Many government use aid to achieve economic development, which is one of the macroeconomic goals. Economic development is a broad concept involving improvement in standards of living, reduction in poverty, and economic choice may also be included.
For economic reasons, aid supplements the lack of domestic resources such as foreign exchange. It also enables infrastructure changes such as dams roads, which would also be an increase in consumption of merit goods. From the aid, the cycle of poverty can be broken with more people with increased incomes leading to more investment.
In terms of politics, foreign aid is used to maintain power. The foreign aid in the form of military goods can suppress opposition and maintains the existing government in power. This may allow for swifter changes and help the development of poorer countries.
Generally, effective aid should overcome the low savings rate as explained in the economic reasons for aid. The money should also help reduce foreign exchange outflows to allow domestic companies to build the infrastructure of development. Aid should also reduce dependence on private investment. Ultimately, with these goals achieved, the standard of living can be increased, along with knowledge and local opinion. This latter would continually boost economic development as people would understand what to invest in. The country will now be able to provide more than just cheap food. Lastly, it also allows choice to be exercised by receiving countries. Tied aid on the other hand, reduces choice as since the developing country may not be getting the best deal. For these reasons, both the rich and the poor in developing countries will benefit, but especially the poor as the percent increase in income may be greater proportionally than to the rich.
