New research dispels the myth that aid does not lead to economic growth. Now we should move on in the debate and instead discuss how aid can be made even more effective. Jesper Bengtsson and Bertil Odén think so, due to the forthcoming report from the think tank Tiden.
Over the past decade, some debaters have argued that development aid does not lead to development. In its most fundamentalist form, criticism is even about aid being directly detrimental to the development of poor countries. A main argument has been that there is no demonstrable connection between the size of development aid and growth in a poor country.
Now has the research program ReCom (Research and Communication on Foreign Aid), within World Institute for Development Economics Researchcompiled years of international research in several important areas, one of which is the link between development aid and growth. And their results dispel the myth that aid does not lead to growth. On the contrary, the results from ReCom's project provide strong support for the conclusion that development assistance has, on average, had a robust and significant positive effect on economic growth. This is despite the fact that only part of the development assistance is directly aimed at achieving growth.
According to Professor Finn Tarp, who led the ReCom program, the effect varies depending on the circumstances in different countries, but on average and in the long term, development assistance corresponding to ten percent of the country's GDP results in economic growth per year increasing by just over one percentage point. Another ReCom study shows that in sub-Saharan Africa, aid from the mid-1960s to 2007 had a statistically lasting positive effect on either investment, GDP or both in 27 of 36 countries and in only three countries had a corresponding negative effect.
Increased economic growth also makes it possible to mobilize greater domestic resources by broadening the tax base. This reduces aid dependency. This is important because a strong aid dependency has been shown to create various types of distortive incentives. Strong aid dependence also risks creating a situation where a country's government feels that it is primarily responsible to the collective donors instead of its own population.
Our hope is that these conclusions will bring some sense to the Swedish development aid debate. In recent years, systemic criticism of development aid has grown to a level that has not occurred since the 1970s. The difference is that then the criticism came mainly from the left, where aid was perceived as an instrument of imperialism and neo-colonialism. Now it comes from the right. The fact that there is no demonstrable connection between the size of development aid and economic growth has been one of the main arguments from those who are critical of development aid as a phenomenon.
Now there are strong empirical studies that show that they are wrong. ReCom's conclusion that development assistance has, on average, a significant positive impact on economic growth also means that the discussion can be focused on how development assistance can be further streamlined.
Because at that point, much remains to be done.
The development assistance's international actors have created exaggerated expectations in the outside world by portraying development assistance as the main instrument for achieving development. This is unfortunate, as the size of aid in most countries has been relatively limited, at least in recent years. Domestic tax revenues, foreign direct investment, remittances from citizens living and working abroad contribute in many countries with significantly larger amounts. This trend has intensified precisely because of the higher pace of economic growth.
Institutions and policies in poor countries need to be further improved, as well as the discussion of the scope for external actors in that process.
Aid actors must also become better at ensuring the context of a country that is a partner. There are no simple answers, no "blueprints" that work everywhere. Instead, actors from the outside must interact with domestic actors and start from what is identified in the individual case as the real needs.
ReCom reminds us that it is only over a long period of time that the effects clearly emerge. The sharp focus in recent years on rapid and easily measurable results in development assistance should therefore be toned down.
Historically, results in the world of research on the relationship between growth and development assistance have not had a major impact on policy, as development assistance is affected by a number of different factors. Right now, among other things, the international processes around what will replace the Millennium Development Goals after 2015 and how development assistance will be adapted to the major global challenges in terms of climate, environment, financial stability, energy, food and water supply. In addition, development assistance has always been part of foreign policy.
But ReCom's findings show that development assistance is an aspect of growth in poor countries, and that growth provides opportunities for other forms of development. which reaches everyone.
Jesper Bengtsson, think tank Tiden
Bertil Odén, author
The think tank Tiden will soon publish a report by Bertil Odén on the connection between development aid and growth.