Aid: Beyond Prejudice and Pride

By Eckhard Deutscher*

Photo: Credit: OECD | DAC

Republished courtesy of IDN-InDepth NewsSpecial – Part 1

PARIS (IDN) – "Africa is drowning in aid money."

"Too much aid goes to the private pockets of corrupt regimes and towards a bloated development industry, when much more should be spent on the private sector."

"Aid is a useless distraction given the impact of issues like trade, investment etc on development."

"Aid is not nearly growing quickly enough."

These are some examples of arguments put forward in a critical political and public debate of development co-operation that has intensified as we approach the reference date for substantial aid commitments and get closer to the deadline for the Millennium Development Goals in 2015.

While there are elements of truth in these statements, it is useful to dissect them and look behind often quoted but rarely substantiated ‘facts’.

AID: DISMAL UNDER-DELIVERY OR FAR TOO MUCH OF IT?

The recent publication of projections for aid volumes in 2010, the reference year for a range of international aid targets, has drawn considerable attention.

But what was the real story? That is indeed the question, as there are at least two stories that need to be told.

The first story is that the last years were very good and encouraging. Aid volumes have never been higher than they are today. Since 2005, when many donors made substantial aid commitments, Official Development Assistance (ODA) has increased by 25 percent in real terms.

The most recent figures, for 2009, show that there is no reversal, with total ODA recording a small increase. Probably more importantly, however, it increased by a rather significant 6.8 percent in real terms, once we take out debt forgiveness, a big, volatile factor that does not involve direct resource transfers.

Never before have we seen a period of similar sustained increase – and this in a time when all other sources of development finance have shown sharp reversals over the past years.

The second story is that the aggregate targets set for 2010 will not be fully met.

While most donors look set to reach their targets, several are set to miss them. Setting commitment targets creates a powerful motivating force for many countries to increase their ODA. Ambitious commitments do usually translate into major increases – even where these do not fully reach the volumes committed, they may well have a stronger impact on increasing development finance than less ambitious targets that are fully reached.

At the same time, a high level of 'ambition commitments' is no excuse for not meeting them – a range of countries have maintained sharp aid increases in line with their commitments, including some hit very hard by the crisis, such as Spain and the United Kingdom. What they tend to have in common is a well-planned and strategic approach to scaling up their aid.

Countries that did not plan early enough for aid increases tend to have fallen short, and, as a consequence, they now find their credibility called into question. This may affect their wider engagement on other important issues, e.g. climate change financing. Fulfilling commitments made repeatedly at head-of-state level is not an optional luxury.

Future aid commitment targets should include annual rates of increase, so that performance can be checked each year and aid volumes kept at predictable and reliable levels. This is, moreover, not just a question of strategic budgetary planning on the side of donors. Reliable and predictable ODA is essential for making aid effective.

The reason for this is as simple as it is essential: it is not possible to plan and use resources effectively, if there is no way to know what the resources to plan with.

One of the first questions by any serious manager asked to take on a project will be: What is the budget for this? Knowing this is essential. For public policy-making in developing countries, the answer is all too often: There is no way to know what your budget is. Developing countries cannot manage their budgets effectively if aid is unpredictable. Unpredictability of aid comes at a terrible cost for developing countries, and also for taxpayers in donor countries.

What about the arguments of Africa, in particular, drowning in aid money?

Here, some clarification might put things into perspective: First, Africa is the region with the highest development needs, so it is appropriate that this is considered in making aid allocations – as reflected in particular commitments for aid to the continent.

The share of ODA to Africa in 2008 stood at 36 percent, roughly the same as the share going to Asia. Second, country programmable aid – the aid that countries can actually work with, was at an average of about USD 29 per capita for Africa from 2005 to 2008.

By way of comparison, average health expenditure per person in OECD countries between 2000 and 2006 stood at USD 2824, more than 100 times in Africa. Or if we take education, in 2006, OECD countries spent on average USD 7840 per student a year.

The point is not to suggest that these amounts are excessive or should be reduced – they clearly reflect necessity, importance and public demand for these key services – but to give a sense of the amount of aid resources on a per capita basis that are actually available for financing development.

AID AND CORRUPTION

Corruption is clearly a big problem for development. This is true everywhere, in all regions of the world, and in countries at all income levels.

It is also obvious that big mistakes were made in the past, in terms of supporting kleptocratic regimes, in terms of failing to deal with conflicts and predatory actors. Much of this happened in a different geo-political context, when there was a cold war which set real agendas for major world actors in a way that was hardly compatible with political and economic development.

Is corruption an issue for aid today? Unfortunately, yes.

Are we learning lessons how to confront the problem? Again, yes.

Will it be possible to prevent instances of corruption completely? No. Corruption must never be tolerated, but even in the best-governed countries, there are instances of corruption.

Is aid the biggest concern when it comes to corruption? No. In fact, development co-operation is a key instrument in the fight against corruption, and a key priority for essentially all donors. The real challenge in terms of money lies in other areas, where there tends to be much less transparency, scrutiny and due diligence, such as in extractive industries.

But tackling corruption is not just a question in which area it is most rampant, or where the highest amount of money is involved. It is essential to have a good appreciation of the various dimension of a very complex challenge.

Corruption will not be reduced merely through conditionality of aid or by a fixation on controlling their aid inputs to the last dot. For one, this would fail to take into account the supply side of corruption, including from donor countries.

Until a couple of years ago, Western companies were happy to pay bribes in developing countries as a normal cost of doing business, which wase tax deductible back at home.

At another level, it is important to understand that it is not the solution for donors to avoid and work outside the country systems - this actually undermines further domestic capacity and accountability in the developing countries.

Rather, to address corruption, it is important to support the countries’ own capacities, processes and stakeholders in the fight against corruption. This means not just focusing on government, but working with political parties, parliament, the judiciary, media and civil society. This, rather than mere transfer of funds from government to government, is indeed the reality of today’s development co-operation.

Before denouncing aid, those who really care about fighting corruption in developing countries should ask themselves how donors could support this struggle in the absence of development co-operation.

GOVERNMENT AID VERSUS PRIVATE SECTOR-LED DEVELOPMENT

One answer put forward is to simply avoid the problem by focusing on the private sector instead of working with the government.

After all, there is no doubt that the key driver of wealth creation is the private sector. It is the market economy on which the success and wealth of OECD countries relies. A stronger emphasis on productive capacity and private sector led growth is essential, because this enhanced economic capacity is also the foundation to promote social and human development goals.

So why not cut out aid to governments and just focus on the private sector?

The answer is that the first condition for private sector led growth is the existence of an effective state that can provide political stability and drive economic and social achievement as the basis for a decent life for its whole population.

If we look at today's world, we see that where such states have emerged, often with considerable aid support, development has usually flourished, the importance of aid has declined over time and the private sector has become the driving force of growth and increasing well-being.

But what is the situation in the many countries where weak capacity or insufficient political cohesion and social consensus mean the de facto absence of such effective statehood?

What are the prospects for relying on private enterprise and civil society to drive development in a country where the state cannot safeguard property rights, contract enforcement or basic personal or economic security?

Where basic conditions for development are in place, it can play a crucial role in creating an enabling environment and in igniting a sustainable growth and development process.

Indeed, looking at the countries with the highest growth rates in Africa in recent years, for examples, reveals a list of “donors' darlings”: Botswana, Ghana, Mozambique and Tanzania – interestingly, recent critique of aid tended to forget this when referring precisely to these countries as an argument for the irrelevance of aid.

In many countries, where basic conditions for self-sustainable development are not given, or where they still depend on international support, development co-operation is essential for getting them into place in a way that is self-sustainable. This is a difficult, long-term process with lots of uncertainty.

- This is the first of two IDN-InDepth NewsSpecials by Eckhard Deutscher. -

See Part Two: International Development: You Don't 'Do' or 'Deliver' Development

* The writer has been the Chair of the OECD Development Assistance Committee (DAC) since January 2008. The DAC is a unique international forum where donor governments and multilateral organisations – such as the World Bank and the United Nations – come together to help partner countries reduce poverty and achieve the Millennium Development Goals.

Published by i On Global Trends - Mike Hitchen Online - news, opinion, analysis
See also Sydney Irresistible and for personal comment, Mike Hitchen Unleashed
Putting principles before profits