Why Donor Countries Give Aid [ Biz/ed Virtual Developing Country ]


Theories

Why Do Donor Countries Give Aid?

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Donor countries generally give aid because it is in their own interest to do so. Undoubtedly some aid is given with humanitarian motives in mind; however, most foreign aid is given for variety of political, strategic and economic reasons that benefit the donor countries in the longer term.

Political reasons
Official Development Assistance (ODA) is often designed to achieve political objectives other than increasing prosperity in recipient countries. In the United States, national security considerations often influence foreign-aid decisions. During the 1980s, Cold War considerations caused a sharp escalation in U.S. aid to Central America and the Caribbean even, as aid to Africa declined. More recently concern over Middle East instability has made Israel, Egypt, and Jordan the largest recipients of U.S. foreign aid. Other donors have their own objectives. For many years Sweden targeted aid toward 'progressive' societies. In France, governments have sought to promote the maintenance and spread of French culture and the French language as well as the preservation of French influence. In Japan, aid has historically flowed disproportionately to neighboring Asian nations in which Japan has the greatest commercial interests, and has often been tied to purchases of Japanese products.

Economic reasons

Filling the gaps
Providing aid to Less Developed Countries (LDCs) ensures that the savings gap and the foreign exchange gap are filled. For domestic investment to take place domestic savings must also occur. If these are absent then a flow of development assistance can help finance investment projects. Likewise, there should also be technical assistance to ensure that the capital is efficiently used. For some economists, development is synonymous with the creation of a sizable, modern manufacturing sector, as opposed to reliance on exports of primary products. The international product life cycle theory suggests that as countries industrialise they off-load more labour-intensive industries to countries in earlier stages of industrialisation. This theory provides some support for the notion that the development of manufacturing industries frequently accompanies increasing prosperity in the developing world. However, others argue that aid for capital investment can be anti-developmental as more capital intensive production in countries may contribute to increasing levels of unemployed and consequential poverty.

An inflow of foreign exchange may also enable LDCs to import foreign capital considered necessary for economic growth and development. In the case of Zambia, where there have been considerable shortages of foreign exchange earning due to falling commodity prices and debt servicing, inflows of foreign exchange through aid have enabled the capital investment needed to maintain the copper industry. It should also be mentioned however, that debt relief would be more effective than aid in reducing the foreign exchange gap.

Self Interest of Donor Countries
Less and less development assistance is given in the form of outright grants and increasingly interest is being charged albeit at concessionary rates. Tied aid is also becoming more prevalent. Tied aid occurs where conditions are place by the donor upon the recipient about what they use the aid assistance for. Usually the recipients are required to purchase the exports of the donors. This may be a more expensive option than purchasing the capital from sources other than the donors. Tied aid may help fill savings and foreign exchange gaps; however, it may not always be in the best interests of the recipient country.

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Related Glossary Items:
Tied Aid
Concessional terms
Soft Loan
Official Development Assistance (ODA)

Related Theories:
Types of Aid

Related Issues:
The Debt Boomerang