Charting the uncertain future of foreign aid

The scale and speed of global development over the past 20 years has improved billions of lives to hitherto unseen levels. Absolute poverty has been halved, and most people are living longer and healthier lives. Economic growth in developing countries has been the key, particularly in China. Growth has accelerated there since Deng Xiaoping’s economic reforms in 1979, and as a result 600m people have been brought out of poverty. The development assistance policies of many industrialised countries have made useful contributions and should be credited for much of this global improvement.

Despite this, the challenges are still there. Average improvements in global living standards can be of little consolation for those caught up in the carnage of Central African Republic, South Sudan or Syria. Around 1.2bn people still live in absolute poverty, and 1.4bn are without electricity. Even though the vast majority of kids around the world can now start schooling, many of them get only a low-quality education. In Africa, around a million new jobs are needed every month just to keep pace with the young people coming into the labour market. To provide food and energy for these growing populations while at the same time preserving our planet means that green revolutions are badly needed. This represents a very big challenge, and foreign aid is going to have to be truly catalytic if it is to have an effect.

Nobody doubts that in general domestic resources and private finance are by far the most important sources of developmental finance, but on their own they’re not enough. Development assistance is still a vital resource for fragile states and the least developed countries. Foreign aid can represent 75% of their financial inflows from other countries, and in the poorest nations are a big part of government budgets. More worrying still is the fact that by 2018, half of the world’s absolute poor may be living in a fragile state. It is therefore problematic that a decreasing share of development assistance is directed to those countries.

We should certainly celebrate the fact that development assistance from the OECD nations reached a record high of $134.8bn in 2013, but the aid given to sub-Saharan Africa actually fell in real terms by 4%. The countries with the greatest needs are being left behind, so it is important to ensure that sufficient development assistance is directed to where it is most needed. Foreign aid alone cannot solve the problems in fragile states; it’s useless to build a school in South Sudan if the schoolhouse will then be burnt down. Instead, development assistance must be used catalytically to support state building and peace processes. The best way therefore to build a state is to let it work.

Catalytic development assistance to vulnerable countries can mobilise the state and increase a government’s ability to keep the peace, implement necessary policies, collect taxes and attract investment. A case in point is when anarchy broke out in the Central African Republic. Army, police and the state administration all fell apart, and Catherine Samba Panza, came into power as interim President of the Central African Republic with virtually no tools at her disposal. It was the provision of development assistance that allowed the president to start paying salaries after several months and to provide some basic public services that would start rebuilding the state.

An oil rich country like South Sudan could fund its own development, but its leaders may use the oil revenues inappropriately to buy weapons and so fuel conflict. To be most effective, development assistance in South Sudan would if used catalytically, support the peace process led by Ethiopia and also to set up an effective and transparent oil revenue mechanism. There’s no point in supporting the social programme of a government if it then uses its own resources for war.

Poor people do not, of course, live only in poor countries. A billion poor people live in middle-income countries like India, Indonesia and Nigeria. Development is mostly paid for by these countries’ own domestic resources. Some $1.2 trillion is now being spent annually by developing countries on education, an amount that’s nine times higher than all development aid combined. Nevertheless, development assistance used catalytically to mobilise more domestic resources can have a huge impact. A good example of this is the way Colombia used a few thousand aid dollars to fund a capacity development programme for its tax administrators that then went on to increase the country’s tax revenues by $2m. The same sort of tax gains have been achieved in Kenya and similar projects are starting in many countries.

Aid-financed public guarantees can also reduce risk and encourage private investment in projects as diverse as roads, ports and wind-farms. The big money needed for green transformation around the world can only come from the private sector, but development assistance can act as a useful catalyst for unlocking climate and development finance. The OECD’s Development Assistance Committee (DAC) now actively welcomes dialogues with banks, funds and the private sector in general on development policy implementation and the best use of innovative instruments. An example of this is the $350bn in remittances immigrant workers send home annually. The cost of sending this money can be as high as 10% because so many poor people have limited access to proper financial services. A World Bank project that aims to halve the cost of sending remittances is hoped to save poor migrant workers and their families billions of dollars.

The shifts that have been taking place in global wealth and power are breaking down many of the old divisions between North and South, developed and developing, donor and recipient. Many countries now provide as well as receive development assistance. China is now a major donor of development assistance and also accounts for 20% of all foreign direct investment (FDI) to developing countries. Turkey, too, has an ambitious development assistance programme  and a unique presence on the ground in Somalia in addition to its generous policies toward Syrian refugees. Brazil, Chile and Mexico are using their resources and own development experience to assist their Latin American neighbours, while Arab donors are also stepping up their efforts.

The world’s development challenges are overcome most effectively by the sharing of knowledge and best practice. We should all think hard about the fact that Vietnamese high school students earn better grades on average than their peers in OECD countries. Or that Bangladesh fares better on indicators of health and education than countries with far higher per capita incomes. Or that Ethiopia aims to become a middle income country without increasing its carbon emissions. Or that Brazil has managed to reduce inequalities and drastically reduce deforestation while growing rapidly and attracting foreign investment.

Rich and poor countries alike can learn from these examples. Policies that work at local or national levels could also excel globally and have a huge developmental impact. We could drastically improve the quality of education while spending less money if we learnt the lessons of the importance of quality teaching.

Many issues can be resolved if development partners come together in Coalitions for Action. The UN’s REDD (Reducing Emissions from Deforestation and Forest Degradation) started when Brazil, Indonesia and other important rainforest harbouring countries joined forces with just a few donors to combat deforestation. What initially started as a pioneering project has since become a global success story. Brazil has reduced deforestation by 80% and Wilmar, Asia’s largest producer of palm oil, has pledged to cease its deforestation activities. On top of this, deforestation has been completely eradicated in Vietnam and the Philippines.

Many other vitally important coalitions are now in the works. An African programme led by Thabo Mbeki, the former South African president, aims to stop the huge illicit financial outflows from developing countries. As much as$1.4 trillion has left Africa in illicit financial flows over the last 30 years, much more than Africa received from the outside over the same period. If successful, this work would release billions of dollars to fund crucial poverty eradication.

Desperately needed, too, is a coalition to halt perverse fossil fuel subsidisations around the world. Many countries unfortunately spend more on fossil fuel subsidies than on health and education combined. The biggest share of the subsidies goes to the richest 20% while a mere 2% benefits the poorest. It would be much better if the fossil fuel subsidies were directed to green energy, health and education. A frontloaded financing facility would allow governments to make cash transfers to the poor, subsidise clean energy and fund more public services in advance of removing their often popular fossil fuel subsidies.

The world’s development assistance efforts have been a remarkable success. But we still need more and better development assistance if we are finally to eradicate poverty and finance sustainable development. My belief is that with more catalytic development assistance we can do much to mobilise state building and release more resources for development.