Every $1 of UK aid increases UK exports by $0.22, study finds

Devex
By Molly Anders

A pallet of InstaPaste, a nutrient-enriched peanut paste used to treat children suffering from acute malnutrition are loaded onto a truck in Nairobi, Kenya. Photo by: Russell Watkins / DFID / CC BY

Bilateral aid has a positive impact on British exports and job creation, new research out today suggests.

Every $1 of aid from the United Kingdom creates $0.22 in new exports, according to a study by the Overseas Development Institute. It suggests that, as a result, the U.K.’s 2014 bilateral aid budget of about $5.9 billion created approximately 12,000 jobs domestically.

Max Mendez-Parra, a senior research fellow at ODI and one of the authors of the report, told Devex the benefits are the result of what he termed the “goodwill effect,” whereby recipient countries make a special effort to build or improve trade relations with donor countries as they build capacity.

He added that the authors believe the full number of jobs that have been created by U.K. aid to be much higher, as the analysis only covered a portion of the country’s $17 billion aid budget — excluding funds given through multilaterals, for example, as it is more difficult to isolate the U.K.’s impact through these convening organizations.

The evidence will be welcomed by U.K. NGOs making the case that development aid also holds benefits for the British public.

Secretary of State for International Development, Priti Patel, told the BBC last year that she hoped to strengthen the relationship between the U.K.’s aid and trade bodies, and said that “British soft power is exactly where DfID and our aid and other relationships around the world come together to deliver in our national interest, and [to] deliver for Britain when it comes to free trade agreements but also life post-Brexit.”

Mendez-Parra told Devex: “We wanted to look in more detail at the effects of aid on trade, based on some previous work done a couple of years ago for the Netherlands and Germany.”

He explained that the U.K. threw up a similar result to Germany, which has a comparable export market and thus reaps similar returns on its aid investments; while the Netherlands scored better, because of its small export market and the comparatively large amount it spends on aid — approximately 0.77 percent of gross national income.

The new paper attempts to quantify the direct and indirect benefit of bilateral aid on the U.K. job market. Using standard econometric techniques, the authors point to aid’s ability to increase consumer demand in many recipient countries, making the U.K. more likely to export goods there.

Targeted aid initiatives to lower trade barriers have also been largely successful, improving flows between countries.

“There’s no conditionality here ... it’s just often the decision of the recipient country to favour exports from the donors.”
— Max Mendez-Parra, senior research fellow at ODI

Crucially, the data assumes that no bilateral aid is “tied” — a process where aid must be implemented through goods or services procured in the donor country. The U.K. formally untied its aid budget in 2001, opening bidding up to all international companies and organizations. Nonetheless, the U.K. Department for International Development estimated in its 2014 annual report that more than 75 percent of grants and contracts still go to U.K. companies or subsidiaries of international companies based in the U.K.

“There’s no conditionality here, it’s not saying these exports are generated because the U.K. has some sort of conditions on the aid that is given; it’s just often the decision of the recipient country to favour exports from the donors,” Mendez-Parra said.

He detailed that bilateral aid investment resulted in almost $1.3 billion of additional exports in 2014, and that the expanding export market created more than 12,000 jobs at home. These were both direct — jobs in the sectors producing the goods for export, for example — and indirect, such as employment in the business services sector in order to manage the increase.

Almost half of the jobs created were among middle-skilled workers, and about a quarter among low-skilled workers.

Mendez-Parra added that the authors controlled for variables such as trade agreements, distance between countries and export tariffs — accounting for the potential effect of the U.K.’s exit from the European Union on trade agreements with recipient countries, for example.