Aid that pays off: Evidence the EU can't ignore in its next long-term budget

The EU is about to embark upon the negotiations of its next long-term budget – the multiannual financial framework (MFF) for 2028-2034 – with proposals currently slated for 16 July. Public finance is tight across Europe, and to make the case for external spending and development aid in today’s environment, proponents must go beyond traditional arguments about global responsibility and solidarity. In a period of geopolitical flux, governments are turning sharply to respond to security threats and increase their economies’ competitiveness. Aid must demonstrate strategic value in line with those priorities, while of course ensuring the right impact for its recipients.

Robust, independent evidence for the mutual benefits of aid is not as comprehensive as we would like it to be. That’s not because the benefits to governments and institutions providing aid do not exist, but because, until now, the focus of research into aid impacts has been on the recipient countries. A new initiative we are working on seeks to collate existing high-quality research and fill this gap.

Already at an early stage of the project, our first paper gives a sense of the vast scale of benefits possible for actors like the EU through aid investments that support progress in recipient countries. It demonstrates that foreign aid is a key strategic tool for securing Europe’s economic competitiveness and resilience.

Not only will aid cuts mean the EU loses out on a range of ‘returns’, they also risk creating opportunities for other geopolitical players and rising powers to gain a competitive advantage. For example, if non-EU governments make aid or aid-like investments, they could lock in advantageous trade relationships, secure access to resources and increase soft power with partner countries.

Aid that yields substantial economic returns

First, let us look at the direct economic case for aid. Aid for trade not only increases exports for recipients, it also facilitates imports to recipient countries from donors. International donors can on average expect nearly one additional US dollar in exports for each additional dollar of trade-related aid given, with increased donor exports ranging from around 60% to 100% of official development assistance (ODA) spent. Japan is exemplary in this regard, with evidence showing that for every additional US dollar in trade-related aid, Japan receives 1.1 additional US dollars in exports.

Aid for infrastructure creates opportunities for foreign direct investment (FDI) – one US dollar in aid invested in social and physical infrastructure and improved governance has been shown to draw in around two US dollars of FDI.

Even in areas where there has been less research to date, the direction of travel is clear. Following a mineral discovery, a recipient country receives 36% more aid compared to a country without such a discovery, suggesting that donors recognise the importance of early engagement in resource-rich regions to facilitate access to resources. In competitive terms, this is about positioning: aid helps ensure that EU firms have a foothold in markets that are of strategic importance.

For the recipient country it is important that this aid has a lasting, positive impact on its citizens. Our research finds that if it does not, the potential returns for international donors are also undermined. So, for aid to be successful, it has to offer mutual benefits.

Aid as a down payment on future stability and economic security

Beyond the more direct economic case for donors providing aid, there are a range of other potential benefits from aid investments. As the new survey paper shows, the evidence is particularly strong for returns to donors investing in post-conflict stabilisation and health.

Aid for post-conflict stabilisation is a key instrument for reducing conflict and security threats, and mitigating their significant economic impacts. Neighbours lose trade revenue, face disrupted supply chains and shoulder an influx of refugees, while more distant countries are affected through commodity price volatility, lost export markets and reduced investment opportunities. The average global cost of a civil war in a low-income country has been estimated at 64 billion US dollars.

In addition, fragile, ungoverned regions can become breeding grounds for extremist movements that represent costly security threats in both human and fiscal terms within and far beyond those countries. Aid has been estimated to reduce the recurrence of conflict by 36%.

Where aid tackles extreme poverty, it has huge potential to reduce conflict risks, since countries trapped in extreme poverty are almost six times more likely to fall into civil war than better-off peers. Moreover, aid for education has been shown to reduce cross-border terrorist attacks, with one study estimating the reduction as high as 70%. This underscores the importance for the EU to maintain strategic investments in fragile and conflict-affected states.

Aid for health is arguably even more compelling. By containing pandemics and infectious diseases, aid pays for itself. Eradicating smallpox globally via the World Health Organization has yielded massive returns for the US. Its total contribution as the largest donor to that effort works out the same as the monthly cost it would bear to vaccinate and treat the disease had it not been eradicated. 

If we take a future COVID-19 pandemic scenario, modelling has shown that every US dollar in preparedness could yield 1,100 US dollars in economic benefits in a country like the US. This gives a sense of the scale of benefits to the EU in a similar scenario.

Finally, the economic benefits of managing antimicrobial resistance are so high that the estimated return on investment in this area is 28 US dollars for every US dollar spent. Aid has been a vital resource in the effort to reduce the spread of drug-resistant pathogens. These measures reduce future disruptions to labour markets, supply chains and health systems across Europe.

Aid that shapes geopolitical influence

Aid that plays a critical role in shaping geopolitical influence creates benefits that add to the economic and security benefits. While soft power returns are harder to quantify, the patterns are telling. Research shows that donor countries tend to increase aid to temporary members of the UN Security Council who support their positions. Similarly, US aid for HIV programmes has been shown to increase positive public opinion of the donor among recipient communities.

Countries that perform well in the Global Soft Power Index top foreign direct investment league tables. Aid can contribute to this positioning by creating alignment between shared values and long-term development goals – something that purely commercial engagement struggles to achieve. This kind of thinking is already reflected in the EU’s Global Gateway strategy, but if the next MFF negotiations result in significant cuts to EU aid, any progress made will most certainly be undone.

Aid is a strategic lever that the EU must not undervalue

While the evidence base is not yet complete and there is scope for future research, it is certainly sufficient to prove that if EU competitiveness and security are prioritised in MFF negotiations, strategic foreign aid must form an integral and significant part of the EU budget. The EU would be wise to understand and improve the evidence for how aid that meaningfully supports recipient countries and their societies uniquely advances their goals. 

The evidence shows that the EU and its member states cannot afford to cut back on aid (further) without geopolitical, economic or security consequences. It is a strategic lever that can both do good, build strong relationships and strengthen Europe’s position in a rapidly changing world. 

Ill-informed cuts will neither save money nor make Europe safer. Instead, they will create vulnerabilities that will be far more costly to fix later than the savings they seek. For this, aid has to be structured in the mutual interest of donors and recipients alike. Now, more than ever, the EU needs to invest smartly in the world it seeks to compete in – for the benefit of both its own and the rest of the world’s citizens' prosperity and security.

Tobias Heidland heads the International Development Research Center at the Kiel Institute for the World Economy. Anna Hope is the policy, advocacy and communications lead at Global Nation.

The views are those of the authors and not necessarily those of ECDPM.

Our work on the MFF

Explore our dossier featuring ECDPM’s work on the new multiannual financial framework and the budget negotiations, along with insights into current and past frameworks. For an overview of how the EU can overhaul its approach to international cooperation and aid, see our recent work ‘Towards NDICI-Global Europe 2.0: Reforms for a new era of EU partnerships’.