Aid workers are doing themselves out of a job, but....

10 July 2012

In a world of ‘known and unknown’ unknowns, few sensible people are prepared to claim possession of a crystal ball. Uncertainty looks set to remain part of the global policy scene for some time, frustrating predictions. So why have Homi Kharas and I tried to do peer into this darkness?  Because we are fairly sure that the world is set to change so radically that, aid agencies must act now to get ahead of the curve.

By 2025 levels of poverty will have fallen further and two-thirds of the world’s poorest will live in fragile and conflict-affected states in Africa such as the Democratic Republic of Congo and Nigeria. Over 50 per cent of global trade and spending will happen outside of the Europe and the US, 78% of the global middle class will come from what we currently call ‘the developing world’.

New technologies will directly link philanthropic citizens, foundations and firms in rich countries with poor beneficiaries in developing countries. Economic growth, more domestic resources mobilized by poor countries, aid and private giving mean that global poverty eradication may become affordable and feasible, if programs are properly targeted. To overcome the most stubborn poverty will require aid to work in a very different way. Three major disruptors will upset the status quo. The first disruptor is the emergence of new philanthropists and other non-state giving channels. The second disruptor is the powerful example of South-South co-operation and blended trade-aid financing. And the third is the imperative of financing public support for climate change using a very different logic to that of poverty reduction.

In our report ‘Horizon 2025’ we have carried out a ‘stress test’ to measure how exposed today’s traditional aid agencies are to this new era. By and large, those who have high shares of their operations in non-fragile, low-poverty-gap countries are more exposed, as are those who have higher shares of activity linked to social welfare versus growth and especially global public goods.

The new era is one in which the political and public context will be much changed, with more aid money being spent on fewer people. In fact by 2025 even quite modest shares of industrialised country income (say 0.3 per cent) could potentially close the remaining poverty gap, if well-targeted. After so many false starts, will the international and local community finally discover, deploy and demonstrate credible and durable approaches to tackle poverty in the most fragile countries? And meanwhile, how long will taxpayers tolerate inexorably rising levels of assistance for places lacking sound public finance and basic democratic systems?

The less progress there is on a global climate-change settlement and trading regime, the more pressure will be put on aid budgets to finance climate mitigation and adaptation.  By 2025 most of this funding will be within countries and privately sourced; a considerable part of the rest will be funded through supranational carbon levies. Nonetheless, because climate-change funding, especially mitigation, follows a different allocation principle to that of poverty reduction, there will be major tensions. Should we give priority to fragile, often landlocked Africa, as above, or to economies where carbon emissions, not the absolute poor, are concentrated?  It will become harder and harder to finesse this trade-off.

A peek into the middle of the next decade raises as many questions as it answers. Can the New Deal herald a breakthrough in how to work in fragile states? Will private philanthropy prove ultimately more effective than aid? Will the need for climate finance shrink the poverty reduction pot?  Which development agencies can adapt quickest? The end goal remains the same but the means are going to have to change.