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date: 27 March 2017

Foreign Aid as Foreign Policy Tool

This is an advance summary of a forthcoming article in the Oxford Research Encyclopedia of Politics. Please check back later for the full article.

The majority of countries around the world are engaged in the foreign aid process, as donors, recipients, oftentimes as both. States use foreign aid as a means of pursuing foreign policy objectives. Aid can be withdrawn to create economic hardship or to destabilize an unfriendly or ideologically antagonistic regime. Conversely, aid can be provided to bolster and reward a friendly or compliant regime.

Although foreign aid serves several purposes, not least among them, the wish to increase human welfare, the primary reason for aid allocations or aid restrictions is to pursue foreign policy goals. Strategic and commercial interests of donor countries are the driving force behind many aid programs. Not only do target countries respond to the granting of bilateral and multilateral aid as an incentive, but also the threat of aid termination serves as an effective deterrent. Both the granting and the denial of foreign assistance can be a valuable mechanism to modify a recipient state’s behavior.

Donors decide which countries will receive aid, the amount of aid provided, the time frame for which aid is given, and the channel of aid delivery. The donor’s intentions and the recipient’s level of governance determine the type or sector of foreign aid. States can choose between bilateral or multilateral methods of disbursing foreign assistance to pursue their interests. While bilateral disbursements allow the donor state to have complete control over the aid donation, the use of multilateral forums has its advantages. Multilateral aid is cheaper, it disperses accountability, and it is often viewed as less politically biased.

Foreign aid, once the exclusive foreign policy instrument of rich powerful states, is now being provided by middle-income countries, too. The motivation for foreign aid allocations by non-traditional donors parallels the motives of traditional Development Assistance Committee (DAC) donors. A main difference between traditional and non-traditional aid donors is that non-traditional aid donors generally do not place conditions on their loans.

The issue of fungibility can obstruct the donor government’s purpose behind the allocation of foreign aid. If the preferences of the recipient government are different from those of the donor, the recipient can often divert the aid and use it for other purposes. A recipient government may reallocate its budget after it determines how much aid it is slated to receive. The recipient government will re-direct its resources to areas that it deems as priorities, but that cannot be funded externally, such as the military or prestige projects.