A Primer on Foreign Aid – 1: Essential Definitions

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Foreign aid is almost always in the news, at times more than others. All sorts of questions keep swirling in the air: questions about its nature, rationale, aims, effects, results, justification, symbolism, and even about its quantum. All through this heated debate the issue remains surrounded by a thick fog of obfuscation; many remain unclear of what exactly is being talked about. In this post, I intend to present a primer on foreign aid. Each of the opinions offered in the following sections can be contested; the aim is not to provide a definitive conclusion but to set the stage for an informed debate that employs common definitions and a shared point of departure.

Aid as a Transfer of Resources

Since almost every resource can be translated into a monetary equivalent we can simplify this discussion by thinking only in terms of financial transfers. Consider a spectrum of transfers whose one end is marked by a charitable donation and the other by a commercial loan. The charitable donation can be characterized as unconditional aid – think of your giving money to a needy person and moving on. On the other side, a loan at the prevailing terms of the market, to be repaid in full at the going rate of interest, does not fall in the category of aid.

In between these two extremes we can insert two other categories – grants and concessional loans. Grants are closer to charitable donations in that they are not to be repaid. However, they are not unconditional; some conditions are typically attached to the use of the resources. Concessional loans are closer to market loans except for the fact that the terms that are attached to them are not available in the commercial market. The ‘soft’ terms can pertain to an interest rate that is lower than the market rate; or a grace period before repayment begins that is longer than that offered by commercial lenders; or a repayment period that is longer than that offered by commercial lenders.

In this discussion of aid we will limit our attention to grants and concessional loans.

Donors and Recipients

We can identify three types of entities – individuals, institutions and countries – each of which can either be a donor or a recipient. Thus there are a total of nine possible sets of donor-recipient pairs: funds can be transferred by an individual to an individual, institution or country; or by an institution or country to the same set of recipients. Illustrative examples are the following: an individual can transfer funds to a needy student or to a church or to a government that sets up a fund for disaster relief activities.

In this discussion we ignore individuals as either donors or recipients. We are thus left with four donor recipient pairs: Institutions to Institutions (I-I); Institutions to Countries (I-C); Countries to Institutions (C-I); and Countries to Countries (C-C). In the discussion countries would be represented by governments or by agencies of the governments. Thus a recipient can be a particular ministry of a provincial government.

Because we are dealing here with foreign aid, we will restrict our attention on the donor side to foreign institutions or countries. We will further exclude non-governmental foreign institutions from the discussion.

Countries, Institutions and Types of Aid

There is no ambiguity in identifying countries; thus we can think of the US as a representative donor and Pakistan as a representative recipient. Institutions are less obvious. On the side of the donors, The World Bank, the Asian Development Bank and the agencies of the United Nations (like UNDP, UNICEF, WHO, etc.) are classified as institutions because they are stand-alone organizations that are not associated with any one country. On the side of the recipients, we can treat, for the purpose of this discussion, Non-Governmental Organizations (NGOs) as institutions because a number of donors are proposing to bypass recipient governments and transfer resources directly to NGOs. In practical terms, such transfers are relatively small and can be ignored for the moment. For the sake of completeness, we should also cater for private institutions (such as private universities and hospitals) as recipients but we also ignore them for the present; in terms of relative size they are more relevant for middle-income than for low-income countries.

Thus we are left with two donor-recipient pairs to consider in the discussion of foreign aid: Government to Government (G-G) and Institution to Government (I-G).

G-G transfers are known as bilateral aid and consist largely of grants. It should be kept in mind that the ultimate donors in the foreign countries are actually the individual citizens as taxpayers. A part of their tax contributions are appropriated by the national legislatures to be programmed as foreign aid to recipient countries.

I-G transfers are known as multilateral aid. The development banks (World Bank, Asian Development Bank) mostly provide concessional loans while the UN agencies provide grants. The term ‘multilateral’ indicates the fact that many countries contribute funds to the institutions that act as agents to channel them to the recipient governments.

What is Included in Foreign Aid?

This is the biggest source of obfuscation in the discussion of foreign aid. For example, if the US government has been transferring one billion dollars per year for the last thirty years to the Egyptian military, this is included in foreign aid. One can think of this as military aid, but the term ‘aid’ is a misnomer that clouds the entire discussion of foreign assistance as far as the ordinary citizen is concerned. Any transfers emanating from the departments of defense or intelligence agencies of donor countries should be classified and treated separately – they are more equivalent to payments for the promotion of the security interests of the donor countries.

Transfers intended for the social, economic and political development of a country and for improvements in the lives of citizens, broadly termed development assistance, are those that the person in the street identifies as foreign aid.

In general, the accounting of foreign aid is so opaque that even people combing through source documents are unable to agree on the disaggregation of total ‘aid’ into military or security assistance and development assistance; estimates vary all over the place. In the case of Pakistan one constantly hears that the US has provided a billion dollars a year for the last ten years but how much of it was for development is the subject of much uncertainty (for the very wide range of estimates for Pakistan – $180 million to $1 billion in 2010 – see here).

This uncertainty is compounded by the fact that an unknown quantum of aid ostensibly classified as development assistance is actually intended for narrower security-related purposes. Just as defense or intelligence agents can be disguised as diplomatic personnel, assistance for security purposes can be disguised, at least in theory, as development assistance. Even otherwise, the categorization of some forms of aid is ambiguous – assistance for control of narcotics in Pakistan is an example. Assistance from bilateral and multilateral donors that is intended solely for development purposes is formally termed Official Development Assistance (ODA).

Aid Agencies

Bilateral assistance earmarked for development is typically channeled by the donor governments through specialized national agencies like the USAID in the case of the US, DFID in the case of the UK and JICA in the case of Japan. Such agencies have their offices in both the donor and recipient countries. Multilateral development banks provide concessional loans only for development purposes; they have their headquarters in one country (the World Bank in Washington, DC; the Asian Development Bank in Manila) and field offices in most recipient countries. The United Nations has its principal headquarters in New York but specialized agencies of the UN have separate headquarters. Thus, while UNICEF and UNDP are based in New York, WHO and ILO have their offices in Geneva, FAO in Rome and UNIDO in Vienna.

Continued here.


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