Financing for development? Show me the money!

Click to see the draft Addis Ababa Action Agenda
Click to see the draft Addis Ababa Action Agenda

Gabriela Ramos, OECD Chief of Staff and Sherpa to the G20

In 2009, Zambian economist Dambisa Moyo published her book, “Dead Aid”which shocked much of the international development community by claiming that ‘traditional’ systems of official development assistance (ODA) to Africa were not delivering, and arguing why we must find alternatives.

These conclusions triggered many stark reactions. That aid may have fallen short of its targets, and in some cases even run counter to them, is certainly a valid point; but to conclude that all forms of aid are therefore “dead”, and of no future use to developing countries, is quite a stretch. First, ODA spending is still alive and well: the OECD estimates that development aid flows hit an all-time high in 2013, at a record $135.1 billion; and while it has remained stable in 2014, overall ODA has increased by 66% in real terms since 2000, when the Millennium Development Goals (MDGs) were agreed to. To the credit of donor countries, these trends occurred when the world economy was being hit by the worst international financial crisis of our time. They were also the source of deep reflections on how to focus on development outcomes and impact, instead of only looking at the level of aid.

In this sense, the mainstream development co-operation debate is putting a lot of effort and innovation into how to use ODA flows more effectively – moving beyond traditional forms of aid and using it in more creative ways, through a wider range of partners and financing mechanisms, and performing more of a catalytic role. Indeed, ODA is increasingly being used as a lever to help countries attract other, complementary forms of financing that will be necessary to meet their development objectives. These other forms of financing include tax revenue and foreign as well as domestic investment. In 2015, the Sustainable Development Goals (SDGs) are being negotiated as successors to the MDGs – and to finance these goals, donors and developing countries alike fully agree on the crucial need for ODA to take on this leveraging role.

Indeed, aid alone (whether in its traditional or its more innovative forms) will not suffice for meeting the SDGs. In just one example, the resources needed every year to achieve the SDGs are estimated to be at least ten times greater than current levels of ODA. This leaves a vast space to be filled. First by donor countries delivering on their commitments to increase their support for financing for development. But also by mobilising private flows and investment that rely on ODA to fill the gap. For the first time in 2012, the share of global foreign direct investment (FDI) inflows going to developing countries exceeded that going to developed countries, making FDI by far the biggest source of capital flows to developing countries.

This said, the overall picture is not rosy: after passing $2 trillion in 2007, global FDI flows fell by 40% during the first two years of the global financial crisis. Six years later, in 2013, they were still down by 30%; in Europe investment outflows are down by as much as 80% since the crisis, with implications that stretch far beyond the Eurozone. The legacies of the crisis are still with us in the form of low investment, low growth and high unemployment. And even when we look beyond this immediate economic context, most developing countries continue to have particularly low levels of investment relative to GDP. In most African countries for instance, investment to GDP ratios struggle to reach 20%, well below the levels of most other developing and emerging regions. This relatively poor investment performance mainly results from a lack of adequate framework conditions through which countries can successfully attract and retain investment.

Developing countries therefore have a challenging task ahead if they hope to stimulate investment flows and make them work for development. To help governments rise to this task and enhance the necessary framework conditions, in June 2015 OECD Ministers plus partner countries that include developing and emerging economies, endorsed a comprehensive policy tool: the Policy Framework for Investment (PFI). Updated by a global taskforce in 2015 led by Myamar and Finland and composed by over 70 countries, the PFI is precisely aimed at addressing the structural conditions for investment in a coherent manner. This includes guidance for attracting investment in specific economic sectors, such as infrastructure, where ODA and private finance can work hand-in-hand particularly well. Based on the PFI, since 2006 the OECD Investment Policy Review process has been used by over 25 developing and emerging economies to assess and reform their investment environment so as to enhance private finance for development.

When they endorsed the updated PFI, Ministers encouraged countries to use the tool as a reference for development co-operation, and particularly as a path towards the SDGs. Exactly how different countries and regions can make the most use of the PFI, so as to attract investment that can complement ODA and tax in financing the SDGs, will be the topic of discussions at the Third International Conference on Financing for Development being held in Addis-Ababa next week. This could be a good opportunity for developing country governments as well as donors to move beyond traditional aid together, and towards more innovative and complementary forms of ODA and investment.

Useful links

OSAA-OECD high-level event on leveraging pension funds for financing infrastructure development in Africa

OECD project on institutional investors and long term investment

How the world reacted to the latest aid data

oda figures 2014Aid is one of those topics that always seems to attract controversy. So, it was no surprise that when the OECD released the latest data on Official Development Assistance (ODA) to developing countries last week, it attracted a flurry of comment and discussion – some positive, some negative.

On the plus side, many news reports noted that aid had stayed at close to historic levels in 2014, around $135 billion – a performance OECD Secretary-General Angel Gurría saw as encouraging “at a time when donor countries are still emerging from the toughest economic crisis of our lifetime”.

Less encouraging, a smaller share of that money made its way to the world’s poorest or least developed countries (LDCs). That looks to be part of a trend: “The decline in ODA to LDCs is something that we’ve been worried about for a couple of years,” the OECD’s Yasmin Ahmad said in The Guardian.

This shift away from supporting poorer countries was described as “shocking,” by ONE, an international advocacy organisation. “Alarm bells should be ringing,” it added. “In 2014, aid to the very poorest countries was cut by $128 million every week – enough to vaccinate 6 million children.”

There was concern, too, from Oxfam International. It pointed out that while total ODA appeared to have remained stable over the past two years ($135.2 billion in 2014 vs. $135.1 billion in 2013), this actually represented a fall of 0.5% in real terms.

Oxfam also argued that – with some exceptions – wealthy countries were still failing to meet a commitment to give 0.7% of their gross national income (GNI) in aid. “Governments first promised to deliver 0.7% of their national income to support poor countries when Richard Nixon was President of America and the Beatles were topping the charts,” said Claire Godfrey, Oxfam’s Senior Policy Advisor, said. “In the 45 years since only a handful of countries have delivered on this promise.”

Away from the headline story, much of the reporting focused on the performance of individual countries. Here, again, the picture was mixed.

Overall, 13 of the OECD’s Development Assistance Committee members increased ODA in 2014 while 15 did not. Countries in this latter group included Australia and Canada, where Stephen Brown of the University of Ottawa warned that “Canadian claims to leadership in international development are contradicted by our relative stinginess,” The Canadian Press reported. However, a government spokesman pointed out that Canada had increased its spending on humanitarian aid – funds distributed after natural disasters and so on – by 62% last year.

Other countries that cut back on ODA last year included France and Ireland. There, The Irish Times quoted Oxfam’s Jim Clarken as saying that “the poorest people on our planet need more ambitious action”. However, it also quoted a government spokesman as saying that the aid budget had been protected as much as possible “in the most difficult of economic circumstances,” and that Ireland remained committed to reaching the 0.7% of GNI target.

What about countries that raised their ODA? The United Arab Emirates proudly announced that it was now the “most generous” donor in the world, with ODA reaching 1.17% of GNI in 2014. “We will continue to reinforce our position as a global hub for humanitarian relief for all those in need of our help,” Prime Minister Sheikh Mohammed bin Rashid Al Maktoum was quoted as saying.

There was an impressive showing, too, from the United Kingdom. “While most countries cut foreign aid, ours goes UP,” a headline in The Daily Mail declared. In the report, Oxfam’s Max Lawson contrasted Britain’s record with that of other countries: “Aid saves lives. What we’re seeing is shameful indifference on the part of many of the world’s richest nations.” Still, not everyone was happy. The newspaper also quoted Conservative MP Peter Bone, who said that “when we have seen cuts at home, people find it very strange that we can give away so many billions of pounds a year.”

Useful links

Development aid stable in 2014 but flows to poorest countries still falling (OECD.org)

Detailed summary of 2014 ODA and complete data tables (pdfs)

OECD Insights: From Aid to Development

Successful modernization of aid

The relative weight of ODA in external financing to developing countries, 2000-11. Click to see full size.
The relative weight of ODA in external financing to developing countries, 2000-11. Click to see full size.

Today’s post is from Erik Solheim, Chair of the OECD Development Assistance Committee (DAC)

The donor countries representing well above 90% of all global development aid agreed in the Development Assistance Committee of the OECD on December 16 on a set of measures to modernize official development assistance, ODA. We will build on the historic success of aid and make it fit for the future. The goal is to provide more and better aid and support the global process of financing the post-2015 sustainable development goals.

The huge development progress over the past decades has made the world a better place to live than at any other point in human history. Extreme poverty, child mortality and malaria have been halved. The majority of people on the planet are better educated and live longer and healthier lives than ever before. But progress has been uneven. Development in states at war and in the poorest nations has been much slower. Conflict has even reversed development in some nations by 20-30 years. Extreme poverty will increasingly be found in weak states and in vulnerable groups such as indigenous communities, small scale farmers, ethnic and religious minorities, and the disabled. The majority of the very poor are women and they are living in rural areas. Global economic growth alone will not get all these people out of poverty. Specific policies targeting the most vulnerable groups and directing more resources to the least developed countries will be required to end poverty.

This is why the Development Assistance Committee has agreed to provide more development assistance to the least developed countries and other nations most in need, including small island states, land-locked countries and fragile states and nations in conflict. Those who have committed have reconfirmed the UN targets of 0.7% of national income for development assistance and at least 0.15% for the least developed countries. New agreed rules for concessional loans will give the poorest nations better access to this important source of development finance. The Development Assistance Committee agreed to modernise the reporting of concessional loans to encourage more resources on softer terms to the poorest nations while putting in place safeguards to ensure debt sustainability. The result of all this will be more and better development assistance to the poorest nations. More grants for schools and hospitals. More loans for railways, manufacturing plants and clean energy.

Development assistance is an important source of external funds for the least developed countries. But the big drivers of global development are private finances and domestic resources. Development assistance reached a record high of $135 billion last year, but foreign direct investments are almost 5 times greater. By far the biggest share of the money spent on education in the developing world comes from domestic resources. A three letter word for development is “tax”. A 1% increase in developing country tax revenues would mobilise twice as much for health, education and roads as total development assistance.

But development assistance can have a big impact on global sustainable development if used smarter to mobilize more private investments and domestic resources. $20 trillion will be invested annually across the world in the coming decades. More of this should be directed to green growth and development.

As our contributions to the global process of financing sustainable development, the OECD Development Assistance Committee will continue to develop new statistical measures to account for and mobilise more private finances. A new statistical tool measuring total official support for sustainable development will complement, not replace, official development assistance data. The purpose is to use public funds to mobilise more of those $20 trillion for green growth and development by making better use of the available financial instruments such as guarantees and equity investments. This work will be refined leading up to the third international conference on financing for development in Addis Ababa. We encourage all nations, private sector and civil society organization to work with us.

Better rules for development assistance are only relevant if it reduces poverty and has a real impact on the life of real people. More and better development assistance will help us towards eradication of extreme poverty by 2030. Our new broader measure is an additional contribution to the UN led process of shaping the sustainable development agenda and ending poverty while protecting the planet.

Useful links

DAC High-level Meeting December 2014, agenda and documents

OECD Development Co-operation Report 2014: Mobilising Resources for Sustainable Development.

Development finance: hundreds of billions more available

DCR 2014Today sees the launch of the OECD Development Co-operation Report 2014: Mobilising Resources for Sustainable Development. In today’s post, Erik Solheim, Chair of the OECD Development Assistance Committee (DAC) argues that hundreds of billions more could potentially be mobilized for poverty alleviation and sustainable development over and above the $134 billion in development assistance donated last year.

The enormous development progress seen over the past 20 years has been unprecedented in human history. Extreme poverty has been halved and 600 million people were brought out of poverty in China alone. The mortality rate for children under age five has been almost halved, saving 17,000 children every day. Economic growth and better government policies explain much of the progress. But official development assistance (ODA) has also been a great success and contributed to global improvements. However, much more and better financing will be required to eradicate extreme poverty and promote green growth.

Official Development Assistance is increasing and has never been higher. The main donors in the OECD Development Assistance Committee increased development assistance by 6.1% last year, reaching an all-time high of 134.8 billion dollars. Additionally, emerging and increasingly important donors like China, Turkey and Arab nations provided around 15 billion dollars. On top of that, Development banks such as the World Bank and Asian and African Development Banks, granted 40 billion dollars in more market-based loans not considered development assistance.

The Bill & Melinda Gates Foundation and other private foundations provided around 30 billion for development, while organizations like the Red Cross and World Vision International raised more than 30 billion dollars from the public. Remittances sent home to their families by overseas workers added 350 billion dollars to the flow of finances into developing countries. Foreign direct investments, by far the largest source of external finances to developing countries, amounted to 600 billion dollars.

Together, this adds up to more than one thousand billion dollars of external financing for poverty reduction, schools, hospitals, infrastructure and jobs in developing countries.

Several additional thousands of billions of dollars could potentially be made available for poverty eradication and green growth, and development assistance can help unlock these resources. Domestic resources such as taxes are the most important source of financing for developing, even in many of the poorest countries. For example, more than 1300 billion dollars is spent on education in developing countries every year but only 15 billion of this comes from development assistance.

Yet, while OECD countries collect on average 34% of their gross domestic product as tax, developing countries achieve only half this rate. The combined GDP of the developing world is over 30,000 billion dollars and adding a mere 1% increase in tax mobilization in the developing world could add 300 billion dollars for public services, schools and hospitals. The OECD has rolled out two programmes – Tax for Development and Tax Inspectors without Borders – to improve tax revenue generation. A pilot project assisting Kenya’s tax administration returned an incredible 1650 dollars in taxes for every dollar invested.

About 5000 billion dollars annually will be required for infrastructure investment to green our economies and support a future population of 9 billion people. The private sector will need to finance most of the required investments in roads, railroads, sustainable agriculture and green energy infrastructure. But development assistance can help mobilize such private investments.

Using financial instruments such as public guarantees, development assistance can help alleviate some of the risks associated with investing in developing countries and mobilize more private finances. New and innovative financing mechanisms like social impact bonds only mobilise 2 billion dollars out of the more than 600 billion dollars that the UN estimates potentially could be mobilized. Institutional investors such as pension funds and sovereign wealth funds are sitting on a staggering 83,000 billion dollars in assets in OECD countries alone. But their investments in infrastructure only represent around 1% of those 83,000 billion.

Encouraging leadership, improving the regulatory environment and using development assistance to alleviate risk would make it easier for institutional investors to finance roads and green energy generation in developing countries. An extraordinary 830 billion dollars would be mobilized for infrastructure investments in developing countries just by directing an additional 1% of our wealth and pension funds to this purpose.

Billions could be mobilized for global development by turning bad investments into good investments. Developing countries lose more to illicit capital outflows such as corruption, money laundering and tax evasion than they receive as inflows from aid and private investments. Poor countries are losing as much as one thousand billion dollars a year to illicit capital flows. These billions are invested in crime and lavish lifestyles rather than schools and hospitals. Illicit flows can be stopped by sharing information and streamlining regulations while prosecuting and jailing financial criminals in developed and developing countries alike.

Global development would improve if we directed more investments from public bads to global public goods. The 544 billion dollars spent on fossil fuel subsidies would do more good if invested in green energy. Any portion of the 1700 billions of defence expenditures would provide security and save lives if directed to peace instead of war. Better rules facilitating global trade could benefit everyone and raise global output by more than 400 billion.

Development assistance has been a huge success. But more and better financing for development is needed to eradicate poverty and support green growth. Traditional and emerging providers of development assistance must work with private investors and developing partners to mobilize more private investments and domestic resources.

Useful links

Find out more about the Development Co-operation Report 2014: Mobilising resources for sustainable development here and follow #DCR2014 for live coverage of the launch events on Twitter.

Aid only for the neediest? Official development assistance after 2015

Click to read the book
Click to read the book

Today’s post is from Jon Lomøy, Director of the OECD Development Co-operation Directorate (DCD-DAC)

According to the most recent OECD aid statistics, in 2013 official development assistance (ODA) reached a record high of USD 134.8 billion, representing a rise of 6.1% compared to 2012. While this is good news, more detailed analysis shows worrying trends. The growth was largely (about 33%) in non-grant ODA – mostly loans – which tends to go to middle-income countries. On the other hand, grants, which typically flow to less developed countries, lagged behind, increasing by only 3.5% (excluding debt forgiveness). What’s more, bilateral aid to sub-Saharan Africa fell by 4% in real terms. So while ODA is on the rise in overall terms, the countries with the greatest need are being left behind.

It is important to put these figures in context when we consider the future of ODA. Traditionally seen as the mainstay of development, in recent times ODA’s volumes and growth rates have been outstripped by foreign direct investment, market-based instruments such as non-concessional loans, and remittances. In addition, many developing countries now have solid domestic resource mobilisation capabilities that are helping them to finance their own development.

Nonetheless, a recent OECD study of external financing options available to developing countries shows that ODA is still a vital resource for the least developed countries, where it represents 75% of financial flows from external sources and the equivalent of 59% of domestic tax revenues. In the upper middle income countries, on the other hand, it accounts for only 6% of external financial flows and is the equivalent of just 0.8% of domestic tax revenues.

Another study takes a look at economic growth forecasts to 2030, estimating which developing countries will no longer qualify for ODA because their average per capita income, measured as average share of Gross National Income (GNI), is too high. At present, the threshold is just over USD 12,000. The projections show that 28 of the 148 countries currently on the OECD Development Assistance Committee’s (DAC) List of ODA Recipients could move above the threshold – but that still leaves many others for whom ODA will continue to be critical.

Does this mean that post-2015, ODA should be targeted only to the least developed countries? While in many ways this is – and should be – the future of ODA, the issue is not so simple.

It is, of course, important to continue to provide support to the neediest countries to ensure that they are not left behind. The OECD Development Assistance Committee is considering building on the current United Nations target, which calls on providers of development assistance to give 0.15-0.2% of their country’s gross national income (GNI) to the least developed countries, to create an even more ambitious target.

Yet it is not only a question of where we use development co-operation, but how.

Providers of development co-operation can help upper-middle income countries overcome stubborn development challenges, for instance, by sharing knowledge and providing technical assistance. Colombia used official development assistance to the tune of just USD 15,000 (two technical missions to Colombia in 2012) to fund a capacity development programme for tax administrators. Tax revenues collected by local authorities jumped from USD 3.3million to USD 5.83million in just one year.

We also need to get smarter about using ODA to leverage private flows for development. Mechanisms like government guarantees can take some of the risk out of investment, encouraging private investors to become active in places they would not usually go. This can help to bridge large funding gaps and bring down some countries’ dependency on ODA. At the same time, it can be particularly useful in many of the least developed countries and fragile states, where large amounts of money are essential to put in place the infrastructure they need to power economic growth, create jobs and reduce poverty.

Finally, the targets that will replace the Millennium Development Goals (MDGs) in 2015 will encompass environmental, economic and social sustainability challenges for all countries that are much broader than today’s MDGs. Funding these new goals will require inputs from across the board – from public and private sources and from all communities and countries. Development co-operation will have a major role to play in helping to bridge the development–environment divide.

Making ODA fit-for-purpose in the post-2015 world is a major challenge – and a major focus of the OECD in 2014. If we make it work, all countries will benefit.

You can read more about this work programme here.

Useful links

Profligate spending?

Global partnership“There are few more confused policies than this Government’s on foreign aid, which has seen the budget soar by a staggering 28 per cent in the past year, to £10.6 billion. This figure, revealed by the OECD, represents probably the biggest percentage increase in a single year ever enjoyed by any department in British peacetime history. And it has happened for no obvious reason. […] The fact that the overseas aid budget is one of the few to be ringfenced often feels more like a public relations exercise than an act of good governance. Rather than boasting of their compassion, ministers should provide more concrete evidence of what our spending has achieved.” That’s the UK Daily Telegraph’s reaction to what it calls “Profligate spending on foreign aid” after seeing the latest figures published by the OECD Development Assistance Committee (DAC).

Today and tomorrow, over 1500 “development leaders” will join Enrique Peña Nieto, President of Mexico, UN Secretary-General Ban Ki-moon and OECD Secretary-General Angel Gurría in Mexico City to discuss the kind of evidence The Telegraph is asking for. The first High-Level Meeting of the Global Partnership for Effective Development Co-operation will review global progress in making development co-operation more effective; agree on actions to boost progress; and “anchor effective development co-operation in the post-2015 global development agenda” – the set of goals and policies that will take over from the UN’s Millennium Development Goals after their 2015 target date.

The UN and OECD will be presenting Making development co-operation more effective: 2014 progress report. The OECD DAC’s data show that aid rose by 6.1% in real terms in 2013 to reach the highest level ever recorded, despite continued pressure on budgets in OECD countries since the global economic crisis. Donors provided a total of $134.8 billion in net official development assistance (ODA), marking a rebound after two years of falling volumes. In all, 17 of the DAC’s 28 member countries increased their ODA in 2013, while 11 reported a decrease. Net ODA from DAC countries stood at 0.3% of gross national income (GNI.) Five countries, including the UK, met a longstanding UN target for an ODA/GNI ratio of 0.7%. At the same time, the fall in the share of aid going to the neediest sub-Saharan African countries looks likely to continue in the years to come.

The 2014 progress report looks at whether this money was well spent, based on data provided by 46 countries that receive aid, or “development co-operation” as the book sometimes calls it. This isn’t the only piece of jargon you’ll need to know to be able to understand the report. The assessment starts by looking at “country ownership”. The case of Korea, where the Global Partnership was created in 2011 at a conference in Busan, illustrates what this refers to. It means that countries receiving aid take charge of the process. Korea wanted non-military aid rather than the guns, tanks and planes it was being offered, and it insisted on focusing on large enterprises rather than the small and medium-sized businesses foreign development experts told it were the key to success. History shows that the Koreans knew better than anybody else what they needed.

Like many aspects of international cooperation, this sounds like common sense, but people involved in actual projects can often tell of money wasted because the experts didn’t know enough about local conditions – building industrial plants without bothering about where the energy to power them would come from for instance. Country ownership appears to be strengthening, but it’s too early to say whether this is translating into increased use of developing countries’ own ways of assessing results to guide cooperation.

Country ownership should reduce the number of useless projects, especially when it is combined with another Busan indicator – untying aid. Many projects that failed in their stated objectives, or contributed little to helping most people in a country improve their lives, were financed to help businesses in the donor country. The money was given on condition that it was spent in a certain way, on certain suppliers, even if the same goods or services could have been obtained more cheaply elsewhere or the funds spent on something more useful. In 2012, 79% of ODA was untied, compared with only 50% at the start of the millennium.

A common criticism of aid is that it ends up in the offshore bank accounts of kleptocrats. And the critics aren’t just in donor countries complaining that income from taxes should be spent at home. Writing in The Nigerian Voice, Gambian journalist Matthew K. Jallow argues that “… a major debilitating by-product of foreign aid to Africa is the culture of corruption that has taken root at every level of every government. Today, corruption has become the way of life in every country in Sub-Saharan Africa”. Jallow’s strategy for fighting this is transparency, accountability, and good governance. Making development co-operation more effective takes a similar view, stating that the “drive for transparency is starting to show results”, although the report also warns that there’s still a lot to be done by donors and recipients alike. “Inclusiveness” is one way to boost transparency. In other words, include non-state actors in national systems and accountability processes. Unfortunately, a government-centred, North-South perspective is still common.

Overall, the report concludes that there are some encouraging signs that “longstanding efforts to change the way development co-operation is delivered are paying off”, and that the quality of this co-operation is improving, but we still haven’t met the targets that the Global Partnership set for 2015, and we won’t meet them without more effort.

Useful links

OECD work on aid effectiveness

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.

Useful links