What Are the Different Types of Foreign Aid?

In 2020, the United States provided foreign aid of various kinds to over a hundred countries in the world.

For American taxpayers, the cost of foreign aid amounted to $43.5 billion in 2020 and $43 billion in 2019. Foreign aid is not the only kind of foreign assistance, but it might be the most controversial. Some of the different types of foreign aid include bilateral aid, military aid, multilateral aid and humanitarian assistance.

Key Takeaways

  • Governments of developed countries often engage in investment and assistance to less developed countries, to the tune of several billions of dollars each year.
  • This assistance is intended to promote global economic and political stability, to encourage growth and development, and to protect allies around the world.
  • This aid typically takes the form of foreign direct investment (FDI), humanitarian aid, and foreign trade incentives.

Types of Foreign Development Assistance

There are three primary forms of international aid, as well as various sub-types. The first primary type is private foreign direct investment (FDI) from multinational or transnational corporations. These are typically equity holdings of foreign assets by non-residents of the recipient country. For example, American companies may engage in FDI by buying a controlling interest in a Nigerian company. FDI reached a peak of approximately $3 trillion globally in 2007 and has since declined for several geopolitical and macroeconomic reasons. Global FDI peaked back up to $2.75 trillion in 2016, fell to $1 trillion in 2018, and rose $1.7 trillion by the end of 2019.

The second primary type is what people normally think of when they hear the term "foreign aid." These are official development tools designed and funded by government agencies or international nonprofits to combat the problems associated with poverty. Humanitarian efforts spearheaded by governments are almost exclusively done by wealthier nations that are also members of the Organization for Economic Co-operation and Development (OECD). Each year, OECD countries spend between $100 billion and $150 billion in foreign aid, with 2020 rising to a record $161.2 billion in response to the COVID-19 crisis in developing countries.

The third primary type, foreign trade, is much larger and much less intentional. By all accounts, openness to foreign trade is the single leading indicator for developmental progress among poor countries, perhaps because free-trade policies tend to go hand-in-hand with economic freedom and political stability. An excellent breakdown of this relationship can be seen in the Index of Economic Freedom provided by The Heritage Foundation.

Disbursements vs. Aid Received

One of the most critical issues in the foreign-aid conversation is disbursement. Most disbursements are measured in terms of money given, such as how many dollars were donated or how many low-interest loans were extended. Many foreign-aid bureaucracies define success on the basis of nominal monetary disbursements. Critics counter that dollars of funding do not always translate to effective assistance, so measuring simply in money terms is insufficient.

Foreign-aid disbursements face many hurdles, including local corruption and alternative domestic agendas. A 2015 report from the Stockholm International Peace Research Institute found that billions in aid to Afghanistan had been wasted or stolen by "kleptocrats," who used the money to suppress entrepreneurs and even to purchase expensive villas.

Bilateral Aid

Bilateral aid is the dominant type of state-run aid. Bilateral aid occurs when one government directly transfers money or other assets to a recipient country. On the surface, American bilateral aid programs are designed to spread economic growth, development and democracy. In reality, many are given strategically as diplomatic tools or handsome contracts to well-connected businesses.

Most problematic bilateral aid disbursements are simple, direct cash transfers. Such foreign aid to Africa has been "an unmitigated economic, political, and humanitarian disaster," as written by Zambian-born economist and World Bank consultant Dambisa Moyo in her book Dead Aid: Why Aid Is Not Working and How There Is a Better Way to Help Africa. Foreign governments are often corrupt and use foreign aid money to bolster their military control or to create propaganda-style education programs.

Military Aid

Military aid can be considered a type of bilateral aid, with one twist. It normally requires one nation to either purchase arms or sign defense contracts directly with the United States. In some cases, the federal government purchases the arms and uses the military to transport them to the recipient country. The country that receives the most military aid from the United States, and the most aid in general, is Israel. For fiscal year 2020, the American government bankrolled the Israeli military to the tune of $3.3 billion.

Multilateral Aid

Multilateral aid is like bilateral aid, except it is provided by many governments instead of one. A single international organization, such as the World Bank, often pools funds from various contributing nations and executes the delivery of the aid. Multilateral assistance is a small part of the U.S. Agency for International Development's foreign aid programs. Governments might shy away from multilateral aid because it is more challenging to make strategic decisions when several other donors are involved.

Humanitarian Assistance

Humanitarian assistance can be thought of as a targeted and shorter-term version of bilateral aid. For example, humanitarian aid from wealthy nations poured into the coastal regions in South Asia after a 9.0 magnitude earthquake triggered a tsunami in the Indian Ocean, killing more than 200,000 people. Because it tends to be higher-profile than other types of aid, humanitarian efforts receive more private funding than most other types of aid.

Article Sources
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  1. ForeignAssistance.gov. "Dashboard," Select "Funding Phase, Appropriated and Planned." Toggle "2019" and "2020."

  2. Congressional Research Service. "Foreign Aid: An Introduction to U.S. Programs and Policy," Page 1.

  3. The World Bank. "Foreign Direct Investment, Net Inflows (BoP, Current US$)."

  4. Organization for Economic Co-Operation and Development (OECD). "Net Official Development Assistance (ODA)."

  5. Organization for Economic Co-Operation and Development. "Official Development Assistance (ODA)."

  6. Heritage Foundation. "Index of Economic Freedom."

  7. Stockholm International Peace Research Institute. "Afghanistan's Private Sector: Status and Way Forward," Pages 29-30.

  8. Congressional Research Service. "U.S. Foreign Aid to Israel," Page 2.

  9. Congressional Research Service. "Indian Ocean Earthquake and Tsunami: Humanitarian Assistance and Relief Operations," Pages 8-9.

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