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Types of aid

Assistance to developing economies comes in a number of different forms. The largest single source is known as aid. This can be given in three main ways. These are:

  • Humanitarian - which can both be by individual country to country or via a major organisation such as one of the UN agencies. This is not a loan and is normally sent to help against a specific problem, e.g. drought.
  • Bilateral - which is given by one country to another. It is a loan, though may be subject to a long period prior to re-payment commencing, and granted as soft or below market terms.
  • Multilateral - which is when separate countries pay money into one central organisation, say the IMF, and it then determines who receives money and for what. So, multilateral aid is given via one of the large international agencies.

Aid may be official, in which case it is administered by government or government agencies, or it may be unofficial, in which vase it is administered by a non-government body, such as a charity.

Grants might be directed at technical services, or scholarships for some students to study in a particular country, and grants do not have to be repaid. Aid might also be trade related, in that the monies will only be made available if the receiving country agrees to buy goods or services from the donor nation. This is called tied aid - the aid is tied to particular contracts, i.e. it has strings attached.

Successful aid should be an attempt to:

  • Overcome the low savings ratios recorded in developing economies. Most poor people consume the vast majority of what they earn.
  • Help reduce foreign exchange outflows, so allowing the domestic government to use such monies to build the necessary infrastructure for development.
  • Reduce the dependency on private investment, which may not arrive or will only be found at a high price to the country seeking such funding.

Successful aid should also:

  • Improve the living standards of the poorest people in the receiving country. This is not always possible, as government is normally based in the capital, which is by definition an urban centre. Like all political regimes, those in developing countries tend to serve those who elected them to office and power. Those who did not tend to receive little. If this persists, it can be a cause of unrest and even coups and military takeovers.
  • Move with the times and accept that what was fashionable several years ago may no longer be. Local opinion and knowledge is increasingly used when deciding on what to invest in and why.
  • Not simply provide cheap food, except in an emergency, as this undermines the domestic agricultural sector. In some countries a once self-sufficient farming sectors have lost part of their domestic markets to food aid and now have to import part of their staple food crop.
  • Allow choice to be exercised by the receiving country. A problem with tied aid is that it reduces choice and the developing economy may not be getting the best deal.

So what are the arguments for and against aid? Have a think about them, jot down some ideas and then follow the links below.

Arguments for aid

Arguments against aid

It is possible to take various positions on aid, and those on the left and right of the political spectrum might both oppose it, but for different reasons. Where do you stand? Have a look at the table below and see if you can identify your position.

Left Left / Liberal Liberal / Right Right
No! Yes, but ... Yes and No!
Aid is a hypocritical neo-colonialist device to make the rich richer We have a moral duty to help those who, through unfair terms of trade, for example, have been the victim of economic injustice at our hands It is in our interest to aid the poor - when they are richer they can buy more from us and help expand world trade. If a country cannot develop without handouts it will not develop with them. What holds less developed countries back is the people who live there.
Aid is used to prop up repressive and reactionary regimes Aid should be directed towards progressive countries We should aid friendly countries, or ones of strategic defence importance. Aid centralises money and power into a few government hands. It makes the possession if political office critical and leads to corruption, instability and coups d'etat.
Aid is creamed off by corrupt ruling elites in developing countries and therefore increases inequality Aid projects should help the redistribution of wealth to the desperately poor. Only the adequately nourished and educated can demand structural changes. Aid should be given to people who can use it effectively to modernise their society and work more efficiently. Aid depresses individual initiative and reinforces torpor, fatalism and beggary.
Loans and grants tied to the purchase of Western goods distort economic development in poor countries - and increase their dependence on the rich. Aid should be given as grants only and recipients should be free to import from wherever they like. Sensible aid can benefit both donor and recipient. Tied aid reduces pressure on the donor's balance of payments and allows more to be given. No 'lame duck' home industries should be subsidised - by tied aid or any other means. And if tax payers in the rich countries were actually consulted about aid they would refuse to give it.
Aid goes largely to governments sympathetic to capitalism. It paves the way for private investment that siphons wealth from poor countries. Aid should be given solely on the basis of need and the potential for social change. Private investment is not aid and can be damaging. Private investment is an excellent form of assistance. And aid can help it function properly by providing economic and political stability. If capital is required, and can be profitably used, it will be available commercially. Grants and interest-free loans only encourage inefficiency and waste.