21 Advantages and Disadvantages of Foreign Aid

Foreign aid is the giving or loaning of resources from one country to another or from an international firm to a foreign country. It usually involves money, labor, or materials, but can include food, water, or other commodities that may be necessary to provide assistance to local population groups. It is always a voluntary transfer.

In the United States, foreign aid is more specific in definition. It refers to economic and military assistance that the government provides to a foreign government. The aid can be offered directly or provided through indirect means. Indirect foreign aid may not always be classified as official aid for budgeting purposes.

The United States provides about $50 billion in foreign aid each year, which is about 0.2% of the GDP. Most officially classified foreign aid from the U.S. is for economic assistance. When all direct aid is considered, including personal remittances, another $75 billion in officially classified aid is provided.

The advantages and disadvantages of foreign aid take a look at the reality of this transfer of wealth. The average American believes 25% of the government’s budget goes to foreign aid. In reality, about 1% of the budget is directly associated with this practice.

List of the Advantages of Foreign Aid

1. It helps other countries fight local problems more effectively.

Foreign aid provides necessary resources for countries to fight local issues that may affect their quality of life. Issues that foreign aid helps to combat include terrorism, HIV and AIDS, and narcotic addiction. Foreign aid can also be used to improve agricultural processes, develop local support resources, and provide training for local populations so they don’t have to continually rely on aid to have a good life. It provides essential resources for survival at a moment’s notice so that recovery can begin.

2. It helps to create an independent world.

Providing financial assistance to other nations allows them to retain their independence. In the 18th and 19th centuries, many countries sold land as a way to raise money. The Russian Empire sold Alaska to the United States for $7.2 million. By offering foreign aid instead, a country can maintain its borders during times of need without worrying about an invasion or trying to determine which part of it should be sold off to create a balanced budget. At the same time, their economy is able to remain stable.

3. It benefits the country providing the foreign aid.

Providing help during a time of need is more than just good ethics. It is also good politics. Foreign aid encourages positive diplomatic relationships. It can create new job opportunities, trade agreements, and even better security arrangements. Although providing foreign aid is a direct cost that taxpayers from the providing nation bear, there are numerous rewards that come from such an action that isolationism could never provide.

4. It stops the effects of poverty.

Foreign aid allows developing countries to have access to food, water, and shelter resources that they may normally not have. Billions of people live on $2 per day or less. The cost to feed these people is often less than $0.25 per meal. By working to eliminate poverty, providing nations can develop new resources in the countries that receive aid so that everyone can benefit in some way.

5. It creates a positive back-and-forth relationship.

The United States regularly receives foreign aid, just as it regularly hands it out. Russia donated over 60 tons of supplies in the aftermath of Hurricane Katrina. The United Arab Emirates has built a neonatal facility in Missouri and donated Apple computers to local students. Turkey provided foreign aid to the U.S. for clean drinking water in a remote area of Oregon. Even Kenya once donated 14 cows as an act of goodwill after the events of 9/11. With foreign aid, what goes around typically comes around.

6. It can save lives.

Foreign aid is often offered when there is a national emergency that occurs. That may be due to an earthquake, a hurricane, a volcanic eruption, or some other type of natural disaster. It is provided as a way to help people gain access to food and clean water supplies when they may have zero access to those supplies for an extended time period. Once the basics are provided, people are able to focus on being able to rebuild their lives. In many ways, foreign aid is the first step toward the hope that can be found during the process of starting over after a disaster hits.

7. It is often given with a donor caveat.

Foreign aid may be given for altruistic reasons, but the implementation of that aid is often done with a specific purpose. Whether the aid is for developmental, humanitarian, or emergency purposes, many nations use “tied” foreign aid instead of an outright donation. That means there is a specific portion of the foreign aid that must be used to purchase goods or services from the country providing the donation. Spain, Canada, and the United States lead the way in tied aid and about 30% of all total foreign aid is tied in some way.

8. It doesn’t have to be a gift or a grant.

Foreign aid is often perceived as a gift or a grant from one entity to another. That is because the idea of “aid” is that it is something which does not need to be repaid. Foreign aid can also be given in the form of a low- or no-interest loan. That means the donor can have a reasonable expectation to receive the funds back at some point. If the loan is tied to a certain percentage so that goods and services must be purchased from the donor nation as well, both countries can benefit from the donation immediately and on a long-term basis.

List of the Disadvantages of Foreign Aid

1. It does not provide a guarantee of benefit.

The United States currently provides foreign aid to over 200 countries every year. Not every country offers any form of aid or benefit in return. There is a certain positive aspect to providing help when it is needed without asking for help in return. Some countries, however, take the aid and do what they want with it. Unless there is direct oversight on that foreign aid, it could be used against the providing nation.

2. It can be a way to show favoritism.

There are currently 5 countries that officially receive more than $1 billion in official foreign aid every year from the United States. When unofficial aid is counted, Israel tends to be the top benefactor of aid, with an estimated $130 billion in annual resources provided. That type of favoritism can be unsettling to a region, especially if there are tensions between the nation receiving the aid and its neighbors. Depending upon the circumstances, high levels of foreign aid can even make the providing nation become a target.

3. It is often under-utilized, if it is even used at all.

Italy sent several supplies to the United States after Hurricane Katrina. Once the shipment was received, it was left outside to spoil, never used. Foreign aid is often sent in a government-to-government manner, so it is left to the recipient to disburse supplies. Corrupt officials can take the aid for themselves, spend it on certain classes of people in society, or hoard them for future profit. Although foreign aid is gratefully received, it often fails to reach the people who need it the most.

4. It can create a dependency.

Foreign aid can be helpful. Countries like Peru and China have received high levels of foreign aid in the past and now provide their own aid to others. It can also create dependencies on that aid. Aid dependency, since 2000, has increased in Mozambique from 58% to 74%. In Ghana, it has increased from 27% to 47%. Even in a country like the Philippines, where foreign aid is no longer a top financial priority, it has created an over-reliance on cash crops to fuel the nation’s economy.

5. It can cause donors to get involved with governing.

Whether the foreign aid is being provided by a government or an international agency, the long-term provision of it has been found to reduce the quality of governing within the recipient nation. It reduces the amount of accountability that is placed on the leadership of the government. Instead of being accountable to their people, the leadership leans toward ensuring that the donor is pleased with their actions so that the foreign aid continues to flow. That can lead to political upheaval, coups, and even civil war.

6. It can perpetuate conflict.

There are some countries that receive foreign aid because they have political instability. Zimbabwe and the Democratic Republic of Congo are two countries with a lengthy reputation of receiving foreign aid in this manner. When foreign aid is viewed as being tied to the stability of the government, then there is a greater incentive for the country to remain unstable so that it can continue receiving the funds that it desires. This perpetuates a cycle of dependency that purposely starts conflicts simply to gain long-term access to some free cash.

7. It has no consistent relationship with investment and growth.

There is research available that suggests foreign aid can have a positive impact on economic growth, but it generally does not impact the levels of saving or investment that occurs within the recipient economy. It may even cause lower levels of saving and investment as reliance on the aid replaces the need to earn an ongoing income.

8. It can eliminate free market price controls.

With 30% of the world’s foreign aid designated as tied aid, competition levels are immediately reduced for the goods and services that are required to be purchased. The firms that are involved can charge up to 30% in excess costs simply because the recipient nation is required to purchase their items. When foreign aid is forced into specific sectors, its value tends to plummet. The effectiveness of the aid is reduced. Any growth that could be achieved becomes unsustainable.

9. It can affect global trade.

Foreign aid, when it is tied, tends to act as a subsidy for domestic firms. Those firms may be in declining sectors and could even be uncompetitive domestically. By requiring a purchase, the trade markets become distorted because the foreign aid is being used as a device to facilitate the transfer of goods. Some firms may even pressure the government to donate the tied aid to wealthier nations because there is a greater long-term incentive to establish relationships there instead of with low-income nations.

10. It can be used for future influence.

Foreign aid is often used to put political pressure on the receiving nation to perform a certain action. It can also be used to place economic pressure on the receiving country. Even if it is not officially part of the agreement, it is not uncommon for the donor government or international organization to expect a future favor in return for the aid being given.

11. It often benefits those who operate on large scales.

Foreign aid is often given to help improve food production, water availability, and other basic necessity resources. When that aid is given, the expectation is that the resources provided be stretched as far as they can possibly go. In many circumstances, that means smaller providers receive few, if any, of the benefits that are offered through the foreign aid. Large-scale providers are able to use those resources to improve the quantity and quality of what they offer while small-scale providers are left in an uncompetitive state.

12. It can increase local costs for basic supplies.

The goal of foreign aid is to develop projects, networks, and resource chains that provide safe food, clean water, and improved living conditions for people in some way. This even occurs in developed countries, such as the aid the U.S. received during Hurricane Katrina. What this means in reality, however, is that development projects can lead to higher local costs for basic needs. Although the initial handout of aid may be free, once the situation stabilizes, people may be forced to pay more for their basic needs than they did before the emergency occurred.

13. It can be a destructive force on the local environment.

About 20% of the world is either homeless or lives in what is classified as “poor housing.” That usually looks like shanties or makeshift homes that are built on vulnerable lands that may be unstable. Flooding and landslides are common factors that affect the safety of these homes. Foreign aid often encourages the building of these “shanty towns” because it seems like an immediate benefit, but the long-term results can be quite destructive. That is why foreign aid should be directed toward skill-building resources to utilize traditional techniques to build better housing resources.

The advantages and disadvantages of foreign aid show us that it is an ethical and moral action that offers many positive outcomes. Both the recipient and the donor can benefit in numerous ways. It can also be the cause of strife and conflict, especially if the distribution of the foreign aid is not supervised. Even when developed countries receive foreign aid, there is a high risk that it may go to waste. That is why there must be accountability, from beginning to end, for this process to maximize its potential benefits.