Why do countries need aid when the world is awash with capital? Latest thoughts from the OECD

October 14, 2014 7 By Duncan Green

I chaired the London launch of the OECD’s annual aid report last week (when it comes to flagships, the multilateral system is starting to look like the Spanish Armada – speeches disguised as questionsmore on that tomorrow). We opted for a radical new model for such meetings: the chair keeps people to time, says where the toilets are (when he remembers) but otherwise shuts up. Panelists speak to time, and discuss the report, rather than random other research interests. And the audience asks questions or makes short points, rather than speeches disguised as questions. Novel, eh?

The Development Cooperation Report 2014 is the second in a trilogy (2013-15) focusing on “Global Development Co-operation Post-2015: Managing Interdependence”. The first was on ‘Ending Poverty’; this one is on mobilising resources, and the final one will cover implementation, reporting and accountability of whatever is agreed in the post-2015 process.

The speakers ranged widely, touching on everything from benevolent dictators to planetary boundaries to just about everything else – maybe my model of chairing needs work. The only thing that enabled me to keep my mouth shut was the knowledge that I could ramble on unhindered on the blog. So here are some impression of the report and the meeting.

The big message from the main speaker, Erik Solheim, was that things are getting better (South Korea’s GDP per capita has risen 390 times – that’s 39,000% – since 1953) and that money is not the problem – there’s loads of it, sloshing around in the international system and domestically ($80 trillion under management by institutional investors, for starters).

In terms of international flows, last year’s record $135bn in aid was just 28% of all official and private flows from the 29 member countries of the OECD Development Assistance Committee (which Erik chairs). There is a growing diversity of options for poor countries seeking cash – market finance, foreign direct investment, private grants from philanthropists and NGOs. And that doesn’t include remittances (3 times the volume of global aid).

But actually, they don’t need any of that if they sort out their tax systems. Tax collected in Africa in 2012 was already 10 times the total aid entering the continent, and among developing countries as a whole, a 1% increase in the tax rate would generate an extra $300bn a year. Alas, in low income countries tax collection as a % of GDP has been stagnant for several decades (according to the speakers) and the donors are doing very little about it – the amount of aid that goes to help poor countries sort out their tax systems is stuck at around a tenth of 1%.

The message on aid gets some careful handling, because the last thing the DAC wants to do is give the impression that aid is no longer necessary. The report identifies three broad purposes for aid:

  • Safety Net: funds and backing for the fragile and least developed countries, which find it hard to attract or raise other resources
  • Leverage: use aid to make investment attractive in high-risk situations by spreading and sharing risk, and by creating incentives
  • Technical assistance: help countries raise and manage their own domestic resources and support the creation of a positive development and investment environment through policy reform in areas such as investment and trade, as well as help new donors like Turkey sort out their aid machinery.

DCR 2014 finalinfoThe meeting generated some powerful calls for measuring the amount of aid that arrives in poor countries, or is spent in poor communities, rather than the amount spent by northern governments (not the same thing at all).

To which I would add a longstanding hobbyhorse – can someone please support a review of donor performance by their supposed ‘partners’ – developing country governments, civil society organizations and other relevant bodies? I would love to see headlines like ‘DFID/USAID/World Bank fell 2 places this year, because African governments were fed up with the lectures/delays/bureaucracy’.

Instead, all the league tables seem to be drawn up by international bodies, whether official or NGO – accountability seems to have an inexorable tendency to point upwards to where the money/power is.

And if I had been less self-controlled, my two minute rant from the chair would have been this. It’s all very well to make the technical argument that aid is so last decade, and targets like 0.7% are a distraction, or that we need multiple definitions to capture the wider flows of finance for development (new definitions seem to be getting a lot of airtime at the OECD). But can we please think through the politics of how those discussions are likely to go? On definitions, cash-strapped governments are likely to argue for dilution so they can shove loads of other expenditure into the aid budget. 0.7 may not have a rigorous analytical basis, but it is something the politicians and public understand – symbols (the non mathematical variety) matter in public debates, even if technocrats find them annoying.

These wonky conversations will all come to a head at the July 2015 Finance for Development conference in Addis Ababa.

Erik ended the meeting with a striking call to arms – against his country’s own pension fund. Why does the world pat Norway on the head for its aid budget of 1% of GNI ($5.2bn), when its $900bn oil fund, the largest in the world, which has only the most minimal social or developmental criteria for its investments? Nice campaign.

And here’s the 3m report summary