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The Power of Foreign Aid

The role that foreign aid plays in determining the power of a nation is all the more relevant today – where there are a rising number of donors and a large number of recipients.

My previous post dwelt with the role that diplomacy plays in determining the power of a nation. This post discusses the role of foreign aid in geopolitics. Foreign aid falls under one of the three elements of national power theorized by Kautilya – ‘Prabhavashakti’ which is described as the combined power of the army and the treasury.

Foreign aid can be widely defined as the voluntary transfer of economic resources from one country or a group of nations to another. Aid has many forms. It includes monetary assistance given for recovering from natural disasters or wars, military aid given in the form of training or hardware and development assistance for infrastructure. It does not include market based flows like FDI, FII or remittances. The intention of this post is to explore the influence a donor wields on the recipient country and vice versa through the variety of aid flows described. The aspects like the effective utilization of aid or its contribution to the economic growth or prosperity of the recipient are not the foci of this post.

 Why the role of foreign aid is all the more relevant today?

A brief history of the ‘aid industry’ will help understand it better. Large scale aid as an arm of foreign policy was used under the Marshall Plan at the end of WWII when US tried to rebuild the shaken western European economies. Subsequently, during the cold war, foreign aid was essentially used as a bargaining chip by the OECD nations to curb communism in infant nations and by Soviet Union to spread it.  After the fall of the Soviet Union, OECD nations remained the sole practitioners of large scale foreign aid distribution. After 9/11, the nature and destination of foreign aid was altered significantly. Usage of foreign aid to help nations counter terrorist movements became more commonplace. In recent times, countries like Brazil, India, China and Saudi Arabia have become donors to a number of nations. The aid these nations give is generally less tied to conditions than the OECD-style aid. This has thus changed the rules of the aid economy making it behave like a multi-player game.

How does giving aid impact the power of the donor?

One viewpoint suggests that aid can make countries tow your line. When the aid amount is a significant portion of the recipient’s GDP, the influence that the donor wields on the recipient becomes significant. For example, countries like Kyrgyzstan welcomed the US air base in Manas as the rent obtained from this air base was itself around 3% of the country’s national budget. Saudi Arabia has postured successfully as an adherent to the tenet of charity in Islam – it is one of the largest providers of aid to Palestine and wields significant influence there.

Donors give more to countries in which they have political or economic interests, rather than to countries that actually need aid or could effectively use it. A series of studies point out that nations that become temporary members of the UNSC receive more foreign aid and do so only for the period around their membership. Temporary members are also more likely to receive a World Bank project. This indicates that donors use foreign aid to increase their sphere of influence in the UN as well.

The attempts of donors to influence recipient nation’s behavior depend on how substitutable one donor is for another. This point is particularly relevant today as the number of aid donors has increased dramatically. Thus, in our neighborhood, the question before India is not about whether to give aid to Bhutan or Nepal, it is about how much and under what conditions. This is because these countries now have China as a potential donor in case India turns away from them.

How does receiving aid impact the power of the recipient?

Even though the multi-player donor scenario has increased the bargaining power of the recipients, an economy dependent on aid reduces the power of the recipient. Some views indicate that recipient nations governed by dictatorships are likely to choose the foreign aid source that is cheapest (with heavy concessions) but can affect the recipient negatively in the long run.

Post 9/11, the military-aid complex is thriving. However, using military aid as the only solution may result in a principal-agent problem as military aid decreases the incentives of recipient governments to negotiate with terrorist groups. But because eliminating terrorist groups means reductions in military aid, recipient governments do not have an incentive to completely eradicate terrorist organizations operating within their territory.¹


Foreign aid continues to remain a major part of foreign policy of all the nations that seek a greater role on the global stage. However, how much power results from giving out aid depends on a variety of conditions like the aid’s contribution to the recipient’s GDP, recipient’s leadership and the number of other donors willing to compete for power.


1. Introduction to the Geopolitics of Foreign Aid – Helen V. Milner and Dustin Tingley


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