Foreign Aid has always been scrutinized for the fact if it is actually effective for the country receiving the aid. The stated goal of foreign aid is to reduce poverty and promote economic growth in the country. There have been mixed results with the outcomes of the countries receiving the aid.
Foreign aid critics, noble laureates Friedman and Bauer (1950) argue that aid strengthened and enlarged central governments and as a result aid did more damage than good, these critics see aid as being used as a political tool that distorts incentives and increases corruption. Brautigam and Knack (2004) concluded and found evidence that suggested that foreign aid has a negative impact on ...view middle of the document...
It than explores some of the problems with aid and how to improve aid effectiveness.
What is Foreign Aid
Foreign aid comes in three forms financial flows, technical assistance and commodities given by the residents and governments of one country to the residents and government of another. It can either be in the form of grants or subsidized loans.
An official source on foreign aid is the Development Authority Committee (DAC) of the Organization for Economic Co-operation and Development (OECD). DAC became part of the OECD on 23 July 1961. It is the largest international organization with 30 member countries, which are most of the major aid donors in the world. The World Bank, IMF and UNDP participate as observers.
According to the DAC, for assistance to be counted as official foreign aid it must meet two criteria’s:
• 1. Assistance has to be designed in a way, in which it promotes welfare and economic growth of a country.
• 2. The aid provided should either be in the form of a grant or subsidized loans.
Foreign Aid has two types Bilateral Aid and Multilateral Aid.
Bilateral Aid is when one country directly gives assistance to another country without having an intermediary. The major agencies for Bilateral Assistance are the US AID, UK department for international development (DFID), Japan International Cooperation Agency (JICA), Canadian International Development Agency (CIDA) and Swedish International Development Cooperation Agency (SIDA).
Multilateral Aid pools together resources from many donors, the major multilateral agencies are the World Bank, IMF and African, Asian and Inter-American development banks.
Motivations for aid
The donors have a variety of motivations to provide aid to low-middle income countries of which a few are regarding economic development, Dwight H. Perkins, Steven Radelet, David L. Lindauer, Steven A. Block (2013) explain that:
• Policy and alliances regarding the recipient country are the major motivators for donor countries to consider when discussing foreign aid deals.
• The income level and poverty levels of the recipient country play a major role in deciding the allocation of aid, the lower the income level and higher the poverty level the more aid grants and subsidized loans they receive.
• Country size is also an important factor in the...