Economic Aid to Developing Countries

Meaning of Aid/Economic Assistance

 

Aid involves economic assistance from one country to another. Usually, aid refers to assistance from the developed world to LDCs – less developed countries. Thus, aid refers to any type of assistance that one country voluntarily transfers to another, which can take the form of a gift, grant, or loan. Most people tend to think of foreign aid as capital, but it can also be food, supplies, and services such as humanitarian aid and military assistance. 

Developed nations may provide developing nations with foreign aid after a natural disaster, times of conflict, or during an economic crisis. The United Nations requires advanced countries to spend at least 0.7% of their gross national income on international aid. The United States is the most generous, according to the Organisation for Economic Co-operation and Development.

As noted above, foreign aid is any type of assistance that one country's government provides to another nation, usually from developed to developing nations. Governments may issue aid in the form of:

• Money
• Food and supplies
• Medical assistance including doctors and supplies
• Humanitarian aid such as relief workers
• Training services including agricultural training
• Health care
• Education
• Assistance with infrastructure building
• Activities related to peacebuilding

Broader definitions of aid thus include any assistance transferred across borders by religious organizations, non-governmental organizations (NGOs), and foundations. U.S. foreign aid usually refers to military and economic assistance provided by the federal government provides to other countries.

Types of Aid

Aid may be of various types.

• Debt Relief - Forgiving debt can save LDCs annual interest payments and leave them more resources for internal investment
• Direct AID- Giving food, money, and health care supplies directly to the countries in need
• Indirect Aid- Financing the building of infrastructure and communication networks that enable countries to develop
• Cheap Finance- Schemes like Micro aid finance give affordable loans so that countries can benefit from more local entrepreneurship
• Tied Aid- The aid is dependent on reciprocal benefits such as agreeing to buy goods and services from the donor country.
• Untied Aid- Aid is given without any strings attached.
• Bilateral Aid- Aid is given directly from one country to another
• Multilateral Aid- Aid is given from one country to an international organization which is then distributed to a variety of different countries. For example, the Red Cross and Oxfam.

The Disputed Effectiveness of Aid

The following arguments show the disputed effectiveness of economic aid.

Aid to poor countries is a controversial issue. Supporters argue that targeted aid can help countries deal with natural disasters and improve infrastructure. Critics of aid argue that it can either encourage aid dependency or be misused and misdirected.

The effectiveness of aid depends on how it is managed and how it is distributed. Critics of aid argue to encourage trade is a more powerful way to increase economic welfare because this encourages self-sufficiency and is more sustainable in the long term.

Some Data and Graphics 

According to the Organisation for Economic Co-operation and Development (OECD), member countries contributed $152.8 billion in international aid in 2019.1 This was divided into:

• $149.4 billion in capital grants and loans
• $1.9 billion to develop private sector vehicles for growth
• $1.4 billion worth of loans and equity to private companies
• $100 million in debt relief

The United States is the most generous, according to the OECD, providing $34.6 billion in foreign aid in 2019. The remaining countries that were among the top five donors included:

• Germany: $23.8 billion 
• The United Kingdom: $19.4 billion 
• Japan: $15.5 billion 
• France: $12.2 billion

The United Nations (UN) calls for economically advanced countries to spend at least 0.7% of their gross national income (GNI) on international aid. Turkey, Denmark, Luxembourg, Norway, Sweden, and the United Kingdom are the only countries that met or exceeded this level. The total contribution of member countries, though, averaged 0.3%—much lower than the UN target.

ODA as a Percentage of Gross National Income in 2019

According to Security Assistance Monitor, the Middle East and North African region received the most assistance, which amounted to more than $1.195 billion in 2018 followed by the Sub-Saharan Africa region, which received about $965 million. The countries that received the most aid that year were Afghanistan, Jordan, Kenya, Tanzania, and Uganda.

Net Official Development Assistance By Country in 2019

These are the countries that gave the most government aid to promote the economic development and welfare of developing countries (in millions of USD).

History of Foreign Aid

Foreign aid also commonly referred to as international aid and economic aid isn't a new concept. The colonies were recipients of foreign military aid, particularly from France, during the American Revolution. During World War I, the U.S. government loaned the Committee for Relief in Belgium $387 million—much of which it later forgave.

U.S. foreign aid began in earnest during World War II. Before entering the war, the government began funneling funds and materials to the allied nations under the Lend-Lease program, which totaled $50.1 billion by August 1945. The United States also contributed $2.7 billion through the United Nations Relief and Rehabilitation Administration (UNRRA), beginning in late 1943.

For the four years following 1948, the U.S. gave $13 billion in aid to countries affected by the war such as the United Kingdom, France, and West Germany through the Marshall Plan. The Mutual Security Act of 1951 authorized around $7.5 billion in foreign aid per year until 1961. The amount of aid authorized by the Mutual Security Act in 1951 was approximately 2.2% of the country's gross domestic product (GDP).

References:

1. https://www.investopedia.com/terms/f/foreign-aid.asp

2. https://www.economicshelp.org/blog/glossary/aid/