Foreign aid can be defined as economic assistance from one country to
another, the recipient typically being a less developed country (LDC). Aid is
usually intended either to provide humanitarian relief in emergencies, to promote
economic development, or to finance military expenditure. Aid may take the form
of outright gifts of money, which may be tied to purchases from the donor, or
untied and available for expenditure anywhere. It may take the form of soft loans,
on terms easier than those available to the borrower in world capital markets. Aid
may also be given in kind, including food, plant and equipment, military supplies
or technical assistance (Dictionary of Economics, Oxford University Press 2002).
Official Development Assistance (ODA) is defined as government aid
designed to promote the economic development and welfare of developing
countries. Loans and credits for military purposes are excluded. Aid may be
provided bilaterally, from donor to recipient, or channeled through a multilateral
development agency such as the United Nations or the World Bank. Aid includes
grants, "soft" loans and the provision of technical assistance. Soft loans are those
where the grant element is at least 25% of the total. (OECD, 2010). The broader
definition of Foreign aid subsumes all money classified as official development
assistance and further incorporates military assistance, political development
programs, export promotion, debt forgiveness and non-concessional lending by all
bilateral and multilateral organizations. Foreign aid itself can be distinguished into
various categories based on its purpose and effects, intended upon the recipient
country. Financial assistance could be disbursed for various reasons including
strategic, political, economic or cultural reasons, which in turn is used as a basis to
differentiate various types of donors.