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Foreign aid flows to developing countries are substantially smaller than the other major sources of international financial flows, namely trade and FDI (as discussed in the previous two chapters). In recent years, most developed countries have officially committed themselves to increasing levels of foreign aid to 0.7 per cent of gross national product (GNP). On average, aid levels (about US$130 billion per year) are currently running at about half of this number.1

Who gives aid and who receives it? About 70 per cent of aid is provided on a bilateral basis and 30 per cent on a multilateral basis.2 About 70 per cent of all official development assistance is provided directly to recipient governments. NGOs account for about another US$30 billion in development assistance, and emergency and humanitarian aid for about another US$15 billion a year, on average.

Should we be giving aid? Assessments by long-time aid practitioners of the efficacy of foreign aid in promoting long-term economic development support a generally pessimistic view, in large part because foreign aid (which is mostly government-to-government) has done little or nothing to transform dysfunctional institutions in developing countries and may indeed have helped to perpetuate them,3 leading to what some commentators have called an “aid-institutions paradox”.4 In contrast, more optimistic views of the contribution that foreign aid can make to improving human well-being stress the substantial convergence that has occurred, through the dissemination of technologies and ideas, over the post-war years between many...