Oxfam: most foreign aid is wasted

By Alex Singleton | 28 February 2005

The front page of today's London Metro features a new Oxfam and ActionAid report. The headline is: "Why 80% of global aid goes missing". Donor bureaucracy and linking aid to the donor country's industries are particularly criticised. The report, Millstone or Milestone?, makes a number of interesting points.

Oxfam and ActionAid say that 80 official agencies and 35,000 aid transactions a year impose a huge administrative burden on poor countries.

The report attacks the practice of "round-tripping" aid. This is where countries link aid to the purchase of products from companies at home. This wastes aid money and constitutes corporate welfare.

But then the report says that procurement should be biased towards local producers in the recipient countries. These local producers should be decided by the recipients. This would be a mistake. Bringing in overseas expertise is in and of itself highly valuable. Moreover, such a local producer bias would mean many such contracts would be awarded to politically-powerful friends of the state, rather than in an open procurement process. Similarly, the report says aid should use a recipient country's own administrative infrastructure. There may be a case for this, but where there is a high level of corruption in a country's civil service, it is not clear that this would be a sensible move.

The report is also mistaken when it says that aid should not be tied to specific projects. Untying aid would lead to more aid being wasted, not less. Tying aid to specific projects has helped move away from money disappearing into Swiss bank accounts or being used for the purchase of arms.

But, criticisms aside, this report is an important contribution to the debate on aid. Intentionally or not, it reinforces the case why trade, rather than aid, is key to improving the living standards of poor countries.