Foreign Aid: A mixture of Politics and Economics

Foreign aid as a concept is well known in generalised terms to most of us. In fact, some may say foreign aid is one of the key defining features of modern day contemporary politics and economics. In the current economic and healthcare landscape the power of foreign aid, both from private and governmental sources, has been highlighted. In the aftermath of the Beirut explosion medical personnel, equipment and of course funds were provided to Lebanon. This outpouring from all corners of the globe, which included national, international, governmental and non-governmental sources is perhaps the piece de resistance to illustrate the emphatic side of modern-day diplomacy.

However, this pandemic has made the political machinations and economic considerations that inform the process of foreign aid, very much transparent. In these times, as political pressure on the People’s Republic of China increases and every action of it, is put under heavy scrutiny, allegations are also raised as to the actual intent of China’s foreign aid plan. At the same time, as political populism gives rise to a nation-first economic stance in many nations, the concept of foreign aid itself is being brought into question, as both a tool for foreign diplomacy and overall economic progress.

Thus, it becomes important to look at foreign aid from a critical lens and also draw a comparison between its various forms.

Understanding Foreign Aid:

Before we can begin to dissect the diplomacy, politics and economics behind foreign aid it is important to have at least a general understanding of the term and the different classifications of foreign aid.

Broadly speaking, foreign aid is defined as international transfer of capital, goods or services from either a nation or organisation towards a recipient nation. Foreign aid can then further be classified into:

Bi-Lateral Aid: Aid from one nation to another, in a direct manner without the intervention of any third party.

Multi-Lateral Aid: Aid provided by multiple nations or organisations usually pooled into one consolidated fund that is handled by one specific organisation for the purposes of distribution.

Tied Aid: Aid that has a stipulation to be used in a specific way, usually in the donor nation or on its goods and services.

Project Aid: Aid that is geared specifically towards a particular project usually infrastructural in nature (examples include dams and canals).

Military Aid: Military aid is of two types, either of pure capital, usually used to fund arms contracts emanating from the donor nation or secondarily of manpower, be it for the purposes of international peacekeeping, military logistics or military training.

Voluntary Aid: Aid that comes from international organisations with a clear backdrop of charity, for example Doctors Without Borders.

Keep in mind, these are just some of the broad classifications of foreign aid and are intended to promote further reading and analysis, not as the final word. Foreign aid is a dynamic concept with diverse historical roots, therefore it cannot truly be bogged down in the realm of static definitions.

The Diplomacy behind Foreign Aid:

While many of us would like to believe that foreign developmental aid is a sign of pure goodwill from developed countries to developing ones, with the intention of solely helping fledgling economies modernise and grow, the cynic within us knows otherwise. Therefore, it isn’t surprising for us to learn that such aid usually comes with intentions of political manoeuvring, economic liberalisation etc.

In this 2002 article in the Journal of Peace Research, three experts attempted to provide empirical proof for a correspondence between the general theories regarding state foreign policies and the mechanism of foreign aid. The article concluded thusly:

“Our findings indicate that aid allocation is affected by other aspects of a state's foreign policy portfolio. The application of a general framework of foreign policy to the study of foreign aid is fruitful.”

Using multiple empirical techniques and linking them to established posits of foreign diplomatic theory the three researchers were able to not only establish this link but provide a hypothesis for the cause and effect of foreign aid. As the Two-Good theory of foreign diplomacy puts forward, all nations at any time attempt to both maintain and change the status quo of international politics, attempting to consolidate their advantages and turn the tide in fields where they may be on the losing side.

Thus, foreign aid becomes an important tool to sway public opinion, both domestically and internationally as Liz Schrayer puts forward in her 2017 article on the politics behind foreign aid in context to how local platforms funded by foreign aid have helped grow US influence:

“Time and again, these local programs have provided an opportunity for policymakers to speak out and the words spoken outside the beltway have translated into positives votes and action back in Washington.”

The power of foreign aid in the world of international diplomacy is palpable, especially once the aspect of international discourse comes into the play. Because, one must remember, international aid allows nations to intervene in local politics, divert the course of national policy and help create international consensus. For example, the famous post-WW2 Marshall Plan from the United States of America, transformed the face of Western Europe, from a war-torn landscape with failing economies to an economic powerhouse that put the USSR’s communist Eastern European economies to shame.

This sentiment is put forward succinctly by Curt Tarnoff’s analysis of the Marshall Plan:

“At the completion of the Marshall Plan period, European agricultural and industrial production were markedly higher, the balance of trade and related “dollar gap” much improved, and significant steps had been taken toward trade liberalization and economic integration”

India’s 1991 economic liberalisation reforms were at least in part, influenced by pressure put forward from the victorious capitalist bloc of the cold war as well as the International Monetary Fund. This 1991 article in the New York Times best highlights the pressure put forward on the then Congress government in terms of India’s financial policies:

“The I.M.F. has indicated, according to officials, that it wants to see the Government's budget, to be issued next month, as well as how India deals immediately with its problems, before agreeing to a major loan. A $1.8 billion emergency loan from the I.M.F., approved in January, has already been depleted.”

The sweeping reforms that came in the aftermath, changed the face of India’s economy from a largely isolationist, socialist structure to one which today has fledgling private sector that as the Cato Institute puts forward in its analysis of the 1991 reforms and the years that have followed as:

“The private sector has performed outstandingly in the past 25 years, taking advantage of new opportunities created by liberalization and globalization. Indian companies more than held their own against foreign newcomers, and the vast majority of big Indian companies have become multinationals, making acquisitions globally.”

India is not the only example of such a massive sweep in national economic policies, influenced by international aid and international aid organisations. At the same time, as mentioned before, foreign aid can be militaristic in nature, the most famous example of which is the American support that has been provided to Israel, especially during the initial period of sporadic conflict that rocked the Jewish state. Stephen Zunes in his analysis of American aid to Israel points this out, writing:

“Israel’s frequent wars have provided battlefield testing for American arms, often against Soviet weapons. They have been a conduit for U.S. arms to regimes and movements too unpopular in the United States to be openly granted direct military, such as South Africa, Iran, Guatemala and the Nicaraguan Contras. Israeli military advisers have assisted the Contras, the Salvadoran junta, and other movements and governments backed by the United States.”

Regardless it becomes clear that foreign aid has the ability to influence nations which receive said aid, both in terms of local politics as well as stances on international issues.

Recently in light of the criticism that China has faced due to the spread of the Coronavirus, the eastern nation has embarked on a diplomatic journey of “mask diplomacy” i.e. it’s policy to provide medical equipment, logistical support and expert help as aid, that according to some experts is severely impacting China’s relationship with its eastern neighbours such as Japan. According to Cheng Li and Ryan McElveen:

“But if nothing else, the coronavirus has done what few observers thought possible: quell generations of China-Japan antagonism. And for the immediate future, both countries are now bound together in the same public health crisis—the full political and economic implications of which are yet unknown — and neither side would gain from halting the mutually-beneficial collaboration now.”

At this juncture the impact that foreign aid has on the foreign and domestic policies of nations is rather clear. It is just as important however to acknowledge a growing sentiment against foreign aid (especially in nations who are donors rather than recipients). Towards the end of the 2010s we saw a marked rise in isolationist, populist politics in the west, be it the growth of the Alternative für Deutschland in Germany or the rise of the illusive bogeyman of American politics, the “Alt-Right”. Regardless it has become clear to many experts in the field that with the growth of a “our nation first” and isolationist tendency in western politics, the concept of foreign aid itself is on the proverbial chopping block. As Sarah Hearn puts forward in her critique of the current system of foreign aid and development funding:

“There are already signs that Western countries are becoming less predictable aid partners. During the election campaign, Trump committed to reducing foreign aid, and consideration of senior appointments at the U.S. Agency for International Development has taken a back seat.”

Amidst the ongoing global pandemic, the Beirut explosion however has certainly put forward a positive example of how foreign aid can act swiftly and efficiently when the circumstances allow it to. The World Economic Forum has put forward a list of nations and what support they’ve extended to the city in Lebanon, in the aftermath of the explosion that rocked its denizens. The wide array of nations who have contributed, irrespective of national income levels and despite growing waves of economic uncertainty in the aftermath (or as some claim, in the midst) of 2020’s economic halt provides perhaps the glimmer of hope that many need in these times.

The Economics of Foreign Aid:

As mentioned earlier, the economic veracity of foreign aid is being questioned by many isolationist ideologues, but this skepticism towards the sustainability of foreign aid as well as foreign aid induced development is not a new phenomenon. This hesitation towards foreign aid comes both from the perspectives of the donor nations as well as the recipients. William Easterly in his working paper on the inefficacy of foreign aid mechanisms called aid organisations and movements “The Cartel of Good Intentions”. In this paper he hypothesises that the inherent conflict between a rigid bureaucratic aid mechanism and the dynamic nature of the recipient nation’s free market dooms the sustainability of aid programmes. He further claims that these same rigid bureaucratic standards aren’t meant to ensure that aid works, rather that aid is advertised domestically with little to no attention being paid to the aftermath of the project. He states:

“The heartbreaking reality of aid isn’t so much that it didn’t work as that we in rich countries didn’t really care whether it did.”

William isn’t the only expert to raise concerns about the economical disadvantages that are borne from developmental aid programmes in poorer nations. Juliette Lyons writes about how foreign aid hurts Sub-Saharan Africa instead of helping. She asserts that current aid mechanisms promote the growth of corruption and that aid dependency goes hand in hand with corrupt governance. In her own words:

“These countries have become used to receiving such large sums of money that they don’t promote local business because they have “free” money at their disposal instead. This prevents any form of improvement in terms of human development and per capita income.”

But then again, for every anti-aid argument one can find expert commentaries that espouse the positives behind foreign aid. Mark McGillivray employs an empirical method to show the positive impact that foreign aid has had on developing countries. Using economic markers to show economic growth in recipient nations and then relating it to the concept of poverty McGillivray concludes:

The overall message from the empirical literature is thus reasonably clear: to the extent that growth is good for poverty reduction, it can reasonably be inferred that poverty would be higher in the absence of aid flows.

The argument that aid does not benefit recipient nations is often borne out of the logistical errors that are made in current day aid mechanisms, but the concept of aid itself remains easily defensible. Sebastian Edwards puts forward his own argument for foreign aid in which he analyses foreign aid and its evolution over the years. In this he argues for the ever-evolving mechanisms of foreign aid that have become more nuanced, targeted and efficient over the years and will continue to do so as long as expert eyes do not wander from the goal at the end of the road. He encapsulates the strides made by foreign aid mechanisms over the years as follows:

“Today, for instance, there is frequent consultation with the local authorities, aid agencies coordinate their work through the DAC, and there is an increasing concern about the views and opinions of the civil society, including their views on the environmental impact of different investments.”

In recipient nations the aim of foreign aid isn’t just for a quick injection of capital, rather it is the long-term growth and development of basic infrastructure, industry and public utilities. This becomes especially important in conflict prone regions where infrastructure has been ignored largely. Civil empowerment also becomes an important aspect of peacebuilding, with foreign aid, especially from voluntary organisations being key to the growth of a democratic structure within nations, that will help the grassroot growth of platforms of discussion. Christine Bigdon and Benedikt Korf conclude in their analysis of the role of developmental aid in conflict transformation:

“Especially with these dilemmas in mind, we still want to stress how important it is for donor agencies focussing on conflict transformation to consciously promote empowerment processes and the rebuilding of local democratic institutions, primarily through a strategy of educated pragmatism.”

For donor nations however, the argumentation is much different, especially amidst an era of economic isolationism. John R. Allen’s 2019 article is a passionate appeal to defend the US aid strategy and increase its intensity. In his opinion, American contribution to international aid must be made a matter of grassroot movements, and a better understanding of small-scale aid programmes within the nation that can have an international reach. He writes:

“To preserve a robust U.S. role in the world, we must understand what the American people care about, engage with them where they are, and find new and novel ways to channel grassroots enthusiasm at the local and state levels so that it has an international impact.”

China too, as a major donor in the world of foreign trade, heavily relies on it to generate international goodwill, control diplomatic discourse and of course, establish new markets for its growing industries. As the NDRI points out in its analytical paper on Chinese foreign aid, China is using its developmental loans, aid programmes and unique ‘Panda Diplomacy’ to establish itself as a competitor to USAID. The report states:

“We find such programs have burgeoned in recent years, with emphasis on development of increased foreign supplies of energy resources, as well as supplies of ferrous and nonferrous minerals.”

This is further backed up by the creation of the CIDCA, a specialised agency in China with a specific objective to establish bi-lateral aid contacts with foreign nations. Cheng Cheng in his article on the logic behind China’s creation of the CIDCA, cited especially the negative perception around Chinese developmental aid grants, which he attributes to a lack of transparency on part of China’s Ministry of Commerce. This point becomes even more important in a post Covid-19 world wherein anti-China rhetoric is being galvanised. In this article he gives this insight:

“China hopes the reputation of its foreign aid programs will improve if the country better distinguishes between different financing vehicles and provides a clearer picture of its development assistance practices.”

Especially given the aggressive push China is giving to it’s economical viability and it’s penetration in foreign markets, this point may well be a defining characteristic of the Chinese financial model in the years to come.


Foreign aid, remains an important tool in the arsenal of seasoned diplomats and ambitious economists. It’s growth and dynamic evolution over the years proves its usefulness and overall flexibility that will prove vital to post Covid-19 economies and international trade. Without a good understanding of the deeper mechanisms behind aid programmes, the underlying political ambitions as well as the geo-political happenings in the world, it is impossible to grasp the levity of international finance and economics.

Written by: Raajveer Singh Bisht

Raajveer also runs his own blog where he analyses political and economics issues. Check it out by clicking the following

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