Foreign aid refers to transfer of real resources from governments or public institutions of the richer countries to governments of less developed countries (LDCs) in the third world.

The flows of foreign resources can be of many types and it is important to know the different elements. Foreign capital flows are generally divided into two broad streams - official and private. The official capital flows are in turn subdivided into bilateral and multilateral flows. Official bilateral flows consist of capital provided by government of

donor to government of recipient countries. Multilateral flows consist of capital flows from multilateral organisations such as the World Bank, the United Nations, the IMF.

Both types of the official flow can take the form of grants, loans or grant-like contributions.

Grants should be considered as the most desirable type of foreign aid since the represent a net addition to the resources available for development porposes. Some loans are given by

the international lending agencies (i.e. World Bank) at interest rate which are lower than those in the capital markets. Where the loans are granted to the LDC'sat a concessionary rate for very long periods, say for 40-50 years, the inflow of foreign resources take the character of foreign aid as foreign private investment in the LDC's are not exactly foreign aid because of they are made on commercial terms.

Development Assistance Committee (DAC) defines foreign aid as official development assistance (ODA) and technical aid. The term excludes military assistance82. ODA flows must satisfy all three of the following criteria;

- their primary objective must be developmental, thus it excludes military aid and private investment,

- they must be concessional83 that is the terms and conditions of the financial package must be softer than those available on a commercial basis. DAC defines as Official Development Assistance (ODA) official flows with a grant element of greater than 25% at a 10% discount rate.

- the flows should come from governmental agencies and go to developing country governments.

Official Development Finance comprises ODA plus international flows

satisfying only the first and third criteria. Flows from voluntary agencies may also counted as aid, but do not satisfy the third criterion.