Foreign Aid

It is a voluntary transfer of resources from one country to another.

Foreign aid or economic assistance is a voluntary transfer of resources from one country to another. Such assistance can be provided in different forms, such as money, food, medical supplies, etc.,

The vast majority of transactions occur from developed/wealthy countries or large International organizations to developing/third-world countries. This can be provided as a donation, grant, or credit facility. The majority of economic aid is created to fulfill multiple goals effectively.

Nations frequently give foreign help to increase their stability and sovereignty. Hence, foreign financial support may be given in exchange for the right to build or utilize army bases abroad or to keep allied governments or nations from being influenced by enemy countries. 

A nation could use foreign aid to further its international and geopolitical objectives, such as increasing access for its ambassadors to foreign leaders, gaining support for its positions within international bodies, or gaining diplomatic recognition.

Grounds For Foreign Aid

A foreign assistance program may require professional direction, training, and goods and financial resources. Financial resources can be obtained through concessional loans or grants, such as export credits.


The most common foreign assistance is Official Development Assistance (ODA), which is given to aid development and poverty alleviation. 

ODA is mostly derived through bilateral donations from one country to another. Some are in the form of loans and are commonly channeled through non-governmental organizations and foreign organizations.

Countries also deploy external assistance to bolster their security. Economic aid can also prevent friendly countries from submitting to hostile governments' authority or paying for the right to build or retain military installations on foreign land.

Foreign assistance can be used to assist a government in achieving its political goals, such as gaining diplomatic recognition, improving respect for its participation in international organizations, or enhancing the accessibility of its diplomats to foreign countries.

International economic assistance can also be used to increase a country's exports and spread its cultural and native goods. Countries commonly send relief to alleviate the suffering caused by man-made or natural disasters such as drought, illness, and war.

It contributes to long-term prosperity, establishing or strengthening political institutions, and resolving a wide range of global challenges such as cancer, terrorism, and other offenses, as well as ecological damage.

Governments may engage in treaties with the countries to whom they transfer help. For example, we can take a look at the Marshall Plan.

The Marshall Plan was an American program implemented in 1948 to offer international aid to Western Europe. 

Following the conclusion of WWII, the United States of America transferred approximately $13 billion in economic recovery projects to Western European economies, and, ever since, the United States of America and the western European countries have had good and peaceful relations. 

Ways in which Foreign Aid can be Provided

Ways of foreign aid

Foreign assistance is primarily provided in the following ways:

  • Money is one of the best ways to provide aid as it allows the receiving country to make more fluid decisions on how to overcome their problem with their methods and control-for example, the famous $18 billion bailout by the IMF to Ukraine.

  • Food and Supplies - There are situations when a country is not economically weak, but there is a high shortage of certain essential food commodities or products. For example, the wheat shortage in India (1991 Indian Economic Crisis) and the United States provided India with wheat on loan. 

  • Health care & medical assistance - Frequently, in war zones, that country's medical and healthcare facilities are destroyed. Therefore international organizations such as World Health Organisation (WHO) and United Nations Refugee Agency (UNHCR) provide such nations with healthcare aid, medicines, trained doctors, etc. For example, UNHCR provided Syrian refugees with $65 million worth of healthcare and medical resources in 2019 due to the rising prices of medical supplies.

  • Humanitarian & Infrastructure aid - When a country goes through a natural disaster, it requires relief workers and assistance in rebuilding its infrastructure. For example, in the 2018 Kerala floods (India), the United Arab Emirates attempted to help India by providing relief workers and resources for rebuilding the infrastructure worth $98 million.

  • Education - This encompasses building education systems for below-poverty-line countries so that the government can fare well economically and democratically. For example, the World Bank has provided loans worth $150 million to Chad so that they can improve their education facilities and standards.

Types of Foreign Aid 

Foreign aid is of various types. These are:

1. Tied Aid 

This is a type of international aid in which the recipient country or a group of nations must invest. For example, a developed nation can make a bilateral credit grant to a developing country, but the money must be used on goods and services produced in that country.


For example, China follows this method of economic assistance. They invest in building ports and airports in many countries, and as a result, Chinese corporations own over a hundred ports and airports in 63 countries worldwide.

2. Bilateral Aid

This means that money is given directly from the government of one nation to the government of another. 

Currency devaluation occurs when money moves from a developed country to an emerging economy. Strategic, political, and humanitarian factors drive bilateral aid. This is implemented to foster democratic freedom, financial prosperity, tranquility & project long-term stability. 

Bilateral aid

For example, in 2022, during Pakistan's major political and economic crisis, the government of the Kingdom of Saudi Arabia directly gave the Pakistan government an $8 billion bilateral loan.  

3. Multilateral Aid

Governments of different countries collectively contribute multilateral aid to international organizations such as the United Nations, World Bank, and International Monetary Fund. These organizations work to alleviate poverty in developing countries. 

Multilateral aid

For example, World Bank provides an $8 billion education and training facilities package to over 35 countries below the poverty line.

4. Military Aid

Military assistance is an aid used to help a country or its people defend themselves or to assist a developing country in maintaining sovereignty over its territory. 

Many countries receive military support to aid in counterinsurgency battles. For example, military aid can be given to a revolt to help it fight another government.

Military Aid

For example, During the Second World War, the United States of America provided the allied power countries with over $50 billion in military resources, weapons, and troops.

5. Project Aid

Project aid is an aid for building a specific humanitarian project, such as hospitals, schools, old age homes, Special Needs centers, etc.

Project aid

For example, The UAE government built and opened up two hospitals in Somaliland. This hospital has all those facilities available in a fully equipped hospital, which runs on the Dubai Care donation fund.

Effectiveness of Foreign Aid in Developmental Economics

There are two main schools of thought on how effective External International Economic Assistance is.

1. The first School of Thought 

This group feels that state aid is useless and has hurt developing nations over time.

According to this viewpoint, official aid fosters reliance, corruption, and currency overvaluation. It also prohibits countries from taking advantage of global economic possibilities.


Example: China is one of the greatest single creditor nations in the world. Over the last decade, its loans to low- and middle-income nations have increased by three times, reaching $170 billion by the end of FY 2020.

According to AidData, China does not reveal half of its financing to developing nations in government debt data. It is frequently allocated to state-owned corporations and banks, joint ventures, or private organizations rather than going directly from the government to the government.

The Chinese government, through its corporations, has lent money to over 40 lower or middle-income countries valued at more than 10% of their GDP, making them fall into a Debt trap.

In the case of Sri Lanka, they acquired more loans from China so that they could pay back its interest. That's one of the reasons why Sri Lanka is going through a major economic crisis.

2. The Second School of Thought 

This group believes that International Economic assistance levels have positively impacted modern geopolitics and that significant increases in such assistance would help eliminate poverty.

Second school of thought

For example, United Nations Children's Fund (UNICEF) has invested in building schools and education centers for young children in middle to low-income countries, which has shown a direct increase in the Per Capita Income (PCI) of the North African countries.

Foreign Aid as a Study in Economics and Politics

Economists are looking into whether aid is helpful in terms of boosting GDP and improving economic results. 

Most of these investigations have attempted to address questions of confounding variables, employing a variety of tools – some more persuasive than others – to address the possibility that slower growth will draw more help.


Many of these researches have looked at nonlinear functional forms and looked at whether there are any relevant connections between assistance and other factors, including literacy, corruption, stable macroeconomic situation, institutional strength, overall strong economic policies, and geography.

Most research has relied on all terrain or cross-sectional data and sought to differentiate between short- and long-term effects. 

Several writers have utilized 'Dutch disease' related models to examine how much extra aid causes currency overvaluation, poor export performance, and crises.

What is the Dutch Disease model?

The term "Dutch disease" refers to an economic trend in which strong growth in one area of the economy causes a deterioration in other sectors. It is also frequently accompanied by a strong increase in the value of the native currency.

Dutch disease model

Economists believe that International aid can be supplied as a diplomatic gesture or to reinforce a military alliance.

Various motives for providing foreign aid include:

  • Rewarding a government for desirable conduct.
  • Extending the donor's cultural influence.
  • Providing the infrastructure required by the donor for resource exploitation from the recipient nation.
  • Gaining other types of economic access.

International assistance aids in the formation of treaties that lead to long-term mutual obligations that promote peaceful cohabitation between governments of developed nations and governments of middle-income and low-income countries.

How is the Effectiveness of Foreign Aid Measured?

There is a QuODA Index that measures how effective it is as International Aid and what its utility is.


What is the QuODA Index?

Quality of Official Development Assistance Index is a system for ranking 31 donors, 23 nations, and eight multilateral – on four criteria ;

  • Maximizing efficiency - Donors may increase the effectiveness of their assistance expenditure, or the "better value for money," by making wise decisions about how to divide their funds across various nations and industry sectors and by supporting international public goods.

  • Fostering institutions - Several institutional processes have been developed for managing development partners' conflicting interests with partner nations, but the preferred course of action is to utilize the systems of partner countries. To address the needs and interests of donors, enhance these institutions.

  • Reduction of burden - The high expenditures that various donor organizations, each with its agendas and reporting requirements, impose on their partner nations have long been a source of complaint. They have promoted a plan for resource cooperation among donors

  • Transparency and learning - As an important step toward greater accountability toward one another, partner nations, and their own populations, donors should pledge to be more open. Additionally, transparency serves as a tool for donor coordination and may be utilized to learn from past mistakes and enhance the efficacy of help.

What do the 4 Components of calculating the QuODA Index mean?

The four aspects of this study have very little association with each other.

As assistance quality is multifaceted, QuODA does not attempt to create a single factor Index but instead gives data on each of the four components.

This is because the goal is to bring about change, which is dependent on particular QuODA aspects.

"How are donors performing on their pledges to improve assistance quality?" is an issue addressed by QuODA. QuODA does not examine the effectiveness of aid; that is determined by the joint efforts of donors and partner nations.

Instead, it reviews donors' attempts to keep their promises on the aspects of assistance quality that data and experience show contribute to successful help. We focus solely on elements under donor agencies' control with QuODA. 


Advantages & Disadvantages


A few of the advantages of foreign aid are:

  • In times of crisis, emergency assistance saves lives.
  • Aid helps rebuild livelihoods and housing after a disaster. 
  • Medical education, medications, and equipment may all aid in improving one's health and living situation.
  • Agriculture aid may assist in increasing food production and so improving the quality and amount of food supplied.
  • Encouragement of assisted industrial growth can lead to the creation of employment and the improvement of transportation infrastructure.
  • International Aid may help countries enhance their natural resources and energy infrastructure.
  • Clean water and sanitation projects may enhance people's health and living conditions.

Advantages and disadvantages


Apart from the mentioned advantages, a few of the disadvantages are:

  • Assistance may enhance reliance on donor nations. 
  • Aid is sometimes a debt, not a gift, and impoverished nations may struggle to return it.
  • It might be a requirement of the investment that foreign firms manage the projects or that a percentage of the resources or earnings are remitted outside.
  • Projects do not always assist smaller farms, and they are frequently large-scale.
  • Employers may gain more from infrastructure upgrades than employees.
  • Assistance can be used to exert political or economic pressure on recipients. 
  • Assistance might not target those who require it the most. 
  • Due to corruption, local officials may use aid for personal or political benefit.
  • Certain infrastructure initiatives might increase the cost of food and water.
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Researched and authored by Aviral Mathur | Linkedin 

Reviewed & Edited by Ankit Sinha | LinkedIn

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