Are we ready for the big development disruptors?

14 November 2012
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Tune in to the 2012 CAPE Conference to hear Andrew Rogerson speak on the future of aid (14 & 15 November 2012).

In yesterday’s blog, I described how the growing concentration of poverty in fragile states is just one challenge to the traditional ‘whys’ and ‘hows’ of international development.

So, are today's long-established aid agencies committed, prepared and equipped to face the challenges to ‘business as usual’ approaches?

To try to answer this question Homi Kharas and I have identified three big disruptors in the development industry: new philanthropy and social impact investors; blended aid and trade; and tax-based finance for adaptation and mitigation. These are powerful new ways of doing the ‘business of aid’ that others will have to emulate, complement, or simply give ground to.  

Each disruptor is linked to a different ‘development’ aim. The first is improved social welfare, see the Millennium Development Goals. Second, mutual self-interest in growing bilateral trade and investment. Third, the provision of global public goods, a collective interest. These overlap in practice, but their motives are distinct.

For social welfare, we consider the disruptive potential of new philanthropyand social impact investors, and the evolution toward private giving and ethical lending as partial substitutes for tax-based aid. New constructs, such as micro safety-nets, social enterprises and bottom-of-the pyramid businesses, combine market disciplines (and often game-changing technologies) with a deliberate social outcome focus. How will new forms of giving interact with public support for aid in the future? How scalable and sustainable are the interventions of these investors on the ground, and how might the ‘love triangle’ between them, public aid agencies, and host governments play out?

For mutual self-interest, we look at the dynamics of blended aid and trade and investment packages, exemplified by certain types of South-South cooperation. The latter is not a single model, but a kaleidoscope of approaches with one thing in common: the idea that value chain links and the diffusion of know-how are at least as important as raw financial support. We find there is more than enough demand for OECD as well as non-traditional sources to provide such packages, especially for infrastructure. But we also ask whether the understandable desire of the former to remain on level terms with the latter will undermine traditional disciplines, such as aid untying.

For global public goods, we focus on climate change, particularly tax-based finance for adaptation and mitigation. In the absence of a global agreement to generate massive new resources, aid budgets will bear the brunt of this political imperative for years or decades, alongside private finance. But public climate change funding follows a different allocation logic to that of poverty reduction. For mitigation, the imperative is to take out emissions where they are generated, which is mostly in large emerging economies where poverty is, as it happens, declining rapidly. For adaptation, the reparations principle is to shore up – literally and figuratively – countries vulnerable to the irreversible effects of past climate change, which means mostly island and coastal economies. These, again, are neither the poorest nor the most fragile, seen through lenses other than climate change. 

So, which bilateral donors and international agencies may be more and less exposed to these disruptors, and to the global shift in the geography of poverty? 

We have produced a first rough and ready index of vulnerability in traffic-light form:  red is worse and green better. Here, exposure to irrelevance rises along with the share of aid going to stable countries with low poverty gaps, and the share of activities focussed on public social service provision.  More favourable weights are given to portfolio shares for growth and infrastructure, and especially for global public goods. 

The first results are not what we are used to seeing in aid effectiveness league tables. The more highly-exposed agencies are those now focussed heavily on social welfare programmes (such as the UN, IDA and the UK to some extent) as well as on non-fragile, middle-income countries (Spain, Japan, France and the European Commission). And there are some poster-villains, such as the USA that do rather well, as do funds that, by design, focus overwhelmingly on global public goods.

Leaving the details of the indicators and ratings aside – this is, at best, a preliminary snapshot. The bigger question is how policies and plans will evolve to take account of these, and other, shifting tectonic plates. This is a key question for those joining the CAPE Conference this week. The exposure index: ranking donors according to their preparedness against each of the disruptors

This publication is an output of the following project: Innovation - Mapping the future of development finance