This document discusses the pros and cons of foreign aid dependency among third world countries. It notes that while foreign aid was initially meant to fill investment gaps, it has led to long-term dependency as donors impose conditions that prioritize their own interests over recipients'. The document outlines the historical development of foreign aid since World War 2 and debates between modernization theorists, who see aid as enabling capital diffusion, and dependency theorists, who argue aid fosters underdevelopment by inhibiting self-sustaining growth. Overall, it concludes that while aid was intended to accelerate development, most recipient countries have failed to develop autonomously and have become burdened by debt due to conditions attached to loans.

1. Foreign Aid Dependency in Third World Countries: Its Pros and cons
By
Khem Raj Subedi
Assistant Professor
Far Western University of Nepal
Abstract
This paper tries to analyze and synthesize both negative and positive aspects of foreign aid
dependency of the third world countries on developed countries to fulfill their resources
gap. Increasing trend of foreign aid dependency has created global power structure in which
weaker countries are economically reliant on stronger countries, allowing the stronger countries
to exercise significant control over the weaker countries’ economic and political behaviour. In
the early decades of development assistance, it was underpinned by an economic logic that
stressed its contribution to filling two 'gaps' constraining development. Aid supplements savings
and enhances investment, making possible an expansion of productive capacity. It furnishes
foreign exchange for essential imports like machinery and, in many cases, fuel and food. But,
critics argue that foreign aid leads to dependency because the donors insist on aid-tying to the
purchase of goods and services at costs much higher than the competitive world price, and on
monetary and fiscal policies detrimental to the national interests of the recipients of aid. Foreign
aid leads to dependency because the donors insist on aid-tying to the purchase of goods and
services at costs much higher than the competitive world price, and on monetary and fiscal
policies detrimental to the national interests of the recipients of aid.
Key Words: Capital Movement, Debt Crisis, Foreign Aid, National Security, Post colonialism.
JEL Classification: F21, F34, F35, F52, F52, F54
1. Introduction
Foreign aid dependency refers to the financial reliance of the third world countries on developed
countries to fulfill their resources gap and has ushered new wave of international economic order
aftermath of World War Second. Foreign aid may have several forms, including transfers of
finance, commodities and other goods, technical cooperation and debt relief. In fact, it has paved
way for long term capital movement from developed world to developing world. Official
Development Assistance (ODA) is the heart of foreign aid. The Development Assistance
Committee (DAC) of the Organization for Economic Cooperation and Development (OECD)
defines ODA as resources transferred on concessional terms, with the promotion of the economic
development and welfare of the as the main objective(Burnell,2011). Chakravarti (2005) defined

2. aid as all official concessional flows from bilateral and multilateral agencies, whether in the form
of a loan, or grant that can be considered developmental in intent. Krueger (1986) also defined
aid as capital inflows into the country; this includes, among others, foreign direct investments. In
the 1960s the Development Assistance Committee (DAC) was established to improve and
coordinate international aid efforts.Probably over 95 percent of ODA now comes from DAC
members, comprising 22 countries plus the European Commission (Burnell, 2011).
Foreign aid can be multilateral or bilateral. Multilateral aid is given by an organization consisting
of more than one state such as the World Bank, International Monetary Fund (IMF) or assistance
provided by development agencies of the United Nations (UN) such as the United Nations
Development Programme (UNDP) and World Food Programme (WFP), as well as concessional
assistance provided by limited membership multilaterally established by the European
Community (Krueger & Ruttan, 1989). On the other hand, bilateral aid is given by individual
donor countries (such as Britain and US) directly to another state. There are also Non-
Governmental Organisations (NGOs) such as World Vision, Care Africa and Oxfam that give
aid. Of late, development practitioners have been advocating channelling aid through NGOs,
rather than governments as NGOs have earned the reputation of getting aid to the poorest people
(Madeley, 1991).
Increasing trend of foreign aid dependency has created global power structure in which weaker
countries are economically reliant on stronger countries, allowing the stronger countries to
exercise significant control over the weaker countries’ economic and political behaviour. Foreign
dependency generally fosters underdevelopment in the dependent country; a country’s adoption
of policies tailored to the interests of a stronger country may inhibit the weaker country’s
domestic growth, speed environmental destruction, or create temporary growth that precludes
sustainable development and economic independence.
2. Historical Background of Foreign Aid
After World War II, there was seen rivalry between the US bloc and the Soviet bloc to provide
reconstruction aid to their allies. The US Marshall Plan (1948-51) set up to aid economic
reconstruction in Western Europe. But the pattern of US aid was strongly motivated by political
reasons of national security and superpower rivalry ( Burnell, 2011 ).At the same time,
the Organization for European Economic Co-operation (OEEC) was formed in 1948( which was
later named as Organization of Economic Cooperation and Development (OECD) ) to administer

3. American and Canadian aid in the framework of the Marshall Plan for the reconstruction of
Europeafter WorldWar II(https://en.wikipedia.org/wiki/Organisation_for_Economic_Cooperatio
n_and_Development). Similarly, The Council for Mutual Economic Assistance (COMECON)
was an economic organization from 1949 to 1991 under the leadership of the Soviet Union that
comprised the countries of the Eastern Bloc along with a number of socialist states elsewhere in
the world. The COMECON was the Eastern Bloc's (also militarily allied with the Soviet Union
in the Warsaw Pact) reply to the formation of the Organization for European Economic Co-
Operation in Western Europe (https://en.wikipedia.org/wiki/Comecon). Other donors who
became prominent later have also pursued multiple goals, although with individual
characteristics. These range from economic objectives (Germany and Japan), and a mission
civilisatrice (France), to maintaining close historical relationship. For example, two-thirds of
Britain's aid has traditionally gone to commonwealth countries. The Netherlands, Canada and the
Scandinavians are sometimes called 'like-minded' donors: they are presumed to share an
attachment to goals of 'humane internationalism'. After the 1973-74 oil price rise, some oil-
exporting countries (OPEC), chiefly Saudi Arabia and small Gulf States like United Arab
Emirates(UAE) have emerged as important donors (Burnell, 2011).
3. Overview of Foreign Aid Flow
United States have become leading donor since the inception of Marshall Plan. As per the OECD
2005 data, United States provided US $ 27.45 billion assistance, followed by Japan US $ 13.10
billion, United Kingdom US $ 10.75 billion, France US $ 10.05 billion and Germany US $ 9.91
billion based on volume of foreign assistance. But based on GNI size of donor country, Norway
is the leading country providing 0.93 percent followed by Sweden 0.92 percent, Luxemburg 0.87
percent, Netherlands 0.82 percent and Denmark 0.81 percent (Table 1)
Table 1 Net Official development assistance, leading donors, 2005
By Volume By percentage of GNI
Donors Volume
(US $
billions)
Percentage
of GNI
Donors Percentage
of GNI
Volume
(US $
billions)
United States 27.45 0.22 Norway 0.93 2.77
Japan 13.10 0.28 Sweden 0.92 3.28
United
Kingdom
10.75 0.48 Luxemburg 0.87 0.26
France 10.05 0.47 Netherlands 0.82 5.13
Germany 9.91 0.35 Denmark 0.81 2.10

4. (Desai & Porter: 2011, p 504)
According to the OECD 2005 data, Iraq is the leading recipient of foreign assistance receiving
US $ 4.65billion assistance, followed by Afghanistan US $ 2.19 billion, Vietnam US $ 1.83
billion, Ethiopia US $ 1.82 and Democratic Republic of Congo US $ 1.81billion based on the
volume of foreign assistance. But based on GNI size of recipient country, Democratic Republic
of Congo is the leading country receiving foreign assistance 98.61 percent of its GNI followed
by Sao Tome and Principe, Guinea-Bissau, Micronesia and Eritrea respectively (Table 2)
Table 2 Net official development assistance, leading recipients, 2004
By volume By percentage of GNI
Country Percentage
of GNI
Volume
(US$billions)
Country Percentage
of GNI
Volume
(US$ million)
Iraq N/A 4.65 D R Congo 98.61 1,815
Afghanistan 34.75 2.19 Sao Tome
and Principe
66.59 33
Vietnam 4.51 1.83 Guinea-
Bissau
63.59 76
Ethiopia 23.54 1.83 Micronesia 47.26 76
D R Congo 98.61 1.81 Eritrea 42.38 260
(Desai & Porter: 2011, p 504)
4. Debates on Foreign Aid
The pertinent questions here are: Why donors give aid? Do we believe that they are altruist?
There is no unanimous answer of this million worth question amongst the academia and
scholar. In other words, the academia and scholars have their different logics in this regard. The
scholars argue that donor-country governments give aid primarily because it is in their political,
strategic, or economic self- interest to do so. Some development assistance may be motivated by
moral and humanitarian desires to assist the less fortunate (e.g. emergency food relief and
medical programs), but there is no historical evidence to suggest that over longer periods of time,
donor nations assist others without expecting some corresponding benefits(political, economic,
military, etc.) in return ( Todaro & Smith, 2012).
4.1 Pro Aid Theory: Capital diffusion

5. There is a growing international awareness that poverty anywhere is a danger to prosperity
everywhere and prosperity anywhere must be shared everywhere (Jhingan, 2001).In the early
decades of development assistance, it was underpinned by an economic logic that stressed its
contribution to filling two 'gaps' constraining development. Aid supplements savings and
enhances investment, making possible an expansion of productive capacity. It furnishes foreign
exchange for essential imports like machinery and, in many cases, fuel and food (Burnell, 2011).
The proponents of the modernization theory presume that the development of third world
countries will happen through the diffusion or trickling down of capital, technology, and
organization methods from modern capitalist areas to developing countries. This theory views
underdevelopment as an original condition of backwardness and proposes that, for developing
countries to draw level with the developed countries there is need for greater penetration of
modern economic principles and institutions (De Beers et. al., 2000). This postulation given by
the modernization theorists is that underdevelopment is primarily a result of the lack of capital
and technological expertise, thus underdevelopment is looked upon as a kind of deficiency
disease which can be taken care of through injections of missing ingredients with foreign aid
being one of these missing ingredients. In other words, aid represents supplementary capital and
is essential for speeding up economic development. Given these suppositions, it is evident that
modernization theory places strong weight on the need for intervention in promoting economic
development and on the thought that more capital leads to greater development.
4.2 Anti-Aid Paradigm: Dependency Theory
Foreign aid leads to dependency because the donors insist on aid-tying to the purchase of goods
and services at costs much higher than the competitive world price, and on monetary and fiscal
policies detrimental to the national interests of the recipients of aid (Jhingan, 2001). In this line
of thinking, by the 1970s heavy criticism was directed at most of aid, by dependency thinkers
and many others in the North and the South, many of whom vied aid as an instrument of
domination and exploitation. Dependency exits when one party relies on another without the
reliance being reciprocal. Baldwin (1980) defined dependence in terms of reliance on others,
lack of self-sustenance and self-sufficiency. He also defined it in terms of the benefits that would
be costly for one to forego. Thus, most developing countries found themselves in this tragic
situation. McKinlay (1977) further elaborated that in such a relationship, one party may choose
to terminate the relationship with little or no costs while the other can do so only at considerable

6. costs. Given the above suppositions, the reliant state, therefore, operates in a subordinate or
dependent position. More so as Moon (1983) puts it, the dominant party establishes a dependent
relationship because it generates a degree of control or influence, and the main use of aid is the
potential to control. Caporaso (1978) alluded to the fact that this control can be used for a variety
of reasons dictated by the dominant state. The critics doubted that it could be an effective means
of reducing Third World poverty, and noted that it benefited privileged elites in the South as well
as donor countries. Rather, they argue that aid has led to the re-colonisation of the Third World
countries through the strings attached to it. Likewise, in the 1980s, ODA was challenged by the
rise of the neoliberal agenda in the west. They maintained that aid was responsible for excessive
government and thereby distorting the market. Neoliberals, especially, claim it can damage
donor economies too, by distorting resource allocation. Thus, both groups of critiques saw aid as
part of problem but not the part of solution. In fact, these LDCs have become addicted to foreign
aid. Foreign aid leads to dependency because the donors insist on aid-tying to the purchase of
goods and services at costs much higher than the competitive world price, and on monetary and
fiscal policies detrimental to the national interests of the recipients of aid.
The 1980s saw a dramatic expansion of conditionality-based lending linked to recommendations
for economic policy and institutional reforms. The advice embraces neoliberal tenets and
embodies what became known as the 'Washington Consensus'-structural adjustment loan (SALs)
for structural adjustment programmes (SAPs) became major features. The conditionalities
incurred much resentment, not least because they appeared to be coercive and offensive to
sovereignty (Killick et.al.,1998). Eventually, it has created foreign debt crisis thereby threatening
the national security.
5. Concluding Remarks
Foreign aid was thought to be indispensable for accelerating pace of economic development of
resource deficient least developed countries (LDCs) in their early stage development. It is a
matter of fact that prior to the World War II, most of such LDCs were the former colony of
developed countries of the contemporary world. They gained freedom after World War II and
tried to give pace of development on indigenous base. But unfortunately they were desperately
lacking human capital, physical capital, financial capital, technical know- how, governance
system and so on so forth which were key for unlocking the road map for overall development.
Under such a situation, they once again sought foreign assistance from developed countries.

7. They received bilateral and multilateral loan package as per the terms and conditions set by
donor countries as well as Britton Wood institutions like International Monetary Fund (IMF) and
World Bank. But, unfortunately most of the LDCs were not able to pay back loan consequently
they were engulfed in debt-trap circumstances and ruined their domestic economic infrastructure.
It has led to a situation where LDCs have failed to set their own pace and direction of
development, free of external interference. Since development plans for developing countries are
drawn thousands of miles away in the corridors of the IMF and World Bank based on the blind
path of false paradigm model. The most of the LDCs lost their autonomy to control and direct
national capital and even increase its bargaining position with respect to foreign capital. In the
light of this, LDCs' postcolonial pace of development has been thwarted by external pressure
acting against internal values and traditions. In short, aid has led to the re-colonization of LDCs
through the strings attached to it.
References
Burnell, P.(2011). Foreign aid in a changing world. In Desai, Vandana & Potter, Robert B. (Eds),
The Compilation to Development Studies (pp. 503-507).Viva Books Private Limited.
Baldwin, D. A.( 1980). “Interdependence and Power: A Conceptual Analysis”. International
Organization 34 (4): 471-506.
Caporaso, J. A.( 1978). “Dependency and Power in the Global System: A Structural and
Behavioural Analysis”. International Organisation
Chakravarti, A.( 2005). Aid Institutions and Development. New Approaches to Growth
Governance and Poverty. USA: Edward, Elgar Publishing Limited.
De Beer, F & Swanepol, H. (2000). Introduction to Development Studies. Cape Town: Oxford
University Press Southern Africa.
Desai, V., & Potter, R.B., (2011). The Companion to Development Studies. Secon Edition,
Hodder Education , Great Britain.
Killick,T., Gunatilaka, R. & Mar, A. (1998). Aid and the Political Economy of Policy Change,
London and New York: Routledge.
Moon, B. C. (1983). “The Foreign Policy of Dependent State”. International Studies Quarterly
279(3):315-340.
Jhingan, M.L.(2001). International Economics. 5th edition (pp.462-472)Vrinda Publications (P)
Ltd. Delhi.
McKinlay, D. R, & Little, R. (1977). “A Foreign Policy Model of US Bilateral Aid Allocation”.
World Politics 30(1):58-86.
Todaro, M.P. & Smith, S.C.(2012). Economic Development. Tenth Edition (pp.715-738).
Dorling Kindersley India Pvt. Ltd. New Delhi
https://en.wikipedia.org/wiki/Comecon

8. http://www.britannica.com/topic/foreign-dependency
https://en.wikipedia.org/wiki/Organisation_for_Economic_Co-operation_and_Development
http://stats.oecd.org/Ind
https://en.wikipedia.org/wiki/JEL_classification_codes