Development Strategies
Senior 6 · Economics
Development Strategies
Lesson 3 of 4
25 min
On 11 June 2026 the Minister of Finance presented Rwanda's budget for 2026–27: Frw 7,796.3 billion, of which domestic revenues provide Frw 5,273.8 billion, external grants Frw 548.3 billion and external loans Frw 1,974.1 billion (MINECOFIN). Twenty years earlier, foreign aid was equal to about a fifth of Rwanda's national income; by 2023 it was under a tenth (World Bank).
Think: is Rwanda becoming less dependent on aid? Are external loans "aid"? And why might a donor give less even to a country that uses aid well?
Worked example 1: how is the 2026–27 budget financed?
Only 7.0% of the budget is grant money that need not be repaid. Loans are a larger external source, and they must be repaid with interest, so a budget can become less dependent on grants while becoming more dependent on borrowing.
Definition
Foreign aid: the transfer of resources (money, goods, services or skills) to a developing country on concessional terms, that is, as grants or as loans cheaper than the market, to promote its development or relieve emergencies. Aid from governments and official agencies is called official development assistance (ODA).
| Classified by | Types | Meaning |
|---|---|---|
| Source | Bilateral; multilateral; non-governmental | From one government; from international bodies such as the World Bank's IDA, the African Development Bank or UN agencies; from NGOs and foundations |
| Terms | Grants; concessional (soft) loans | Need not be repaid; repayable at low interest over long periods |
| Conditions | Tied; untied | Must be spent on the donor's goods and services; can be spent anywhere |
| Form | Financial; technical assistance; food aid; in-kind goods | Money; experts and training; food; equipment or medicines |
| Delivery | Project aid; programme aid; budget support | For a specific project; for a sector; paid into the government budget and spent through its own systems |
| Purpose | Development; humanitarian (emergency); military | Long-term growth and services; disaster relief and refugees; security |
Worked example
Worked example 2: the two-gap model (illustrative figures)
A country targets 7% growth with a capital–output ratio of 4. Domestic saving is 18% of GDP. Growth at 7% needs imports of 36% of GDP, while exports are 21% of GDP. How much aid, as a share of GDP, does the two-gap model say is needed?
The binding constraint is the larger gap, the foreign-exchange gap, so aid (or other foreign inflows) of about 15% of GDP is needed. Filling only the savings gap would leave the country short of foreign currency for imported machines.
| Problem | Explanation |
|---|---|
| Weaker tax effort | Governments that rely on aid have less reason to collect taxes, and are accountable to donors rather than citizens |
| Volatility | Aid can rise and fall sharply (see the chart), disrupting budgets and projects |
| Conditions | Donors attach policy conditions that may not suit the country |
| Tied aid | Forces the recipient to buy the donor's often dearer goods and experts |
| Debt | Concessional loans still have to be repaid; debt service takes revenue |
| Fragmentation | Many donors, each with its own projects and reports, overload officials |
| Corruption and leakage | Funds may be stolen or wasted where controls are weak |
| Exchange-rate effects | Large inflows can raise the real exchange rate and hurt exporters ("Dutch disease") |
| Crowding out | Free food or goods can undercut local farmers and firms |
Jeffrey Sachs (The End of Poverty, 2005) argued that much more aid, well targeted, could lift the poorest countries out of the poverty trap. William Easterly (The White Man's Burden, 2006) and Dambisa Moyo (Dead Aid, 2009) argued that large aid flows had done little for growth and had weakened accountability. Most economists now ask a narrower question, the one Esther Duflo asked in Unit 5: which aid, used how, works?
Donors may cut, delay or refuse aid because of:
Warning
Not every foreign inflow is aid. Foreign direct investment, commercial loans and remittances are not aid, because they are not concessional. A concessional loan is aid, but it still adds to debt. When you judge dependence, look at grants, concessional loans and their share of the budget separately.
Tip
Structure any aid essay as need, problems, use. Why is aid needed (the gaps)? What can go wrong (dependence)? What makes it work (ownership, national systems, results, exit)? Finish with a judgement about which type of aid helps most.
Important
Discuss. Rwanda now finances about two thirds of its budget from domestic revenue. Should it aim to end all foreign grants by 2035? What would it gain, and what might it lose?
Dambisa Moyo, "Is Aid Killing Africa?" (interview with ABC, March 2009, posted on her own channel). Moyo puts the case against government-to-government aid. Note her two strongest arguments, then answer them using the "using aid well" list in this lesson.
Practice
Sources and credits
Written by Ganzaa: the text, the chart, the tables, the worked examples and the practice items. The figures in worked example 2 and the practice items are illustrative.
