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What are the Prospects of More and More Effective Aid in Support of the MDGs

Date
Time (GMT +00) 13:00 14:15

Speaker:

Richard Manning, Chair of OECD's DAC

Discussant:

Paolo de Renzio, Research Fellow - ODI

Chair:

Simon Maxwell,  Director - ODI

The sixth meeting in the series was held on Friday 11th March 2005. The meeting was chaired by Simon Maxwell. The speaker was Richard Manning and the discussant Paolo de Renzio.

1. Richard Manning began by explaining that he would address the topic of the session in two parts. Firstly the question of more aid and secondly, the question of more effective aid and he would refer to three documents and events, namely the OECD Development Co-operation Report 2004; the declaration made in Paris on the High Level Forum on Aid Effectiveness and the Annual High Level Meeting of the DAC.

2. In addressing the question of more aid, Richard Manning stated his thesis as ODA had risen and would rise further but that this would not necessarily be reflected in increases in real resource transfers to poor countries without radical steps. He presented a graphic of DAC members ODA from 1990 to 2003 and simulations to 2006 and 2010 (please see Figure 4.1 in the presentation). He explained that if the graph was rolled back for a few years, then it would be clear that DAC members' aid was always about 0.33% of their GNI, roughly half of the UN target. This assistance was relatively reliable year after year. However since the Gulf War in 1991 and the fall of the Berlin Wall, when a peace dividend might have been expected the graph indicated that this had not been realised although a lot of money that did not count as ODA was spent in Eastern Europe. Instead, the earlier aggregate levels of ODA fell to unprecedented low levels as the portion of the GNI of DAC members from 0.33% to 0.22% in the space of 5 years. Since then, the levels remained fairly constant for 4-5 until 2002 when levels began to increase quite sharply. During this period, the proportion going to the Least Developed Countries (LDCs) tracked the total and also rose quite sharply in the last 2 or 3 years.

3. Richard Manning then went on to deconstruct the increases in aid that had occurred in the last 2-3 years (in constant prices) (please see slide 4 in presentation). Over the years emergency aid had risen considerably after a small decline in 2001, a significant share of this accounted for by Iraq and Afghanistan, debt forgiveness grants had increased year on year from approximately $3 billion a year to $8 billion, technical co-operation, which accounted for approximately $17 billion a year, had also continued to increase (prompting the DAC to propose more work to deconstruct these figures). The result of this was that actual resource transfers had not moved at all and had actually decreased in the three years.

4. Richard Manning continued to explain that if all donors honoured the commitments that they had made at Monterrey, then there would be a headline increase in ODA (in 2003 prices and exchange rates) to $88.4 billion. There were however clear risks of shortfalls for example some EU countries were still very far off the 0.33% level and the US Millennium Challenge Account (MCA) had still not disbursed any funds. Richard Manning noted however that emergency aid to 2006 was likely to increase, for example in response to the Tsunami where most donors had announced substantial (and to a real extent) additional resources for the region, and that the world had agreed to write off large amounts of debt for Iraq of approximately $17 billion dollars. An interesting conclusion that was reached by the Strategic Partnership for Africa (SPA) was that (to 2004) Africa had not actually received any additional increase in non-emergency aid in the recent past. This was a very important issue not only in the context of the Africa Commission, but also in considering the question of whether Africa could absorb more aid.

5. Beyond 2006, Richard Manning expected the EU to announce a new round of forward commitments after the current commitments reached in Barcelona expired in 2006 and hoped that additional commitments would be made to 2010. In terms of the non-EU DAC donors such as Japan who did not make any additional commitments in Monterrey because of an inconducive domestic situation, Richard Manning hoped that forward commitments would also be made. Australia was perhaps close to this and Canada made a commitment in Monterrey to increase its program by 8%. The US, had taken separate initiatives in the context of Monterrey by announcing efforts such as the MCA and the AIDS initiative. Of all the donors, the US was also the one that was increasing its aid at the fastest rate, although a lot of this was accounted for by Iraq and Afghanistan. For donors outside of the EU and the DAC, such as China, Saudi Arabia, Kuwait, Russia, Israel, South Africa, Brazil, Malaysia and Thailand, the traditional Middle Eastern donors were limited by the fact that they were providing loans for projects. Of the non-traditional donors, many were in the market for tri-lateral co-operation where they provided technical assistance financed by of other donors. Richard Manning felt that increasingly, they would also be providing resource transfers for example India was working to provide generic drugs for Southern Africa. He then turned to innovative sources of financing and noted that the two main components were the IFF and on taxation, the proposal of the French government.

6. Richard Manning then turned his attention to issues of aid allocation (please see figure 2.7 in the presentation) and noted that in terms of the total DAC aid effort, the poor and very small countries, many of them LDCs, were getting at least as much aid as their share of the total of very poor persons but in countries such as India, those under a dollar a day were getting next to nothing, more in countries such as Vietnam and a large transfer relative to the number of very poor in middle income countries. The pattern of disbursement of individual donors was also differing. The UK for example transferred a relatively large amount of their bilateral support to under a dollar a day poor in LDCs but relatively little in MDCs. Another way of examining this issue (please see figure 2.5) was which groups of countries were getting what per head. The least developed and lower middle income countries were getting virtually the same per head and had done for the last 10-11 years and there was an almost equal correlation between middle income countries, including India, and the upper middle income countries. The conclusion to this was that aid was still not fully rationally distributed which was partly a small country effect and a result of a historic statistical practices. However, aid per head to people in lower-income countries as a group had actually increased. Furthermore, whereas average developing country income had gradually improved over the past 12 years, the income of the average ODA recipient had gradually fallen, indicating some improvement in targeting. Furthermore, the LDC share had increased quite sharply particularly if debt relief and the HIPC effect was included.

7. Richard Manning then went on to consider the issue of aid dependency (please see Figure 2.1) and indicated that aid was falling as a proportion of recipients GNI and that this was a very different picture as in the late 80s and early 90s. Furthermore, most countries were no longer dependent on aid except for the LDCs although they were also less dependent on aid than they were in the early 90s.

8. In terms of the share of DAC countries aid disbursed through multilateral channels (Please see Chart 2.5), it could broadly be concluded that between 1992 and 2002, even though the multilateral system was often purported to be a better system in which to disburse aid, the amount of aid that DAC countries disbursed through multilateral systems had remained broadly constant.

9. Richard then turned to issues of aid effectiveness and focused on the High Level Forum in Paris in February and whether this built on the commitments made in Rome two years previous. While some progress had been made in implementing the Rome agenda in developing countries, good practice was by no means general practice. The Paris conference was however very well attended with 60 developing countries, most represented at ministerial level. Secondly, the agreement of the Paris Declaration generated a detailed list of partnership commitments of what both donors and recipient countries should be doing at the country level. This would be a useful checklist for both donor and partner countries. 12 indicators were also agreed to measure and monitor progress twice before the next Forum (to be held in a developing country) in 2008. Fourthly, it was also agreed that targets should be set to 2010 although some donors had been cautious about targets but much support from the NGOs and partner countries. 5 targets were agreed which would be reviewed again by September with a further 6 were to be set by September. For the 12th issue (untying aid) progress would not be made on setting a target unless the broader discussion on untying was moved forward. Richard Manning felt that the Paris Declaration would have much more purchase than that at Rome. Richard Manning also noted that the harmonisation, alignment and ownership agenda was being pursued in order to achieve more sustainable results at the country level.

10. Paolo de Renzio then took the floor and started by stating that he agreed with most of what Richard Manning had presented and that he would build on some of points in his presentation. He explained that he would focus on a) What he termed 'actual aid' b) the harmonisation and alignment agenda and c) scaling up in the context of the opportunities of the 2005 agenda including the Commission for Africa Report.

11. On actual aid Paolo de Renzio reinforced points made by Richard Manning and agreed that in the year, the 3 categories of aid that were rising at the fastest pace were emergency aid, debt relief and technical co-operation. It was quite clear that these could not be considered as real resource transfers to poor countries that could be expected to contribute to the achievement of the MDGs, especially for debt relief and technical cooperation. Paolo de Renzio welcomed the DACs proposal to unpack the issue of technical co-operation, as it was possible to question the actual impact that technical cooperation had on poverty reduction, and that at times it could be argued that there was a 'boomerang effect' where the money that was shown to be going to poor countries was actually going back to donor countries through large and expensive consultancy contracts. He noted that under technical co-operation, 3 of the 4 largest DAC donors, namely Japan, Germany and the US, disbursed a large proportion of the aid in percentage terms as technical cooperation (approximately 50% of their bilateral assistance). This called into question the extent to which they would contribute to poverty reduction and the achievement of the MDGs. Paolo de Renzio also felt that there was a need to address the issue of aid tying with greater force, and that at present the US did not even report on its tying status.

12. With reference to some of the shortcomings of the delivery mechanisms that were currently being used to send aid resources to poor countries, Paolo de Renzio felt that the harmonisation and alignment agenda has delivered very few results so far calling into question some of the conclusions drawn on increases in aid and that the costs for example of fragmentation and lack of co-ordination which also needed to be considered.

13. In turning to the harmonisation and alignment agenda, Paolo de Renzio noted that while the Rome Declaration was only adopted a couple of years ago, meaning that there had not been a significant time period for change to occur, comparisons with the Paris Declaration would find limited differences, and that the two documents were strikingly similar in the wording and content. While some changes were introduced with Partnership Commitments, Paolo de Renzio argued that attention also needed to be given to issues and questions that were not included in the Declaration, covered in a recent Opinion piece titled "The seven effective habits of aid" Paolo de Renzio welcomed the discussion on mutual accountability and the principles entailed and the indicators of progress contained in the Paris Declaration. In particular on mutual accountability, it was not clear what were the incentives provided by the foreseen mechanisms to ensure actual reciprocal responsibilities. A recent report of work done by ODI on incentives for harmonisation in aid agencies looked at the internal systems of 6 different aid agencies in terms of whether they were geared to delivering on harmonisation and alignment. This work found that while there was a lot of senior management and to and extent political, commitment to harmonisation and alignment, there was a great lack of mechanisms that made sure that the political commitment could trickle down to actual implementation both at the institutional level looking at rules, regulations, procedures and policies and to the individual level where an individual's engagement in harmonisation and alignment actives was recognised either through the recruitment, appraisal or incentive systems. Essentially, there was a lack of appropriate incentives in the system for agencies to deliver on harmonisation and alignment objectives and therefore, the authors of the report felt that there was a need for a very clear and strong mutual accountability framework, possibly coming out of the broad and general commitment to it in the Paris Declaration.

14. Paolo de Renzio also argued that there was a need for a better understanding of what happens at the country level in terms of making harmonisation and alignment happen and that this was an area that had not received much attention. There were for example significant circumstances at the country level that had the potential to work against harmonisation and alignment such as internal politics of recipient governments and petty disputes among country offices of different donor agencies.

15. Paolo de Renzio addressed the topic of scaling up by assuming that 2005 could prove to be the breakthrough that the year's agenda promised and that a substantial increase in aid flows in the next few years with a specific focus on Africa could materialise. One of the main potential opportunities in this scenario was the International Financing Facility (IFF). Paolo de Renzio noted that if and when it did get off the ground, the IFF would represent a substantial (and qualified) increase in aid flows. He argued that there were three factors that would be key in deciding whether the effect would be a useful instrument for leveraging change in the aid system or if it would just reinforce existing mechanisms. These issues were a) the governance of the IFF, b) allocation criteria and c) the implications of different delivery mechanisms.

16. Paolo de Renzio noted that there was a risk of incoherence and fragmentation and the possible proliferation of alternative delivery mechanisms such as vertical funds and the US Millennium Challenge Account. He stressed that these issues had to be considered otherwise there was the potential that substantial increases in aid could actually increase the inefficiency of the aid system as a whole which would frustrate the achievement of the objectives.

17. Paolo de Renzio also stressed that there was a significant challenge about absorptive capacity and questioned whether large additional resources could be effectively used. In addressing the issue of aid absorption, Paolo de Renzio argued that it was necessary to a) improve aid practices b) promote sensible macro-economic management to deal with possible Dutch-disease effects c) address issues related to politics, institutions and accountability. Paolo de Renzio argued that the latter point was the key issue. If aid was doubled to African countries, such as Mozambique, serious consideration would have to be paid to the effect on domestic accountability and politics. In terms of the more narrow understanding of absorptive capacity, looking at existing infrastructure and technical and managerial capacity, he felt that there was reasonable evidence to support the argument that if increases in aid were disbursed gradually and through processes designed to improve capacity over time, without going for a 'big bang' approach, then the potential ground that could be covered would be considerable. He also felt that innovative approaches were required for example trust funds where money was set aside for countries as they built their absorptive capacity and governance system. He also floated the idea of a global social welfare system.

Nambusi Kyegombe
March 2005

Description

This session examines the ability and desirability of efforts to secure large volume increases in aid to support of the achievement of the MDGs. Cynics of this position posit issues around aid absorption, macroeconomic threats, aid dependency and the fungibility of aid as reasons for avoiding these efforts without commensurate efforts to improve quality of aid. This session gives ODI and APGOOD the opportunity to host the UK launch of the DAC Annual Development Co-operation report.

Conference Room