Aid addiction

From November 29 to December 1, 2011, approximately 2,000 donors and beggars will review global progress in improving the impact and effectiveness of aid, and make commitments that set a new agenda and indicators to underpin aid effectiveness for development, our Chief Correspondent, Ekow Essabra-Mensah looks at the key success factors leading to Busan, South Korea.

When the aid community meets at the High Level Forum (HLF) on Aid Effectiveness in Busan, Republic Korea, in November 2011, they will have two tasks to accomplish.

The first is to take stock of commitments to improve the quality of aid made at previous forums in Paris and Accra.

The second is to establish a new global compact that can drive further effectiveness improvement in the official aid sector while capturing the different circumstances under which aid is delivered.

The 2011 High Level Forum on Aid Effectiveness in Busan is expected to be different from the preceding forums in Rome (2003), Paris (2005) and Accra (2008).

It must directly contend with a particularly complex mixture of factors. First, budget difficulties in the traditional donor countries which provide major development support are likely to mark the end of an era of growing official aid budgets.

Surveys by the Development Assistance Committee of the Organisation for Economic Cooperation (OECD/DAC) suggest that aid growth will slow to just two percent a year from 2011 to 2013.

Consequently, there is a search to leverage aid with other resources and strategies for development. With tighter aid budgets, there is greater attention than ever before on improving the dysfunctional international aid architecture to make it more efficient, effective and accountable.

Furthermore, newly prominent actors in development — from official partners like China to international NGOs to private corporations — have become large in financial terms, changing the nature of the aid landscape. While this phenomenon has been unfolding for years, the degree to which it is treated seriously in Busan will determine the relevance of this High Level Forum.

Nevertheless, the process of setting up indicators, targets and monitoring instruments has proven its worth in supporting accountability, knowledge and learning. As targets for the Paris indicators were only specified up to 2010, a key success factor for Busan will be the development of a new set of targets and indicators to underpin ongoing dialogue on improving aid effectiveness.

Statistical background on aid

In 2010, net official development assistance (ODA) flows from members of the Development Assistance Committee (DAC) of the OECD reached US$128.7billion, representing an increase of +6.5% over 2009.

This is the highest real ODA level ever, surpassing even the volume provided in 2005 which was boosted by exceptional debt-relief. Net ODA as a share of gross national income (GNI) was 0.32%, equal to 2005 and higher than any other year since 1992.

Bilateral aid for core development programmes and projects (e.g. excluding debt-relief grants and humanitarian aid) rose by +5.9% over the 2009 figure. New lending (+13.2%) increased faster than grants (+6.8%).

Bilateral ODA to Africa was US$29.3billion, of which US$26.5 billion was for sub-Saharan Africa. These amounts represent an increase in real terms of +3.6% and +6.4% respectively over 2009. However, excluding debt-relief grants, bilateral ODA fell very slightly (-0.1%) for Africa but rose (+1.7%) for sub-Saharan Africa.

Donor performance

In 2010, the largest donors by volume were the United States, the United Kingdom, France, Germany and Japan. Denmark, Luxembourg, the Netherlands, Norway and Sweden continued to exceed the United Nations ODA target of 0.7% of GNP. The largest increases in real terms in ODA between 2009 and 2010 were recorded by Australia, Belgium, Canada, Japan, Korea, Portugal and the United Kingdom.

The United States continued to be the largest single donor with net ODA disbursements of US$30.2billion, representing an increase of +3.5% in real terms over 2009. This is the highest real level of ODA ever recorded by a single donor country, except for 2005 when the US gave exceptional debt relief to Iraq. US ODA as a percent of GNP remained unchanged at 0.21%.

Its bilateral ODA to the Least Developed Countries (LDCs) rose to a record US$9.4billion, representing an increase of +16.2% over 2009.

Much of this increase was accounted for by the US response to the 2010 Haitian earthquake (aid to Haiti rose +241% to US$1.1billion). Among non-LDCs, aid to Pakistan rose especially sharply (+126% to USD 1.4 billion), reflecting increased disbursements across many sectors.

ODA from the 15 EU countries that are members of the DAC rose by +6.7% in 2010 to reach US$70.2billion, representing 54% of total net ODA provided by DAC donors. It also represented 0.46% of DAC-EU GNI, up from 0.44% in 2009. This was well above the overall DAC average of 0.32%.

Available data shows that donors generally failed to deliver on aid promise. This is just one of the tasks that the Busan High Level Forum has to clear.

Owing to the needs of developing countries, which largely constitute aid-recipient countries, the group of rich countries - called the Organisation for Economic Cooperation and Development (OECD) countries - promised at the UN in 1970 to increase annual aid to 0.7 percent of their Gross National Product (GNP).

The 22 OECD countries, the major donor countries of the world, failed to meet this target. It was reaffirmed in the Monetary Consensus of 2002, but as of now only five of these countries - Luxemburg, Denmark, Sweden, Norway and the Netherlands - have fulfilled their commitment.

Throughout the 1990’s, OECD aid declined from a high of 0.33 of gross national product to reach 0.22 percent in 1997.

The years between 2001 and 2005 were periods of remarkable increase in total aid, but the increases were ruled out by critics because of their composition. In 2005, for instance, aid flows rose 31.4 percent to top the US$100billion mark for the first time. Contributing to the increase was a US$19billion debt-relief for Iraq and Nigeria, as well as US$2.2billion Tsunami aid.

A total of US$103.7billion was provided by the OECDs in aid to developing countries in 2007, which represents a drop from 0.31 percent of members’ combined gross national product in 2006 to 0.28 percent in 2007. In absolute terms, the figure equals a real decline of 8.4 percent from the 2006 level.

According to the Development Cooperation Directorate, however, the fall was expected because Oversees Development Assistance (ODA) had been exceptionally high in 2005 (US$107.1billion) and 2006 (US$104billion), due to large Paris Club debt operations for Iraq and Nigeria. Debt-relief grants diminished in 2007 to US$8.7billion as the Paris Club operations tapered off.

Excluding debt-relief grants, net ODA rose by 2.4 percent in 2007 while bilateral aid to sub-Saharan Africa, excluding debt-relief, increased by 10 percent in real terms. This represents an improvement on the recent rate of increase.

But it is clear that donors still face a real challenge to meet the Gleneagles G-8 summit projection to double aid to Africa, as pledged in 2010.

The largest donors in 2007, by volume, were the United States followed by Germany, France, the United Kingdom and Japan. These countries however failed to meet the United Nations target of 0.7 percent of GNP.


Ghana's position on Aid Effectiveness

Cabinet passes national aid policy

Ghana’s Cabinet is expected to fully pass the national aid policy document to harmonise and promote aid effectiveness, and to improve country ownership and leadership of aid management.

The framework, expected to receive final passage by the end this year, will become the nation’s short-term aid policy blueprint which will provide guidelines for attracting aid to support the developmental agenda from 2011 to 2015.

The national aid policy framework presently awaiting cabinet endorsement has 10 thematic areas including policies and strategies - focusing on country systems and coordination of aid management - and is targetted at ensuring accountability and transparency in aid inflows.

Mary-Anne Addo, Director, Ministry of Finance and Economic Planning, disclosed: “We need a value for the money framework to make sure ODA’s US$120billion is spent as effectively as possible.

“Aid effectiveness is about making aid make a difference; keep it simple, stick to the essentials – ownership.”

Ms. Addo, who is the Director, External Resource Mobilisation (Multilateral) Division at MoFEP, presenting a paper under the topic “The Aid Architecture Reform Agenda: The Journey from Monterey through Paris and Accra to Busan”, noted that development aid to partner countries does not fully achieve desired results due to how aid is delivered and managed.

She said several partner and donor countries, international and civil society organisations, meeting in Paris at the Second High-Level Forum (HLF-2) on Aid Effectiveness in 2005, committed themselves to reforming aid delivery and management to achieve greater effectiveness and results.

The stakeholders, she said, agreed on the Paris Declaration on Aid Effectiveness which included Partnership Commitments to strengthen ownership, alignment, harmonisation, managing for results, and mutual accountability.

“Since aid effectiveness is about value for money, benchmarks are needed for donor and partner countries -- which were not clearly spelt out at that time. The PD and the AAA were therefore a step forward in ensuring greater aid effectiveness and results since they provide those benchmarks.

“Partner countries, since the Paris Declaration,” she noted, “have developed better understanding of aid effectiveness; but the development agenda is still threatened by over-bureaucratisation.” She therefore called for political engagement and mutual trust on the part of both sides to achieve results.

Touching on fragmentation of donor assistance, Ms. Addo said the practice increases transaction cost and affects implementation of projects. According to the director, the practice would not be a problem if donors did not insist that partner countries adopt donor-country systems to deliver aid.

Mrs. Stella Williams, External Resource Mobilisation Division, said the sheer scale and complexity of the modern global aid and development agenda makes the drive for aid and development effectiveness one of the most important global public service initiatives currently being undertaken.

“This process has not delivered all the expected results or included the concerns of all stakeholders, which is essential for national cohesion and stability. There is, however, the will to improve national ownership of projects and accountability.”


Can Africa forego Aid?

Concerns have been raised by stakeholders, civil society organisations and policy analysts of the need for governments to develop pragmatic strategies to wean themselves from aid and concessionary loans and become self-dependent.

Dr. John Kwakye, a senior economist at the Institute of Economic Affairs, contends that foreign aid can be foregone with improvements in Africa’s tax effort and a dose of financial engineering.

“Some financial engineering is all that is needed to tap alternative resources,” he said at a roundtable on overcoming Africa’s aid addiction in Accra.

“The first vehicle is the budget itself. The budget offers scope for augmenting the resource envelope. This requires both revenue and expenditure measures. On the revenue side, there is room to broaden the tax-base... On the expenditure side, there is a need for prioritisation by curtailing non-essential spending to create space for priority spending.”

Across Africa, there is a large informal sector that hardly shows up on the tax-radar. Dr. Kwakye said this segment must be targetted, together with limited tax-exemptions and resolute enforcement of compliance.

The domestic capital market is another vehicle to raise financing and not have to depend on others’ largesse, he offered.

“Bonds could be issued by the government, municipalities and the private-sector. This can provide long-term funds for the budget and other development activities in the key sectors of the economy.

“In this regard, it will be necessary to develop appropriate institutional infrastructure and the legal framework,” he said.

Bar South Africa, regional capital markets are underdeveloped say analysts, and African governments have to grapple with the cost of funds. On the other hand, aid is received in the form of “very soft” loans (attracting interest as low as between 0 and 1 percent) and could serve as a cheaper financing option. But Dr. Kwakye points out that Africa’s dependence on foreign aid comes with costs.

Aid resources have not matched the region’s vast development needs, particularly relating to building physical and human capital, even as it has worsened indebtedness, he said; adding that associated conditions hardly serve the interests of African countries.

At the start of the last decade, a number of African countries drenched in substantial debts signed on to a debt-forgiveness initiative with Western donors in order to ease fiscal management.

Yet such countries have continued to receive additional resources from donors, and new commitments have been agreed to expand the scope of assistance.

Dr. Kwakye faulted aid for the bureaucracy and volatility in its delivery, which often “curtails or frustrates African development budgets.”

In Ghana a year ago, the World Bank’s erstwhile country-representative Ishac Diwan had cause to complain about the slow delivery of funds approved for disbursement by the bank.

The African Diaspora can provide a solution to Africa’s development-financing needs, the senior economist suggested.

He said remittances from this population can be tapped to provide capital to support domestic budgets. Another instrument could be Diaspora Bonds that pay returns to Diaspora investors, while raising capital for the continent.

African countries, rich in natural resources, could also securitise future foreign-exchange flows, he said, but resources must be used wisely and, to the extent possible, invested in productive – not consumption – activities.

There is a positive history to aid, evidenced by the Marshall Plan for the reconstruction of Europe after the Second World War, Dr. Kwakye admitted, but said “it is time Africa broke its aid addiction.”
Critical Aid issues

There is a troubling trend emerging in bilateral donor financing of development: it is falling, with what appears to be little coordination among donors.

Aid effectiveness principles call on donors to ensure their work is complementary - in part by reducing duplication through improved division of labor.

This push for donors to focus on their comparative advantages, together with the increased interest in achieving results, prioritising aid to poor countries and tighter fiscal environments, has led increasing numbers of bilateral donors to reduce the number of countries and sectors in which they work.

While this is not inherently worrisome, it becomes problematic if bilateral donors are not working together to identify focus countries and sectors to ensure that new gaps are not created. Without this coordination, aid effectiveness turns into the law of unintended consequences - and identifying comparative advantages becomes merely an isolated exercise of prioritising internal strengths.

With little more than a half-month left to prepare before a key international conference on aid effectiveness in Busan, Korea, the country’s policymakers and formulators must consider the answers to two key questions: what would success at this meeting look like? And what can be done in the preparation phase to maximise the chances of success?

The fourth High Level Forum on Aid Effectiveness will build on agreements from past years, but this time the discussions are taking place in a markedly different context.
In the face of heightened pressures on international aid, the meetings in Busan present an opportunity to finally take development cooperation seriously. The U.S. government in particular could play a critical and catalytic role.

Delivering on aid promises and timelines

The Accra High Level Forum targetted world leaders to agree to develop an effective and transparent international mechanism for improving aid allocation. Rich countries should find it important to meet the UN threshold of giving 0.7 percent of GNP as aid annually.

A basic condition for aid effectiveness is that it should be allocated to countries and to areas that need it most.

Present systems suggest that donors continue to allocate aid according to their own interests and objectives, and using allocations to impose policy conditions.

Aid is often disbursed according to donors’ own priorities and timetables, without sufficient effort to respect and conform to national planning, development priorities, or the national-budgeting time-frame of recipients.

This makes it very difficult for recipients to prepare effective budgets or to plan ahead. It also makes it difficult for watchdogs like the civil society organisations to monitor aid-flow and its effectiveness.

Donors should agree new targets to make multi-year aid predictable and guarantee aid commitments based on clear and transparent criteria - and should deliver those commitments on schedule in a transparent manner.

Over the past six years, the OECD has organised three High Level Forums on Aid Effectiveness. At these Forums, a growing group of key stakeholders – including the international donor community, developing countries and civil society organisations – met to agree on the most effective ways to manage the aid process.

The first Forum was held in Rome in 2003, followed by Paris in 2005 and Accra in 2008. They helped transform aid relationships between donors and partners into true vehicles for development cooperation.

The Rome High Level Forum on Harmonisation

In February 2003, major donors, multilateral organisations and aid-recipient countries gathered in Rome for the first High Level Forum on Harmonisation. They broke ground by agreeing on a common set of principles to improve the management and effectiveness of aid: the Rome Declaration.

This Declaration differs from the Paris Declaration in that it contains commitments solely on the donor side. It focuses on the harmonisation of donor procedures and practices so as to reduce transaction costs for partner countries.

The Paris High Level Forum on Aid Effectiveness

The Paris Declaration on Aid Effectiveness, endorsed on 2 March 2005, is an international agreement adhered to by over 100 Ministers, Heads of Agencies and other Senior Officials. By adhering, they commit their countries and organisations to put into practice a set of principles to improve aid effectiveness, enabling them to reach specific targets by 2010. This is the highest-level existing statement of international norms regarding aid-delivery, with 56 partnership commitments and 12 indicators of progress.

The Accra High Level Forum on Aid Effectiveness

The Accra Agenda for Action (AAA) was agreed in September 2008 at the Third High Level Forum on Aid Effectiveness. It contains a series of commitments to strengthen and accelerate implementation of the Paris Declaration. While it does not replace the Paris Declaration and does not contain any additional monitoring arrangements, it elaborates on and sharpens the Paris commitments in important ways.


Busan High Level Forum on Aid Effectiveness

Preparations are already underway for the next High Level Forum, to be held in Busan, South Korea. This will take stock of progress toward the targets set out in the Paris Declaration; a final round of monitoring together with a full evaluation of the impact of the Paris Declaration will be carried out. Based on these analyses and the discussions at the Forum, participants will decide on the way forward.

Based on 50 years of field experience and research, the five principles that resulted from these fora encourage local ownership, alignment of development programmes around a country’s development strategy, harmonisation of practices to reduce transaction costs, the avoidance of fragmented efforts, and the creation of result-frameworks.

Looking ahead, diverse sources of finance, knowledge and expertise play a key role in the future of development - and broad, dynamic partnerships will continue to give aid principles relevance which become catalysts in fast-tracking third-world nations’ developmental agendas.

Aid, Beyond 2011

The OECD has just completed the fourth comprehensive survey of donors’ future spending plans, which provides an indication of the collective forward programming of bilateral and multilateral donors through 2013.

Preliminary findings based on DAC members’ returns to the forward spending survey suggest slower aid growth ahead.

Global Country Programmable Aid (CPA) planned to grow at a real rate of 2% per year from 2011 to 2013, compared to 8% per year on average over the past three years. For DAC countries’ bilateral aid only, the projected increase is slightly lower at 1.3% per year.

The deceleration is likely to be more marked for low-income countries and for Africa, where CPA is projected to increase at about 1% per year in real terms, compared to a 13% annual growth rate in the past three years. Thus, additional aid to these countries is likely to be outpaced by population increases.

The DAC is developing illustrative aid scenarios for the next few years as a number of donors do have aid targets, notably the EU target of at least 0.7% of GNI for the 15 EU members of the DAC and 0.33% for other EU members in 2015, along with the commitment of the EU and its member-states to reach a collective target of 0.7% in 2015.