies conducted between 1970 and 1995 reveal, among other things, that aid flows had a minimum (and in some countries negative effect on savings. In other countries the impact of aid on investment and growth was positive only under stable macroeconomic policy environment. Several explanations have been advanced for the poor aid performance including; use of aid funds for consumption, aid not targeted to any specific programme and the crowding out of the private sector. In most of the Sub-Saharan Africa Counties aid flows were channeled mainly to the public sector. The 1961-1996 experience in Tanzania tends to confirm that indeed aid flows were channeled mostly to the public sector. With the changing macroeconomic environment a conducive affairs of the state. This private sector role can be further enhanced by channeling of more aid flows to the Small and Medium Enterprise (SME) sector with the aim of improving the business environment and for business development services. In this way aid can assist less developing countries like Tanzania to systematically get out of aid dependency.

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