Richard Manning, Chair, Development Assistance Committee, OECD
Andrew Lawson, ODI Research Fellow
John Battle MP, Chair, APGOOD
The fourth meeting in the ODI/APGOOD 'What's next in international development?' series discussed emerging donors and international cooperation.
Richard Manning began by stating that his presentation would seek to answer two questions:
Are there new donors in the international aid system?
Are there any standards to which they adhere in terms of providing aid to developing countries?
In addressing these two questions, he stated that he would divide donors into 3 groups:
The 'Western' countries
The countries of Eastern Europe & the former Soviet republic
The new 'emerging donors'
In the 1960s, DAC countries did not have a monopoly in terms of giving aid. In 1978 & into the 1980s, Arab & OPEC countries contributed 30% of all aid, but as the price of oil declined, these countries started to give less. Furthermore, in the post-Cold War period, Eastern European countries' contributions also declined, so that by the mid-1990s, DAC countries came to dominate what had become a much smaller aid 'cake.'
Manning described 4 groups of countries additional to the DAC who also contribute to aid:
Non-DAC OECD members, e.g. Korea, Turkey, Iceland, & the Eastern European countries through their EU commitments.
Non-OECD EU states with small economies.
Manning stated that the DAC standards with regard to aid are a key point of reference for both of these groups, together with the Paris Declaration of 2005 on Aid Harmonisation & Alignment. Although, they will of course have their own approaches & interests.
OPEC & Arab states - at the moment they give 4% of all ODA, but in a much more harmonised way. All their aid is untied, however it is often given in the form of loans and/or on a project basis. Any future increase in aid given by this group however could be significant.
Countries that don't fall into any of the above groups - this is a disparate group which includes: South Africa, Russia, Brazil, Thailand, Malaysia, India & China. This group is described as the 'emerging donors' & are often both donors & recipients of aid. India & China have both followed a logical pattern in terms of the amount of multilateral aid given to them, which has declined in recent years. However, bilateral aid to China has increased & that to India has decreased in recent years.
A study will be published next week on the impact of ODA on African producers. China's policy on aid to Africa is based on reciprocity. India tends to borrow money to lend to African countries, the value of which is tied to procurement, even though India itself doesn't accept tied aid.
In 2004, DAC countries gave $80bn in aid. This will rise in 2010 to $130bn. This is a massive increase & the DAC will remain the largest source of ODA for a long time to come.
The DAC consists of a very diverse group of countries, within which consensus is achieved only slowly. Agreed guiding principles, however, are that aid has to:
Promote economic development
Have concessional terms
Should be untied
Good practice should be used by all donors
Many of these points were captured in the Paris Declaration of last year.
What are the implications of this proliferation of donors?
Middle Income Countries (MICs) are no longer dependent on the International Financial Institutions (IFIs)
Each of the main banks are paid back more than they are contributing
There is more choice & more freedom for aid recipients & the arrival of new donors will provide even more freedom for manoeuvring
Many HIPC countries have had their debts scaled down considerably
There are, however, risks:
Countries might make the same mistakes that they made before
Non-DAC donors may bankroll smaller countries
To help avoid these, the DAC needs to share its experience & treat other, new donors positively. It started this process of engagement in February this year, aided by:
All countries are now signed up to achieving the MDGs by 2015
Triangular cooperation, including technical assistance is now advocated
Policy coherence between trade, investment, migration, etc is as important as aid
G8 meeting in Moscow will help to cement these principles
The new ECOSOC development cooperation forum to 2007 will act as the UN window to this process & the natural way for the DAC to engage with other donors
Andrew Lawson, Research Fellow at ODI was then invited by the Chair to make his points.
He started by stating that the DAC has instituted only modest measures aimed at improving aid quality. In Madrid a couple of weeks ago, there was a great desire amongst donors to comply with DAC standards, which are seen as an important benchmark in how aid is provided. The DAC should be more aware of this but should also be challenged to do more.
In referring to 'Aid as a Market' by Klein & Harford, Lawson stated that a common assumption is that aid is given for free & that it is scarce. However, neither of these are true. There are often high transaction costs associated with aid & many countries have too much & want better not just more aid. Does the aid 'market' allow them to do this? No - there are barriers to exiting the market on these grounds. E.g. 60-70 development agencies are active in Tanzania, but does this represent choice for the 'consumer'? No - aid is tied to diplomatic & trade relations. The consequences & costs to Tanzania of rejecting aid would be too great to bear, so instead she has to take bits of aid from all donors. There are therefore major problems making the 'aid market' work to the benefit of aid recipients.
Possible solutions to this would involve an examination of the following questions:
If aid was untied, this would remove assumed linkages & act to separate markets. This raises the question of what more could the DAC could do to regulate the market?
If we were all investors, with the freedom to move our money around as we chose, what choices would we make? We would look at the nature of the industry, specifically the peaks of profitability which occur at different levels of concentration of aid (see graph via link above), & put our money where the profits peak. Why don't donors do this? There are market-related reasons which act as barriers to entry for donors, such as cartels, oligarchies, & the structure of regulation.
Is aid is large-scale? For instance, is the World Bank inherently better than smaller scale donors? Should the EU set up its own development agency?
What affects aid - what are the inherent features of aid which are affected by factors such as regulation?
How can we measure the effectiveness of aid? What would we put on the Y axis? Customer satisfaction? The DAC does have experience of this.
Only by answering these questions, can we hope to improve aid.
John Battle thanked both speakers for their contributions, stating that a new space had been opened up, in terms of thinking about aid & took 4 questions/comments from the floor:
Aid in India had been filtered from the cattle market - a novel approach.
We should welcome emerging donors even though their standards might be slightly different to ours - the place for setting these standards is in Paris. Or else, is it a problem of governments, in which case, could the DAC be organised differently?
There are 40-50 fragile states - the thinking in the DAC is to change the nature of the aid therein. Should this be a state-owned enterprise, with guidelines, etc?
There are issues around recipients & governance - e.g. transaction costs in India are the reason that bilateral aid levels have been diminishing. Aid is only 1% of the budget whereas in Tanzania it is 60-70%. Also, the question of standards should be extended to include gender - aid should be gender-equitable.
In answering these queries, Richard Manning stated that:
Peer review could be offered to new EU member states too. This would be interesting but it has not been implemented yet. The DAC has also done much work on applying OECD standards with Brazil, Korea, etc as they get more serious about DAC membership.
The DAC is too diverse to be a cartel. The harmonisation agenda can be intimidating for some small countries.
Client satisfaction can be monitored via the Paris Declaration. This is not just questionnaires, but a whole process involving the relationship between countries & donors.
Countries are learning to say no to donors. This is very important otherwise a dependency mentality develops, but they do need confidence to do this.
In terms of welcoming the emerging donors, this is a two-way process & methods need to be found by which they can make their own contributions to the debate. The ECOSOC development cooperation forum will help with this.
DAC is ultimately connected to the OECD which is now run by a Mexican (Mexico is not a DAC member), so it will be interesting to see what new directions the organisation takes as a result.
On fragile states, the MDGs are very good objectives, but they need to be achieved in a secure environment.
Some non-OECD states, such as Argentina, Chile, etc have accepted the DAC guidelines & also use them as a channel for complaints about MDBs.
High standards in areas like gender & the environment are just as important as areas such as governance, etc.
Andrew Lawson reinforced his point that many recipients still do not have the option to say no. In India, there is a shortlist of donors but aid is indeed a very small percentage of the budget. This is not a question of culture, it depends on diplomacy, trade, etc & most countries decide it is best not to jeopardise these factors so instead they get harmonisation, i.e. 20 donors on a list.
It is not a good idea to threaten to decrease aid in relation to human rights abuses - there is room for more effective use of aid, & these issues should be separate.
Further points raised by the audience at the end of the meeting included:
This is not a new aid agenda - new donors will move into countries & provide aid that's less transparent in order to sustain regimes. These are politically inspired motives.
Describing aid as a 'market' assumes that the market is a natural creation when in fact it is a human creation embedded in social factors.
John Battle thanked the speakers & the audience for their contributions.