What Are the Different Types of Foreign Aid?

The United States provides foreign aid of various kinds to at least 95% of the countries in the world, though a far smaller number of countries receive any substantial aid in terms of dollars spent. For American taxpayers, the cost of foreign aid amounts to around $35 billion per year, including $20.7 billion in the first 7.5 months of 2016, or $2.93 million per hour. Foreign aid is not the only kind of foreign assistance, but it might be the most controversial. Some of the different types of foreign aid include bilateral aid, military aid, multilateral aid and humanitarian assistance.

There are three primary forms of international aid, as well as various sub-types. The first primary type is private foreign direct investment (FDI) from multinational or transnational corporations. These are typically equity holdings of foreign assets by non-residents of the recipient country. For example, American companies may engage in FDI by buying a controlling interest in a Nigerian company. FDI reached a peak of approximately $3 trillion globally in 2007. Global FDI was approximately $2 trillion in 2015.

The second primary type is what people normally think of when they hear the term "foreign aid." These are official development tools designed and funded by government agencies or international nonprofits to combat the problems associated with poverty. Humanitarian efforts spearheaded by governments are almost exclusively done by wealthier nations that are also members of the Organization for Economic Co-operation and Development (OECD). Each year, OECD countries spend between $100 billion and $150 billion in foreign aid. In the 50 years between 1962 and 2012, wealthy countries contributed a cumulative $3.98 trillion with mixed results.

The third primary type, foreign trade, is much larger and much less intentional. By all accounts, openness to foreign trade is the single leading indicator for developmental progress among poor countries, perhaps because free-trade policies tend to go hand-in-hand with economic freedom and political stability. An excellent breakdown of this relationship can be seen in the 2016 Index of Economic Freedom provided by The Heritage Foundation.

One of the most critical issues in the foreign-aid conversation is disbursement. Most disbursements are measured in terms of money given, such as how many dollars were donated or how many low-interest loans were extended. Many foreign-aid bureaucracies define success on the basis of nominal monetary disbursements. Critics counter that dollars of funding do not always translate to effective assistance, so measuring simply in money terms is insufficient.

Foreign-aid disbursements face many hurdles, including local corruption and alternative domestic agendas. In 2012, Ugandan Prime Minister Amama Mbabazi famously apologized to the United Nations when his aides embezzled more than $13 million of aid money. A 2015 report from the Stockholm International Peace Research Institute found that more than $100 billion in aid to Afghanistan had been wasted or stolen by "kleptocrats," who used the money to suppress entrepreneurs and even to purchase expensive villas.

There are also concerns about using aid to help businesses with connections to Washington, D.C. The U.S. Agency for International Development (USAID) openly states that "80 percent of USAID's grants and contracts go directly to American firms and nongovernmental organizations."

Bilateral aid is the dominant type of state-run aid. Bilateral aid occurs when one government directly transfers money or other assets to a recipient country. On the surface, American bilateral aid programs are designed to spread economic growth, development and democracy. In reality, many are given strategically as diplomatic tools or handsome contracts to well-connected businesses.

Most problematic bilateral aid disbursements are simple, direct cash transfers. Such foreign aid to Africa has been "an unmitigated economic, political, and humanitarian disaster," as written by Zambian-born economist and World Bank consultant Dambisa Moyo in her book "Dead Aid: Why Aid Is Not Working and How There Is a Better Way to Help Africa." Foreign governments are often corrupt and use foreign aid money to bolster their military control or to create propaganda-style education programs.

Military aid can be considered a type of bilateral aid, with one twist. It normally requires one nation to either purchase arms or sign defense contracts directly with the United States. In some cases, the federal government purchases the arms and uses the military to transport them to the recipient country. The country that receives the most military aid from the United States, and the most aid in general, is Israel. The American government effectively bankrolls the Israeli military to the tune of $3 billion per year.

Multilateral aid is like bilateral aid, except it is provided by many governments instead of one. A single international organization, such as the World Bank, often pools funds from various contributing nations and executes the delivery of the aid. Multilateral assistance is a small part of the U.S. Agency for International Development's foreign aid programs. Governments might shy away from multilateral aid because it is more challenging to make strategic decisions when several other donors are involved.

Humanitarian assistance can be thought of as a targeted and shorter-term version of bilateral aid. For example, humanitarian aid from wealthy nations poured into the coastal regions in South Asia after a 9.1 magnitude earthquake triggered a tsunami in the Indian Ocean, killing more than 200,000 people. Because it tends to be higher-profile than other types of aid, humanitarian efforts receive more private funding than most other types of aid.