How Foreign Aid Affects The Economy of Underdeveloped Countries

The issue of foreign aid on underdeveloped countries and the effect that it has on their economy, as well as the economy of the giving countries has been of great controversy. The reason for this controversy is the fact that while some might argue that foreign aid is beneficial for the economy of of the needing countries, for multiple diverse factors, others debate that the aid does the exact opposite and instead negatively affects the economy. Nonetheless, foreign aid is a factor that negatively affects the economy of underdeveloped countries because it stimulates dependency and creates a cycle of negative economic choices.

In the article Aid Dependency: The Damage of Donation, an accurate definition of foreign aid decency is given. The author states that “Aid dependency refers to the proportion of government spending that is given by foreign donors.” The question that arises however is, how does foreign aid increase dependency? Foreign aid on underdeveloped countries increases dependency over the help because when a country is getting economic aid, then that country will be in debt with the country that is providing said aid. If the underdeveloped nation did not have the economic means necessary to perform in certain areas, and was thus in need of accepting foreign aid, then that country is most certainty not going to be able to pay the debts instantly. The issue with not paying a foreign aid debt is that as the years pass by, the debt constantly grows. A hypothetical example is that if a country had a debt of $2 million dollars in 2010, then by the year 2017 that debt could’ve grown up to $5 just on interests. This would make that poor country need to rely on further foreign aid in order to maintain the nation surviving and slowly pay the debts.

There are many more factors caused by foreign aid, which also contribute to the under developing of a country. James Roberts provides one of these in the article Foreign Aid: Breaking the Cycle of Dependency when he states that “Unfortunately, weak judicial systems and corruption in the public and private sectors greatly impede democratic institutions and keep many potential MCC compact countries from growing and developing.” Furthermore, he also states that “Instead, it tends to promote policies that create economic distortions and foster dependence on the government. It reinforces instead of fixing the problems that undermine sustainable development -- including corruption.”

Underdevelopment has been an issue of great concern for economist and both the growing nations of the world, and the grown nations that own a strong economic base. Although the intentions of foreign aid are candid, an underdeveloped country does not have the base nor the government or plans to get itself into debt by accepting help from stronger countries. Diverse solutions like programs should be considered before intending to provide money through foreign help.