We Effect’s analysis of the Swedish government’s new plan for foreign aid

We Effect supports female farmers in Honduras to make an income out of their crops. Photo: Philip Krook

We have analyzed the new agenda for aid that was presented today by Sweden’s Aid Minister Johan Forssell. We Effect has five important recommendations for the government in turning the plan into reality.

1. The role of agriculture in economic development is central

Global hunger is increasing faster than ever. More than one in ten people are hungry today and the number has increased for several years in a row. This is a life-threatening development that risks leading to new conflicts, refugee flows and increasing poverty. Eradicating hunger is the most fundamental development goal. 

Therefore, it’s surprising that world hunger did not get more space in the new agenda. Eradicating hunger is the basis for peoples’ health, education and economic development. 

We recommend the government to focus new investments on creating jobs and economic development with the fight against hunger. The World Bank and the EBA agree that investing in agriculture is the most effective way to reduce poverty, and at the same time increasing food security in the rural areas where the shortage is often greatest.  

2 Reduce emissions here and contribute to adaptation there

Increasing the proportion of aid dedicated to climate issues is a positive development. This has been a significant ambition in Swedish aid policy for many years, and it is commendable that the government is upholding it. However, allocating a larger share of aid to reduce emissions in developing countries that already have lower emissions than Sweden and Europe is the wrong approach. 

We recommend that the government focus its climate efforts on contributing to the adaptation of developing countries to the new, warmer climate. In recent years, droughts, heavy rainfall, cyclones, and rising average temperatures have significantly contributed to increased hunger, poverty, and migration. These effects will only worsen, and concerted efforts are needed to help poor countries build their resilience. 

Probably the clearest shift in policy is the increased focus on trade. We Effect fundamentally supports the government’s exploration of new synergies between development cooperation and trade. 

The World Bank has noted that the global 2030 goals will never be achieved without co-financing and engagement from the business sector. Therefore, it is crucial for the Swedish government to seek synergies and new ways to align corporate agendas with development goals. 

This government is not the first to tackle this important challenge. Other countries such as the Netherlands, the United Kingdom, and Finland have already experimented with different methods to integrate trade and development. Even the previous Swedish government made cautious attempts through the Sustainable Transition Through Economic Partnership initiative, or “STEP.” 

There are several evaluations and important lessons from these countries that the government should consider. While critics may view them as evidence that “aid and trade” don’t work, we believe they should be seen as lessons to build upon. The co-financing and participation that the business sector can contribute to global development are simply too vital to dismiss. 

After reviewing the reform agenda, we present three crucial recommendations for the government to consider in implementing the new policy: 

3. It could become expensive for development goals to favor Swedish companies

An important lesson from other countries, such as the Netherlands, that have previously attempted to combine trade with aid is that it is challenging to develop a cost-effective and purposeful development policy if one commits to simultaneously benefiting one’s own export companies. 

Sweden has companies that shine – and even lead globally in certain areas – but they may be weaker in others. There is a risk that the strengths of Swedish companies will guide the choice of development projects rather than addressing the needs on the ground. Committing to procure from Swedish companies rather than sourcing goods and services through open competition in the entire market risks making interventions more expensive and thus less cost-effective. If Swedish companies are best suited, which they probably are in some cases, they will benefit regardless. 

We recommend that the government always start with the aid goals and the needs on the ground, then seek collaborations with the entities best suited to meet the task, regardless of the country of origin of the company or organization. This approach will make aid purposeful and more cost-effective. 

4. Shifting focus from the countries in most need to the most promising markets requires mature consideration and careful action

According to World Bank statistics, the majority of the world’s poor live in middle-income countries. So, even though it may not be entirely intuitive, it is not necessary to conduct aid in the poorest countries to combat extreme poverty. Sweden’s aid has traditionally prioritized the absolutely poorest and most challenging contexts. Now, the government wants to change that and focus more on middle-income countries. There are pros and cons to this approach. 

The government has stated multiple times that it can “fight more poverty per krona” in middle-income countries compared to low-income countries. Middle-income countries are also more interesting for companies to operate in, which is a fundamental requirement for aligning aid with Swedish export. Now, the government wants to create country strategies for all policy areas, rather than specific bilateral aid strategies. 

However, there lies a problem in this approach. While it is true that one can battle more poverty per krona in middle-income countries, all poverty does not look the same. In countries like China and India, the percentage of people living in poverty has decreased dramatically since the 1990s. In the 90s, every other Indian lived in poverty, while in 2019, it was fewer than one in ten. 

There are still poor people in both China and India, of course. But that does not mean aid funds should go there. If funds are shifted to such countries, they would need to be taken from poorer countries experiencing deeper poverty. And if the poorest countries lose their support, the risk increases that they will remain impoverished. This would contribute to widening global disparities, potentially fueling hunger, conflicts, and migration, thereby contributing to an increasingly insecure world order. 

The principles of aid dictate that those with the greatest needs should receive help first. Should a portion of aid be redirected to the poor in middle-income countries, even if their path out of poverty is shorter, and their country has reasonable prospects of handling development on its own? Or should aid only support those in the deepest poverty and countries with limited capabilities to manage development independently? It is a difficult, fundamentally moral question that requires mature consideration and cautious action. 

We recommend that the government ensures that changes in the Swedish aid portfolio between different countries and regions are made based on the central commitment of the global goals, namely that no one should be left behind. Do not abandon those with the greatest needs in favor of those with the most cost-efficient potential. 

 5. Trade is crucial for economic development, but not a guarantee

A significant and controversial component of the government’s reform agenda is aid-financed export credits and guarantees for companies wishing to engage in developing countries, including middle-income countries. However, these tools are not a guarantee for inclusive, fair, and sustainable economic development that benefits those living in poverty. There are plenty of examples of countries with thriving trade that do not meet the most basic needs of their population, human rights, or sustainability goals. 

For trade to lead to development, economic development must benefit the population and be inclusive, respecting human rights, workers’ rights, and global sustainability goals. It is crucial that trade involves sectors and product categories relevant to the development of the poor, either by creating jobs or increasing access to basic goods and services such as food and healthcare. 

Swedfund has long included aid and civil society organizations in its work when investing in developing economies to ensure that its investments not only provide monetary returns but also align with the goals of Agenda 2030. Now, as the government makes a broader effort to align aid and trade, they should follow their example and strive to develop methods that guarantee harmony between corporate benefits and development goals. 

We recommend that the government establishes an expert council with representatives from the business sector, government agencies, academia, and civil society. With their combined expertise and experience, they can provide guidance in operationalizing the reform agenda.