Do we need foreign aid to transform this country?
Posted Wednesday, March 19 2014 at 02:00
President Museveni’s assent to the “Anti-Homosexuality” Bill sparked off a debate with a spin-off into the old ‘foreign aid’ controversy. Concerns relating to the threat of aid cuts by Western countries are rife.
In response to these concerns, I wish to underscore that foreign aid must never be made to become a substitute for our domestic responsibility to mobilise resources to invest in the country and the people. Although foreign aid can be useful, it has notoriously been characterised by a high level of volatility based on donor whims but also, unfortunately, predatory local financial impropriety.
As I write, there is a spate of aid cuts in reaction to the legislation. How far are these latest developments likely to go? My prediction is that there is likely to be a shift in Uganda’s aid portfolio from unconditioned budget support to direct project support overseen by agencies from the same countries. The Netherlands is reported to have frozen $9.6 million to Uganda’s Judiciary so as not to facilitate what they see as restrictive legislation, while Denmark is redirecting its aid from government to project support and the US and other Western countries are reviewing their aid folders to Uganda.
These developments are actually an opportune moment to critically reflect on the role of aid in the economic transformation of countries. While the Marshall Plan on which foreign aid is modelled, might have acted as a silver bullet in the reconstruction of post-war Europe, how important is aid to the development of a country? Is aid indispensable or is it over-rated? What has been the empirical record of aid in low income economies?
It is important to underscore the fact that while aid can help, its usefulness to the recipient country depends on many critical factors including 1) the degree of concessionality, 2) the terms and conditions of the aid, 3) possible ulterior motives that may be camouflaged in the aid package, but more importantly, 4) how the aid money is used by the recipient country. It matters greatly how the aid money is used by the recipient country.
This is why combating corruption is an important game changer.
Another critical dimension is the composition of the aid portfolio – namely the proportion of commercial, concessional and grant elements of the aid and the associated conditionality. In general, conditionality is aimed at restricting fungibility. Tying aid, however, is a double-edged sword. While it can restrict abuse of aid resources, it may also restrict the latitude for justifiable discretion in the use of the money. Although much of Uganda’s aid portfolio has comprised grants and concessional loans, any misappropriation can have negative cost-benefit implications that will hold our unsuspecting posterity to ransom.
Uganda’s official policy stance and debt sustainability strategy is to minimise indebtedness by opting for concessional aid, particularly grants and low interest loans. In the last budget, the minister of Finance reported that we now fund 80 per cent of the budget. This is a good trend based on a good debt strategy and going forward, the country must make up its mind to positively transform and achieve Vision 2040 with or without foreign aid. Hopefully, Uganda will soon be able to wean itself off aid with the advent of petroleum. I wish to emphasise, however, that our ‘ownership’ of our country’s development process is the acute prerequisite for successful development, which must primarily proceed from inside-out. Thus, what we do ourselves here in Uganda is key, aid on the other hand, is just the icing on the cake.
Drawing on the prevailing state of wisdom on the subject, aid will only benefit a recipient country when the country has an accountable developmental government, sound policy framework and the ability to choose an aid portfolio that is favourable and aligned to the country’s development strategy.
Dr Ijjo is a senior research Fellow with the Trade and Regional Integration Unit of the Economic Policy Research Center in Kampala. email@example.com