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Getting smart with aid

Date: 
27 February 2014
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Jon Lomøy is Director of the OECD Development Co-operation Directorate (DCD).

Local self government in Turkmenistan- UNDP Europe and CIS (Creative Commons licensed via Flickr)

Continuing our financing progress series, the OECD's Jon Lomøy looks at the characteristics of contemporary aid and suggests ways in which aid can best respond to the ever-changing landscape and best meet the needs of developing countries. We need to get 'smart' with aid, but what does getting smart entail?


It’s fashionable these days to talk down official development assistance – ‘aid’, for want of a better word. Certainly, there’s little doubt that its relative importance has dwindled as more developing countries gather the economic momentum they need to finance their own progress and as aid becomes just one of many sources of finance for development.

All of this is welcome and helps us imagine a day when aid is just a distant memory. But that day is not today. Aid still matters, as even a quick glance at the websites of DAC members’ development agencies shows. Here we can see countless examples of how donor countries work with developing countries to get ahead of the curve in meeting social and other objectives.

So, aid still has a role to play, but that role is changing and sometimes at such a pace that it can be hard to keep up. That’s why I want to set down, first, some of the characteristics of the changing world in which aid now operates and, second, how aid can best meet the needs of developing countries in this ever-changing landscape.

A changing environment for aid

The world in which aid operates has shifted profoundly. Take poverty. The poorest people once lived in ‘poor’ countries but, as Andy Sumner has shown, today around three-quarters of them now live in middle-income countries. On one level, this shift simply reflects what some have called a statistical ‘artefact’ – the poor didn’t move countries, but their countries moved classifications from low to middle income.

On another level, however, it underlines how the fight against poverty is evolving. As Owen Barder has argued, ‘The figures suggest that the biggest causes of poverty are not lack of development in the country as a whole, but political, economic and social marginalisation of particular groups in countries that are otherwise doing quite well.’

At the very least, this shift underlines the reality that developing countries are increasingly diverse, spanning a spectrum from middle-income emerging economies like China to low-income fragile states like South Sudan. Their needs vary greatly, as does their capacity to drive – and fund – their own progress. To be effective, aid must respond to this diversity.

A second key change is the increasing importance of non-aid financing, such as foreign investment and tax revenues, for developing countries, as well as development co-operation provided by countries beyond the DAC. At the OECD, we calculate that aid provided by the ‘traditional’ DAC donor countries now accounts for just one-quarter of total financing for development (official development assistance as captured in DAC statistics divided by total developing countries’ resource receipts, 2012 data).

Aid must also respond to the changing international development agenda. While the final shape of the post-2015 development goals has yet to emerge, they seem likely to include at least two priorities. First, building on the MDGs, world leaders will probably commit to the eradication of absolute poverty over a relatively short timeframe. Second, we’re likely to see a gradual merging of the development and sustainability agendas. This makes sense: it’s already clear that climate change threatens the hard-won progress made by many developing countries in recent years while undermining the foundations of future growth in both developing and developed countries – carbon emissions know no borders.

Not just aid, but ‘smart’ aid

So, how should aid respond? In many areas, it already is. In recent years, for example, a growing slice of the aid pie has been spent on climate change mitigation. And the pie needs to get bigger: by 2020, an estimated $100 billion a year will be needed from public and private sources to tackle climate change. In other areas, however, aid is dragging its feet, with some countries getting far less than their fair share: using a recently developed analytical tool, the OECD calculates that 8 countries – from Madagascar to Togo – are ‘under-aided’.

All of this only emphasises the challenges that aid must address. If it’s to succeed, it must become ‘smart’ – increasingly targeted towards the poorest countries and those that face the greatest difficulties in raising alternative finance for development. It must also become increasingly strategic in creating effective development partnerships and in mobilising non-aid sources of financing for development. These ideas might sound abstract, but they have real-world applications. A few examples:

Untie aid to improve transparency: ‘tied’ aid obliges developing countries to use goods or suppliers based in donor countries. Untying aid creates greater transparency to build more effective partnerships, and cuts the cost of goods and services by at least 15%.

More value for money with predictable aid: uncertainties about future resources complicate countries’ decision-making and can stand in their way when it comes to the strategic planning of their own development priorities. More predictable aid allows countries to better implement their own development plans and reduces the deadweight loss associated with aid volatility, which has been estimated to amount to 15%-20% of the total value of aid.

Use aid to mobilise domestic funding: in Colombia, a $15,000 investment in capacity building for tax administrators was followed by a 76% increase in tax revenues – a rate of return of about $170 for every dollar spent.

Use aid to mobilise additional resources: guarantees for development have been attracting attention among both the development community and the private sector as an effective tool to leverage private finance for development. According to a survey recently conducted by the OECD, guarantees issued by development finance institutions, both multilateral and bilateral, mobilised $15.3 billion from the private sector for investments in developing countries.

A last point: ‘smart’ should also mean taking our knowledge of what works in aid and putting it to good use. But, as a recent OECD paper pointed out, only 0.07% of aid allocated to fragile states is currently being used to bolster tax revenues in developing countries. Smart move? I’m afraid not.

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