Do not stop aid to new middle-income countries

More and more developing countries are taking the step from low to middle income status. Uganda hopes to be next in line. Despite high growth, these countries face several challenges. Abruptly stopping aid to these countries risks being counterproductive, writes Annie Sturesson, senior economist at the Ministry of Finance in Uganda.

The group of middle-income countries, ie countries with a gross national income (GNI) per capita between 1 and 036 US dollars, now amounts to over 12 countries, while the group of the world's poorest countries has decreased to 615. war-torn South Sudan, to higher middle-income countries such as Hungary.

Aid decreases faster than income

One thing these countries have in common is that as their economies grow, aid decreases faster as new sources of income increase. In 2014, Sweden phased out aid to seven middle-income countries, including South Africa and Vietnam. The purpose was to focus Swedish development assistance to the poorest countries, which, unlike middle-income countries, have few funding opportunities in addition to development assistance.

But even if it is rational to reduce aid to richer countries, the picture of new middle-income countries needs to be nuanced. Decisions on support for middle-income countries should take into account the countries' financing options and socio-economic challenges.

Lack of funding for middle-income countries

The growing group of middle-income countries is complaining about a so-called "Missing middle dilemma" and lack of access to finance. Donors reduce their assistance and long-term loans with very low interest rates are exchanged for commercial loans. Foreign investment has increased but is often concentrated in extractive sectors.

A new study estimates that for every dollar earned, developing countries (including lower and upper middle-income countries) lose two dollars on profits taken by international companies, repayment of foreign debts and illegal economic flows.

The majority of the world's poor live there

One problem with reducing poverty reduction funds for middle-income countries is that it is in these countries that most poor people are. Up to 80 percent of all the world's poor today are estimated to live in these countries.

Many NGOs believe that the focus should be on helping the poor, no matter where they are. Social and economic and inequality tend to increase in countries with rapid economic growth. Middle-income countries are therefore often more unequal than poorer countries. Large income disparities damage social cohesion and increase the risk of conflict.

Uganda wants middle-income status

Uganda is one of the fastest growing countries in Africa with a focus on middle income status. Like its slightly richer neighbors, Kenya and Tanzania, Uganda has large funding needs but few sources of funding. A rapidly growing population places great demands on investments in social sectors and infrastructure.

As a result of a growing economy and planned oil production, for example, the African Development Bank has begun to redirect “softer” loans to more commercial lending instruments where Uganda has to compete with other countries for financing. To get faster and bigger loans, Uganda has started turning to China. More expensive loans, however, entail greater risks that the country will have large debts. Unfortunately, the most important and most stable source of income, tax revenue, is lowest in East Africa.

Did not meet the goal

Last year, there were high hopes that a recalculation of gross national income (GNI) would lead to Uganda reaching middle-income status. Or as a colleague at the Ministry of Finance put it: "When we become a middle-income country with our new GNI, we no longer need assistance."

However, the result was lower than expected and GNI per capita increased only to 788 USD. But how appropriate is it really that aid decisions are based on this type of numeracy exercise? A higher GNP indicates that Uganda's economy is growing, but says very little about the well - being of the population or how it is going with, for example, tax reforms.

Continued support is needed for reform work

It is both reasonable and necessary for co-operation between rich and poorer countries to change as the latter become richer. But shutting down the aid cranes abruptly can be counterproductive.

As the example of Uganda shows, the transition from a developing country to a trading partner requires several major and difficult reforms. Through continued support and new collaborations on private investment, tax collection and the counteracting of illegal economic flows, donors have an important role to play in the reform efforts of middle-income countries.

Annie Sturesson

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