Foreign Aid

Topics: Aid, Development Assistance Committee, Development aid Pages: 12 (3747 words) Published: August 11, 2010
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 example, aid figures may or may not include transfers for military use: to cite one instance, the United States included military assistance in its aid figure until 1957 but no longer does. Another issue is whether to count remittances by expatriate workers to family members in their home countries as aid. This constitutes a large but difficult to measure international flow of funds. Loans and grants are also forms of foreign aid.

Foreign Aid also refers to any money or resources that are transferred from one country to another without expecting full repayment. Official Development Assistance (ODA) includes all grants and concessional or soft loans that are intended to transfer resources from More Developed Countries (MDCs) to Less Developed Countries (LDCs) with the intention of fostering economic development. Most studies consider concessional loans as those that have a grant element at 25% or more. It does not include commercial or non-concessional loans, private foreign direct investment such as inward investment by multilateral corporations, nor does it include preferential tariff reductions offered by MDCs to LDCs enabling them easy access for their exports into the markets of the MDCs.

1.2 About Foreign Aid
Official organizations and those scholars who are primarily concerned with government policy issues frequently include only government-sourced aid in their aid figures, omitting aid from private sources. The most widely used measure of aid, "Official Development Assistance" (ODA) is such a figure. It is compiled by the Development Assistance Committee of the Organization for Economic Co-operation and Development. The United Nations, the World Bank, and many scholars use the DAC's ODA figure as their main aid figure because it is easily available and reasonably consistently calculated over time and between countries. The DAC consists of 22 of the wealthiest Western industrialized countries plus the E.U.; it is a forum in which they coordinate...

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
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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
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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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