The Cost of Foreign Aid

Abstract

N O general agreement has been reached about principles that should govern cost sharing in international alliances. Burden sharing problems have been discussed in the literature, and I will attempt no review here.1 This paper is addressed to one modest aspect of burden sharing: what is the real cost to the donor of foreign economic aid? It may be useful after all, in discussing each country's aid contributions, to establish an economically meaningful definition of what constitutes aid. The paper discusses briefly the present definitions used by donor nations for valuing economic aid; it then goes on to consider how more appropriate valuation criteria might be established. On the basis of these criteria, I have first computed, within limitations set by existing data, the real cost of U.S. bilateral aid to underdeveloped countries in 1961. By these standards, U.S. foreign aid efforts involved considerably less resource sacrifice than the officially reported totals imply. Second, to illustrate the effect of this definition on the aid figures of other countries, I have computed the real cost of official bilateral and multilateral aid offered in 1962 by seven Western European countries, the United States, and Canada. The results indicate, on the basis of incomplete data, that other countries also tend to overstate the cost of their foreign aid; their relative overstatement frequently exceeds that of the United States. In 1961, the principal donors of aid to underdeveloped countries agreed to hold annual reviews of each other's aid efforts on the basis of an agreed aid definition; these reviews are conducted by the Development Assistance Committee (DAC) of The Organization for Economic Cooperation and Development (OECD). The present DAC system for analyzing members' aid flows defines total official aid as the sum of six elements: (1) contributions to international organizations for development purposes; (2) bilateral grants; (3) bilateral loans repayable in lenders' currency; (4) bilateral loans repayable in borrowers' currency; (5) consolidation credits; (6) transfer of resources through sales for recipients' currency (this consists almost exclusively of U.S. contributions of surplus agricultural commodities under Public Law 480). This classification indicates both an awareness of the fact that various types of aid have different impact on donor and recipient, and an inability to devise a system that could deal systematically with these differences. Thus, for example, DAC realizes that a loan repayable in soft currency is different in effect from one repayable in hard currency, and separate categories are therefore established. However, these and other subtotals are then added together to form a single aid total. Table 1 shows U.S. 1961 aid commitments as computed by this method.