Foreign Aid

Reviewed byDheeraj Vaidya, CFA, FRM

Foreign Aid Definition

Foreign aid or international aid refers to the voluntary transfer of resources like money, goods like food, drugs, weapons, or technical services, and training from a developed country to a developing one in the form of a loan. Governments or international or non-governmental organizations provide it to address issues like terrorism, environmental degradation, pandemics, etc.

Different types of foreign aid assist countries with poor humanitarian and economic conditions or those suffering from natural disasters or war. Other objectives of international loans may include healthcare and infrastructureInfrastructureInfrastructure refers to fundamental physical and technological frameworks that a region or industry establishes for its economy to function properly.read more development and diplomatic relations. OECD’s Official Development Assistance (ODA) is one such assistance that supports the development of societies and reduction of poverty.

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Key Takeaways

  • Foreign aid is the process of transferring resources such as money, items such as food, pharmaceuticals, weapons, or technical services, and training from a wealthy nation to a developing country in the form of a loan or grant.
  • Foreign aid has several purposes, such as maintaining diplomatic relations, providing healthcare, improving infrastructure, and combating poverty. However, it is criticized for raising inflation and interfering in local politics.
  • Bilateral, multilateral, tied, military, project, and voluntary are all common types of foreign aid.
  • According to the OECD, the United States, Germany, the United Kingdom, Japan, and France, were the top foreign aid donors in 2020.

How Does Foreign Aid Work?

Foreign aid, in most cases, involves the transfer of funds or resources from a wealthy country to a poor state. It differs from commerceCommerceCommerce is the accumulation of several transactions for a given industry. A transaction is a one-time event where an entity exchanges anything of value with a different entity.read more in that the resource transfer is accomplished by giving or lending something rather than trade. Also, it is driven by international politics or humanitarian concerns.

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The main foreign aid benefits are reducing hunger and poverty in developing nations, assisting economies to recover from crises, and establishing diplomatic connections with countries. It may also aid in the promotion of a country’s culture and languages and boost its exports.

Critics often criticize foreign aid for interfering in the politics of another country. Aid recipients become more politically reliant on the countries that provide it, leading to shifts in foreign policies and international politics. Another problem is that it may increase inflation by injecting money if the economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read more is not productive. There is also the issue of corrupt governments and bodies interfering with the proper flow of aid. In other words, the donor and receiver nations must ensure that the help reaches the right and deserving people.

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History Of Foreign Aid 

Foreign aid is vital for establishing and fostering international relations. The earliest known foreign aids were mainly as military assistance offered to the allies in times of war. These aids were to promote infrastructure development in colonies.

The practice gained traction after the United States introduced the Marshall Plan, which helped European economies recover post-World War II. However, despite being popularly linked to the U.S. and its foreign policies, foreign assistance first appeared before the Marshall Plan. Several countries have been using forms of it throughout history, including aids offered by England and France to Portugal soon before the Seven Years’ War, for instance.

Organizations such as the United Nations (UN), the World Bank, and the International Monetary Fund (IMF) expanded their scope by assisting countries in financing projects or resolving economic issues. These international groups are responsible for allocating foreign grants or loans, determining who qualifies for aid and assessing the impact of the assistance. IMF also uses foreign aid to promote economic reforms and lower trade barriers between countries.

Types Of Foreign Aid

Foreign aid can take several forms and originate from various sources. It can come as food, human resources, or even weapons, but with/from agreements. The following are the most popular forms of international aid agreements:

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#1 – Bilateral Aid

It is the most common type of international aid, often provided by a developed country to an underdeveloped one through a bilateral agreement. One side determines the conditions for granting the money, while the other agrees with them. Bilateral grants are the primary sources of ODA. The two main reasons for this kind of agreement are geopolitical (and hence, strategic) and to assist during a humanitarian crisis such as an earthquake, tsunami, or other natural disasters.

#2 – Multilateral Aid

It includes funds raised by a group of countries via an international organization to assist developing nations. Most of the time, the capital is used to aid the world’s poorest countries, alleviate hunger, and improve humanitarian conditions. One of the most influential organizations engaged in multilateral aid is the World Bank.

#3 – Military Aid

Military aid, unlike bilateral and multilateral, is not about charity. It is all about selling and buying weapons and signing defense contracts. Countries amid a crisis frequently seek international assistance in obtaining weaponry to combat their adversaries. The United States is the most well-known provider of military aid. It accounts for roughly 30% of overall US foreign aid. However, countries like Russia are also known for it.

#4 – Voluntary Aid

Voluntary aid is a charity mainly carried out by non-governmental organizations (NGOs) and is not necessarily linked to governments. The well-known ‘Doctors Without Borders’ project, for example, sends doctors to countries with poor health conditions to better the lives of the residents.

#5 – Humanitarian Aid

It is often given to countries struck by a natural disaster. It is a more short-term aid and involves several nations, NGOs, or private entities donating resources and services during a crisis.

One recent example is the rebuilding of the Notre Dame cathedral in France. After the fire, the French government received money from entities worldwide to help rebuild the famous cultural symbol.

Another example is the U.S. government foreign aid spending over $1.5 billion on emergency health and humanitarian needs in other nations during the COVID-19 outbreak.

#6 – Tied Aid

It works similarly to bilateral aid. However, the contract states that the entire loan amount must be spent on a specified country. Most of the time, it is either the donor country or its group of allies.

This type of aid is known as a form of protectionism. The government of the developed country donates the capital to another. But the recipient can only spend it on improving the economy of the donor.

# 7 – Project Aid

It intends to assist with specific projects. A country may, for example, assist another in the construction of a school or a hospital in a region. In this scenario, the funds help support the project. The funding may or may not originate from a single source.

Foreign Aid Donor Country

Member countries of the DAC (Development Assistance Committee) of the Organization for Economic Cooperation and Development (OECD) significantly contribute to ODA. The OECD has set the benchmark for foreign aid by country at 0.7% of its gross national income (GNI).

The countries that give the most foreign aid are among the wealthiest nations in the world. According to a note from OECD, the top countries that donated money in 2020 are the United States, Germany, the United Kingdom, Japan, and France.

Top Donor Countries 2020 (In Billions)
United States$35.5
Germany$28.4
UK$18.6
Japan$16.3
France$14.1 

Other countries that stand out in the OECD’s report are Luxembourg, Denmark, Norway, Turkey, and the United Kingdom. Despite not donating such large amounts of money, they spent a fair share of their GNI on foreign aids.

Foreign Aid Receiver Countries

While developed countries usually give the most foreign aid, countries suffering from humanitarian crises or poverty receive it the most. According to the report from Statista, Syria received the most foreign funds in 2019, followed by Yemen, Sudan, and Somalia. The Regional Response Plan and the Humanitarian Response Plan are two different measures to assess humanitarian aid in the report, the combined value of which is as follows:

Top Receiver Countries 2019 (In Millions)
Syria$4,526
Yemen$1,909
Sudan$2,098
Somalia$829
Democratic Republic of Congo$814

Frequently Asked Questions (FAQs)

What does foreign aid mean?

Foreign aid is the process of sending resources from an affluent nation to a developing country, such as money, food, medications, weaponry, or technical services and training in the form of a loan or gift. Governments or international or non-governmental organizations provide bilateral, multilateral, military, tied, project, or voluntary aids to address various regional and global issues.

Why foreign aid is important?

Foreign aid intends to help countries in need of humanitarian and economic assistance and those affected by natural catastrophes or war. Healthcare services, infrastructural development, prevention of hunger and poverty, and diplomatic relations are some of the other goals of international aid. It may also help promote a country’s culture and languages and increase exports.

Who gives foreign aid to whom and why?

In most circumstances, foreign aid entails the transfer of finances or resources from a wealthy nation or entity to a developing country. Its goals could be to provide development assistance, reduce hunger and alleviate poverty in developing countries, assist economies in recovering from crises, forge diplomatic ties with governments, and increase exports. Critics, however, chastise it for rising inflation, meddling in local politics, and leading to corruption.

This has been a guide to Foreign Aid and its definition. Here we discuss how does it work along with types, donor and receiving countries, and history. You can learn more from the following articles –

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