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CHAPTER OUTLINE
I. Foreign aid is a controversial topic with detractors from the right and left. The
text provides various examples to highlight the nature of the public debate. By
de nition, foreign aid consists of grants or subsidized loans. Aid then falls
into one of the following main categories: of cial development assistance
(ODA), concessional assistance, and private voluntary assistance (PVA). Aid
may be provided bilaterally or multilaterally. The United States has been the
biggest absolute donor, but when aid is expressed as a percentage of GDP, the
United States becomes one of the smallest donors. In nominal terms, global
ODA has increased steadily, but in real terms total ODA was less than the
levels from the late 1980s and early 1990s. The largest multilateral agency is
the World Bank, but many of its loans are not characterized as foreign aid.
Likewise, the International Monetary Fund (IMF) does not provide much
foreign aid. Much of the recent increase in foreign aid has come from private
sources.
II. In calculating who receives foreign aid, different mea sures may be used. These
include total aid, aid as a percentage of gross national income (GNI), and aid
per capita. Though these mea sures may differ, all three indicate that aid does
not ow to the poorest countries. The motivations for aid may be summa-
rized into ve distinct objectives: to support foreign policy and po liti cal alli-
ances, to raise income levels and reduce poverty, to impact country size, to
strengthen commercial ties, and to reward newly demo cratic countries.
III. Has aid helped growth and development? In order to wade through the litera-
ture, the text suggests three viewpoints. In the rst viewpoint, aid on average
has a positive impact on economic growth and development. To support this
stance, the text draws from recent examples on aid helping health, education,
Foreign Aid
CHAPTER 14
98 | Chapter 14
and the environment; providing humanitarian relief; and supporting economic
and po liti cal stability. In the second view, aid has actually undermined growth.
To illustrate this point, the authors employ the ideas of absorptive capacity,
aid crowding out tax revenue, and aid de pen den cy. The third and nal view-
point is that aid has a conditional relationship with growth, helping countries
with good policies or institutions. Much of the support for this viewpoint
stems from recent empirical research, though the authors indicate the evi-
dence is far from clear– cut.
IV. Other aspects of foreign aid can be gleaned by analyzing donor relationships
with recipient countries. These relationships can be seen through the recent
tool of principal- agent theory because much aid is provided through an indi-
rect and distant relationship. The issue of conditionality lies at the heart of
many donor interests, and the text points out that there are shortcomings to
conditionality, namely that donors do not follow through on the conditions.
The future of aid can be improved through aid effectiveness as in improving
the selection of countries, having more recipient participation, increasing
coordination among all donors, and basing aid on results.
Boxed Examples
Box 14–1: The Marshall Plan
Box 14–2: The Commitment to Development Index
Box 14–4: Controlling River Blindness in Sub- Saharan Africa
Box 14–5: Food Aid and Food Production
There are ve boxed examples in the text. The rst describes the Marshall Plan as
laying the groundwork for future aid to developing countries. The second illus-
trates the Commitment to Development Index, which rates developed countries
on aspects other than giving aid. The third describes the history of foreign aid
provided by China. The fourth box study discusses a success story, the cost-
effective multilateral program that treated “river blindness” in 11 West African
countries. The nal study illustrates the relationships between foreign aid and the
production and prices of food.
In the New Edition
Chapter 14 has been updated to re ect recent trends in of cial development assis-
tance, which, in part, are the results of events in Af ghan i stan, Iraq, and Pakistan.
New boxes have been added on the Commitment to Development Index and on
Chinese foreign aid.
Foreign Aid | 99
Class Notes
The topic of foreign aid will surely generate a large amount of classroom discus-
sion. More discussion will be encouraged if students read controversial material
such as William Easterly’s White Man’s Burden. Students may bene t from a dis-
cussion on the de nition of foreign aid and the appropriate indicators for foreign
aid. Students can debate the issues by taking different positions on the three view-
points on aid and development. A DVD that covers the impact of aid, the World
Bank, or the controversy surrounding aid in general would be useful. The material
is nontechnical, but advanced students can read the papers with the econometric
tests of aid and growth and evaluate them.
QUESTION BANK
Concept Map
What Is Foreign Aid?
Who Gives Aid?
The Motivations for Aid
View 1
View 2
View 3
Multiple- Choice Questions
1. When the U.S. government provides a grant to build an electricity generator:
a. it counts as foreign aid.
b. it does not count as foreign aid.
c. it depends; sometimes it counts as foreign aid.
d. it counts as private assistance.
2. When Citibank provides a commercial loan to build an electricity generator:
a. it counts as foreign aid.
b. it does not count as foreign aid.
c. it depends; sometimes it counts as foreign aid.
d. it counts as private assistance.
3. A loan counts as aid if it has a grant element of at least:
a. 10 percent.
b. 25 percent.
c. 50 percent.
d. none of the above; it never counts as a grant.
4. When the U. S. government provides a grant to purchase military equipment:
a. it counts as foreign aid.
b. it does not count as foreign aid.
c. it depends; sometimes it counts as foreign aid.
d. it counts as private assistance.
5. Most aid has been given:
a. bilaterally.
b. multilaterally.
c. through private organizations.
d. through individuals.
6. In terms of total amount, which country gives the most aid?
a. United States
b. Japan
c. United Kingdom
d. Norway
7. Surveys indicate that the U.S. public believes the United States spends how
much of its bud get on aid?
a. 1 percent
b. 5 percent
c. 10 percent
d. 20 percent
8. In terms of aid as a percentage of GNI, which country gives the most aid?
a. United States
b. Japan
c. United Kingdom
d. Sweden
9. Primarily, the World Bank provides:
a. foreign aid.
b. loans to middle- income countries at market rates.
c. investment in private companies.
d. settlement of international disputes.
10. True or False: Being a former colony substantially increases the probability
of receiving aid ows.
a. True
b. False
c. True only for former colonies of Great Britain
d. True only for older colonies
11. Beginning in 2002, which country became the largest aid recipient in the
world?
a. Iraq
b. Iran
c. Vietnam
d. India
12. Aid falls to about 50 percent of its peak level after:
a. 6 years.
b. 12 years.
c. 18 years.
d. 24 years.
13. As aid increases, GDP growth:
a. increases.
b. decreases.
c. stays the same.
d. none of the above; there is no de nite relationship between the two.
14. A study on the ypaper effect in Indonesia revealed that aid:
a. crowded out government spending.
b. crowded in government spending.
c. was neutral to government spending.
d. was harmful to government spending.
15. Aid has helped in all of the following areas except:
a. health.
b. education.
c. emergency assistance.
d. stimulating tax revenue.
IDs and Paired- Concept Questions
These terms can be used individually as short- answer identi cation questions, or
they can be used in pairs. In the latter case, ask students to explain (1) the meaning
and signi cance of each of the two terms and (2) the relationship between them.
2. Foreign aid, nonconcessional assistance
4. Commitment to development index, foreign aid
6. Aid, growth
8. Absorptive capacity, aid
10. Future of aid, recipient participation