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Foreign Aid: Detrimental or Beneficial? Research Paper



Over the last five decades, several countries and blocks in the western world as well as Japan have spent billions of dollars in terms of foreign aid by assisting governments, international and local organizations to cope up with various social, economic, political, and security challenges. Nevertheless, what exactly is foreign aid? According to Riddell (2007), foreign aid is the international transfer of commodities, services, and financial means from the supporting country or international organization for the benefit of the target country or population. According to Riddell (1987), the aid can be in any form such as military, economic and humanitarian assistance. Food, equipment, commodities, credit, grants, cash, technical training, and technical advice are the major forms of foreign aid in the world today. In the past, Egypt and Israel, due to their location in the Middle East and cordial relationships with the west, have been the major beneficiaries of foreign aid. On the other hand, the western world has been a major source of foreign aid in the world.

For instance, Germany has been funding Israel since 1948 as a way of compensating the Jewish community for the atrocities they suffered under the Nazi. Similarly, Egypt and Israel have been receiving massive foreign aid from Western Europe and the US to help them cope with the political and insecurity problems in the Middle East (Alesina & Dollar, 2000). However, since America’s military intervention in 2002 and 2003 respectively, Iraq and Afghanistan have become the major beneficiaries of foreign aid from the US. Nevertheless, Africa remains the major destination for foreign aid from the Western World, Eastern Europe, Japan, and recently, China. It is estimated that the foreign aid business is worth more than $100 billion and it is expanding every year as more and more countries and international organizations continue injecting millions of dollars into projects in Africa and Asia. However, the major issue is to determine the impact of foreign aid projects in destination countries. Does foreign aid work? Are the positive outcomes realized in the long-term perspective? Is there evidence of the negative impacts of foreign aid on socioeconomic and political development in the destination countries? Therefore, the purpose of this paper is to determine whether foreign aid is good or detrimental and whether it should be continued or discouraged based on the outcomes.

Donors and recipients

In modern times, official development assistance (ODA) has become the major form of foreign aid to third world countries. The purpose of ODA is to help populations of the third world nations overcome poverty. It is mainly obtained from developed nations in the form of bilateral grants between nations, loans or funds for nongovernmental organizations as well as international organizations. For instance, the World Bank and the international monetary fund are the best examples of international organizations that receive and distribute millions of dollars in the form of foreign aid every year.

Since the 1960s, the US, Canada, Western Europe, and Japan have been the major sources of foreign aid among developing countries, mostly in Africa, Asia, and South America.

Initially, the western world used foreign aid to liberalize politics in the emerging countries post-independence, especially between the 1950s and 1980s. Some studies have shown that apart from alleviating social and economic problems, the western world initially wanted to use foreign aid in the developing and emerging markets to fight communism and Marxism and instead encourage them to liberalize their markets. Some scholars cite this as the major cause of the problems associated with the lack of correlation between foreign aid inflows into the target countries and the level of economic and social development. Western countries have been aiding NGOs when regimes become enraged by foreign influence on local political and socio-economic systems (Bornstein, 2007). Some scholars have shown that this form of foreign aid brought negative impacts rather the spurring growth and development in some countries. For instance, Pakistani Christian groups received massive funding in the 1970s and 1980s from the western world, which the local governments disapproved of and attempted to halt. Using NGOs, western donors attempted to reshape the political and social systems in these countries (Findley, Powell, Strandow & Tanner, 2010). Similar examples are evident in Afghanistan, Ethiopia, and several other countries in the developing world, where donors fund certain NGOs, but the governments oppress these groups.

Does foreign aid give the expected results?

In general, the major problem is to find adequate evidence to determine whether foreign aid is effective in destination countries or populations. In the earlier times, there was an assumption that foreign aid would help the developing nations fight poverty and insecurity, spur growth and development, and eventually ensure that the population is independent.

Existing evidence shows that some foreign aids have spurred growth and development in the target countries, raising the economic and social welfare of the population involved. For instance, Israel depended on foreign aid to develop mega-projects such as agriculture and housing. German and American aid to Israel in the form of financial assistance and technical expertise helped Israel stabilize her food production through irrigation projects, despite being a desert land. Similarly, the HIV/AIDS projects in Africa, initiated by America, the UK, the European Union, and Japan, have produced positive results through research and provision of cheap and sometimes free drugs to cope with the HIV/AIDS disaster on the continent. It is also worth noting that the foreign assistance that Rwanda received after the 1994 genocide has spurred growth and development, political stability, and improved health and education sectors. Rwanda has used foreign aid from the western world to improve infrastructure, political and social institutions, and the economy in general. The aid is ensuring that Rwanda recovers fully from the effects of the 1994 genocide.

Aid and Growth

However, this is not always the case. The above cases are examples of the few foreign aid projects that have produced positive results. Most of the foreign aid channeled from the developed nations to the developing and poor countries does not show positive results. Several studies carried out in the last three decades have shown that the correlation between the amount of inflow of foreign aid in a country and the growth rate is relatively inconsistent. Most studies have shown that the correlation is zero, suggesting that foreign aid does not work as expected. Why is this so? Some studies, however, have shown that foreign aid can only work in countries with good governance and effective political and socioeconomic structures to ensure that the resources are used for the right purpose. For instance, studies have shown that good governance is the standard for determining whether foreign aid to a given country works as expected (Green & Haines, 2008). The researchers indicated that for foreign aid to spur growth and development, the destination country must have sound economic, social, and political policies and a low level of corruption. This led to the use of the ‘Millennium Challenge Accounts’ program by the US. Other similar efforts have been initiated by some western sources of foreign aid in an attempt at curbing the huge losses incurred due to corruption and poor policies in the destination countries.

Does foreign aid work?

Studies have shown that foreign aid that works as per the expectations is exclusively limited to cases of emergencies and humanitarian interventions. For instance, foreign aid is given during disasters such as the recent tsunami in Asia, earthquake in Haiti, and famine and HIV/AIDS in Africa are some of the few examples that work because they lessen the weight of the disaster. However, these interventions are temporary and they are for humanitarian purposes, which means that the long-term impact is not considered. Otherwise, most studies have shown that foreign aid aimed at spurring growth and development for poor and developing nations fails to work due to several reasons.

First, the political, economic, and structural setups in the recipient nations hinder growth and development, despite the amount of aid received. For instance, countries faced with corruption, oppressive regimes, political instabilities, poor social and political institutions, and ineffective economic systems are not likely to gain from foreign aid (Collier, 2006). It has been shown that most of the resources received end up being misused by a few individuals rather than helping the target population. For example, studies have shown that some 75% of the NGOs in countries like Ethiopia and Uganda are briefcase institutions, unregistered and owned by cartels. They receive foreign aid for helping the local population to achieve economic and social development, however, few individuals spend the money.

Secondly, foreign aid creates ‘dependency syndrome’ rather than spurring growth. Foreign aid, unlike loans that need to be repaid, is likely to be misused because it is freely available. The recipients are likely to live beyond their means because the consequences are minimal. Foreign aid creases a culture of bad financial behavior in which the recipients use the resources for other purposes other than the expected ones. Even in cases when foreign aid is used for the right purpose, the projects fail to be maintained because the population expects foreigners to provide maintenance for them. This is exemplified in Pakistan, where the government relies heavily on foreign aid even for its annual budget. This makes the government less committed to tax the local economy than in countries receiving little or no foreign aid. This has produced a culture of tax evasion by companies as well as individuals. The long-term effect is that economy of Pakistan is underdeveloped, with the government collecting less than 10% of the GDP in taxes and facing a heavy annual deficit of more than 6% per annum (Blue, 2006).


The problems have shown that foreign aid does not always work as expected. Some receiving nations have realized the negative impact of free foreign aid and are extensively calling for increased trade with foreign donors rather than free resources. For instance, African countries like Nigeria, Kenya, Uganda, Zambia, and Ghana have reduced their dependencies. Some of them are no longer considering foreign aid, including loans, for their annual financial budgets. Instead, they are encouraging foreign nations like the US, the European Union, Japan, and China to involve in active trade. China has taken this advantage and is carrying out mega projects in Kenya, Ethiopia, Uganda, Tanzania, and several other developing countries.


Alesina, A., & Dollar, D. (2000). Who gives foreign aid to whom and why?. Journal of economic growth, 5(1), 33-63.

Blue, K. (2006). Practical Justice: Living off-center in a self-centered world. Chicago, IL: Intervarsity Press.

Bornstein, D. (2007). How to Change the World: Social entrepreneurs and the power of new ideas. London, UK: Oxford University Press.

Collier, P. (2006).The Bottom Billion: Why the poorest countries are failing and what can be done about it. London, UK: Oxford. University Press.

Findley, M. G., Powell, J., Strandow, D., & Tanner, J. (2010). The Localized Geography of Foreign Aid: A new dataset and application to violent armed conflict. Uppsala, SE: Brigham Young University Press.

Green, P. G., & Haines, A. (2008). Asset Building and Community Development. New York, NY: Sage Publications.

Riddell, R. (1987). Foreign aid reconsidered. Baltimore, ML: Johns Hopkins University Press.

Riddell, R. (2007). Does foreign aid work? London, UK: Oxford University Press.

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IvyPanda. (2021) 'Foreign Aid: Detrimental or Beneficial'. 18 March.

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