Foreign aid is one the largest sources of foreign exchange. There are five different types of foreign aid programs. It is defined as the voluntary transfer of resources from one country to anther. It includes any flow of capital to developing countries. A developing country usually does not have a strong industrial base and is characterized by a low Human Development Index (HDI). The aid can be in the form of a loan or a grant.
Foreign aid maybe in either a soft or hard loan. If repayment of the aid requires foreign currency then it is a hard loan. If it is in the home currency then its a soft loan. The World Bank lends in hard loans, while the loans of its affiliates are soft loans.
The U.S. spends roughly $50.1B in foreign aid each year which is only 1.2% of the Federal government’s budget.
Uses of Foreign Aid
Foreign aid may be given as a signal of diplomatic approval, or to strengthen a military ally, to reward a government for behavior desired by the donor, to extend the donor’s cultural influence, to provide infrastructure needed by the donor for resource extraction from the recipient country, or to gain other kinds of commercial access.
US Aid may often times buy assistance for American citizens in that nation, alter the course of government laws or something similar in a way that benefits US interests.
In the case of Peru back in the 1990’s, Peru conspicuously changed its policies of not allowing religious missionaries in the country or even jailing them upon arrival. After a promise of aid to bail out the Peso, suddenly Mormons and other groups had access to the nation without harassment.
Types of Foreign Aid
1. Bilateral aid
Bilateral Aid is assistance given by a government directly to the government of another country. It is when the capital flows from a developed nation to a developing nation. It is often directed according to strategic political considerations as well as humanitarian ones. These are to assist in long-term projects to promote democracy, economic growth, stability, and development.
2. Multilateral aid
Multilateral Aid is assistance provided by many governments who pool funds to international organizations like the World Bank, United Nations and International Monetary Fund that are then used to reduce poverty in developing nations. Though this sector constitutes a minority of the US’s foreign aid, the nation’s contributions make up a significant percentage of the donor funds received by the organization.
3. Tied aid
Tied Aid is one of the types of foreign aid that must be spent in the country providing the aid (the donor country) or in a group of selected countries. A developed country will provide a bilateral loan or grant to a developing country, but mandate that the money be spent on goods or services produced in the selected country.
4. Project aid
Project Aid is one of the types of foreign aid where the funds are used to finance a particular project, such as a school or a hospital.
5. Military Aid
Military aid (which was about $15 billion in 2011) is never altruistic and such aid usually requires said nation to either buy arms or defense contracts directly from the USA or in other cases just simplifies the process by having the federal government just buy the arms itself and ship them over on military transport.
Arguments for Foreign Aid
The economic reasons for giving foreign aid:
- Humanitarian reasons
- Improve the country’s international image
- Build positive working relationships with other governments
- Promote the conditions for peace and stability, because many governments genuinely believe we’ll be safer and happier when everyone else is safe and happy.
Four Disadvantages of Foreign Aid
The economic arguments for not giving foreign aid:
- According to critics, foreign aid does not promote faster growth but may in fact hold it back by substituting for domestic savings and investment.
- The aid is generally focused on the growth of modern sector. Therefore it increases the gap in living standards between the rich and the poor in Third World countries.
- If the aid given is concerned with unproductive fields or obsolete technology, it will have the effect of increasing the inflation in the country.
- The biggest objection is that donor countries make interference in the economic and political activities of the recipient country.