Foreign Aid

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EFFECT OF FOREIGN AID IN KENYA
1. Introduction
Foreign aid is usually associated with official development assistance, which in turn is a subset of the official development finance, and normally targeted to the poorest countries (World Bank, 1998). Foreign aid represents an important source of finance in most countries in sub-Saharan Africa (SSA), where it supplements low savings, narrow export earnings and thin tax bases. In recent years the donor community has become more stringent about fiscal discipline and good policies, which has led to freezing of donor funds to governments that do not conform with aid conditionalities. The Kenyan government has experienced such aid cuts in the past.

1.1 Definition
The standard definition of foreign aid comes from the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD), which defines foreign aid (or the equivalent term, foreign assistance) as financial flows, technical assistance, and commodities that are (1) designed to promote economic development and welfare as their main objective (thus excluding aid for military or other non-development purposes); and (2) are provided as either grants or subsidized loans.

Foreign aid is a voluntary transfer of resources from one country to another, given at least partly with the objective of benefiting the recipient country. It may have other functions as well: it may be given as a signal of diplomatic approval, or to strengthen a military ally, to reward a government for behaviour desired by the donor, to extend the donor's cultural influence, to provide infrastructure needed by the donor for resource extraction from the recipient country, or to gain other kinds of commercial access. Humanitarianism and altruism are, nevertheless, significant motivations for the giving of aid. Aid may be given by individuals, private organizations, or governments. Standards delimiting exactly the kinds of transfers that count as aid vary. For



References: Boone, Peter, 1994, “The Impact of Foreign Aid on Savings and Growth,” Centre for Economic Performance Working Paper No. 677, (London School of Economics). Collier, Paul, and David Dollar, 2002, “Aid Allocation and Poverty Reduction” European Economic Review, Vol. 45, No. 1, pp. 1-26. Friedman, Milton, 1958, “Foreign Economic Aid,” Yale Review, Vol. 47 (4), pp. 501-16. Kanbur, Ravi, 2003. “The Economics of International Aid,” forthcoming in Serge Christophe-Kolm and Jean Mercier-Ythier,eds, The Economics of Giving, Reciprocity, and Altruism (North Holland). World Bank, World Development Indicators, 2010 Lancaster, Carol; Ann Van Dusen (2005) Todaro, Michael P. and Smith, Stephen C. (2003). “Economic Development.” Pearson Education Limited, Eighth Edition World Bank (1998) Chenery, Hollis B. and Carter, Nicholas G. (1973). “Foreign Assistance and Development Performance, 1960-1970.” American Economic Association, Vol.63, No.2 Collier, Paul and Dehn, Jan (2001) Collier, Paul and Gunning, John (1999). “Explaining African Economic Performance.” Journal of Economic Literature 37 (1), pp.64-111 Fayissa, Bichaka and El-Kaissy, Mohamed I Lancaster, C. 1999. Aid to Africa. Chicago: University of Chicago Press. O’Brien, F.S and T.C.I. Ryan. 1999. “Aid and reform in Africa: Kenya case study”. World Bank project on Aid and Reform in Africa. Washington, D.C.

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