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137 Monthly Lab. Rev. 1 (2014)

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Monthly Labor Review


JANUARY 2014

Foreign aid: history, theories, and facts

Brian I Baker

What drives a country to donate aid to another country? Is it altruism? The expectation of something in
return? Both of these? Something else? In Donor motives for foreign aid (Federal Reserve Bank of St.
Louis Review, July/August 2013), Subhayu Bandyopadhyay and E. Kataina Vermann present a
historical review of U.S. and other countries' foreign aid, together with theories and with empirical
facts that mostly support the theories. Overall, the authors find that motives of donating nations have
varied over the decades, but two stand out: humanitarianism and strategic interests. Both have existed
in different and changing proportions since about World War I, and both still exist today, but the
watershed events of September 11, 2001, have focused nations' efforts on the latter.
   The authors begin with an account of which of the world's regions have received foreign aid from
1960 to 2011. Throughout the entire period, sub-Saharan Africa has consistently received the most aid,
and that aid has increased from $6 billion in 1960 to $46 billion in 2011 (in constant 2011 dollars).
Also, there was a spike in aid to Middle Eastern nations in 2005-a phenomenon associated with the
Iraq war-as well as a decided upward trend in aid to countries in south and central Asia, likely
because of the growing involvement of the member nations of the Organisation for Economic Co-
operation and Development... in addressing security concerns originating from the Indian subcontinent
and surrounding areas.
   Next, the focus shifts to which nations have received U.S. foreign aid over the same period. In the
1960s, India received a disproportionate share of U.S. aid, because it was one of the poorest countries at
the time. Then, in the 1970s, Israel and Egypt got the lion's share of U.S. foreign aid, largely because
they were partners of the United States in attempting to broker a peace deal in one of the most turbulent
regions of the world. Later on, in the early and middle years of the first decade of the 21 st century, Iraq
was the recipient of large amounts of foreign aid as the United States prosecuted the war.
   After their historical review, the authors bring forth a number of theoretical models of donor nations'
motives proposed in the literature on foreign aid. Chief among these models is that of Leonard M.
Dudley and Claude Montmarquette (A model of the supply of bilateral foreign aid, American
Economic Review, March 1976), which, apparently, serves as an archetype upon which the other
models expand. According to that model, three donor motives play the leading role in decisions
involving foreign aid: expectations of gratitude, in the form of support for the donor's interests;
furtherance of the donor's economic interests, via the vehicle of more trade; and altruistic motives, the
desire to raise the standard of living in recipient countries. Dudley and Montmarquette express their
model in three equations which together imply that per-capita aid to a nation rises when (1) the value to
the donor of giving foreign aid to that nation is high enough, (2) the recipient nation's per-capita
income is low enough, and (3) the recipient nation's population is low enough.
   The authors then present various extensions and elaborations of the Dudley-Montmarquette model
before examining the empirical literature on the subject of foreign aid. Chief among the findings from
the literature are the following: (1) an increase of one standard deviation in civil or political rights
results in an increase of $29 million in aid to a recipient country, and an increase of one standard
deviation in government effectiveness produces an increase of $54 million (Subhayu Bandyopadhyay
and Howard J. Wall, The determinants of aid in the post-Cold War era, Federal Reserve Bank of St.


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