aid – Virtual Economics

July 15, 2015December 24, 2017

Where Australia’s case for aid went wrong – and what we can do to rebuild

Huge cuts to the Australian aid program have left supporters angry and in shock. Five years ago, there was bipartisan support for a 0.5 per cent of Gross National Income (GNI) target for aid. In this year’s budget, aid is just half of that—0.25 per cent of GNI. But instead of losing heart, we need to channel our energy into the business of building and renewal.

Rise and fall of political support for aid

Successive governments have supported the aid budget because it has been seen to be an important tool of foreign policy. As a middle power, largely surrounded by developing countries, Australia has been well served by the aid program. Across South East Asia and the Pacific, the aid program has helped Australia to win friends and influence. The aid program has enabled successive Australian governments to be part of ‘coalitions of the willing’ to provide global public goods; helping to address HIV/AIDs, trade reform, and environmental problems. And Australia’s aid program has created highly regarded infrastructure like the My Thuan Bridge and provided thousands of scholarships, gaining a strong constituency here in Australia and around the region.

Bipartisan support for ‘scaling up aid’ began to emerge in 2005. Prime Minister John Howard attended the UN World Summit in September 2005 and agreed to double Australia’s aid program by 2010. Then, ahead of the 2007 election, Labor committed to increase aid to 0.5 per cent of GNI in 2015–16. Later, both major Parties committed to a 0.5 target at the 2010 election, with the Liberal Party even committing to appoint a Minister for International Development. 2010, then, can be seen as the high water mark of political support for the 0.5 target.

Bipartisan support for the aid program didn’t disappear overnight; it slipped away slowly, starting with small steps and then gaining momentum—and arguably aid supporters were not as vocal in its defence as we should have been:

In the 2012 and 2013, Labor pushed back the timing of the aid target.
Significant volumes of aid started to be diverted to support asylum seeker policy, damaging the integrity of the aid program and making it look like a piggy bank ripe for raiding.
In 2012, the Opposition started to speak repeatedly about ‘waste and mismanagement’ in the aid program and then, on the eve of the 2013 election, the Coalition abandoned the 0.5 per cent aid target altogether and bipartisanship was gone.

Public support for aid is generally strong and this support is based on an understanding that aid is directed at ending poverty. For example, an ANU poll last year found that support for Australia’s foreign aid program remains strong at 75 per cent. Other polls, though, suggest that many Australians support cuts to aid. However, conclusions on public perceptions of aid need to be interpreted cautiously. Although the data is limited, we would argue that the major political shift away from supporting aid was not driven by changes in broad public opinion.

However, the rapid growth of the aid program following the 2005 World Summit occurred at a time when DFAT was feeling the strain of successive ‘efficiency dividends’. In 2009 and 2011, the Lowy Institute published reports (here and here) on Australia’s ‘Diplomatic Deficit’, pointing out that Australia had one of the smallest diplomatic footprints in the OECD. Sustaining support for aid when other departments, especially DFAT, were being starved of funds was a difficult challenge.

Most governments come to power focused on domestic issues, and only a small number of Parliamentarians understand and appreciate the value that the aid program creates for Australia. So the 2013 election was always going to be a dangerous one for the aid program, but not many people foresaw that it would be quite as disastrous as it proved to be.

Rebuilding support for aid and ending poverty

Whilst the cuts are painful, there is a clear challenge to rebuild support for Australian aid—and if we want a fair and prosperous Australia and a better world, then we have a responsibility to do so.

First, we need a broader and better narrative on the benefits of aid and international development, and this needs to be part of a new narrative on Australia’s future and our place in the world.

Australia’s future is intimately linked to broader events in the world. We are coming to the end of an era of prosperity that was buoyed by the mining boom, and we are now experiencing tougher economic and global conditions. If we want a future that is fair and prosperous, then we need make tough choices now and implement domestic and foreign policies to: improve productivity (e.g. education, infrastructure, and structural reforms); expand opportunities for our businesses; and chart a course through some formidable external risks (including global growth, commodity price shocks, a shifting balance of power and climate change).

It is beyond the scope of this post to give a fair appraisal of this agenda, but the point we wish to underscore is that in order to create a fairer and more prosperous future, Australia will need to stand tall in the world, and we will need to bring credible and coherent international development policies to the table.

Second, Australia’s aid and development policies are an important, yet poorly utilised lever for managing regional risks and expanding opportunities.

We, like many supporters of aid, strongly believe that the first priority of aid and development policies is poverty reduction—part of our moral responsibility, but also our international obligations.

At the same time, aid supporters also need to make the case that aid and development policies can also help deal with the root causes of risks that also affect us, such as migration, disease, terrorism and climate change. And that aid investments are also central to building markets for Australian businesses overseas and boosting growth in developing countries, which will end dependency on aid.

Third, in making these arguments, we will need rigour. We need to be mindful and realistic about what aid can and can’t achieve (and have evidence to support the claims that we make). We need to be hard-nosed about the effectiveness of aid and development policies: ensuring that they deliver the intended results and at a reasonable cost. And we need to consider how aid is used together with a broader set of development and security policies—the case for aid and development policy must be coherent.

Concluding remarks

The case for international development needs to focus on how aid can support a broad range of Australia’s and the region’s shared interests, built on a foundation of poverty reduction.

The case needs to be made primarily to the political class. If they are convinced, politicians are less likely to bag the aid program on spurious grounds (waste and mismanagement, borrowing money to send it overseas etc.). And with less political bagging, the public will be happier with aid.

Building the case will involve:

Reframing narratives on Australia’s future and our place in the world, and the role and benefits of aid and development policies;
Developing a new approach to aid and development policy that can deliver those benefits, and that we can work towards; and
Appealing to core supporters, in both the political and public spheres, who want to end poverty, as well as aspirational Australians who want a better Australia and a better world, and building networks of supporters who can drive change.

The aid program is down, but not out. As in other areas of public policy, we need a new vision, and we must rebuild and renew.

Matthew Morris is an economist with twenty years of experience in aid and development policy. He helped establish Devpolicy and served as its first Deputy Director. Julia Newton-Howes is the CEO of CARE Australia.

May 13, 2015December 24, 2017

Financing for Development: this year’s big debate

More and better financing for development will be required in order to end poverty by 2030 and achieve the proposed Sustainable Development Goals. The UN and member countries are currently working to reach agreement on priorities for reform ahead of a major meeting in July. This article looks at the ongoing debate.

The United Nations has circulated a discussion paper on financing for development, which is guiding debate on the financing framework for the Sustainable Development Goals (SDGs). The financing framework is due to be considered in Addis Ababa on 13-16 July, and the SDGs themselves at the UN General Assembly in September.

Seven elements of the financing framework

The discussion paper canvasses a broad range of sources of finance to support the achievement of the SDGs, and proposes seven ’elements’, which are broadly as follows.

The first is domestic public finance. On the revenue side, this refers to the taxes and government income generated by developing countries themselves. Despite increases in revenue over the past decade, they are insufficient and problematic: tax can have a negative impact on inequality; it can be difficult to capture resource rents; and tax evasion and avoidance lead to large losses. On the expenditure side, budget processes are often weak and efforts to tackle corruption insufficient.

The second element is domestic and international private finance, which have both increased substantially over the last decade. Nevertheless, it is recognised that these flows are primarily profit-motivated and as a consequence leave gaps (e.g. there are important market failures in the provision of public goods). Remittances are important, but the cost of sending money is often high. Finally, financial markets are often inadequate, leading to limited access to finance for poor people, especially women, and small businesses.

The third element is international public finance. Net Official Development Assistance (ODA) has increased significantly over the past decade, but remains below commitments (especially if climate finance is netted out), often doesn’t reach the poorest countries, and further efforts are needed to improve effectiveness (e.g. through results-based aid, and ‘smarter’ aid that leverages other flows).

The fourth element, trade, has been an ‘engine’ of development in many advanced and emerging economies, yet it has been elusive for many poor countries and small island states, who face capacity constraints, struggle against subsidies in trading partners, and need to tackle tough trade rules and fragmented agreements.

The remaining three elements cover:

Technology, innovation and capacity building, which are constraints in many poor countries and negatively affect the productivity of the aforementioned flows.
Sovereign debt and the challenge of balancing debt financing against the need to prevent debt crises.
Systemic issues in global financial markets, essentially the need to be aware of the impact of liquidity, and prudential and regulatory policies on poor countries.

Towards an agreement on financing for development

The seven elements form the framework for specific commitments that are contained in the draft outcome document. There has been extensive consultation on the discussion paper and outcome document, and a number of countries, UN organisations and NGOs have provided comments (which are available here).

Clearly a one-size-fits-all approach won’t work

It’s beyond the scope of this post to fully review all of these. Nevertheless, it is instructive to consider some of the comments on the broad elements, especially ODA.

Broad elements

There seems to be general acceptance of the broad elements being proposed. At a very high level, they are hard to argue with, but important differences emerge in the emphasis, contextualisation and details.

There is debate in the various submissions about the relative emphasis on public versus private flows. There is also debate about the applicability of different flows to different country contexts (e.g. the scope of domestic resource mobilisation in small island states, or private investment in conflict-affected states). And there is debate about the detail, including who does what. Some countries, such as India, point out that the ‘South’ is being asked to do a lot, whereas the ‘North’ needs to offer to do much more (e.g. on trade, tax avoidance and climate finance).

ODA targets

There is a clear consensus that ODA has an important role to play in helping developing countries, especially the poorest countries, initiate and push faster rates of public spending to improve infrastructure and social services.

Given the important role that ODA plays, there is significant support across developing countries and civil society for the 0.7% aid target, with 0.15 to 0.2% of GNI to be directed to the least development countries.

Views diverge among donors though. For example, the EU, led by the UK and Scandinavians, reaffirms its commitment to the 0.7% aid target. While Australia, perhaps unsurprisingly, goes to great lengths to talk up the role that ODA can make in ‘leveraging’ other flows, whilst simultaneously sidestepping the issue of the aid target.

Another thorny issue is quantitative aid targets for emerging economies: something that the BRICS have baulked at so far, while at the same time enthusiastically pushing targets for advanced economies.

Rescheduling past aid commitments

Recipients are clearly aware that commitments to aid targets have not been honoured in the past.

The G77+China group have come up with an interesting proposal:

[T]he unfulfilled ODA commitments on the unfinished MDGs should be carried forward and be estimated in the context of the review of the implementation of the Monterrey Consensus and Doha declaration as a matter of urgency.

It’s a novel idea, and one that is sure to get the attention of donors—especially the more recalcitrant ones. But it is actually a milder form of my April Fool’s Day proposal, and no more likely to be accepted.

Aid predictability and monitoring

Developing countries and NGOs continue to express concerns that aid predictability is a problem.

NGOs have suggested the International Aid Transparency Initiative (IATI), should be reflected in the framework. There are also calls for donors to make clear, time-bound commitments: both in aggregate and for individual countries.

India has suggested that this is an area where the multilateral system can help, and where independent monitoring of aid commitments could provide valuable feedback. More generally, there is a need to ensure that some countries do not get overlooked by the international aid system. This can especially be a concern for fragile states, which present more pressing challenges for donors to do business with. Monitoring of aid commitments needs to keep a close eye on these countries and draw attention to unmet needs, if some countries look like being ‘left behind’.

Final thoughts

The ‘elements’ and discussion paper provided a sound starting point for the debate on financing for development. The consultations that followed illustrate the importance of the issues, as well as some of the tensions and challenges.

Clearly a one-size-fits-all approach won’t work, but the framework provides enough scope for tailoring to the country context. So long as common sense prevails, then it can be applied in practice.

On aid targets, I share some of the concerns expressed by developing counties and civil society that some rich countries are using the framework to divert attention away from their failure to honour aid commitments, and that there are risks going forward. This needs to be managed by pressing for individual and binding commitments, especially for aid to least developed countries, and backed up by independent monitoring.

Looking beyond aid, the proposals to stimulate trade and non-aid financial flows look like they need more substance. In particular, I would like to see more tangible commitments from the major economies (i.e. G20) on actions to deal with tax avoidance and tax evasion, including in the resource sector; what steps they will take to tackle trade barriers, such as subsidies and standards; and how they will encourage their major companies to honour their corporate responsibilities when investing in developing countries. None of these issues are new, but past efforts have been insufficient.

Overall, I am cautiously hopeful though—not for a perfect plan, but for an evolution of existing commitments and a stronger consensus on financing for development

February 11, 2011December 24, 2017

Aid Innovations: 21st century aid

Note: This is a blog post of my presentation at the Doubling Australian Aid conference. A narrated slideshow can be found here.

It’s a myth that aid is static, as we shall see there are some exciting changes taking place. What are the new innovations that are improving aid effectiveness in the 21st century aid?

As you read this blog post, I’d like you to keep at the back of your mind the determinants of aid effectiveness. (For more on this see a new discussion paper by Stephen Howes.)

We can improve the quality of recipients by selecting on the basis of performance and results, and (trying) to improve governance.
We can improve the quality of donors by reducing the knowledge burden and making donors more accountable.
And we can also improve the interactions between donors and recipients.

Yet all three of these challenges are compounded by imperfect information, principal-agent and political economy problems. Giving aid isn’t easy!

This blog post provide examples of four innovations that are already happening in aid agencies, and two innovations from the private sector that are yet to take-off in the aid world. None of these are panacea, but all have the potential to improve aid effective.

Innovation 1 – Cash on delivery aid

Cash on Delivery is a new approach to results-based aid, proposed by the Center for Global Development.

Traditional programs can create unintended incentives for rent-seeking and problems of dependence. And, as we know, they often have disappointing impacts on development outcomes.

Cash on Delivery aid differs from traditional projects and budget support. It seeks to address these problems by linking payments to progress on specific outcomes. For example, a donor might sign a contract with a recipient that says that for every extra child completing school, the donor will pay $100. A third party is contracted to verify the number of children completing school. And based on this an aid payment is made.

The approach is appealing because it tackles some of the imperfect information, principal-agent and political economy problems associated with traditional aid. This is why UK and Germany are planning pilots of Cash on Delivery aid.

Innovation 2 – Independent Evaluation

With these kinds of pilots taking place and increased scrutiny of aid programs, a growing number of donors are making the move to independent evaluation, and using more rigorous methods.

When it comes to scaling up aid, we want to make sure that we avoid two mistakes: a ‘Type 1’ error occurs when we don’t scale up something that works, and and a ‘Type 2’ error when we scale up something that doesn’t work.

Organizations such as the Jameel Poverty Action Lab at MIT, and 3ie (an international initiative on impact evaluation) are driving better evaluation standards to help reduce mistakes.

Better techniques, such as rigorous impact evaluations with control groups, are part of the solution, but we also need to reduce institutional biases associated with internal-models of evaluation. Such models can lead to overly positive assessments, uneven rigor, and delayed publication.

This is why a growing number of donors are making evaluation more independent. The World Bank and ADB’s evaluators both report directly to their respective executive boards. And among the bilateral donors:

Sweden already has an independent evaluator.
The UK has established an Independent Commission on Aid Impact (Commissioners were appointed last week)
The US has just released an independent evaluation policy.
And Germany is also planning to set up an independent evaluation agency.

Innovation 3 – Selectivity

Aid agencies have a large knowledge burden – the challenges of operating in large number of countries and many sectors.

Specialization and decentralization are two ways to manage this, but in a context where administrative costs are under pressure there are limits to how far agencies can pursue this strategy.

Meanwhile, the number of aid projects has increased exponentially over the last couple of decades – compounding problems of knowledge burden and coordination.

This is why nearly all donors are choosing to be more selective in where they work, the sectors they engage in, and the number of projects that they manage.

In 2009, the Canada announced that it would spend 80% of its bilateral aid money in 20 ‘countries of focus’ – chosen based on ‘their real needs, their capacity to benefit from aid, and their alignment with Canadian foreign policy priorities’.
DFID is conducting reviews of the UK’s bilateral and multilateral aid programs, to narrow down the scope of engagement: fewer countries, fewer sectors in countries, and fewer and larger projects.
And the European Commission is implementing a Code of Conduct on Division of Labour to reduce the proliferation of aid. This agreement also includes giving Commission funds to Member States to manage.

Innovation 4 – Aid Transparency

With disappointing progress in taking forward the aid management reforms agreed in the Paris Declaration there is a resurgence of interest in accountability. Better transparency is necessary for accountability and can also make coordination easier, in line with Paris Declaration goals.

The last couple of months have seen significant advances on the aid transparency agenda both internationally, and by individual donors.

The UK’s Department for International Development (DFID) last year announced their Aid Transparency Guarantee. This signals a move towards proactive disclosure, announcing that in future, detailed information about all new DFID projects and programs will be available online, and the information published will be “comprehensive, accessible, comparable, accurate and timely.” The crucial thing here is that DFID acknowledges the importance of ensuring that aid information is published in ways that make it easily accessible and internationally comparable.

Meanwhile, 18 donors have so far signed up for the International Aid Transparency Initiative (IATI) – Australia being one of them – a further 15 countries having endorsed the initiative.

Last month, the US government said that it expects to publish details of its aid program in line with the IATI standard.
And the EU Foreign Affairs Council has agreed that member states would publish details of their aid in an internationally comparable format.
Last week the UK became the first donor to meet the new IATI standard for aid transparency.

Some donors are taking transparency further by opening up the vaults to their vast databases.

The World Bank’s Open Initiative makes the World Development Indicators and other datasets freely available, and their Apps for Development competition is encouraging innovation to make this data even more accessible.

Although the main focus of this presentation is on innovations from established donors, we shouldn’t ignore that recipients are also doing things differently to promote transparency. There are some exciting lessons from Africa, including the geo-coding of aid data in Malawi.

Innovation 5 – Crowdsourcing

New innovations can come from aid bureaucracies, but many of innovations above have their origins outside of aid agencies – in think tanks, NGOs and the private sector. The final two innovations that I will discuss are examples from the private sector that have not yet been adopted by aid agencies. These are future opportunities.

Broken feedback loops from recipients to donors are a recognized problem for aid accountability. How do we know projects are being implemented and services reaching recipients? Crowdsourcing recipient feedback is one way to find out.

Ushahidi is a a non-profit tech company that specializes in developing free and open source software for information collection, visualizarion and interactive mapping. Ushahidi is a pioneer in crowdsourcing data from citizens to map out crises as they unfold. Citizens can send an SMS message or an email to provide feedback and the data is collated in a form that is accessible to broad audience.

This is also a potentially powerful tool for fixing feedback loops on service delivery. Imagine PNG schools being able to send an SMSmessage to confirm that Australian-fund textbooks have been delivered, and school kids in Australia being able to see this information visualised on a map.

Innovation 6 – Technical assistance

Technical assistance accounts for about a quarter of bilateral aid from DAC member countries, and almost half of Australia’s bilateral aid, yet the evidence of its impact is tenuous. There are oft-cited problems of high costs and disappointing results. Yet technical assistance is firmly embedded and likely to remain a key instrument of foreign aid for some time to come. Perhaps there are ideas from private sector that can help us to make it work better – specifically to make the market for technical experts work better.

For example, web-based marketplaces and workplaces, such as Elance, have transformed freelance services in the private sector, yet are not a key feature of the delivery of technical assistance.

Web-based solutions have several attracted features.

First, they directly tackle imperfect information on the quality experts by introducing a transparent feedback loop.

Secondly, virtual solutions can also reduce the amount of work that needs to be done on-site. (That’s bad news for hotels and airlines, but good news for bank balances and the environment.)

Thirdly, they can also solve some principle-agent problems by lowering transaction costs so that recipients can recruit and pay for results themselves, with donors playing an ‘no objection’ and co-funding role.

Conclusion

These are just some examples of the exciting innovations and opportunities for the aid world. In the 21^st century, the aid agencies that do best will be the ones who, experiment, adapt and evolve.

Donors who collaborate with new partners to capture the benefits of information, networks and new technologies.
Donors who experiment with new approaches to giving foreign aid – be it cash on delivery or smarter technical assistance.
Donors who evaluate and scale up programs that work.

These will be the donors that deliver the best aid. The future of foreign aid beckons – are we ready?