Has foreign aid led to economic growth in Uganda?

Has foreign aid led to economic growth in Uganda?

Uganda’s impressive economic growth has led to a significant poverty reduction over the last two decades, while the country has, at the same time, been amongst the world’s top aid recipients. What is the relationship between foreign aid and economic growth in Uganda and elsewhere?

The utility of foreign aid is a hotly debated topic. Famed economist Jeffrey Sachs argues that development aid is capable of eliminating extreme poverty, if applied correctly. On the other hand, William Easterly of New York University claims that aid agencies have no incentives to actually measure their impact, and they promote the theory that “aid buys growth” largely on flawed economic calculations.

In his 2008 book Does Foreign Aid Really Work, Roger Riddell attempts to examine all available evidence and conclude whether aid is actually effective. His conclusion — “it depends” — is rather unsatisfactory, while also acknowledging the highly complex nature of modern aid and the impossibility in finding an answer that fits across all sectors and regions.

Looking at a specific case, Uganda’s experience offers some evidence that foreign aid may indeed have a benign effect on a country’s economic development.

A powerful aid presence

Uganda has been amongst the world’s top aid recipients for several decades. Between 2003 and 2012 the country received more than $16 billion in official development assistance (ODA), ranking them as the 13th largest recipient worldwide. The ratio of aid-to-GDP peaked at 19% in 1992, and has remained around 10% over the last two decades.

The government has for years relied on ODA for large parts of its budget, with international donors accounting for an astonishing 42% of the budget in 2006. Although this ratio has decreased to 25% in recent years, the government still relies heavily on donations to fund their bills.

When officials in the prime minister’s office in 2011 were caught embezzling $13 million in foreign aid, international donors withheld hundreds of millions of dollars in ODA – accounting for nearly 6% of government revenue, forcing them to raise money through borrowing instead.

Economic growth and poverty alleviation

In contrast to their status as a major aid recipient, Uganda has consistently shown strong economic growth over the last decades.

GDP has increased an average of 7% annually since 1990, reducing poverty levels from 56% in 1992 to 20% in 2012. The country is rich in mineral deposits, enjoys fertile soils with adequate rainfall, and has huge amounts of undeveloped oil reserves.

Despite impressive progress on reaching many of the Millennium Development Goals on HIV, school enrollment, and infant mortality, Uganda still suffers from many of the common problems for developing countries. Uganda’s global competitiveness is low and decreasing. Business conditions remains unfavorable to private companies, with weak infrastructure, lack of relevant education and poor financial services, and sky-high corruption rates at all levels of governance.

Although conditions have improved slightly in recent years, Uganda has also witnessed modest setbacks on key human development factors. The strong economic performance has also been very unevenly distributed geographically, as the northern and eastern regions largely remain impoverished.

A negative or positive relationship?

With foreign aid accounting for over 20% of government revenues, it is easy to assume that aid would have a negative effect on fiscal behavior — for instance, by eroding government incentives to raise capital through better tax collection. Yet, according to a UN report, the opposite has occurred in Uganda.

Foreign aid has not been used to balance budgets and has rather increased efforts at raising tax revenues (which are already very low) as aid donors regularly attach certain conditions on fiscal behavior. Uganda was also the first aid-recipient country that commissioned an independent evaluation of how foreign aid had contributed to its development progress, in particular the reduction of poverty.

The UN report concluded that international aid had contributed to a significant overall reduction of poverty — although this had not occurred in the north and the east of the country.

Since the authors acknowledged that it was difficult to quantify exactly how ODA had contributed to overall poverty reduction, the report is unlikely to satisfy those advocating that international trade is a better poverty weapon than direct aid. For Uganda, economic forecasts are largely positive — with an improved current account balance, strong economic growth, and continued poverty reduction — making the case that aid certainly doesn’t reduce economic progress.

About Author

Havard Bergo

Håvard is a foreign policy analyst who works in Kampala for LPC Consult International, a consulting company that specializes on developing projects in East Africa and Mozambique. He has previously worked with the United Nations in Bangkok and as a project manager for a research project in Montreal. Håvard graduated with an MSc in International Relations from the London School of Economics (LSE).