This chapter examines the impact of foreign aid to southeast Asia countries. There are many arguments around the concept of foreign financing for developing countries, especially to the southeast Asia countries. Some believe foreign aid is detrimental for infrastructure development, while many also believe that foreign aid is one the key factors for the development. This research is qualitative research that uses descriptive analysis research and secondary data collection. Despite of the many arguments, foreign aid has shown a positive impact for their recipient country infrastructure development. Moreover, the most developed countries for the ASEAN countries member use external financing as a method to finance their huge project infrastructure, other than relying on government funding and private sectors or public private partnerships. It is found that most foreign aid failures are caused by internal shortcoming itself, rather than the external financing.
TopIntroduction
Infrastructure is one of the most important aspects for a country's economic development. This statement can be proven by the reported correlation between an improved infrastructure and the economic rise of a country. By their definition, what is meant by infrastructure is water supply, sewage, housing, roads and bridges, ports, power, airports, railways, urban services, communications, oil and gas production, and mining which serves to help the running of a country. Several studies concluded that infrastructure has a great influence on national economic growth and has become a major factor in economic development. Therefore, in order to maintain a high quality infrastructure, a huge number of funds is needed for infrastructure to be constructed, operated and used for its development.
Southeast Asia countries are very diverse. The differences can be seen from various aspects of a country such as the military, culture, and also economy sectors which are different with one and another. The diversity of Southeast Asia countries causing them to face various economic problems as well. Most of countries income per capita differences are being counted on from the low total factor productivity (TFP) in poor countries (Klenow and Rodr´ıguez-Clare, 1997; Hall and Jones, 1999). Based on the TFP, poor countries tend to be more unproductive in the production of tradables and investment goods. Although some countries in Southeast Asia have developed, some of them are still struggling to build their economy sectors. This situation shows the importance for other countries to help those that are still developing (Hamdan et al., 2021).
External financing is a necessity for developed and developing countries (Rosli et al., 2022). A successful economic development and net financial flows are built upon external financing (Anshari et al., 2022; Firmansyah et al., 2024). Thus, it is very important for Southeast Asia countries to maximize the benefits of external financing, which can have done through cooperation, investment, loan, or in the form of bilateral, regional, or international trade to improve their country infrastructure development. However, it is believed that the external financing would actually be detrimental and increasing the burden of the recipient countries. This research has the purpose to reveal the impact of external financing in Southeast Asia, by conducting in-depth observations of its countries.
Theoretical Framework
The theory of foreign aid and the theory of general growth and development have the same fundamental principles. Despite of the same basis, these are two different separated theories. However, development economic did not acknowledge the independent existence of the theories, whereas the criticism of the foreign aid theory is range and suit to the growth and development theory. There are three approaches of the foreign aid theory. One, savings-investment gap approach. two, foreign exchange earning expenditure gap approach, and three capital absorptive capacity approach with all of them are focused to made a positive impact to the recipient country growth and the development in infrastructure or economy.
Foreign aids have an important role for global development dialogue and International economic order. Based on the Harrod-Domar growth model, it is explained that capital is one of the most important factors in the growth and development of a country, in accordance with foreign aid. This model emphasizes the function of foreign aid, especially in a developing country. After the second world war, foreign aid significantly impacts the third world countries development experiences and forming a south-north relation. Foreign aid is capable to remove three major deficiencies of a developing countries, that is capital, foreign exchange, and technical knowledge.