Foreign Aid in Ug

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Types of Foreign Aid

Prateek Agarwal
Development Economics
October 31, 2017
Foreign aid is one the largest sources of foreign exchange. There are five different types of
foreign aid programs.
What is the definition Foreign Aid?
The voluntary transfer of resources from one country to another is defined as Foreign Aid. This
includes any flow of capital to developing countries. A developing country usually does not have
a strong industrial base and is characterized by a low Human Development Index (HDI).
Foreign aid can be in the form of a loan or a grant. It may be in either a soft or hard loan. This
means that if repayment of the aid requires foreign currency then it is a hard loan. If it is in the
home currency then its a soft loan. The World Bank lends in hard loans, while the loans of its
affiliates are soft loans.
The U.S. spends roughly $50.1B in foreign aid each year which is only 1.2% of the Federal
governments budget.
Uses of Foreign Aid
Foreign aid may be given as a signal of diplomatic approval, or to strengthen a military ally.
Other reasons to give foreign aid include to reward a government for behavior desired by the
donor, to extend the donors cultural influence, to provide infrastructure needed by the donor for
resource extraction from the recipient country, or to gain other kinds of commercial access.
US Aid may often time buy assistance for American citizens in that nation, alter the course of
government laws or something similar in a way that benefits US interests.
In the case of Peru back in the 1990s, Peru conspicuously changed its policies of not allowing
religious missionaries in the country or even jailing them upon arrival. After a promise of aid to
bail out the Peso, suddenly Mormons and other groups had access to the nation without
harassment.
Types of Foreign Aid

1. Bilateral aid
Assistance given by a government directly to the government of another country is Bilateral Aid.
It is when the capital flows from a developed nation to a developing nation. Strategic political
considerations and humanitarian ones often direct Bilateral Aid. These are to assist in long-term
projects to promote democracy, economic growth, stability, and development.
2. Multilateral aid
Multilateral Aid is assistance provided by many governments who pool funds to international
organizations like the World Bank, United Nations and International Monetary Fund that are
then used to reduce poverty in developing nations. Though this sector constitutes a minority of
the USs foreign aid, the nations contributions make up a significant percentage of the donor
funds received by the organization.
3. Tied aid
Tied Aid is one of the types of foreign aid that must be spent in the country providing the aid (the
donor country) or in a group of selected countries. A developed country will provide a bilateral
loan or grant to a developing country, but mandate that the money be spent on goods or services
produced in the selected country.
4. Project aid
When the funds are used to finance a particular project, such as a school or a hospital, it is
considered to be Project Aid.
5. Military Aid
Military aid is never altruistic. The U.S. gave about $15 billion in Military Aid in 2011. Military
aid usually requires said nation to either buy arms or defense contracts directly from the USA or
in other cases just simplifies the process by having the federal government just buy the arms
itself and ship them over on military transport.
6. Voluntary Aid
This is aid usually in the form of charity. For example, Mdecins Sans Frontires (Doctors
Without Borders) is is an international humanitarian non-governmental organization best known
for its projects in war-torn regions and developing countries affected by endemic diseases
Advantages of Foreign Aid

The economic reasons for giving foreign aid:
For humanitarian reasons

To improve the countrys international image
Continue to build positive working relationships with other governments
To promote the conditions for peace and stability. Because many governments genuinely
believe well be safer and happier when everyone else is safe and happy.
Disadvantages of Foreign Aid

The economic arguments for not giving foreign aid:
According to critics, foreign aid does not promote faster growth but may in fact hold it
back by substituting for domestic savings and investment.
The growth of the modern sector is generally the focus of aid. As a result, it increases the
gap in living standards between the rich and the poor in Third World countries.
If the aid given is concerned with unproductive fields or obsolete technology, it will have
the effect of increasing the inflation in the country.
The biggest objection is that donor countries make interference in the economic and
political activities of the recipient country.
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Intelligent Economist

Types of Foreign Aid

What is the definition Foreign Aid?

Types of Foreign Aid

Advantages of Foreign Aid

For humanitarian reasons

Disadvantages of Foreign Aid

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The 25 Best Economics Podcasts Of 20161.5K Total Shares

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