Foreign Aid

Foreign Aid

Given the high levels of global inequality and poverty that exist in the world today, many human rights activists, policymakers, along with development aid workers are working towards alleviating international poverty in domestic society, and throughout the world. One way in which they are attempting to do so is through offering foreign aid. In fact, global north countries use foreign aid in their international relations. In this article, I will discuss foreign aid as it pertains to international relations. In addition, we shall examine whether foreign aid is effective in reducing poverty and economic inequality.

What is Foreign Aid

Foreign aid is defined as “the international transfer of capital, goods, or services from a country or international organization for the benefit of the recipient country or its population. Aid can be economic, military, or emergency humanitarian (e.g., aid given following natural disasters).” There is also another definition used when discussing foreign aid. Radelet states that 

The standard definition of foreign aid comes from the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD), which defines foreign aid (or the equivalent term, foreign assistance) as financial flows, technical assistance, and commodities that are (1) designed to promote economic development and welfare as their main objective (thus excluding aid for military or other non-development purposes); and (2) are provided as either grants or subsidized loans.

Grants and subsidized loans are referred to as concessional financing, whereas loans that carry market or near-market terms (and therefore are not foreign aid) are non-concessional financing. According to the DAC, a loan counts as aid if it has a “grant element” of 25 percent or more, meaning that the present value of the loan must be at least 25 percent below the present value of a comparable loan at market interest rates (usually assumed by the DAC – rather arbitrarily — to be 10 percent with no grace period). Thus, the grant element is zero for a loan carrying a 10 percent interest rate, 100 percent for an outright grant, and something in-between for other loans (4).

Foreign aid can take a number of forms. One of the most noted forms of foreign aid is food and essentials aid to help those who are suffering from malnourishment, or from a lack of basic necessities. Foreign aid has been used by individuals, NGOs, states, and international organizations (which can often be organized throughout the United Nations, as well as the World Bank) to help reduce the global inequality gap, as well as fighting food insecurity

However, while most of the foreign aid is often food and other essential items, there are many other forms of foreign aid. For example, one aspect of foreign aid may actually not be for civilians, but rather for the government. This is often in the form of military aid. For example, the United States of America has been criticized by many for its high levels of military aid to countries such as Israel and Egypt, particularly given the human rights records of Israel in the Occupied Palestinian Territories, or Egypt under Hosni Mubarak (and today under Abdel Fattah el-Sissi). Wealthy states have used foreign aid to try to establish or maintain political alliances. This has been a staple of international relations; one can see numerous historical examples of countries spending billions to support allies for political interests. An example of this is when the United States and the Soviet Union both attempted to spread their influence during the Cold War, offering aid to countries in exchange for political allegiance. 

Who Gives Aid?

As I mentioned above, there are many international actors who offer foreign aid. However, the main actors with regards to foreign aid are states (either by themselves, or within international organizations). Along with states, NGOs have also mobilized to offer international aid. For countries, they are viewed as the primary donors given their levels of wealth compared to non-state actors.

Is Foreign Aid Effective?

One of the most important questions that scholars and students of international relations have asked with regards to foreign aid is the question of whether foreign aid is effective.

As mentioned, countries offer foreign aid for various reasons. However, “Most foreign aid is designed to meet one or more of four broad economic and development objectives: (1) to stimulate economic growth through building infrastructure, supporting productive sectors such as agriculture, or bringing new ideas and technologies, (2) to strengthen education, health, environmental, or political systems, (3) to support subsistence consumption of food and other commodities, especially during relief operations or humanitarian crises, or (4) to help stabilize an economy following economic shocks” (Radelet, 2006: 7).

“Almost since its inception, the impact of official aid has been disputed” (Riddell, 2008: 165). This has been viewed as an important question in the academic and policy community, particularly since we have seen and “large amounts of money donated by OCED states” (Easterly, 2008: 3). The implications of ineffectiveness of aid. And while there are many within the international community that argue that aid is effective, after reviewing the academic literature and studies of the impact of aid, it is evident that aid, at least how it is being distributed currently, is mostly ineffective in bringing out economic growth. Findings on the impact of aid have been framed as a “left” versus “right” issue that includes a number of points in the discussion the effectiveness of the aid, discussions such as the “morality” of donating (and within this discussion the “obligation” developed states have toward developing states (or the Global South)) (Therian, 2002: 459), the impact of using as for foreign policy goals, the “wastefulness” of what the aid buys, as well as the impact of aid going to states that are against US objectives (Therian, 2002). Scholars explain that many on the “right” for example see aid being used by leaders who do not give the aid for the population, but actually use it for “repression” (Goldsmith, 2001: 123)

As early as the 1960s and 1970s, we have seen examinations of the impact of foreign aid. For example, Bornshier, Chase-Dunn, and Rubinson (1978), in a cross national review of various studies conducted on the impact of foreign aid find that while there was a “short-term” positive effect, long term effects of aid suggest a “decrease” of growth, with the most decline occurring in countries of “both richer and poorer developing countries…[with] the effect [being]…stronger in the richer than in the poorer countries” (677). Others point out that many studies of the impact of aid on growth in the 1970s found that aid only lead to an increase in domestic government, along with aid having no effect on increased savings, although others later took issue with this latter claim, questioning the direct causality of the relationship (Papanek, 1972).

During the Cold War, while aid was used as a political tool for democratization, it was not effective as it was often used to maintain governments supportive of particular donor policies (de Waal, 2001). When looking at the effect of foreign aid, Pedersen (1996) points out that the impact of aid on the growth of a state has varied depending on time and circumstances.

Burnside and Dollar (2000) examine the impact of aid on 56 overall countries during “six four year periods from 1970-1973 through 1990-1993” (849) (some of which had multiple four year observations within the study) and find, similar to others who have examined the effect of aid that the impact of aid for the most part has little impact on growing the economy and improving the economic situation of the recipient country. They do find however when conducting a robustness check that some positive impact of aid what found on recipient government’s growth but when they themselves had a strong domestic economic policy. Examining whether aid was more likely to go to such economies with stronger economic policies, they found that while “total” or “bilateral aid” did not seem to go to such governments, “multilateral” aid did seem to be going to countries with strong domestic policies (864). From this, they point out that this is why most aid is not effective, since it is bilateral aid. A remedy therefore to aid donation should be based upon conditions of a recipient country establishing strong policies that would aid in the overall “country growth” (864). This has been found to be effective in case studies of Benin where adopting “good” economic policies was beneficial (Gazibo, 2005).

In a follow up piece that works off of the original findings of Burnside and Dollar (2000), Easterly, Levine, and Roodman (2004), in an updated testing of the original work that includes a new four year period from 1993-1997, find results that weaken Burnside and Dollar’s results, suggesting that while they are not necessarily suggesting the world should give up on giving aid, the effectiveness of aid on recipient countries with strong economic policies is heavily lessened. Easterly (2003) explains in an early published piece discussing the Burnside and Dollar (2000) results that their finding of aid being effective depending on strong economic policy did not pass robustness checks of operationalizations of “aid,” “good policy,” and “growth”” (27). Other studies following Burnside and Dollar’s (2000) seminal piece however find opposite evidence, instead suggesting that aid does not impact growth (Jensen & Paldem, 2003: in Harms & Lutz, 2004). Harms & Lutz (2004) suggests that further research should be done to account for methodological and operationalizational differences in studies.

Thus, there are different findings on the issue of foreign aid effectiveness.

Other studies examining the impact of foreign aid from a 1971-1990 period have also failed to find that aid positively impacts growth, failed in increasing the overall levels of “human development” such as “infant mortality and primary education” (27), along with human rights (Islam, 2003), but that aid does expand the recipient government (Boone, 1995), while other later studies have found that aid (and particularly NGO aid as opposed to bilateral aid) does decrease infant mortality rates (Masud & Yontcheva, 2005; Islam, 2003). In Boone’s (1995) findings, explains that these loans were primarily given to the recipient states without enforceable conditions. Boone (1995) explains that from this, even though some programs such as aid for “immunization…can be effective” (27), most have not made a positive impact on growth.


Foreign aid does not help or promote democracy: (Friedman 1958, in Knack) found that aid hurts democracy since the aid goes to leadership, and does not help the “private sector” (253). Scholars (Fridmand, 1958; Knack, ) explain that democracy best develops in “the public sector,” and thus aid impacts democracy. Others have found that aid has also not been effective in growth for democracies, but has actually been found to have some positive effect on growth in authoritarian governments (Islam, 2003).

In a study done examining the impact of aid in South Africa, Brautigam and Knack (2004) find that aid actually hurt the level of effective government (277). While they do not address the particular reasons for South Africa, they ponder whether it may be related to “weak institutions” that are unable to handle the competition for the aid within society, or also the “collective action problems” that arise within society in attempts to best use aid for the country (Brautigam & Knack, 2004)

When a country merely thinks that it is likely to receive it, it will often spend less on public goods that are needed within society (Svensson, 1999). Svensson (1999) argues that it is possible to fix this “if the donor community can enter into a binding policy commitment” (437). (Fait: this may be related to conditions).Along with this, Svensson (1999) finds that foreign aid is actually bad in countries with various “competing social groups” (457), often leading to an increase in corruption.

Grossman (2002) aid may be seen as “a prize” and thus entice domestic instability (Knack, 2004: 253).

Knack 2001 Aid increases level “corruption” while decreasing “bureaucratic quality” (Knack, 2004: 253).

Knack (2004) finds over a 25 year study of the impact of aid on democracy, that as the level of aid increased, a country’s democracy score decreased by .833, which was significant at the .01 level.

Pedersen (1996) explains that the impact of aid does not solely depend on the actions of the government receiving the aid, or the organization giving the aid, but rather a combination of both play a role as to the effectiveness of foreign aid. In order to be highly effective, Pedersen (1996) argues that what is needed is for an understood agreement between the aid organization and the recipient state as to exactly what role the aid organization should have. For example, if the aid country is too involved in all aspects, without a voice for the state receiving the aid, then aid will not be effective. Similarly, if the aid organization is not active in any decisions, then this will also suggest a lack of active involvement in the progress and use of the aid. What is therefore needed is a system where the aid organization plays a role in decisions of aid, but that the state receiving the aid does have conditions for which it must follow. He points out that often a problem exists where states are not punished by changing the terms and using aid without discussion with the aid organization. Pedersen (1996) therefore argues that aid organizations must set a strict agreement prior to the aid with an understanding of how the aid will be used, along with expected returns, since often a problem arise where an aid organization “announce[s] their aid allocation criteria, based on their perception of need, in a way that allows the recipients to adjust in order to qualify for aid” (424). Instead, what should be done is for the aid organization is to effectively attempt to implement conditions that are maintained, something most organizations have little success doing, since often the recipient government has the ability to manipulate their situation to ensure new aid will be delivered. Others have also found that “binding” agreements between the donor organization and the host government may have an impact in the positive effectiveness of aid (Svensson, 2000). Others studies also find that strong conditions are needed in order for aid to work (Svennson, 1999). For example, Svennson (1999) examines food aid and finds that without conditions, governments will be less likely to give the majority of the aid to those who really need it. Therefore, Svennson (1999) argues that “strong conditions” which are enforceable are crucial for aid to be effective.

Others argue that Yes, foreign aid is effective. Tavares (2003) finds that foreign aid reduces corruption. However, aid, to be effective, must be distributed before a period of rising inflation, and that once inflation has began and aid has taken time to be given to the recipient country, then the aid will not be effective in attempts to bring stability (Casella & Eichengreen, 1996). Goldsmith (2001) finds that foreign aid has all in all helped African governments to provide public goods, and that while the relationship is small, aid does help in increasing democracy. Other case studies of aid in Nigeria have found that aid given at “critical moments” when the government is on the verge of falling that aid may positively help democracy since the aid will “[weaken] socioeconomic threats” (Gazibo, 2005: 83). Others however have found that IMF loans for example have had a negative impact on democracy (Barro & Lee, 2005).


Foreign aid continues to be used by actors in international relations, whether as soft power, to build alliances, to reduce income inequality, and to fight poverty, amongst other reasons. It is imperative to continue studying foreign aid, and how it is used (as well as examining the effectiveness of foreign aid) in the international system.

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