Foreign aid explained

Since the Second World War, international politics has remained at the heart of foreign aid as many countries, especially the underdeveloped, appreciated external assistance to boost investment and economic growth. This is because underdeveloped countries are trapped in the ‘Vicious Circle of Poverty’. In a country with low foreign investment, investment funds are only made available from people’s savings. Because of low incomes, savings remain low, resulting in low levels of investment. Because of low incomes, taxation for the government also remains low. Hence, governments face a saving-investment deficit.

External aid as an instrument of foreign policy can simply be defined as the transfer of finance, goods, services and technical assistance from a donor country to a beneficiary. While donor countries offer aid because it is in their political, strategic and/or economic interests to do so, beneficiaries receive aid due to their needs and necessities.

In absolute majority cases, foreign aid is transferred from developed or rich countries to less developed or poor countries. In other words, foreign aid is the additional resource used to raise the performance of the recipient country, thereby promoting economic development and human welfare. While we often hear and read about foreign aid, one hardly understands the complexities in its different ‘forms and types’. There are many forms of foreign aid including grants, bilateral/multilateral loans (soft and hard), project/non-project aid, and technical assistance. These are broadly categorised into private and public development assistance.

Public assistance includes bilateral or individual aid from one government to another, along with multilateral assistance, which usually comprises funds channelled through multilateral financial institutions such as the Asian Development Bank, the International Monetary Fund and the World Bank. Aid from international non-governmental organisations, e.g., the Red Cross is classified as private assistance.

Similarly, a grant does not involve the payment of principal or interest. It is a ‘free’ gift from one country to another, and can also be termed ‘pure aid’. Loans are the most significant form of foreign aid; soft loans or concessional loans are issued at low interest rates with longer duration for repayment as opposed to hard loans.

Published in The Express Tribune, February 19^th,  2015.