Foreign aid has acquired a bad reputation in recent years. Fuelled by polemics such as Dead Aid by the Zambian economist Dambisa Moyo, the anti-aid backlash has promoted the notion that foreign aid is always wasteful and useless.
Yet the enormous publicity given to Ms. Moyo’s book has overshadowed the evidence that aid often can work. A new study by a leading anti-poverty organization, ActionAid, concludes that the intelligent use of foreign aid has helped many of the world’s poorest countries to boost their tax revenue and their economic growth.
African countries, often seen as heavily dependent on foreign aid, are among those that are dramatically cutting their reliance on foreign aid as they strengthen their economies and their state revenue. Ghana, for example, has cut its aid dependency from 46 per cent of government expenditure to just 27 per cent in the past decade. Mozambique has slashed its aid dependency from 74 per cent to 58 per cent in the same period, and Rwanda has reduced its aid dependency from 86 per cent to 45 per cent.
On average, the world’s poorest countries have cut their aid dependency by a third in the past decade. Yet, oddly enough, the countries that have been fastest to reduce their aid dependency have actually seen a tripling of their aid receipts in the past decade. They simply managed to increase their economic growth much faster than their aid donations -- a sign that the aid is helping to boost their growth.
Foreign aid tended to be wasteful in the 1970s and 1980s, when it was largely a political exercise, designed to win ideological allies in the Cold War. But more recently, aid has increasingly been targeted at useful goals, like improving tax collection and accelerating economic growth.
The report by ActionAid found that tax revenue across Africa has increased by more than 7 per cent of national income in the past decade. When properly targeted, aid can boost the savings and investment rate, and can increase economic growth by 0.5 to 1.5 per cent annually, the report said. Globally, aid has helped to halve the number of people in poverty since 1990.
Many African countries, including Ghana and Rwanda, have received aid from donors to improve their tax policies and make their tax collection more efficient. As a result, they have dramatically increased their government revenues. Ghana, for example, collects 22 per cent of its GDP in taxes -- one of the highest percentages in Africa.
Rwanda is another good example of how a poor country can boost its tax revenue and cut aid dependency. In 1998, it received a large grant from Britain to help it establish the Rwanda Revenue Authority. Over the next eight years, Rwanda quadrupled the amount of taxes that it collected, while drastically reducing its dependency on foreign aid.