Economic Aid to Developing Countries

Definition: Aid involves economic assistance from one country to another. Usually, aid refers to assistance from the developed world to LDCs – less developed countries

Aid can take various forms:

  • 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 which 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. Aid which is dependent on reciprocal benefits such as agreeing to buy goods and services from the donor country.
  • Untied Aid. Aid given without any strings attached.
  • Bilateral aid. Aid given directly from one country to another
  • Multilateral aid. Aid given from one country to an international organisation which is then distributed to a variety of different countries. For example, the Red Cross and Oxfam.

The disputed effectiveness of aid

aid-vs-trade

  • Aid to poor countries is a controversial issue. Supporters argue 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 encourage trade is a more powerful way to increase economic welfare because this encourages self-sufficiency and is more sustainable in the long term.

Spending on Foreign Aid in US

  • According to OECD figures from 2009, the US spent 0.21% of GDP on foreign aid. [2. Guardian article on Foreign Aid]
  • However, other estimates of US spending on foreign aid say it is closer to 1% of GDP. [2. Guardian article on Foreign Aid]
  • According to World Public Opinion, in a survey, the average guess by Americans was that 25% of GDP was spent on foreign aid. [2. World Public Opinion]
  • This is a huge difference between public perception and what the government actually spends.
  • Unsurprisingly, foreign aid is one of the few budget American voters would like to see cut.  [4. Pew rethinking spending]

Spending on Foreign Aid in UK

In 2008/09 the UK provided £5.5 billion of aid to poorer countries. The budget will increase to £7.8 billion by 2010/11. By 2013, the equivalent of 0.7% of the UK’s gross national income will be dedicated to development assistance, from 0.36% in 2007/08 [1. DFID]

What Counts as Aid?

I’m not sure on what actually counts as foreign aid. For example, the recent crisis in Egypt revealed that the US gave over $1 billionto the Egyptian army, even though the country was a dictatorship. The US gives approx $3billion of aid to the Israeli military [6. Washington Report].

Related articles on aid

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