Donor countries and multilateral organizations may pursue multiple goals with foreign aid, including supporting low-income country development for strategic/security purposes (national security, regional political stability) and for short-and long-term economic interests (market development and access, local and regional market stability). While the literature on the effectiveness of aid in supporting progress on different indicators of country development is inconclusive, donors are interested in evidence that aid funding is not permanent but rather contributes to a process by which recipient countries develop to a point that they are economically self-sufficient. In this report, we review the literature on measures of country self-sufficiency and descriptive evidence from illustrative case studies to explore conditions associated with transitions toward self-sufficiency in certain contexts.
We first review the literature on measures of country self-sufficiency as discussed in multilateral and bilateral donor policy documents and in academic studies and gray literature on aid transitions. While self-sufficiency is inconsistently defined in the literature and donor policies, commonly reported measures or indicators do fall into five major categories: economic performance (e.g. GNI per capita), access to non-aid finance (e.g. creditworthiness, ability to raise tax revenue, investment capacity, trade capacity), institutional performance (e.g. quality of country institutions, country policy assessment, absorptive capacity, gaming behavior, policy ownership), aid dependence (e.g. aid to GDP ratio, Aid per capita, aid to government expenditure ratio), and vulnerability (e.g. instability, poverty, population).
The question of whether there is a causal link between receiving aid and transitioning to self-sufficiency is difficult to answer with certainty, as we can never know the counterfactual, i.e., what would have happened to a country’s trajectory in the absence (or presence) of aid. Further, the relationship between aid and self-sufficiency is endogenous, as one key indicator of self-sufficiency is reduced reliance on aid. The existing literature is largely descriptive or non-experimental and does not causally test the impact of aid on measures of self-sufficiency, though some quasi-experimental studies test for associations between aid and particular indicators related to self-sufficiency, such as GDP growth. Much of the literature on international aid focuses on aid effectiveness, rather than the relationship between aid and self-sufficiency, and self-sufficiency is not consistently defined or measured. However, descriptive evidence from illustrative case studies does shed some light on the conditions associated with transitions toward self-sufficiency in certain contexts.
We analyze trends in aid and indicators of self-sufficiency for Botswana, India, Indonesia, Ghana, and Rwanda, all countries highlighted in the literature on self-sufficiency as presenting examples of success or challenges in transitions toward self-sufficiency as measured by various indicators. For each case study we evaluate the conditions under which increased self-sufficiency was realized (or not) in each country, and summarize evidence from the literature on the role of aid in this process. These case studies reveal six main areas of ongoing debate in published and gray literature: whether or not aid negatively impacts a country’s progress toward self-sufficiency; whether transitioning countries off of aid should be the assumed goal of donors; whether tax capacity can positively impact transitions toward self-sufficiency; whether technical assistance and capacity-building programs can strengthen institutional characteristics associated with self-sufficiency; whether a “missing middle” of government funding status can threaten self-sufficiency of countries as they transition out of aid; and whether emerging donors may impact the aid landscape, especially in terms of government aid policy ownership.
Read our blog post about conceptualizing self-sufficiency for aid recipient countries.