The Political

Economy of Foreign
Aid

Rizki Rahmadini Nurika, S.Hub.Int., M.A.
Week 12
 Introduction

 The political economy of foreign aid is in which aid
is given in the name of economy but for political
reason.

The recipients come from

The donors come from
developing and less
developed countries who
developed countries who
are trying to widen their
are looking for assistances
sphere of influence.
to develop their economy.


 
 The earliest form of foreign aid
was military assistance designed
to help warring parties.
 Its use in the modern era began in
the 18th century, when Prussia
subsidized some of its allies.
 European powers in the 19th and
20th centuries provided large
amounts of money to their
colonies  improved
infrastructure to increase
economic output.
 
 The structure and scope of
foreign aid today can be
traced to two major
developments following
World War II.
 The implementation of the
Marshall Plan, a US-
sponsored package to
rehabilitate the economies of
17 western and southern
European countries 
reason???
 
 The founding of UN, IMF, and World Bank at the
Bretton Woords Conference  reason???
 They have played a major role in allocating international
funds, determining the qualifications for the receipt of
aid, and assessing the impact of foreign aid.
 Foreign Aid Today

 The concept of Official Development
Assistance (ODA) was introduced in the
early 1970s by the Development
Assistance Committee (DAC) of the
Organization for Economic Cooperation
and Development (OECD).
 ODA consists of official grants from
bilateral or multilateral donors to
developing countries aiming to promote
economic development and welfare.
 

 Aid flows to developing countries are in one of three major

currencies: the US dollar, the euro, and the Japanese yen.
 Determinants of Aid Allocation

 Donors’ aid allocation aims to promote their own
interests as well as oriented towards the needs of
recipient countries  matching both interests.
 4 keys in determining donor’s aid allocation.
 Recipients’ needs.
 Donors’ strategic and political interests.
 Donors’ economic interests.
 Recipients’ governance.
 Aid allocation is also determined by donor’s motive in
giving aid.
 
How about the physical factors of recipients???
Geography? Natural resources?
 Motives of Giving Aid

 Countries often provide foreign aid to enhance their
own security.

 Foreign aid is used to prevent friendly governments

from falling.

 Foreign aid is used to achieve a country’s diplomatic

goals  to garner support for its positions in
international relations.
 
 Foreign aid includes promoting a country’s exports
and spreading its language, culture, or religion.

 Foreign aid is used to relieve suffering caused by

disasters or transnational problems including disease,
terrorism and other crimes, and destruction of the
environment.

 Which reason is the most important???

 
 Because most foreign aid programs are designed to
serve several of these purposes simultaneously, it is
difficult to identify any one of them as most
important.
 
 In the post 9/11, the perspectives of donor nations on
foreign aid or ODA have changed significantly.
 In the past, especially in the Cold War environment,
foreign aid was at times used to “buy” elites and thus
influence affairs in third world countries.
 Latter, this approach is no longer acceptable because
developing nations’ importance to global security has
risen significantly in recent years.
 E.g. several developing countries in Asia and Africa have
served as staging points for worldwide terrorist attacks
 Why???

 Impacts of Aid

 Donor country may expect that:
 The recipient country will behave more favorably
toward donor country by supporting donor’s national
interests.
 The recipient country will confer economic benefits
towards the donor by buying more of the products
from the donor country.
 The lives of people in the recipient country will be
better because of donor’s assistance  lead to
dependency???
 
 Despite the above-mentioned important impacts,
foreign aid also leads to “bandwagon effect”
whereby donor might expect that the impact of its
aid on recipient country would be higher, the greater
the aid the rest of the donors grants to a recipient
country (Dudley and Montmarquette 1976).
THANK YOU
