Foreign Aid can be defined as all types of unilateral transfer including technical know-how, consumer goods and capital stock as loans, grants and export credits of various durations.It also means those additional resources which are used to raise the performance of the recipient country above the existing level.It is the transfer of resources from rich countries or international financial institutions to the poor countries. It is subject to certain limitations which generate various forms of foreign aid.
12 Best Types Of Foreign Aid You Must Know
It is simplest form of capital inflow in convertible foreign exchange. It is divided into various sub-forms as:
It is of two types.
(i) NATION TIED AID.
It is given to the recipient country on the condition that she will spend it in donor country to solve the balance of payments of that country and to stimulate exports, e.g. Pakistan is given aid by U.S.A. and is asked to import raw-material and machinery from U.S.A.
(il) PROJECT AID.
It is given only for specific projects and the recipient country cannot shift it to other projects.
When the foreign aid is not tied to any project or nation is called untied aid. The recipient country is not bound to spend the foreign resources on specific projects or in the donor countries which may charge higher prices than international market.
It is the form of foreign aid which does not entail either the payment of principal or interest. It is a free gift from one Government or an institution to a Government. It is given on the basis of humanitarian grounds in the days of emergencies, earthquakes floods, wars etc.
It is borrowing of foreign exchange by the poor country from the rich country to finance short or long term projects. These have two types:
These loans are given for a period of five years or less to finance industrial imports. There are no concessional elements.
These loans are given for a period of 10 to 20 years and are repaid in the currency of recipient* country. Interest rate is low and a grace period is involved.
This type of foreign aid relates to agricultural products, raw materials and consumer goods. It is also a shape of tied aid.
This type of foreign aid, the training facilities are provided by the donor country and it bears all the expenditures involved in the training of advisory technocrats. It is also a type of tied aid but it is much useful for the recipient country to increase the pace of economic development by using the modem technology in the country.
DIRECT FOREIGN INVESTMENT
The direct foreign investment is also included in the category of foreign aid. It is much cheaper for the recipient country because it entails no payment of principal and interest. But it is also argued that profit out flow may exceed the amount of repayment. But the technical know how can be purchased at cheaper rates on commercial basis.
FOREIGN Aid ACCORDING TO SOURCE
Foreign aid is divided into two types according to their sources.
When the foreign aid is given from the Government of the donor country to the recipient country, is called bilateral aid. It depends up the political economic relations and the will of donor country.
When certain financial institutions agencies, or organizations given foreign aid to poor countries, it is called multilateral aid. It is helpful in raising the pace of economic development of a country.
IMPACT OF FOREIGN AID ON A DONOR COUNTRY
There are certain objectives behind the foreign aid. Therefore, the effects or objectives or impact of foreign aid on a donor country is discussed as below:-
TO STABILIZE PRICE LEVEL
By providing commodity and technical aid to developing countries, the donor country can maintain the economy at a high level of employment and to stabilize general price level at reasonable limits.
DISPOSAL OF SURPLUS RESOURCES
The surplus economic resources of donor country can be disposed of by providing foreign aid. The saving and investment are correlated to stimulate the production level.
TO REMOVE DISPARITY
Wide disparity in economic growth is highly undesirable from political point of view as it endangers the world peace. The donor countries can remove the disparity in the economic growth of different countries of the World through mobilization of economic resources.
Foreign aid is used as a mean of propagating the political ideology so the number of allies countries may be increased and the political strength of the donor country may be strengthened. Therefore, the aid receiving countries follow the political ideology.
Foreign aid may be used as a mean of establishing strong hold in the economic system of aid receiving countries so that the economic ends of the donor country may be properly and adequately served.
The production and consumption levels may be maintained at desirable limit to expand the market for some produce and to have the disposal of surplus idle stocks. In this way, the fluctuations in economic activities can be controlled.
BALANCE OF PAYMENT
Resources are transferred as foreign aid becomes a payment with no corresponding receipt and the country develops unfavourable balance of payments. In long-run the donor country covers up the deficiency so caused.
The transfer of surplus resources’ as aid stabilizes the internal price level which stimulates economic activities in the country and the employment level is well maintained at a reasonable limit.
The invisible earning of the donor country increases as a result of accrued interest on loans, export credits and the expatriation of earning of her nationals in developing countries.
The accrued earnings are invested in developing countries and a commercial interest of the donor country is created in foreign land which may be utilized by her for political and economic exploitation.
IMPACT OF FOREIGN AID ON RECIPIENT COUNTRY
Foreign aid flows to the LDCs in the form of loans, assistance and grants from various governmental and institutional organizations. It is regarded indispensable for the development of LDCs. But there are some economist who dispute this view and hold that foreign aid is not indispensable for their development rather it obstructs it. Now we study the advantages and disadvantages of foreign aid for recipient country.