Aid pessimism: myth and reality

Aid commitments should be met not despite but because of the current financial crisis, and aid allocations prioritised for the poorest, and most vulnerable countries - are among the recommendations in this reply to Phil Vernon.
Robert Picciotto
18 November 2009

It is time to distinguish aid myths from aid realities. The current aid pessimism is unwarranted. The overwhelming evidence is that aid can help and that it does help. Of course, aid can be improved. But so can other public welfare programmes. It is self defeating and frankly disingenuous to set unrealistic expectations about aid performance. In fact, taxes used for aid save more lives than taxes used for any other purpose. Yet, it is axiomatic that aid quality is as important as aid quantity and that aid quality could be improved.What do we know?According to the Centre for Global Development every dollar of aid raises output by $1.6 in real terms. For Finn Tarp “the single most common result of the modern aid-growth literature is actually that aid has had a positive impact on growth”. In the words of Paul Collier: “A reasonable estimate is that over the last thirty years aid has added about one percentage point to the annual growth rate of the bottom billion”. For Mrs Sirleaf Johnson, Liberia’s President ‘Reducing aid would slow private sector growth, stall poverty reduction and undermine peace and stability in countries that are struggling to become part of the global economy. Where do we stand? Most developing countries grew at impressive rates during the first five years of this century, managing to pull millions of people out of poverty. But the current perspective is bleak: by the end of the year, the number of poor people may increase by more than 100 million. Still the share of the absolute poor (those who subsist on $1.25 a day) is expected to fall from 42% in 1990 to 15% in 2015. But this conceals major differences across regions and countries.   The World Bank’s Global Monitoring Report 2009 shows that most countries are off track in meeting most of the Millennium Development Goals (MDGs). Of the 84 countries with available data (out of 144), only 45 are on track to meet the poverty reduction target. The rest including 75% of African countries and 10 out of 12 fragile states are not. The most serious gaps are in sanitation, child and maternal mortality, education and hunger. The least progress has been made in improving maternal health. Over three quarters of the countries where data are available will not meet the goal of reducing child mortality goal by two thirds in 2015. Most countries are unlikely to halt the spread of HIV-AIDS by 2015.    What then is to be done? First, the volume of aid should increase. Second, its targeting should improve. Third, its fragmentation and volatility should be reduced. Fourth, its efficiency should be raised.  Aid volumesAccording to new data aid levels from traditional donors rose by 10 percent in 2008 following declines in the previous two years. Overall aid is estimated to have reached is estimated to amount to $120 billion in 2008 (100 billion in 2005$). This is a record level and the UK increased its aid during that year by 24% but this is still only the same share of the gross national income as the average of all donor countries, i.e. 0.37%. But this is half the share of the gross national incomes of donor countries that economically advanced countries solemnly agreed to exert their efforts to reach by 1975 at the United Nations General Assembly of 1970.   For all Development Assistance Committee (DAC) donors current trends suggest major shortfalls compared to the Gleneagles commitments of an extra $50 billion by 2010. In 2009 currency fluctuations could deflate aid volumes in dollars by $3-5 billion.  Based on current donors’ intentions DAC estimates a funding gap of about $37 billion in 2007 dollars in 2010 unless additional commitments are made.   Only 47% of the aid is country programmable, i.e. available for development programs and projects. The rest is devoted to debt forgiveness (27%), humanitarian aid (10%), administration (5%), refugees (2%), NGOs core funding (2%), student costs (2%) etc. If technical assistance is excluded no more than 38% may be country programmable. Greater priority to CPA is needed. DAC projects current commitments to generate an increment of CPA from $60 billion to $72 billion. This compares to a Gleneagles target of $105 billion.   In 2005, out of $8.5 billion of aid, the United Kingdom spent only 3.2 billion on country programmable aid. This is relatively low (38% compared to 54% for the US and 53% for Japan). This is because $3.5 billion went for debt relief during that year in addition to $0.6 billion for humanitarian aid, $0.6 billion for core NGO funding and $0.4 billion for administration.   The aid shortfall for Africa has been especially large. Aid to Africa was supposed to increase by $25 billion by 2010. But only one third of the donors have achieved the 50% increment that had been promised. To reach this level would require an increase of 17 percent annually for the target to be reached. In terms of country programmable assistance only $2 billion extra was provided from 2004 to 2007. Another $20 billion over existing commitments would have to be provided to Africa in country programmable terms to reach the Gleneagles commitments.  Aid targetingPolicy research makes clear that the greatest poverty impact of aid is reached when it is channelled to the poorest and the most vulnerable countries. Yet, in the aggregate the poorest countries get only 30 percent of the aid and the aid accorded to social services is only half the minimum recommended by the United Nations. It is time to revise the aid allocation protocols that dominate aid allocations. They favour countries where risks are perceived to be low. Yet the rewards of rechanneling aid to fragile states would be far higher.  Aid fragmentationIn 2006 there were 81,000 activities registered at the DAC. This compares to 17,000 in 1996. The mean size has dropped from $3.2 million to $1.6 million.  The average number of recipients in donors’ portfolios was less than twenty in 1960. It now exceeds 100. Part of the explanation lies in the diversification of aid sources. By 2007 aid from non DAC donors was $5.6 billion in 2007 (of which $1.4 billion from China). About $49 billion in private philanthropy from 11 OECD countries was identified by recent research and some estimates of US private giving go as high as $37 billion in 2007. The Gates Foundation alone will provide $3.8 billion in 2009. Total philanthropic aid may be about $60 billion but much of it is humanitarian rather than developmental. Even small DAC donors spread their resources thin to reach out to many countries, e.g. Greece spreads its limited aid to 115 countries. All in all, too many donors are giving too little to too many recipient countries thus increasing transaction costs in both directions. The United Kingdom is no exception. Its aid concentration measure is 39% for country programmable aid. Only the United States (27%) and Japan (33%) spread their funding more thinly.  Aid volatilityThe problem of aid volatility has got worse. It went up by 16 percent from 1980-89 to 2000-2006. Aid shocks faced by low income countries are comparable in size and frequency to major shocks faced by developed countries during the Great Depression and the two world wars. The volatility amounts to about 15-20 percent of aid flows. Surprisingly, volatility of country programmable aid is as high as volatility of humanitarian aid. This is due to the fact that there is one pot for each donor for aid without any compensatory mechanism from one donor to the other and also because the volatility of humanitarian aid creates volatility in development aid due to diversion of funds from development aid to humanitarian aid when an emergency strikes. The pro-cyclical nature of aid in relation to country budget revenues is highly disruptive for development planning. On the other hand, aid is less volatile than export revenues or private flows. Providing more aid to the most vulnerable countries (e.g. in terms of conflict risks or commodity price shocks) would generate high returns according to Patrick Guillaumont’s research.Transaction costsFinally, the costs of administering aid are too high. Coordination is poor. Fewer than 20 percent of countries have adequate development strategies around which donors could coordinate. Public finance management systems are weak. The use of project implementation units that distort civil service salaries and divert skills from core government functions remains widespread. Aid bureaucracy is burdensome. There may be over 30,000 aid donor missions a year. They divert scarce administrative resources in poor countries. Efforts to reduce the number of missions have only begun to have an impact. Donor missions in a sample of 33 countries showed a modest decline from 9,200 to 10,300 from 2005 to 2007. This may be the most difficult nut to crack since cutting down on administrative oversight is not easy to justify to taxpayers since corruption is likely to be the highest tax currently imposed on aid flows.  ConclusionsThe above diagnostic leads to the following recommendations:

  • Aid commitments should be met not despite but because of the current financial crisis.
  • Aid allocations should be reformed to emphasize the poorest, most fragile and most vulnerable countries.
  • Aid fragmentation and aid volatility should be reduced.
  • The transaction costs associated with aid should be reduced through elimination of tied aid by all donors, larger operations, greater selectivity, greater concentration of aid portfolios and adequate fiduciary controls aimed at reducing corruption.
  • Greater coherence should be sought between official DAC aid, non DAC official aid and private philanthropy.
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