Types of Foreign Aid [ Biz/ed Virtual Developing Country ]


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Types of Foreign Aid

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The term 'Foreign Aid' is broad one. It refers to any money or resources that are transferred from one country to another without expecting full repayment. Official Development Assistance (ODA) includes all grants and concessional or soft loans that are intended to transfer resources from More Developed Countries (MDCs) to Less Developed Countries (LDCs) with the intention of fostering economic development. Most studies consider concessional loans as those that have a grant element at 25% or more. It does not include commercial or non-concessional loans, private foreign direct investment such as inward investment by multilateral corporations, nor does it include preferential tariff reductions offered by MDCs to LDCs enabling them easy access for their exports into the markets of the MDCs.

To be considered foreign aid a flow of funds should meet two simple criteria:

  1. It should be non-commercial from the donors point of view
  2. It should be concessional so that the interest and repayment is less stringent or softer than commercial terms

Although official development assistance has grown in absolute terms, it has declined sharply as a percentage of donor countries' GDP in recent years. Despite the commitment to ODA of 0.7% of national income made by the rich countries at the United Nations in 1970, only the Scandinavian countries, the Netherlands and Luxemburg had met this target by 2003, the USA was bottom of the table of OECD countries, with 0.15%.

Foreign aid includes all grants and concessional or soft loans that are intended to transfer resources from MDCs to LDCs with the intention of fostering economic development. Most studies consider concessional loans are those that have a grant element at 25% or more. Foreign aid can be divided into Public Development Assistance and Private Development Assistance:

  1. Public or Official Development Assistance
    • Individual government assistance, known as bilateral aid
    • Multilateral donor agencies such as the IMF and World Banks offering multilateral aid
  2. Private Development Assistance
    • Private non-governmental organisations (NGOs) such as the Red Cross, Oxfam

A considerable amount of foreign aid is tied aid. Here the grants or concessionary loans have conditions laid down by the donor country about how the money should be used. Tied aid by source means that the recipient country receiving the aid must spend it on the exports of the donor country. Tied aid by project means that the donor country requires the recipient country to spend it on a specific project such a road or a dam. Often this might be to the commercial or economic benefit of the firms in the donor country. For example their engineers might be the designers of the project.

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Related Glossary Items:
Tariff
Foreign Direct Investment
Multinational Enterprise
Tied Aid
Non Governmental Organisations (NGOs)
Official Development Assistance (ODA)

Related Theories:
The World Bank
The Arguments for Foreign Aid
The Arguments Against Foreign Aid

Related Issues:
Non Governmental Organisations