In the 60 years since its early beginnings, official development aid (ODA) by the world’s richest countries has expanded into an intricate web of donors and recipients. Practically every country is either a donor or recipient, and some like India and China are both. When the Cold war ended there were some doubts about ODA’s future, but the last decade has in fact seen aid by the main donor governments growing in volume.
Yet, for all that, there’s a lot wrong with aid. The gap between what it does and what it could do is widening fast.
International discussions about aid have long been dominated by the issue of how much aid is being given, and in what form. This is important because the more aid that is given, the greater the likelihood of more people being lifted out of poverty. The main problem has not been so much the failure of governments to pledge to increase aid, but the failure of so many to honour those pledges. This has happened before and is happening now. At the G8 meeting at Gleneagles in 2005, donors pledged to increase aid by $50bn a year by this year, yet the latest estimates suggest they will manage only $13bn. And only five of the 27 EU member states are on course to meet their self-imposed target of giving 0.56% of national income in official aid.
Besides the amount of aid, attention has also been focused on its effectiveness. This is important because improving aid effectiveness contributes to narrowing the gap between what aid actually does and what potentially it could achieve.
Until recently, donors’ efforts were focused exclusively on trying to improve the quality of their own aid. This changed, though, when in March 2005 the Paris Declaration on Aid Effectiveness was signed by all the major donors as well as a significant number of recipient governments. This marked the first formal acknowledgement by donors that wider systemic issues matter greatly in aid-giving. In other words, that what one donor does, or does not do, has an impact on the overall effectiveness and impact of aid. Donors and recipients agreed on the need to work more closely together.
In September 2008, a major stock-taking exercise of the Paris Declaration was held in Accra, Ghana, and it produced the Accra Agenda for Action. The meeting’s main conclusion was that implementation of the Paris Declaration had been too slow and needed to be speeded up.
But the main problems with the Paris Declaration are more fundamental. First, it is not a binding agreement. Like the pledges donors have made to increase aid, under the Paris agreement no donor is required to change its prevailing practices. Second, the declaration fails to mention some of aid’s major systemic problems or to identify the key underlying reasons for their persistence.
The central problem of the aid system is that there is no system. The way aid is given and received suffers from two fundamental problems. In the first place, no attempt is made to determine accurately which countries need development aid or to assess each recipient’s specific requirements, even though we know that the gap between what is needed and what is provided is very large. And in the second place there is no system for raising aid funds or for ensuring that aid goes to those who need it most. Aid-giving is voluntary, and no sanctions or penalties are applied either to those who choose not to provide aid, or who pledge to provide aid and then renege on their promises. The aid channelled to different countries is the sum of the separate decisions made by individual donors of how much aid they will give to their chosen recipients. If one donor decides not to provide aid to a particular country, no other donors feel the need to make up the shortfall.
The reason why these systemic problems matter so greatly is that directly or indirectly they are the cause of a number of major distortions and practices which together severely undermine the effectiveness and impact of aid. Aid-giving decisions are made by rich country governments. While all acknowledge that the prime purpose of aid is to contribute to sustainable development and poverty reduction, their decisions continue to be influenced by short-term political considerations and their own national and commercial interests. The following illustrates some of the consequences.
Most aid does not go to those who need it most. Less than half of all official aid is channelled to the poorest 65 countries of the world.
Aid is given on a short-term basis, often switched to different recipients and is volatile and unpredictable. Afghanistan, Iraq and Pakistan together received less than 2% of all official aid in 1999. Five years later, they accounted for 26% of all official aid (including debt relief), nearly a 30-fold increase. Aid volatility has risen over the past two decades, reducing the effectiveness of aid by a loss equivalent to $16bn.
The number of donors recipient countries have to deal with has increased dramatically, from an average of 12 in the 1960s to 33 by 2005; currently at least 30 countries have to deal with more than 40 separate donors each. In 1996, 17,000 separate donor-led aid activities were recorded and 10 years later this had risen to 81,000. It is estimated that over 30,000 donor missions to recipient countries take place each year, averaging over 100 a year. In some countries, a new donor mission arrives every day.
Less than half of all aid that poor countries receive passes through the recipient governments’ financial systems. Most aid is packaged up into different projects, overseen and often managed by the donors. Less than half of all aid is completely untied with the recipient free to choose where to purchase the goods and services it needs. The tying of aid from donor countries raises the costs of aid to recipients by between 20% and 30%, equivalent, in aggregate, to a loss of about $8bn a year.
Donors have in recent years been creating a succession of new mechanisms and funds to channel aid to recipient countries to address such specific needs as increasing food production, expanding primary school enrolments, extending immunisation programmes to address HIV/AIDS, TB and malaria problems, or addressing environmental and climate change problems. These run in parallel with, but are usually not linked to mainstream aid programmes. The allocation of money from these funds is predominantly controlled by the donors, although that’s the reverse of what was agreed in the Paris Declaration and often skews the budgets and sectoral priorities of recipient countries.
Almost since official aid was first given, politicians have both warned of aid’s systemic problems and proposed alternatives. These include raising aid funds through an automatic compulsory mechanism based on the ability to pay; pooling aid resources and allocating them on the basis of need; and, if there are grounds for believing that the recipient government is unable or unwilling to use the aid funds transparently, “ring-fencing” the aid in a fund to be administered independently.
Most of these good ideas have been eclipsed by the focus on increasing aid levels. A common response to anyone advocating these solutions to aid’s systemic problems is the counter-argument that they are part of the very nature of the aid system, and that it is naive to suggest that it can be changed. They warn that if governments are unable to decide for themselves how to give aid and then check on its use, then they simply won’t provide it.
There are two ways to respond to these arguments. One is to point out that that aid’s systemic problems are getting worse and fast and frustrating progress on the core objective of ending extreme poverty. Resolving key systemic problems would probably have a greater effect on extreme poverty than expanding the amount of aid given. The other is to draw attention to high-level discussions where the sorts of changes needed to fix aid are being presented as politically viable. At the 2006 Spring meetings of the IMF and World Bank, UK Prime Minister Gordon Brown made a plea for the operational work of the IMF to be made “independent of political influence and wholly transparent”. Why stop there? The argument about short-term political distortions and independence applies with equal force to the aid system. And at last September’s meeting of G20 finance ministers a background paper tabled a proposal for all except the very poorest countries to pay into a global climate fund and for the money to be disbursed to the countries needing it most. Once again, why stop there? The same argument should be extended to the aid system as a whole.
The aid system needs a radical overhaul. The catalyst for change lies in political leadership, and EU governments provide almost 60% of all official aid and are also among the world’s most forward-thinking donors. Now, the Lisbon treaty offers Europe a new opportunity to speak out about the need for fundamental change in the aid system and to lead the discussion about how to bring this about.