Aid and development

1. International aid is a voluntary transfer of resources from one country or organisation to another on concessional terms, meaning terms more generous than a commercial lender would offer.
2. It is given to relieve poverty, respond to emergencies and finance long-term development.
3. Aid can ease the constraints that hold back a developing economy, but it is not automatically beneficial, so its value depends on its form and how it is used.

Forms of aid

1. Bilateral aid flows directly from one government to another, for example the UK channelling support to Kenya through the FCDO, or China financing roads and railways across sub-Saharan Africa under its Belt and Road Initiative.
2. Multilateral aid is channelled through international institutions such as the World Bank, the IMF or United Nations agencies.
3. Tied aid requires the recipient to spend it on goods and services from the donor country, so part of the value flows straight back to the donor.
4. Aid may be a grant, which is never repaid, or a soft (concessional) loan at below-market interest rates.
5. Humanitarian aid meets emergency needs after disasters, while development aid funds long-term projects such as schools and power grids.
6. Technical assistance transfers expertise, training and skills rather than money.

Reasons for giving aid

1. Donors give aid for humanitarian reasons, to relieve poverty and respond to disasters.
2. Aid can serve economic motives, since building future trading partners today opens export markets for the donor's firms tomorrow.
3. Aid can pursue political and strategic aims, strengthening alliances and diplomatic influence.
4. Tied aid can advance the donor's commercial self-interest by guaranteeing orders for its own exporters.
5. Aid can help fill a developing economy's savings gap and foreign exchange gap, relaxing the constraints on investment.

Effects of aid

1. Aid can fund investment in infrastructure, health and education that a poor economy cannot finance itself, which raises long-run productive capacity.
2. By filling the savings and foreign exchange gaps, aid can shift the production possibility curve outward and support economic growth.
3. Emergency aid can save lives and relieve suffering after a crisis such as a famine or flood.
4. However, aid can foster a dependency culture that weakens the incentive to reform and to raise domestic taxes.
5. Poorly governed aid may be lost to corruption or fail to reach the poorest households.
6. Free food aid can undercut local producers: prices fall, so domestic farmers cut output and rural incomes drop.
7. Aid given as loans adds to external debt, so future repayments divert scarce foreign exchange away from imports.

The importance of aid

1. For the least developed countries, aid can be a large share of national income and of the government budget.
2. Aid is often vital for funding public goods and human capital where domestic resources are scarce.
3. Its importance is debated, as many argue that trade and investment do more for development in the long run, the "trade not aid" view.
4. On balance, aid is most effective as a complement to trade and investment rather than a substitute for them: well-targeted grants and concessional project finance for health, education and infrastructure can raise long-run productive capacity, and for the least developed countries, where aid may fund a large share of the budget, emergency aid saves lives immediately, but the growth pay-off builds slowly over years and the cross-country evidence is mixed, so the size of the gain turns on the form of aid, the conditions attached and the quality of governance far more than on the sum transferred.