Getting smart with aid

Climate change threatens the most vulnerable
Climate change threatens the most vulnerable

Today’s post is from Jon Lomøy, Director of the OECD Development Co-operation Directorate (DCD-DAC). It is also being published by Development Progress.

It’s fashionable these days to talk down official development assistance – ‘aid’, for want of a better word. Certainly, there’s little doubt that its relative importance has dwindled as more developing countries gather the economic momentum they need to finance their own progress and as aid becomes just one of many sources of finance for development.

All of this is welcome and helps us imagine a day when aid is just a distant memory. But that day is not today. Aid still matters, as even a quick glance at the websites of DAC members’ development agencies shows. Here we can see countless examples of how donor countries work with developing countries to get ahead of the curve in meeting social and other objectives.

So, aid still has a role to play, but that role is changing and sometimes at such a pace that it can be hard to keep up. That’s why I want to set down, first, some of the characteristics of the changing world in which aid now operates and, second, how aid can best meet the needs of developing countries in this ever-changing landscape.

The world in which aid operates has shifted profoundly. Take poverty. The poorest people once lived in ‘poor’ countries but, as Andy Sumner has shown, today around three-quarters of them now live in middle-income countries. On one level, this shift simply reflects what some have called a statistical ‘artefact’ – the poor didn’t move countries, but their countries moved classifications from low to middle income.

On another level, however, it underlines how the fight against poverty is evolving. As Owen Barder has argued, ‘The figures suggest that the biggest causes of poverty are not lack of development in the country as a whole, but political, economic and social marginalisation of particular groups in countries that are otherwise doing quite well.’

At the very least, this shift underlines the reality that developing countries are increasingly diverse, spanning a spectrum from middle-income emerging economies like China to low-income fragile states like South Sudan. Their needs vary greatly, as does their capacity to drive – and fund – their own progress. To be effective, aid must respond to this diversity.

A second key change is the increasing importance of non-aid financing, such as foreign investment and tax revenues, for developing countries, as well as development co-operation provided by countries beyond the DAC. At the OECD, we calculate that aid provided by the ‘traditional’ DAC donor countries now accounts for just one-quarter of total financing for development (official development assistance as captured in DAC statistics divided by total developing countries’ resource receipts, 2012 data).

Aid must also respond to the changing international development agenda. While the final shape of the post-2015 development goals has yet to emerge, they seem likely to include at least two priorities. First, building on the MDGs, world leaders will probably commit to the eradication of absolute poverty over a relatively short timeframe. Second, we’re likely to see a gradual merging of the development and sustainability agendas. This makes sense: it’s already clear that climate change threatens the hard-won progress made by many developing countries in recent years while undermining the foundations of future growth in both developing and developed countries – carbon emissions know no borders.

So, how should aid respond? In many areas, it already is. In recent years, for example, a growing slice of the aid pie has been spent on climate change mitigation. And the pie needs to get bigger: by 2020, an estimated $100 billion a year will be needed from public and private sources to tackle climate change. In other areas, however, aid is dragging its feet, with some countries getting far less than their fair share: using a recently developed analytical tool, the OECD calculates that 8 countries – from Madagascar to Togo – are ‘under-aided’.

All of this only emphasises the challenges that aid must address. If it’s to succeed, it must become ‘smart’ – increasingly targeted towards the poorest countries and those that face the greatest difficulties in raising alternative finance for development. It must also become increasingly strategic in creating effective development partnerships and in mobilising non-aid sources of financing for development. These ideas might sound abstract, but they have real-world applications. A few examples:

Untie aid to improve transparency: ‘tied’ aid obliges developing countries to use goods or suppliers based in donor countries. Untying aid creates greater transparency to build more effective partnerships, and cuts the cost of goods and services by at least 15%.

More value for money with predictable aid: uncertainties about future resources complicate countries’ decision-making and can stand in their way when it comes to the strategic planning of their own development priorities. More predictable aid allows countries to better implement their own development plans and reduces the deadweight loss associated with aid volatility, which has been estimated to amount to 15%-20% of the total value of aid.

Use aid to mobilise domestic funding: in Colombia, a $15,000 investment in capacity building for tax administrators was followed by a 76% increase in tax revenues – a rate of return of about $170 for every dollar spent.

Use aid to mobilise additional resources: guarantees for development have been attracting attention among both the development community and the private sector as an effective tool to leverage private finance for development. According to a survey recently conducted by the OECD, guarantees issued by development finance institutions, both multilateral and bilateral, mobilised $15.3 billion from the private sector for investments in developing countries.

A last point: ‘smart’ should also mean taking our knowledge of what works in aid and putting it to good use. But, as a recent OECD paper pointed out, only 0.07% of aid allocated to fragile states is currently being used to bolster tax revenues in developing countries. Smart move? I’m afraid not.

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  1. Luc Lapointe - 27/02/2014 Reply

    Dear Jon,

    Always love to read about “smart” aid and future directions. Yes there is a movement of “love” to “hate” ODA and I think it’s not because it’s not having any impacts….it’s just to it seems to be delivered in a way that fully disregard other efforts. I am writing to you from Colombia (not as a Colombiano) but as Canadian in Cali Colombia.

    I think I should address the “tax” thing right way because I think there is naive assumptions that there is a lot of revenues that could be generated from a middle class that is vulnerable to fall back into poverty. When it comes to the “poor” because I still have a problem in making the difference between poor, extreme poverty, or ultra poverty — would taxing the small transactions that they generate would actually serve them?? Let’s just assume “health” — It would take a miracle for this government to generate sufficient money to address all of the “holes” in the health system in Colombia — any investment from tax revenues would actually serve the rich ..not the poor. The cities are built on crumbling infrastructures — health, water, roads, access to energy, capacity building — it’s not impossible!! I just think it’s aVERY naive assumptions to think that taxing the poor will actually help them. As you mentioned — capacity building is working — now they have Red Light Cams and speed traps all over the city. Is it making road safer?? Well not really but it’s generating lots of revenues. It’s almost a circus to see how it works…every other week they have police stopping cars and motorcycle and seizing for none payments of fine generated via these speed traps and Red Light Cam…..because people can’t afford it.

    The problem is not money …as you said it’s to make it smart! The problem is not human resources — it’s to connect them to existing efforts. No need to tell you that the world is changing when it comes to ‘aid’ — I have a collection of press releases, speeches, and announcements from the club of 26 that…yes…the solution is corporations and philanthropy or the diaspora. So let’s just assume tomorrow that everyone would take on the challenge….corporations, foundations, and the diaspora – where would they go? who would they work with? what sector? what about the orphan causes? – how would you make it effective.

    Back to Colombia — I teach Privatization and Public Private Partnerships at the University amongst many other things. Most NGOs have limited capacities to apply for funds and report back — not that they don’t do good work…just that they would have a hard time delivering on international standard. As you mentioned, the “aid” is not tied in traditional ways — it’s tied to government officials – another private political clubs.

    I meet with all public organizations to discuss Private Aid….how would they best prepare themselves for this changing spectrum of development. I would challenge you to find me “ONE” good map of ODA….”one” that could actually help a local government understand these investment in the context of all the other things they do locally?!

    Back to Colombia — Look at the ODA mapping – it’s showing 1/2 billion in ODA while the OECD website shows 1 billion. Where is the other 1/2? The recent I bring this up is that the government can’t really make sense of “aid” from 26 donors…how would they make sense of small/punctual investments from 10,000 small organizations? Who would inform who?

    In the past two/three years, I have had the opportunity to present at a numbers of CSR events…where all have the same problem…how to report, what to report, who to report to, how to measure, and the most difficult component — the transaction cost! It may seem simple but millions (billions) are lost in transactions cost and currency fluctuations. Most NGOs don’t have the capacity to understand it, to put in place the process to mitigate that risk, and to make a “wise” financial decision…it would take a miracle for all organizations to make a transaction on the day that both currencies are at the perfect place…one very high and one very low (purchasing power).

    You also brought up the subject of “predictable aid” — well we all know that the financial crisis or the series of financial crisis….1993, 2008, and the many others have created the perfect condition for “aid” NOT to be predictable.

    Back to making AID SMART and yes back to Colombia — what would it take to have the OECD actively participate to invest in a model here in Colombia that would include a platform for collaboration, a global fund to mitigate risk of currency fluctuation, and a system that would reward “collective actions” — collective in the sense of starting from the local community (measuring local efforts) and complementing these efforts with ODA, PDA / PDI and a mix of philanthropy and CSR efforts.

    Making AID smart will actually function when the OECD will help create the right conditions that would reward collective actions.

    I use the PPT that Scott Simpson did for a presentation in Australia last year — it’s interesting to see how it went from “aid” that used to be crowdsourced / crowdfunded through religious missions and private actions TO official aid (private club of 26) and that now we are going full 360 to a crowdsourced /funded aid model ….but again without the right tools to make it effective and smart.

    Saludos from Cali Colombia and hope that through our ongoing efforts to lobby the UN and OECD …and host country governments …that we will eventually find a receptive “ear” to commit — whatever we do…however we do it …will generate impact but not as smart as it should be ….does it affect me? not really? but our commitment to act NOW could save many lives.

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