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Friday, November 9, 2012

House of Lords Defines Aid Dependency

After months of traveling, job searching and excuse giving, I'm finally getting caught up on my Google reader. Among the most prolific bloggers, the "I have a theory and by golly I'm sticking to it" team of writers from the Why Nations Fail blog discussed something yesterday about the UK's House of Lords that is, like their book, detailed and littered with examples.

Tucked in nicely towards the beginning of the post was a mention of a report commissioned by our favorite unelected-yet-still-very-powerful legislative body entitled "The Economic Impact and Effectiveness of Development Aid". (Full report available here.)

Now I'm intrigued. And now I don't feel so bad about not reading the full post. I'm even more excited when I flip to page 25 to a section on "Graduation from aid dependency". If you read my last post you know that this is something that interests me deeply.

The report measures dependency as "aid as a share of GDP" and gives several examples of countries that have substantially reduced their 'dependency on aid', sometimes (as is the case with Ghana going from 16.3% in 2004 to 4.1% in 2008) in a very short period.

Unfortunately, unlike my rant about dependency, the word 'sexy' does not make an appearance. More importantly, defining aid simply as a percentage of GDP over-simplifies the issue in a way that is quantifiable but may not be all that useful.

Let's take Bangladesh as an example.

Touting Bangladesh as a success (aid was 8.2% of GDP in 1977 and 1.3% in 2009) may be a bit misleading. Doing so does not take into account annual population growth of 1.78% since 1999 or annual GDP growth consistently over 5% during the same period. Put another way, UK development aid to Bangladesh could have stayed the same (or even increased) in terms of money provided, but since population and GDP grew at a faster rate, they are apparently 'less dependent' on foreign aid. I haven't had the pleasure of visiting Bangladesh yet, but others who have might say that this would come as news to lots of Bangladeshis still very much reliant on development aid. Additionally, Bangladesh still receives £171 per year (page 39 of the report), the third largest recipient of of UK aid, scheduled to drop to 4th on the list by 2015. So much for freedom from dependency.

To be fair, the report is talking only about UK assistance and DFID puts much of its funding towards direct government to government, bi-lateral support. Because of this, they're mainly looking at how much less of a percentage of the recipient government's budget they have to support. Yet they've still chosen GDP (an indicator of overall economic growth) as their denominator. In the grand scheme of things this is a very narrow, and perhaps not altogether accurate, interpretation.

One takeaway from the report is that over-simplifying the definition of (or narrowly defining) 'aid dependency' opens up a rather large can of worms and more questions than any of us have time to answer. It's a complicated subject, one that needs much more research and more than a simple formula to truly understand. It deals with more than propping up developing country budgets. It has to do with people and businesses and their ability to be independent from handouts. 

A bigger (and more positive) takeaway is that the report valiantly places growth at the top of the agenda, saying that they "believe that poverty reduction through economic growth should remain the aim of aid policy" (page 34). I applaud this belief and encourage the US purse-string-pullers and all other donors (including you, Mr. Insomniac flipping through late night commercials of malnourished African babies) to follow suit.

In the meantime, the search for a better definition of aid dependency continues.