THE DEVELOPING WORLD
How to stop development aid from doing harm
Autumn 2007
Development aid suffers as much from “short-termism” as do major corporations and the world’s financial markets. Mick Foster sets out his proposal for an international aid guarantee facility to ensure that spending crucial to the Millenium Development Goals does not stop because aid money runs dry
Discussion of aid mainly focuses on getting rich countries to provide extra cash to help poor ones achieve the dramatic poverty reductions and health and education improvements envisaged by 2015 in the Millennium Development Goals (MDGs). But the debate is rarely conducted from the viewpoint of aid recipients and the risks that can go with accepting increased aid.
Estimates of the cost of meeting the MDGs vary widely, but there is consensus that doing so will require African countries to expand their public expenditure with unprecedented speed. Even with optimistic assumptions about future growth of the economy and of taxation, the bulk of the additional resources will need to come from donors. Most African countries would become dependent on aid to finance significantly more than half of total public expenditure. These increased aid levels would only start to decline gradually in the 2020s.
Very rapid increases in public spending often fail to yield the expected benefits. When budgets are rising rapidly, it becomes more difficult to turn down bad spending proposals, especially when they are politically advantageous, and it becomes more difficult to resist pressures for pay increases. A rapid increase in spending is also likely to run into shortages of skilled labour and local materials, causing delays and cost increases. The expansion in government may squeeze out the private sector, and may damage exports as entrepreneurs find it more profitable to supply the rapidly growing government sector. Fear of these adverse consequences may lead a prudent government to pause before committing itself to the very rapid growth of public expenditure that would be needed to meet the MDGs.
An even bigger worry, though, is the reliability of the increased aid on which additional public expenditure depends. If the recipient government doubles the number of teachers, starts to provide free basic education and health services and starts to finance expensive treatment to AIDS patients, it will not be able to simply abandon these commitments if donors stop providing the increased aid needed to pay for them. The past record of aid donors is not encouraging; aid surges are rarely sustained for more than a few years, and are often succeeded by equally dramatic aid declines. The case of Rwanda illustrates the point. Between 1994 and last year gross aid to the country has fluctuated from $350m down to $200m, back up to $340m in 1998, down to around $230m in 2002 and last year reached $450m. Similar fluctuations can be seen in most other African countries.
Donors rarely provide indications of future aid levels beyond the next two or three years, and even these short-term forecasts have proved very unreliable. Administrative problems account for some of the reasons that make aid much less predictable than tax revenues, but there are also problems related to the conditions that accompany the aid, with implicit ”governance” conditionality causing particular difficulty. Countries bordering the Democratic Republic of Congo have had aid suspended following actions they believed necessary to secure their borders. Tanzania had its aid interrupted due to a possibly misjudged choice of a new air traffic control system. Other countries have faced suspensions after adverse audit reports and a perceived lack of energy in following up the findings. There are arguments on both sides in each of these cases, but the governments concerned found it uncomfortable to be so vulnerable to donor responses to their actions across almost the whole range of policy and practice.
The current approach offers no guarantees that the promised aid will be forthcoming, even if a government does everything that is asked of it. All of the risks are borne by the recipient country, which is far less able to manage those risks than are the rich donors.
Many African countries experienced the consequences of a sudden drop in external resources after the second oil shock in 1979-80, when access to cheap commercial borrowing came to an abrupt halt. Governments were left with schools without books, clinics without drugs, roads collapsing for lack of maintenance and civil servants paid less than a living wage. Budgets were spread so thinly that nothing worked properly, and the population was worse off than if the increased spending had never been undertaken.
It will not be easy to convince African governments that they can afford to trust donors’ promises of doubling aid to Africa by 2010, but the strategy for achieving the UN’s development goals depends on it. The donors may have forgotten the bitter lessons of the long years of public expenditure retrenchment, but the memories of those who lived through it are not so short. With no mechanism in place to insure against the risk of unreliable aid, African governments are opting for a slower but surer rate of progress towards the MDGs. The governments of Uganda and Mozambique, for example, have expressed concerns about existing levels of aid dependence, and are trying to reduce rather than increase their reliance on aid. My own conclusion is that the donors must either find a way to make credible long-term commitments to individual countries, or else give up the plan for scaling-up their aid to Africa.
Although the UK has made long-term commitments to some countries, notably Rwanda, most donors are reluctant to commit future governments. A credible long-term commitment will therefore need to be a collective one, underwritten through some kind of multi-lateral framework. A possible approach to this would be to establish an international Aid Guarantee Facility. This idea was first proposed in a 2005 paper for Britain’s Department for International Development (DFID), and subsequently discussed in the high-level forum on health. My purpose, here, is to promote recognition that this is a problem that needs to be solved, and to stimulate discussion of how it can best be tackled. The details of the proposal are less important, but the basic idea is that a group of donors would establish a fund to guarantee the levels of aid that they have collectively promised to provide to a specific country or group of countries. The recipient government would agree with these donors the minimum amount of aid they will collectively provide each year for as far ahead as possible, preferably stretching to 2015. If aid in any year falls below the guaranteed level for that year, the country would be able to make up for the shortfall by drawing on the facility. The country would repay the facility in subsequent years, although repayments would be limited to ensure that aid net of the repayment never drops below the guaranteed minimum.
The commitment cannot be absolute. There are clearly extremes of governmental breakdown or human rights violations where aid would have to be suspended. What is needed, however, is a more objective process for assessing the case for suspension, to convince recipient governments that they will not be subject to capricious or arbitrary decisions. An international panel that includes representatives from low-income countries should therefore determine whether access is to be denied.
Aid should also be able to react over time to evidence on whether it is being well used, but the current “stop-start” approach to conditionality is unhelpful. There would be provision for adjusting the guaranteed aid level over time if the country failed to implement agreed policies and programmes. But changes should be slow enough for governments to have time to adjust their expenditure in a planned way that minimises disruption of critical services and functions. The facility would limit the likelihood of persistent donor shortfalls by making public the details of the countries where the donor community is falling short of its commitments, and identifying the donors that are responsible. The Jubilee 2000 campaign was very successful in lobbying for debt relief, and similar international pressure could be brought to bear to ensure that aid donors live up to their commitments.
There is clearly a case for rich countries to substantially increase their aid to help poor countries reach the Millennium Development Goals. There are also very grave risks for countries in embarking on expenditure plans that could prove over-ambitious if donors do not deliver. That means that an effective international arrangement is needed to reassure recipient countries that aid can not longer be abruptly withdrawn.