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Aid: boom or bust?

03 July 2014

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Letasi lulai is an advisor to the executive at The World Bank. His research has focused on the impact of aid volatility in Tuvalu.

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Huge swings in the proportion of foreign aid in Pacific budgets from year to year are inhibiting government planning, a new study has found.

The study highlights for the first time at a country level the remarkable oscillating in foreign aid in one Pacific Island nation; fluctuating from 18 per cent of the Tuvalu’s government’s revenue in 2001, to 76 per cent in 2007. Writing for Asia and the Pacific Policy Studies, the flagship journal of Crawford School of Public Policy at The Australian National University, World Bank advisor Letasi Iulai detailed his research on the impact of aid volatility on Tuvalu.

“Tuvalu is a very small country with a population of 10,000 and a small area of just 26 square kilometres. Foreign aid has played a very important role in the development of the country,” Iulai said.

“The main sources of government revenue in Tuvalu are foreign aid, tax revenue, fishing licences, distributions from Tuvalu’s trust fund and payments from the .tv internet domain. Most of these are outside the control of government; income is very difficult to control.

“This is important because the government provides everything from education, to health, transport, power. Any substantial shortfall in revenue requires the government to make the necessary adjustments. So the impacts of aid volatility are quite severe given the size of the country.”

While his research focussed specifically on Tuvalu, Iulai argues that it has broader resonance in the Pacific.

“Kiribati, Nauru have similar economies to that of Tuvalu, with foreign aid making up a big proportion of the budget,” he said.

“I found that project aid is more volatile than aid that goes to budget support and routine programs such as scholarships. I wasn’t surprised at all with this finding, that project aid is more volatile.

“Because of the smallness of Tuvalu, if there’s a huge infrastructure project provided by Japan which at times worth tens of millions of dollars, there is a big skew in aid flow.

“Aid volatility results in incomplete projects, high transaction costs, ‘Dutch disease like problems’ and fiscal planning problems.”

At a local level, this means employment is often sporadic and tied to these big aid projects, with people saving their salary to cover the years of unemployment that come between these large infrastructure projects.

“These projects come in waves to Tuvalu; people have to wait for another big project to come up again for work,” he said.

“It makes it very difficult for the government to plan.”

To read the full Asia and the Pacific Policy Studies article, go to http://onlinelibrary.wiley.com/doi/10.1002/app5.30/full

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