18 Advantages and Disadvantages of Foreign Aid to Developing Countries

Giving foreign aid to developing countries means a transfer of wealth occurs. Resources from the developed world are given to the developing world in a variety of ways. Most transfers involve grants, donations, or low-interest loans to build up the infrastructure of the affected nation.

Some foreign aid involves the direct distribution of survival fundamentals, such as food, water, or clothing. This transfer of wealth is always voluntary, whether it is a government doing the work or a charitable organization.

The United States offers a specific definition of foreign aid which must be included in an analysis such as this. U.S. assistance includes military help to countries which may request it through direct or indirect means. Some options may not be financially classified as foreign aid, but it creates the same impact when made.

About $75 billion in foreign aid to developing countries comes from the U.S., through taxpayer and personal payments, with billions more offered by the 35+ countries labeled with “developed” status.

Here are the advantages and disadvantages of foreign aid to developing countries, and if such a practice should continue.

List of the Advantages of Foreign Aid to Developing Countries

1. Countries who supply foreign aid to the developing world see domestic benefits.
Foreign aid to the developing world does create a direct cost paid voluntarily through personal remittance or involuntarily through taxpayer funds. When these payments are made, the diplomatic benefits create new trade opportunities between the two nations. Job opportunities become available through the process of monetary transfers. As the basic needs of the developing country are met, there is even the benefit of doing good for someone else to consider.

2. Countries who supply foreign aid help others solve their domestic issues.
The developing world sometimes lacks the resources necessary to deal with internal problems. Examples of foreign aid to counter domestic issues include money and supplies to fight HIV/AIDS, law enforcement resources to fight terrorism, military aid through the provision of training to help local police and Army activities, and food support to help farmers find new ways to increase their yields. By improving these issues or processes abroad, the country providing aid prevents them from becoming negative impacts back at home.

3. Countries who supply foreign aid reduce the impacts of poverty.
The statistics of extreme poverty are staggering in the developing world. It begins with the fact that almost 11% of the global population lives on less than $2 per day. Providing foreign aid reduces the impact of this issue, along with these other facts.

  • 41 children out of every 1,000 die before their fifth birthday because of poverty.
  • 63 million children in the developing world cannot attend school.
  • 12% of the world’s population still practices public bathroom habits.

Rural populations in the developing world are four times more likely than urban populations to be drinking contaminated water. Foreign aid won’t solve these issues, but it will reduce the number of people facing them each year.

4. Countries who supply foreign aid promote global freedom.
The preferred way to resolve issues in the past was to colonize the affected country. For much of the first half of the 20th century, Africa and parts of Southeast Asia were governed by international governments. As these nations moved toward independence and the benefits of foreign aid were discovered, people found themselves enjoying more freedom than before. Although the removal of colonialism also created dictators and despots around the world, people are usually happier when they have more say in the outcome of their lives and foreign aid makes that possible.

5. Countries who supply foreign aid often receive it in return.
Did you know the United States receives almost as much foreign aid as it gives each year? According to reporting from The Baltimore Sun in 2017, the cumulative FDI received in the U.S totaled $3.1 trillion as of 2015. Countries which the U.S. helped to rebuild after World War II were some of the largest investors, including Japan and Germany. During national disasters, several tons of food, emergency supplies, and other needed items are donated as foreign aid too. Even Russia once gave the U.S. sixty tons of food after Hurricane Katrina.

6. Countries who supply foreign aid help to save lives.
Many of the foreign aid programs funded by the developed world provide basic survival and healthcare needs where it is not available. PEPFAR (President’s Emergency Plan for AIDS Relief) proved antiretroviral treatments for 11 million people, cared for 6 million orphans, and trained 220,000 new healthcare workers in its first 13 years of existence. The fact is that preventing disease is always cheaper than treating it reactively. Some years, just 0.2% of the GDP goes to foreign aid from American taxpayer funds, yet over 1% of GDP comes back in returns.

7. Countries who supply foreign aid can stipulate returns.
Foreign aid programs are often viewed as being grants or gifts, but it doesn’t need to be structured that way. Some aid is given in the form of loans, including low-interest products with an expected feedback. Some loans are even tied to the recipient nation purchasing specific goods or services from the donating nation to create an economic cycle. Although some loans do default eventually, the returns that foreign aid creates have ongoing benefits which, in the case of Germany, are seen for several generations after the work is done.

8. Countries who supply foreign aid can tie it to domestic products.
The United States ties about 30% of its foreign aid to the purchase of goods or services manufactured domestically. Even though the funds go to the country in question, the purchases provide economic opportunities for businesses at home. Several countries make this stipulation when offering financial aid, with Canada and Span tying about the same percentage as the U.S. whenever they assistance becomes necessary.

That setup allows for the developed world to provide humanitarian and emergency aid while growing internal opportunities at the same time.

List of the Disadvantages of Foreign Aid to Developing Countries

1. Countries who supply foreign aid can create negative environmental impacts.
Foreign aid tends to be directed at food resources, emergency supplies, and developmental healthcare needs. Some of that aid is used to supply villages with needed homes. If the work is left to local providers, these new housing units may be nothing more than a glorified shack. Living in these communities may increase the risk of disease transmission, encourage landslides, and create other negative impacts on the local environment.

2. Countries who supply foreign aid may impact local markets.
Free market economies thrive because of the rule of supply and demand. If demand levels are high and supplies are low, then costs begin to rise. When countries offer foreign aid, the dynamics of the market shift because more of specific products are available. That forces local prices lower, if they can even charge at all, since foreign aid goods are often distributed without charge. Even though the goal may be to improve local living conditions, inflation tends to occur once a situation stabilizes, creating a higher overall risk of poverty.

3. Countries who supply foreign aid often benefit those in power first.
Foreign aid requires oversight of the distribution process for its impact to be positive on a nationwide scale. When one government works with another to distribute resources, those at the top sometimes find that it is too tempting to take a first cut at the supplies offered. The African Union estimates that 25% of the continent’s GDP, a value of $150 billion each year, is lost because of corruption.

Global Financial Integrity reported in 2013 that up to $1.3 trillion left Africa through illegal financial flows between 1980-2009, a figure which is about equal to the entire GDP of the continent in 2014. Funding cuts are not the solution. Better oversight and accountability are necessary, which is something the developed world has not been keen to do since the 1960s.

4. Countries who supply foreign aid may be purchasing future favors.
The developed world often uses foreign aid as a way to place political pressure on someone else. Canada might decide to offer foreign aid to Cuba, for example, to place pressure on the U.S. to change its trading stance on the small island nation. Some aid offerings are used to create economic or political pressure for specific actions, like supporting rebel activities in Syria. These influences are not usually part of the official contract, but it is common for the country offering foreign aid to expect favors in return for the money or supplies provide.

5. Countries who supply foreign aid impact global trade.
There are times when foreign aid offers do not carry expectations of a return. Emergency supplies are an excellent example of this. Then there are the times when the issuance of foreign aid is nothing more than a domestic subsidy. Countries can issue aid internationally to support dying industries at home by requiring a specific transfer of goods. The businesses who benefit from this process often stop selling in their local markets to focus on the provision of aid supplies. That creates a false economy where there would be no success without government intervention, which shifts the emphasis of capitalism and free markets.

6. Countries who supply foreign aid impact pricing schedules.
Up to 30% of the foreign aid offered in a given year may be designed as aid tied to specific purchases. That setup creates reduced competition for those specific items. Companies involved with the industries designated by the arrangement only compete with each other for the right to provide services. Since each knows they can charge more because the recipients of foreign aid are forced to make a purchase, a price war begins on how much profit can be earned without negatively impacting the business.

7. Countries who supply foreign aid are not often concerned with international growth.
Countries like South Korea have benefited greatly because of the presence of foreign aid. Then there is the 60 years of foreign aid, along with nearly $100 billion in total funding from the U.S., directed to Africa where it remains a “beggar continent” according to reporting from The Hill. Countries must be incentivized to become successful economically when they receive foreign aid for the advantages of these payments to occur.

When no such incentive exists, then there is no need for change. The recipients of the foreign aid become dependent on handouts from the wealthy, then they fight internally about who gets to keep the largest portions offered. Even in 2015, $8 billion in aid was provided to 47 African countries by the United States despite these issues.

8. Countries who supply foreign aid may encourage conflict.
Brigham Young University published a study in 2011 with Harvard which looked at foreign aid as a cause of violent armed conflict in the world. They found that 15 severe shocks to economies occurred when foreign aid was suddenly removed, leading to four armed conflicts in those nations within 12 months of the event. Reducing or eliminating foreign aid more than doubles the risk of an armed conflict occurring.

Some countries try to tie the stability of the government to the foreign aid offered. That arrangement often leads to governments which become more unstable over time. The reverse is also true. When aid provisions occur because governments are unstable, then there is an incentive to stay that way.

9. Countries who supply foreign aid reduce international governing efficiencies.
Long-term provisions included with foreign aid packages create reductions in accountability from the giver and the recipient. As with any other form of power, the goal focuses on retaining or increasing what is provided instead of trying to change the structure of local economics. Those who offer the funds, along with those who distribute the aid, hold the most power in that relationship.

10. Countries who supply foreign aid create dependencies.
Aid dependencies in Africa continue to climb, even as offering nations look for ways to reduce the issue. Although over one-third of the poorest countries in the world have reduced their percentage of GDP from foreign aid since 2000, countries like Ghana still rely on support for over 50% of their budget. Haiti still relies on subsidizes grain stock imports from the U.S. for over 80% of their inventory. Unless an effort is made to improve local conditions through training and oversight, providing aid encourages more to be given in the future.

The advantages and disadvantages of providing foreign aid to developing countries always come back to oversight, distribution, and local outcomes. It is understandable that the developed world would want a return on the funds offered. Those requirements may also reduce the beneficial impact of the aid offered. When power and influence are incorporated into this equation, the results can be just as bad as they can be positive. That is why meaningful oversight must come from third parties to ensure fair results. Otherwise, the giver and the recipient will be supporting their own interests.

Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.