ABSTRACT
It may be asked why, if a loan abroad is actually financed, as it maybe, by borrowing, it has to be weighed against other government ex penditures or increased taxation. The answer is that developed countries are all in a position to maintain full employment of resources without having to invest in the developing world. This being the case, any increased government expenditure results in some extra demand for real resources which must be released from other uses. If other government expenditure is unchanged, then either private consumption or investment must somehow be reduced, normally by taxation. Of course, part of the demand created by a loan abroad will be spent abroad (possibly the major part if the loan is untied) and to that extent there is no need to free domestic re sources from other uses: but in that event there will be a loss of monetary reserves which might have been spent for the benefit of the developed country. Thus public lending abroad is just like public
240 INTERNATIONAL AID investment at home in that, unless excessive reserves are held, room has to be found for it by reducing other demands, whether for in vestment or consumption: and similarly with grants to overseas countries except that, here, there is no prospect of the outflow being reversed. The only exception to this would be if the rich country could find no outlet in investment at home for savings which its citizens insisted on making: which is hardly likely to arise.
