Aid must change in order to tackle inequality: the OECD responds to Angus Deaton

Guest post from Jon Lomøy, Director of the OECD Development Co-operation Directorate (DCD)Jon Lomoy OECD

Official development assistance – or aid – is under fire. In The Great Escape, Angus Deaton argues that, “far from being a prescription for eliminating poverty, the aid illusion is actually an obstacle to improving the lives of the poor.”

Yet used properly, “smart aid” can be very effective in improving lives and confronting the very issue that Deaton’s book focuses on, and which US President Obama has called the “defining challenge of our time”: rising inequalities.

As a recent UNDP report shows, more than three-quarters of the global population lives in countries where household income inequality has increased since the 1990s. In fact, today many countries face the highest inequality levels since the end of World War II.

There is clearly moral ground for arguing that it is unjust for the bottom half of the world’s population to own only as much as the world’s richest 85 people. Above and beyond this, however, academics, think tanks, and international organizations such as the OECD have found that rising inequalities threaten political stability, erode social cohesion and curb economic growth.

It is not surprising, then, that reduction of socio-economic inequality has moved to the centre of global discussions on the post-2015 goals. The OECD, responsible for monitoring official development assistance (ODA) and other financial flows for development, is complementing these discussions by exploring ways to better use existing financial resources – and mobilise additional ones – to promote inclusive and sustainable development. This includes redefining what we mean by ODA, as well as looking at the ways it can best be used to complement other forms of finance.

While the relative share of concessional public finance – what we traditionally refer to as “aid” – is shrinking compared to new sources of finance for development, this is still a particularly important instrument to address poverty and inequality in many countries – especially those affected by conflict and fragility, where it is difficult and risky to invest.

But to do this effectively, what we know as aid must change and adapt to the needs and priorities set by the countries themselves. Traditional aid must work in untraditional ways.

Africa tax doodleSmart aid can, for example, help countries finance their own development using domestic resources. Colombia used official development assistance to the tune of just US$15,000 (two technical missions to Colombia in 2012) to fund a capacity development programme for tax administrators. Tax revenues collected by local authorities jumped from US$3.3million to US$5.83million in just one year. Rather than eroding the social contract between citizens and states – as Deaton argues that it does – aid used in this way is likely to increase citizen’s confidence in the state by seriously bolstering the social benefits the government is able to provide them.

A recently published OECD report shows that providers of development co-operation can also help developing countries confront the challenges of illicit financial flows. Large sums of money – likely to exceed the annual volume of total official development assistance – are illegally transferred out of developing countries every year, depriving the host country of essential revenues. Multinational companies, for instance, use so-called transfer pricing to reduce their tax burden by positioning their profits in countries with low corporate taxes.

A US$10,000 project in Kenya (the cost of two workshops in Kenya that provided advice to the Kenyan Revenue Authority – KRA – on transfer pricing audits) enabled the tax authorities to negotiate a transfer pricing adjustment, contributing to an increase in tax revenues of US$12.9million. Subsequent transfer pricing adjustments by the KRA led to additional tax revenues: from US$52million for the year ending 30 June 2012 to US$85million in 2013. The KRA states that the assistance and advice provided by the workshops has been a major contributor to achieving these increases.

What’s more, development co-operation can be used to mobilise additional financial resources by providing the conditions needed to attract private investment through mechanisms that reduce risk. For example, government-provided ODA can be used to offer guarantees for private investors; or different sources of finance can be “blended” to spread the risk over a group of lenders (the syndicate), one of which is often a multilateral development bank.

These are just some of the ways in which resources can be mobilised through the smart use of development co-operation to help states reduce socio-economic inequalities, finance policies that enable more people to benefit from inclusive economic growth, and provide public services such as education.

Later this year, the OECD will publish its Development Cooperation Report 2014: Mobilising Resources for Sustainable Development. This provides an overview of existing sources of finance for sustainable development, as well as a number of financial and policy instruments that can be used to mobilise additional resources.

Critics are not wrong in questioning how aid is used. We at the OECD – and our member countries – are also doing so to ensure that we learn from the better aidpast to build better and more fit-for-purpose assistance. Times have changed, and so must public development finance. But it would be wrong, as Duncan Green says in his review of Deaton’s book, to throw the baby out with the bathwater and simply stop providing this assistance. One may argue that aid is actually one of the better instruments we have available for redistributing a share –albeit an admittedly small share – of our enormous global wealth to countries and people where it can make a great difference, thus reducing global inequalities.

Part of the “aid illusion” is thinking that aid can’t change.

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7 Responses to “Aid must change in order to tackle inequality: the OECD responds to Angus Deaton”
  1. charlotte sterrett

    Hi Duncan, Perhaps a follow up story to this blog could be about what is happening to aid levels in the name of ‘economic conservatism’. Here in Australia the budget released yesterday includes a freezing of aid, a dismantling of the promise of work towards 0.5% of GDP (not even 0.7% I know), resulting in $7.6 billion being effectively cut from the aid budget. It’s desperate times for poverty affected people, even while Australia sits very comfortably. The rationale for cuts were were to reduce the country’s deficit (20% of savings incidently came from cuts to international aid). Thanks, Charlotte

  2. Paddy Coulter

    Good on you, Duncan, for running this guest blog! Its acknowledgement of complexity is in welcome contrast to the Punch-and-Judy tone of much current debate on aid. Is it too much to hope we might now get a more grown-up, evidence-based debate than the ‘All aid is pernicious’ vs ‘All aid is beneficial’ simplicities??

  3. Richard Gower

    Hi Duncan/Jon, there’s an aspect of the aid debate that I rarely see mentioned even in well-reasoned contributions like the one above, and this is the role that aid plays in countries like Zimbabwe (where I used to work). In these states there isn’t much (if any?) social contract between the authoritarian government and the people for aid to erode, and the only serious providers of healthcare, education, agricultural programming and other resilience-improving interventions are funded directly through ODA. Improvements in governance/democracy in these countries are far more dependent on internal factors than on anything to do with aid, and in the meantime aid dramatically improves development outcomes and resilience for large parts of the population.

  4. Luc Lapointe

    Dear Jon,

    Unfortunately, I am less optimistic about the possibility for “aid” to change even though…as you mention it could play an important role in “issues” that are not sexy to the private sector – orphan causes.

    A few conflicting thoughts in your contribution. Yes new flows are exponentially generating more that ODA but once again this shift comes without tools to make them more effective. The problem is not money — it’s the ongoing disconnected approach to local needs/opportunities and the ongoing thinking that “scaling up” is success. BINGOs have the same view of development – do and replicate!

    1) When it comes to inequality, I believe that this new private sector approach to development might just further foster more inequality. Who are the new “darlings” of development — Coka Cola, Unilever, Pacific Rubiales, Sab Miller! Not that they can’t play a role but quite often these companies dump cheap products in local markets and SMEs can’t compete .. poor people are most likely to purchase Coke Cola than making juices from local fruits. In a small city outside of Cali Colombia, the farmers prefer to let the fruits rot in the field because locals prefer to use “Tang” than purchase local / fresh fruits. Job creation is important but at all cost?

    2) The OECD has a good opportunity now to break the silos and help all Private Development Assistance (PDA) sources of funds to think/act collectively. Once again more silos…more fragmentation! Here is the definition of PDA (source Hudson Institute) — Private assistance is further limited to aid that is: (a) undertaken by private actors including individuals, foundations, corporations, private voluntary organizations, universities and colleges, or religious organizations; (b) with promotion of economic development and humanitarian need as the objective; and (c) at concessional financial terms where commodities and loans are concerned.

    Is it possible to make these silos collaborate and more effective – we believe so and working on it.

    3)Glad you mentioned Colombia and “taxes” – I think it would be worth it to do a good tour of the cities in Colombia to better understand the sources of taxes …if this is key to sustainability. For example, only 14% of the population in Cali is considered “middle-class” which means that they have the weight of this social debt. Would increasing taxes or tax collection actually help? or would it take more money out of a very fragile economy?! Would taxing the informal economy generate investment in infrastructures that supports poor people? I doubt it! Like any other countries ..poor people don’t vote or could be purchased at a very low price. Investment in infrastructures are made in area where “rich” people live. Cali is a very good example — you could actually believe that things are working here.

    All this to say that we are, once again, missing a good opportunity to think collective and to scale down instead of scaling up. Can the OECD break the silos? At the last HLM in Mexico, I sincerely think that the OECD missed an opportunity to end the event with a session that would have connected the dots. From tourism to CSR and private development or philanthropy — everyone met and everyone left with their own narrow vision of what would could be collective approach to development.

    I think “aid” could change if we stop looking at development in silos and put in places the processes that would “foster” collective approach.

    Saludos cordiales….from Cali Colombia

  5. Cornelius Chipoma


    I too wonder about the categorical, if not indeed misleading, statements on the preponderant impact of aid on growth. I recently looked at Zambia’s national accounts data from the early 70s to the 80s. The data for this period shows consumptive spending increasing as a percentage of GDP from 54.6 percent in 1970 to 98.8 percent in 1982. Over the same period investment spending fell as a percentage of GDP from 28.4 percent in 1970 to 16.9 percent in 1982. Translation – consumption was ferociously eating away at productive investments – certainly key infrastructure such roads lacked investment and were falling apart. At this rate, we cannot even speak about savings. In fact, consumptive spending grew in tandem with the ruling government’s political decline. The year 1982 marked the end of Zambia’s Second National Development Plan which the government admitted had failed to spur growth.

    Add to this, the importance given to military spending given regional security engagements. The liberation war in Southern Rhodesia (Zimbabwe) and Zambia’s hosting of African National Congress (ANC) activists resulted in huge budgetary allotments to military spending. The disruptions to trade routes through Rhodesia and related economic embargos had huge cost implications. For example, in 1975, Zambia airlifted copper to ports for export. So, without the fancy econometric footwork, it is inconceivable, under these conditions, that aid alone would have a preponderant influence on economic growth.

    For the cases of positive deviance cited above by Jon Lomøy the larger question is how these were facilitated? Can we do more? The aid predicament, for me, is well articulated in this Chinese proverb: ‘Give a man a fish and he eats for a day, teach a man to fish and he can feed himself for life.’ As virtuous as this proverb is, how does it work in practice? What are the incentives/disincentives associated with just giving or just receiving? How can we positively influence these incentives? What kind of assistance environment (including resources, time, and approach) facilitates this ideal? I have wondered why projects generally have five year time frames, what is the rationale for this? So, there is scope to do more and better.

  6. MJ

    Is it just me, or does this post fail to grapple with the primary criticism? I don’t think many people would quibble with $10,000 here or $15,000 there for a couple of transformatory workshops. It’s the billions of dollars that gets critics’ goat. Whilst I am no fan of how a lot of ODA is spent, I am even less of a fan of the “Stop all Aid” school of thought. Unfortunately this post does not seem to help very much.

  7. Michael Kleinman

    This begs the question – why does Colombia need $15k (or Kenya $10k) in external assistance for these programs, especially if they represent such a clear return? Isn’t this exactly the sort of thing that governments themselves should fund?

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