Concept of Foreign Aid
The concept of foreign aid involves the transfer of real resources from governments or public institutions in developed countries to governments of less developed countries (LDCs) in the third world. There are many types of flows of foreign resources, and it is important to identify them. There are generally two broad categories of foreign capital flows – official and private.
There are two types of official capital flows:
- Bilateral and
Governments of donor countries provide capital to governments of recipient countries through official bilateral flows. A multilateral capital flow is one that originates from multilateral organizations such as the World Bank, the United Nations, and the IMF. The two types of official flow can be in the form of grants, loans, or grant-like contributions. Since grants represent a net addition to the resources for development, they should be considered as the best kind of foreign aid. World Bank, for example, gives loans at lower interest rates than those on the capital markets. In cases where loans are granted to the LDCs at a concessionary rate for very long periods, such as 40-50 years, the inflow of foreign resources is characterized as foreign aid, although foreign private investments are not exactly foreign aid because they are made on commercial terms.
Over the years, the degree of reliance on foreign assistance has increased for many developing countries. It is unfortunate that many times the growth in aid flows has not been matched by adequate administrative capacity to manage them. Fiscal economists can be affected by this in several ways. Development assistance aims to relieve poverty, boost investment and increase the growth rate of GNP among developing countries.
Foreign aid, however, has not always been able to achieve these objectives since the motives of donors for giving aid and recipients for accepting it often conflict with the economic objectives of foreign aid. Over long periods of time, there has never been any historical evidence that donor countries provided their support without receiving some form of recompense (political, economic, military).