Foreign Aid

Foreign aid is a cross-border transfer of financial resources, technical advice, real capital, or other assistance. In most cases these transfers originate with donors from richer countries. In its broadest context the term “foreign aid” can be applied to any development assistance, humanitarian or emergency assistance, or military assistance. Foreign aid is derived from a number of sources. Bilateral aid typically travels between two governments. Multilateral aid travels from international organizations to governments, nongovernmental organizations, or businesses. Private foundations, corporations, voluntary organizations, colleges and universities, and other elements of civil society supply foreign aid to the needy. Individuals, through remittances of money to their home countries, also contribute to financial flows between countries.

Members of the Organization for Economic Cooperation and Development (OECD) represent one major source of foreign aid. Within the 34-member OECD is the Development Assistance Committee (DAC), which consists of 26 member nations. DAC coordinates the distribution of members' foreign aid, called official development assistance (ODA), to poorer countries and to multilateral development organizations such as the World Bank and regional development banks. ODA includes aid for the “economic development and welfare of developing countries”^[1] but does not include military assistance to recipient countries. Measured in current dollars—that is, dollars not adjusted for inflation—DAC countries committed $125.6 billion in net ODA in 2012 to support projects to improve education, build infrastructure, and attend to humanitarian needs.^[2] Net ODA is the amount of aid once various repayments have been made by recipient countries to donor countries. The top recipients of gross ODA in 2011 are shown in Table 13.5.^[3] Gross ODA is the total amount of aid before any repayments are made by recipient countries to donor countries.

The largest portion of ODA is committed to the world's poorest countries. Ranked by world region, the top recipient of gross bilateral ODA in 2011 was Sub-Saharan Africa (37 percent of ODA), followed by South and Central Asia (20 percent), Other Asia and

Table 13.5 Top Ten Recipients of ODA, 2011

Source: Organization for Economic Cooperation and Development, Development Assistance Committee, “Total DAC Flows at a Glance.”

Table 13.6 Top Donors of ODA, 2012

Source: Organization for Economic Cooperation and Development, Development Assistance Committee, “Table 1,” Aid Statistics, March 4, 2013.

Oceania (17 percent), Latin America and the Caribbean (12 percent), the Middle East and North Africa (10 percent), and Europe (4 percent). Ranked by countries' income classification, the highest percentage of bilateral ODA was allocated to the least developed countries (LDCs) and other low-income developing countries (46 percent), followed by the lowermiddle-income countries (36 percent), and upper-middle-income countries (18 percent).^[4]

The flow of ODA to poorer regions has generally increased over the past three decades. Measured in constant 2010 dollars ODA increased from $59.8 billion in 1981 to $128.4 billion in 2012, more than doubling during the 30-year period. Measuring ODA in constant, inflation-adjusted dollars more accurately reflects the true growth of ODA over time. Despite this increase in ODA, the average ODA granted by DAC member nations in 2012 was just 0.29 percent of their combined GNI—far below the unofficial United Nations ODA guideline of 0.7 percent of GNI. Just five DAC countries met the unofficial target of 0.7 percent of GNI. The largest ODA contributors by dollar amount and percentage of GNI in 2012 are shown in Table 13.6.^[5]

The amount of foreign aid entering the world's poorer countries is still debated. The Organization for Economic Cooperation and Development (OECD) has begun to quantify some of the non-ODA sources of foreign assistance. The OECD found that nonODA sources accounted for more than $400 billion in aid in 2011. Non-ODA sources of aid include groups such as non-DAC countries, various international organizations, and private foundations. Further, the OECD estimated that in 2011 financial remittances added another $345 billion to global foreign aid. Remittances are transfers of money sent by people working outside their native country to people, usually family members, in their home country. The OECD estimated that ODA, non-ODA, and remittances combined accounted for more than $900 billion in aid to the developing world.^[6]

The effectiveness of foreign aid is debated. One concern is that foreign aid might promote a culture of dependency rather than a helping hand toward sustainable economic development. Another concern is that foreign aid might not reach intended recipients. This concern stems from the absence of good governance in some recipient countries. Corruption, cronyism, and other abuses of the public trust sometimes results in the theft or misuse of foreign aid. A third concern is that some aid efforts are inefficient and poorly coordinated. This is a special concern during crisis relief when humanitarian efforts might be impeded by costly organizational bureaucracies, redundant programs, or ineffective delivery systems. Finally, some question whether aid is “real aid” or “phantom aid.” ODA, for example, counts debt relief, administrative costs, and technical cooperation as aid even though these initiatives involve no cross-border monetary flows.^[7] This phantom aid may show up as an entry on a financial ledger, but may have a limited impact on people's well-being.

• [1] Organization for Economic Cooperation and Development (OECD), “Official Development Assistance: Definition and Coverage,”
• [2] Organization for Economic Cooperation and Development (OECD), “Table 1: Net Official Development Assistance from DAC and Other Donors in 2012,” April 3, 2013
• [3] OECD/DAC, “Top Ten Recipients of Gross ODA,”
• [4] OECD/DAC, “Total DAC Flows at a Glance,”
• [5] OECD/DAC, “Table 1: Net Official Development Assistance from DAC and Other Donors in 2012,” “Aid to Poor Countries Slips Further as Governments Tighten Budgets,” Aid Statistics, March 4, 2013
• [6] OECD/DAC, “Resource Flows beyond ODA and DAC Statistics,”
• [7] Julia Benn, Andrew Rogerson, and Suzanne Steensen, “Getting Closer to the Core: Measuring Country Programmable Aid,” Issue 1, Development Brief, OECD, June 2010, 1–2.