14
Foreign Aid and Foreign
Investment
Financial flows to developing countries take two main forms—aid that comes from foreign governments, often called official development assistance, and investment from foreign private companies, known as private capital flows.

Official Development Assistance
After World War II and until the early
1990s, the main source of external finance for developing countries was official development assistance provided by the governments of high-income countries in the form of food aid, emergency relief, technical assistance, peacekeeping efforts, and financing for construction projects. Donor countries are motivated by the desire to support their political allies and trade partners, to expand the markets for their exports, and to reduce poverty and military conflicts threatening international security.
After the breakup of the Soviet Union, former centrally planned economies also started to receive official assistance, aimed primarily at supporting market reforms. Table 14.1 shows the amounts of net official assistance provided to developing and transition countries by the member countries of the
Organisation for Economic Co-

operation and Development (OECD) in 1996.
On average, the donor countries in Table
14.1 spend about one-third of 1 percent of their combined gross domestic product (GDP) on official development assistance. Use Table 14.1 and Data
Table 1 to calculate which countries spend larger and smaller shares of their
GDP on such assistance.
Official assistance to developing and transition countries has three main components: •
•

•

Grants, which do not have to be repaid. Concessional loans, which have to be repaid but at lower interest rates and over longer periods than commercial bank loans.
Contributions to multilateral institutions promoting development, such as the United Nations,
International Monetary Fund,
World Bank,