20 Advantages and Disadvantages of Foreign Aid to Developing Countries

Foreign aid occurs when the resources of one country are given to another nation as a way to provide supports of some type. Almost any type of resource can qualify as foreign aid, including money, materials, or labor.

Governments in the roughly 40 developed countries often provide foreign aid to the developing world as a way to improve resource access and boost the local economy. It is possible for anyone to contribute to this process, which means there are organizations and individuals who send resources to others overseas as well.

You might hear the terms “economic aid,” “international aid,” or “developmental aid” when discussing resource transfers with someone. Each option is another way to describe the processes of foreign aid.

There are two types which trade hands each year around the world: multilateral and bilateral.

Multilateral foreign aid is a collective action taken by several governments, organizations, or individuals to help a specific cause. The bilateral version is the direct giving of resources from one government to another.

The United States offers roughly $30 billion in foreign aid to almost every country in the world each year. Here are the crucial points to review when looking at this subject.

List of the Pros of Foreign Aid

1. Foreign aid benefits the domestic economy at the same time as the international one.
The issuance of foreign aid can take on several different forms. Governments can offer it as an outright gift or grant that does not require any repayment. Another option is to offer a low-interest loan that allows for a small window of profit to the gifting nation. One of the most population ways to issue this resource, however, is to have it come with what is called a “donor caveat.”

The donor nation offering the foreign aid can stipulate that a specific percentage of the goods, sometimes as high as 30%, be purchased by the recipient from their domestic providers. If the U.S. gave foreign aid to the Philippines with this rule, then they would need to purchase American goods at that percentage to qualify for the aid.

2. Foreign aid creates a stronger relationship for all the parties involved in the transaction.
An individual, business, or government can offer foreign aid to take advantage of this benefit. People often receive benefits when they give them to others. Even the U.S. receives foreign aid each year. It isn’t always a large gift, but it is still a meaningful gesture. The Masai of southern Kenya once gave Americans 14 cows after the attacks of 9/11 as a gesture of solidarity. When anyone is willing to give, the goodwill it creates can create a lifetime of positive memories. This process helps to make the world a smaller, more peaceful place.

3. Foreign aid can reduce the impact of poverty.
80% of the world’s population lives on a salary of $10 or less per day. There are states in the U.S. where the minimum wage per hour is higher than that. When the wealthy countries contribute some of their excess wealth to the poor nations of the world, then they can make a positive impact on poverty in that region. The amount given by Americans to the rest of the world is equal to what it would take to alleviate hunger right now. Imagine what could happen if the world’s 40 wealthiest countries got together for a multilateral grant, contributing $1 billion each annually, to improve food production and distribution systems. That’s the power of foreign aid.

4. Foreign aid provides economic opportunities for the giver and the recipient.
Countries that give foreign aid can receive economic benefits without having a donor caveat in place because of the stimulus effort it creates. From the improved international relationships to the increase in job opportunities, this process can form the foundation of trade talks, security agreements, and compacts of mutual aid. Although there is an initial expense that taxpayers must face when this gift is offered at first, it will also pay dividends for a long time after thanks to the impacts it creates.

5. Foreign aid encourages national independence.
Foreign aid helped many countries remain independent throughout the 19th century as another wave of colonization swept around the planet. It supplies resources of national security even today because the funds are useful in the war against terrorism. When the funds can also supply strength to weak institutions, prevent corruption in governments, encourage transparency, and fight poverty, then there are fewer opportunities for a hostile force to step in and try to take over the government.

6. Foreign aid can offer agricultural improvements.
The world’s top 3 food producers are China, India, and the United States. The U.S. is regularly the top food exporter globally, finishing second in total production most years. Chinese agricultural needs often remain domestic. India sometimes outproduces Americans on this front too, which is understandable considering the size of each population center. When these world leaders in this fundamental economic product teach others how to maximize their resources, it creates agricultural improvements that can reduce hunger permanently while creating a potential trading partner in the future.

7. Foreign aid allows countries to help others without direct interference.
The provision of foreign aid allows a government, business, or individual to offer financial support to others as a way to solve local problems without direct interference on their part that could destabilize the region. Many countries offer the developing world funds that work to stop serious diseases like ebola and AIDS, fight addiction, combat terrorism, or begin building necessary infrastructure items. The eventual goal is to help these countries develop enough resources that they can eventually support themselves and no longer require the foreign aid for survival.

8. Foreign aid doesn’t require a significant amount to create positive change.
The University of Pennsylvania conducted a research study that asked Americans how much they thought their country spent of foreign aid out of the annual budget. The average amount that people guessed was 26%. The actual amount is less than 1% each year. Because the value of currency is much higher than what most other nations who need foreign aid have with their own, a little bit of assistance can offer a lot of support for a family in need.

Haiti is an excellent example of this advantage. If you have 1 USD, then you can exchange that for roughly 80 Haitian Gourde. A family who receives a $20 donation in foreign aid can purchase new clothing, livestock, medicine, shoes, and food supplies and potentially still have cash left over for an emergency. That’s why the value of foreign aid is such a powerful economic generator.

List of the Cons of Foreign Aid

1. Foreign aid can increase local prices.
When foreign aid is offered at any left, the goal is to help that nation create their own resource chain that can be used to create the essentials of life: food, water, clothing, and shelter. Most markets operate on the basis of supply and demand. If you give people more money to spend, then you give them more access to resources. That lessens the local supply, which drives up prices. Even though there is no cost associated with the gift, the price inflation may never go away. This process creates a cycle where foreign aid can become constantly necessary.

2. Foreign aid benefits those who operate on an economy of scale.
When governments issue a contract for foreign aid provision, they are wanting to work with companies that can provide the most value for the investment offered to someone else. That means small providers can struggle to stay competitive for this domestic economic gain. Most of the work will go to the biggest companies that can provide the cheapest work. It becomes another example of how those who have money can make more of it, while those who do not must struggle to survive.

3. Foreign aid is sometimes offered as a political tool.
Hyeon-Jae Seo wrote this for the Harvard International Review in 2017 regarding foreign aid. “Aid is never as simple as one country providing resources for another – rather, it is often a highly complex political maneuver with a multitude of intertwined purposes resulting in varying degrees of impact and potentially harmful consequences.”

It is very easy for foreign aid offers to become political tools. Countries can withdraw their resources as a way to create changes that they want to see in the government. This impact can create the effect of a coup without ever setting foot in the country.

4. Foreign aid can be used as a method of global favoritism.
Although the United States offers foreign aid to over 180 different countries each year, there are only five nations that receive over $1 billion in direct aid each year. That figure is for cash grants, gifts, or loans that are handed out each year. One of the most significant recipients of U.S. foreign aid is Israel. Americans currently supply $3.8 billion each year to the country in military aid that does not qualify as “foreign” aid under budgetary classification.

The same issue can be found with aid given to Lebanon. Over $16 million in laser-guided rockets were given to the local military by the U.S. as a “firm and ready” commitment to the country in 2018.

5. Foreign aid is easily wasted, especially when it is not wanted.
Between 1971-1994, over $1 trillion in foreign aid was handed out by the United States to help the 70 poorest countries in the world. Numerous other governments supplied aid to the tune of hundreds of billions in funding as well. By 1996, the United Nations was forced to make the declaration that 43 out of the 70 countries were in a worse financial position than they were before they received their first gift. When the money is not wanted in the first place or invested in areas that create economic stability, then foreign aid becomes a trail of cash that creates dependencies.

6. Foreign aid does not create more peace in the world.
Between 1971-1994, Somalia received $6.2 billion in foreign aid from the United States and still ended up being under U.S. military occupation. Haiti received $3.1 billion and experienced the same result. There are several countries experienced warfare or economic chaos while receiving at least $3 billion in aid during that same period. Chad, Burundi, Rwanda, Uganda, Zaire, Mozambique, Ethiopia, and Sudan are all on that list. The final three countries all received over $10 billion in foreign aid.

7. Foreign aid does not offer a guaranteed benefit.
Even though many countries will try to place donor caveats on the foreign aid they provide to others, there is not usually a system of accountability in place that allows officials to follow-up on where the money goes or how it is spent. The United States passed the Foreign Aid Transparency and Accountability Act in 2016 and there is no plan in place to create any oversight of the money that is headed to other countries. Even more problematic is the fact that the U.S. now has multiple data points to study because of the legislation.

As Representative Gerry Connolly (D-Virginia) told the press in January, “Let’s have uniform data so we’re all singing from the same hymnal. We could all make different conclusions about what that data means, but to have different sets of data… in no way is in the spirit of our bill.” When there is no accountability, then countries can spend the money on anything they want.

8. Foreign aid creates dependencies when not correctly managed.
Mozambique gets to make another appearance in the list of disadvantages of foreign aid. Ever since they started receiving assistance from the United States, the level of dependency as a percentage of their GDP rose by 16 percentage points in less than 20 years. Ghana saw an increase of 20 percentage points using the same measurement. When nearly half of a country’s budget comes from financial assistance provided by other nations, then they are no longer in a position to develop new resources. They will sit and wait for the next check to come their way.

9. Foreign aid can cause special interests to get involved with foreign governments.
Long-term foreign aid typically reduces the effectiveness of governing at the local level for the recipient. One of the primary reasons for this disadvantage is the fact that there are contractors and special interests involved in the process when non-money aid is offered to a foreign government.

It is in the domestic interest to maintain those relationships because it keeps money flowing through the company. Lobbying efforts form to keep elected officials renewing the aid packets to ensure the revenues keep coming in to support the company. It doesn’t take long for the foreign aid to become more about what it can do for businesses and special interests more than what it does for those who receive it.

10. Foreign aid can encourage conflict.
Countries in Africa who receive foreign aid are under the suspicion of creating conflict or prolonging its existence because the presence of violence brings more money into the country. There are times when this resource can offer stability to a country, but it should never be tied to a specific regime or structure. When that occurs, then it becomes advantageous for the recipient to remain unstable because that guarantees more access to free or low-cost resources without the need to offer anything in return.

11. Foreign aid reduces or eliminates market pricing.
When there are donor caveats in place for foreign aid, then the giver creates a market shift in the economy of the recipient. The cheaper, subsidized goods that the government must purchase to receive the aid makes it challenging for local producers to compete with that pricing. That leaves domestic companies with two choices: lower their prices to match or go out of business. Most choose the former instead of the latter, so it impacts the quality of life adversely because of the artificial competition in their marketplace.

12. Foreign aid doesn’t create wealth.
The purpose of foreign aid is to provide an option for survival. People and governments can experience a positive economic impact when its presence is available in society. What it does not offer is an opportunity to create wealth at the household level of society. It will not usually create a higher rate of savings or investment in the general population. There are even times when this resource creates lower levels of wealth because households focus on spending or see their currency devalued because of the artificial infusion of capital.

The pros and cons of foreign aid can be a tricky balancing act to navigate. On one hand, there is a natural desire to help other people and countries who find themselves in a disadvantaged position. On the other hand, there is the need for oversight and accountability that can put a rift in some international relationships. When we get it right, then incredible things can happen in our world. That’s why each