Key messages
- This paper analyses the current aid crisis and its causes. It suggests that the multiplication over decades of objectives assigned to aid has prompted its fall. Expectations are not met, and the resulting trust crisis has caused criticism of aid both in donor and recipient countries. In the current state of confusion, two urgent actions are required:
- First, restoring trust by regaining the truth about aid: this will require greater transparency about what aid is and is not, its objectives and modalities (from solidarity to investment promotion), and a stronger monitoring and accountability framework with key performance indicators aligned with assigned objectives.
- Secondly, putting developing countries in the driver’s seat, with country development and financing strategies at the heart of the system: this will require a change of perspective on measurement and effectiveness, and impose a market approach to financing sustainable development with new mechanisms to improve market functioning and remedy its failures.
- The paper suggests adjustments to existing measurements, practices and standards, including a new role for incumbent platforms like the OECD Development Assistance Committee to take those actions forward.
- It also sheds a positive light on the future of aid that will remain a key component of any policy, even self-centric and self-interested, at the same time as it stresses the costs of delays in action and the need to get over the current aid existential crisis as soon as possible.
Analysis[1]
Aid is in trouble: the brutal closure of the US Agency for International Development (USAID) followed by the Millennium Challenge Corporation (MCC) is just the tip of the iceberg, with many major traditional OECD Development Assistance Committee (DAC) aid providers contemplating the reduction of their aid budgets by up to two-thirds, in the EU, the Netherlands, Finland, France, the UK, Switzerland, Germany, Sweden and others. According to the OECD, Official Development Assistance (ODA) fell by 7.1% in real terms in 2024 after five years of consecutive growth. These cuts are accompanied by violent criticisms in both the anti- and pro-aid camps: how could the taxpayers’ money be used for supporting countries that are our commercial and political rivals? Why are countries turning their back on aid and causing millions of unnecessary deaths? These add to governance challenges, with a pressure to overhaul the global financing architecture inherited from Bretton Woods and the 1960s, including the OECD DAC: how can rich countries set the rules by which they must abide?
Each camp organises its arguments and counterarguments, and citizens are left with an even greater sense of confusion: was aid about solidarity or trade and investment promotion? Was aid not about grants but about loans that generate net benefits for ‘donors’? Did aid not necessarily feed the budget of developing countries but was spent in donor countries, covering costs of refugees, academic institutions or NGOs? Trouble is not only rooted in the rise of nationalism, it has deeper causes: the black box of aid needs unpacking; the governance of aid must change.
Business as usual is not a solution anymore, and a new narrative will not solve the problem either. A problem of the rich, in search for the meaning of aid to justify budget allocation, cannot put on hold responses to global challenges like hunger, poverty, health, education, climate change and biodiversity loss. The cost of inaction is too high, primarily with the poorest, but also in donor countries themselves as the COVID pandemic or the mega-fires have shown. Urgent action is needed to respond to people’s questions about aid, and to think the system afresh to make it fit for today’s challenges and constraints.
1. Restore trust, restore the truth
The first step is to restore trust: trust with citizens in countries of origin of financing flows, and trust with citizens in countries of destination. Trust is broken because expectations about aid are not met on either side. Not all countries had the trajectory of France, the first recipient of an International Bank for Reconstruction and Development (IBRD, part of the World Bank Group) loan in 1947, or South Korea that went from the status of aid recipient to member of the OECD DAC in 2009 after four decades of successful development policies. In West Africa, ‘darlings’ of the French development cooperation rebelled against the former colonial power and cut all ties without qualms.
Restoring trust should start with restoring the truth. Aid is not a silver bullet that will fix all the problems of the world. Looking at the stocks of assets under management in the world –estimated at about US$460 trillion– and the flows of financing available to developing countries –such as trade, investment, government revenues, remittances, etc–. Official Development Assistance (ODA) is actually the only source of financing in the order of billions compared to trillions for others. Still, it feels like ODA should do it all, and decade after decade, the objectives of aid have multiplied, most recently with the 2030 Agenda, the Sustainable Development Goals (SDGs) and the Paris Agreement on Climate Change. By trying to do it all, aid lost its soul and credibility.
Restoring the truth means clarifying the objectives of aid and holding policy makers and aid providers accountable for results and impact.
2. How did aid get into trouble?
2.1. The layers of objectives
The concept of foreign aid appeared in the 18th century, when Prussia provided military assistance to strategically important warring parties. Thus, the record high support to Ukraine and growth of military budgets in the early 2020’s is closing a loop.
Yet, the roots of aid have long been forgotten, and the objectives of aid have kept evolving over time. Following World War II aid served the reconstruction of Europe; during the Cold War it served the race for influence of the superpowers; during the decolonisation period it served to support the take-off of newly independent economies; at the end of the 20th Century it supported the globalisation of trade and investment; since the beginning of the 21st Century, with the adoption of the Millennium Development Goals (2000-15) and the Sustainable Development Goals (2015-30), the focus of aid has shifted from the eradication of poverty and hunger to a broader range of objectives including Global Public Goods (GPGs); with the COVID-19 pandemic, the multiplication of climate-related shocks and armed conflicts, and the forced displacement of populations, aid has supported responses to more frequent and larger scale crises. In sum, decade after decade, the primary objectives of aid have changed but also cumulated to the point of confusion.
This confusion about objectives has been magnified by the evolution of statistics on aid. The OECD DAC has for 60 years been the guardian of ODA’s integrity, and made all efforts to adjust measurement to the evolution of ODA’s objective and practice. Most recently, the DAC concluded 10 years of ODA modernisation discussions that allowed, for instance, the inclusion of private sector instruments (PSI) in ODA. A new measure of Total Official Support for Sustainable Development (TOSSD) was also created, now managed by an independent International Task Force. Yet, ODA statistics resemble a Swiss watch’s movement with a level of complexity that is hard to understand by non-experts, raising a number of questions, such as: why are in-donor refugee costs included in ODA? And what is the grant-equivalent methodology? The UN objective of 0.7% of GNI in ODA has also contributed to this complexification, creating an incentive to expand the definition of ODA to come closer to 0.7, while at the same time it has been an essential political driver of ODA.
In that context, aid can only deceive because it cannot do it all: it cannot fill the US$4 trillion SDG financing gap or even the US$300 billion needed on climate alone. Even if DAC donors reached the 0.7% target, ODA could fill only one tenth of the estimated financing needs. In a situation of budget restrictions where governments try to identify cuts, a policy that does not meet its objectives –as unrealistic as they might be– is an easy target.
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The historical drivers of aid are challenged but remain essential:
In a world driven by self-interest, what could be the main threats or interests motivating aid spending? Looking at the current global risk landscape, aid remains a useful policy tool to prevent and mitigate negative domestic effects of global risks. For example, on the basis of global risks rankings by the World Economic Forum:
A more systematic analysis of risks as perceived in individual countries should help tailor aid to specific policy objectives and make the case for aid, even in a self-centric and self-interested regime. |
2.2. The emperor has no clothes
The brutal closure of USAID revealed a latent ODA crisis and many donors coincidentally announced aid cuts. Some estimate that ODA could drop by close to 30% by 2027. Yet, this is probably not the end of aid. ODA has proved the most resilient source of financing to developing countries, and has been through many crises in six decades of existence, in particular when its objectives shifted. At the end of the Cold War, when the world geopolitics had a major shift, ODA dropped by a quarter over five years (1992-97) –a scenario similar to today’s projections–. Aid in recent years has been mainly driven by responses to crises, and new crises will unfold, driving new forms of aid. Aid is even likely to increase in the medium to long term, since the cost of achieving the SDGs, climate adaptation, peace and security will only increase as a result of current inaction and aid cuts.
The phoenix will rise from the ashes, but the face of aid will change, again. Aid is folded once again into foreign policy, including institutionally, with development ministries being merged with foreign affairs (see, eg, the UK Department for International Development, DFID, folded into the Foreign, Commonwealth and Development Office, FCDO, or the USAID folded into the States Department). When prevention fails, aid manages crises. The example of Ukraine shows how it can slip from soft to hard politics, from development to rearmament.
As ODA budgets are under stress, they reveal donor priorities or the limits thereof. Solidarity is a challenge: countries with a low-income (LICs) and most in need, such as least-developed countries (LDCs), have been the first victims of reductions in ODA concessionality, with the share of grants in ODA declining to the benefit of loans. In times of cuts, the logic would be to ‘ringfence’ ODA to the benefit of countries –and sectors like health– that need it most and have no alternative source of financing. However, current calls for ‘leveraging’ ODA could have the opposite effect, diverting even more resources away from them. The idea is that ODA should be better leveraged as it gets scarcer so that catalytic effects compensate the cuts. However, as the OECD has shown, using the example of multilateral development finance, ‘stretching’ the balance sheet comes at a cost that could exclude some of the poorest countries, and it should be accompanied by a capital increase and ringfencing of resources for the poorest to avoid diversion. In sum, there is a risk that current reactions magnify cuts in countries most in need and social sectors, and generate massive setbacks on poverty, hunger or health.
More and more development strategies assign self-serving objectives to aid, such as the promotion of national business interests, challenging previously agreed principles like ‘untying aid’ or making the frontier between aid and export subsidies more tenuous (see new aid strategy of the Netherlands, aimed at giving Dutch businesses more opportunity to win development contracts). Most blended finance projects involve national investors. Earmarking of aid channelled through the multilateral system, including more recently in multilateral development banks (MDBs), also challenges multilateralism’s reason of being and effectiveness, reflecting individual donor priorities instead of collective ones, and adding to the fragmentation of the system.
The problem is not that donors compete at the investment margins of aid and try to leverage ODA; on the contrary, these efforts should be better measured, acknowledged and rules adjusted to unleash them and ensure a level playing field with other actors. For example, the aid principle aims to secure value for money and avoid competition with emerging industries in the recipient country, but is it still justified in countries that already have competitive industries? The problem is to lie about objectives and put aid under one single umbrella at the solidarity and investment margins, with serious risks of diversion and no systematic compensation (as illustrated by the vacuum left by the cut in the US solidarity efforts that is not filled by countries who are only interested in loans at the investment margin). More and more authors call for a clear distinction of financing by objectives. Cuts can be absorbed in part by stretching balance sheets at the investment margin, but they should also prompt a ringfencing of ODA at the solidarity margin to avoid diversion and leave no one behind.
3. The truth about aid
3.1. What aid is not
ODA is a public policy: its budget and allocation are subject to the sovereign decisions of governments and parliaments. Making the case for ODA is often harder than for other public policies because the benefits are more remote geographically and in time. In a period of budget constraints, cutting aid rather than other domestic policies is politically less costly. Aid also fluctuates with foreign policy imperatives and the level of isolationism or expansionism of the donor country, as illustrated by current trends.
Therefore, calls of the civil society and some countries to agree on an international development cooperation (IDC) convention reveal a certain misunderstanding of the nature of aid. Should such a convention be concluded, the UN could not bind its members to a certain level of spending or allocation of ODA. Likewise, the idea of an ‘ODA debt’ makes no sense since the 0.7% was just a policy objective –not even recognised by all, although those countries who translated it in their domestic law did respect it–. Most likely, an IDC convention would on the contrary lead to ODA setbacks, taking it even further away from people and their sovereign representatives. It is unlikely that what cannot be agreed at 33 in the DAC could be agreed at 193 at the UN. Overruling the DAC and ODA would require answering questions like: who are the donors and recipients? Would China become a donor and accept the rules established by the UN for donors? How would the trade-off or complementarity between vulnerability and poverty be addressed in deciding eligibility for ODA? What would be the new target for aid to GDP? Would it exclude climate finance? The idea of universality of the UN neglects the importance of the participation of all its members in the established rules: preserving the UN and multilateralism also means not condemning the institution to failure by adding mandates when budget cuts are made simultaneously.
Members of the OECD DAC have not transferred their sovereignty to the committee. Within the DAC, the consensus rule remains, and its recommendations –while subject to peer review and pressure– are non-binding. Still, the DAC remains a quite unique legacy of the post-war multilateralism with a number of countries having agreed to use common definitions, measures, standards and accountability mechanisms for greater effectiveness.
Nonetheless, there would be a case for a truly international solidarity mechanism independent of national sovereign decisions, eg, for the management of global solidarity levies. Multilateral development finance and global funds should already have served such a purpose, but they have remained dependent on ODA allocations (decisions to replenish a fund or not) and an increasing earmarking of funding, as well as being the victim of fragmentation that illustrates again the desire of donors to keep control of specific organisations or funds. A truly independent management of global solidarity levies and a boost of core funding to multilateral organisations and funds could remedy this problem in part.
3.2. What aid should be
Restoring the truth about aid would require the DAC and all donors making a massive transparency effort and review communication about aid. Communication about aid has largely been driven by a ‘beauty contest’ with donors interested in the big picture and their position in rankings: who gives the most? There should be no more mixing pears and apples: aid data should be disaggregated to distinguish what is spent at home, how it is allocated, where it stands along the solidarity-investment spectrum, and so on. This would respond, in part, to the request, in the lead-up to FfD4, for greater transparency on country programmable aid and budget support (see paragraph 31 of first draft of FfD4 outcome document).
Greater transparency should be accompanied by a simplification or at least a better explanation of statistics. The DAC should provide information on the whole spectrum of aid, from grants and the most concessional instruments at the solidarity margin to loans and the least concessional instruments at the investment margin. Statistics should also probably look beyond aid to make the link with trade, investment and peer-to-peer cooperation. This would require the DAC to cooperate with other committees at OECD, and data on aid to be combined with data on investment and trade to capture private flows. A number of OECD standards, for instance on the qualities of FDI or the sustainability of value chains, do have positive development effects even if applicable to commercial relations. This would allow a ‘ringfencing’ of ODA combined with greater transparency and acknowledgement of efforts done beyond ODA to promote growth and development.
4. Towards a greater accountability and impact
4.1. A public policy
Aid should respond to the same standards as any other public policy. It should be better monitored and policy makers held accountable for results. Whereas aid policies are subject to evaluations, it is also the role of the DAC to review results, conduct peer reviews (that include broad consultations as well as visits to the field) and ensure the effectiveness of ODA. However, the process could be improved to be more inclusive and hold donors accountable individually and as a group. This could include new forms of evaluation such as:
- Thematic peer reviews (regional or sectoral).
- Regular dialogue and consultations with recipient countries to ensure standards and practices are fit-for-purpose (beyond Global Partnership for Effective Development Cooperation, GPEDC –in regular DAC meetings–).
- A reinvigorated effectiveness agenda that would ensure the effective implementation of agreed principles, including a critical assessment of the GPEDC.
- A strong follow-up and monitoring mechanism for the future Seville agreement and action pledges that could build on SDG targets and other relevant indicators.
Such improvements should not add layers of complexity and reporting burden to developing countries, but on the contrary aim for simplification. Despite the numerous publications of the OECD DAC, there is currently no report assessing the performance of donors as a group such as an annual report of a court of auditors that could also provide an opportunity to give a voice to developing country partners. This leads to situations like the current one, where donors reflect on 10 years of implementation of the Addis Ababa Action Agenda (AAAA) and realise the lack of progress in many key areas like effectiveness or private finance mobilisation. Key performance indicators (quantitative and qualitative) should be set and monitored on a more regular basis (DAC annual report or revisited Development Cooperation Report to focus on accountability).
4.2. Key performance indicators aligned with objectives
During negotiations leading to the 4th International Conference on Financing for Development in Seville, the notion of ‘impact’ was prominently put forward, among others with a call to work towards suitable measures of development impact of all types and modalities of development cooperation (and climate finance). The first draft of the FfD4 outcome document included 47 references to impact and called for new impact metrics or valuation methodologies in many places. It also included impacts on development and its prospects of other policies, such as trade, competition, climate and investment, stressing the need for greater coherence of policies and more consideration to the potential cross-border effects of domestic policies.
Measuring the impact of development cooperation is a complex challenge that has given way to a vast compendium of academic work, as illustrated by the attribution in 2009 of the Nobel Prize to Abhijit Banerjee, Esther Duflo and Michael Kremer who have tested the outcomes of a range of interventions in different development cooperation areas using field experiments. However, no methodology has reached a consensus. For example, after two decades of existence, output-based (or results-based) aid has encountered renewed interest and refers to strategies linking delivery of public services in developing countries to targeted performance-related subsidies.
More systematic work and mainstreaming of impact measurement and accountability frameworks, including clear objectives and key performance indicators, at individual donor or collective levels, should significantly help restoring trust in development cooperation and increase its effectiveness. Most of the information already exists but is dispersed across communities of practice and publications: it should be brought together in an annual report of DAC activities and results against key performance indicators for greater transparency and accountability.
4.3. A Copernican revolution of aid
For 60 years the debate on aid has been donor- or supply-centric: measuring and comparing donors’ efforts (ODA rankings), sharing good practices and standards (donors’ evaluations, peer reviews), measuring and enhancing effectiveness (return on donors’ investment) and leveraging on ODA (the capacity of donors to mobilise other resources). Even civil society organisations (CSOs) fall easily into the trap of calling for more aid to solve all development problems, thereby denying the self-determination capacities of developing countries. This did not help to build trust and accountability in recipient countries. Sixty to 80 years after the main wave of decolonisation, it is time to shift the paradigm and bring the developing countries’ perspective forward, not only through a change in semantics (this paper deliberately uses the term ‘aid’ or ‘donors’, that have long become obsolete and been replaced by development cooperation and providers to denounce the illusion of change through semantics) but through a change of perspective and practice.
This change of perspective to put demand forwards and developing countries in the driver’s seat should trigger a real Copernican revolution of aid in terms of measurement, needs assessments, strategies, effectiveness and results. Only a market approach could reconcile the imperative of accountability in both the countries of origin and destination of financing and create room for policies to enhance the market’s functioning and remedy its failures. From a developing country perspective, the objective is quite simple: filling financing needs, ie, securing access to financing (public and private, domestic and external) for the normal functioning of the state and the promotion of private sector growth and development, possibly with relevant transfers of capacities for a better use of those resources (qualitative and non-financial dimensions of aid). A better functioning market should allow for this objective to be filled, rebalancing and better matching demand with supply. Keeping that in mind, like donors, developing countries also have foreign policy objectives, and development cooperation has a non-financial dimension.
This paradigm shift would also put an end to the ‘Do what I say, do not say what I do’. It would force the aligning of narrative with action, rather than the other way around (creating mistrust due to lack of progress on delivery, eg, with the billions to trillions or implementation of effectiveness principles), and communication would be about how the DAC performs compared with other donors, what its comparative advantages are, rather than build on the assumption that it is at the centre of the system.
5. From a donor to a recipient/client perspective
5.1. Putting developing countries in the driver’s seat
The draft FfD4 outcome document calls for putting developing countries in the driver’s seat of development and financing strategies. Although country ownership has long been one of the effectiveness principles, its full implementation would correspond to a profound change in paradigm and perspective, from a supply- to a demand-driven approach to development cooperation. However, this is easier said than done, and it would require in many instances a reinforcement of capacities to design and implement development and financing strategies, as is the case, for instance, in the context of Integrated National Financing Strategies (INFFs).
This new bottom-up/needs-based approach would require to systematically answer the following questions:
- What are the country’s development needs, as identified through an inclusive, multi-stakeholder dialogue?
- What are the best-fit, most impactful solutions, drawing on a diverse basket of instruments?
- How –and by whom– can these solutions be financed and implemented most effectively?
Some emerging donors like Brazil have started to implement this bottom-up/needs-based approach with the launch, at the G20, of the Global Alliance against Hunger and Poverty that provides a menu of rigorously evaluated policy instruments, ensuring that donor investments are directed towards cost effective, high-impact initiatives. The Alliance then acts as a neutral facilitator, reducing transaction costs and avoiding duplication of efforts by leveraging a unified database, streamlining the identification of knowledge and funding needs and opportunities.
5.2. The new paradigm in practice
Changing the paradigm would have a number of practical consequences, taking the developing country rather than the donor perspective (the Copernican revolution).
Country development and financing strategies should be at the core of the system. These should provide a clear assessment of the needs and should to the extent possible include budgets aligned with the sustainability objectives. The discussions in the lead-up to Seville have revealed the multiplicity of country platforms (some by actors, like the INFFs or Multilateral Development Banks, MDBs, country platforms; some by sectors, like the Just Energy Transition Partnerships, JETPs) and the need –as well as difficulty– to harmonise them in order to reduce the burden on developing countries (paragraph 33 of the first draft FfD4 outcome document). Similarly, the implementation, monitoring and assessment of country strategies should be improved and mainstreamed to avoid multiple reporting through SDG Voluntary National Reviews (VNRs) and Financing Action Reviews (paragraph 58 of the first draft FfD4 outcome document) In all scenarios, technical assistance and capacity building in support of those strategies will require significant scaling-up (paragraph 33 of the first draft FfD4 outcome document).
The measurement of financing for development flows should also be adjusted to the recipient perspective. This change had already been initiated with the new measure of Total Official Support for Sustainable Development (TOSSD) that takes the recipient perspective and adds a number of information to ODA statistics, including South-South and triangular cooperation or mobilised private finance. TOSSD also adopted a sustainability lens (alignment with SDGs) and offers recipients the possibility to challenge and improve statistics that they consider do not reflect reality. TOSSD coverage also goes beyond ODA’s one, with use of criteria beyond GDP for reporting eligibility. Still, TOSSD remains a work in progress and would need further refinement and appropriation by all developing countries. It would also be important to have a complete picture of all flows –and not only official ones– so that governments can create more accurate strategies. Discussions in the lead-up to Seville also point to the need to further disaggregate ODA to include information about programmable aid, which reflects the same objective of providing more information and predictability to governments designing country strategies.
Whereas the discussions in the lead-up to Seville call for a revamping of the effectiveness agenda (paragraph 32 of the first FfD4 draft outcome document), the change of paradigm might require going even further. Taking the recipient perspective, the main concern is to identify development cooperation that is fit-for-purpose and meets the national development and financing strategy needs. Effectiveness becomes ‘fitness’. This will require the country to not only assess the needs (demand) but also identify the best partner/instrument to fill those needs (supply), and the role of the developing financing architecture becomes one of facilitating the match of demand with supply (market approach). Specifically, for the DAC, it means better explaining and communicating its value-proposition, explaining how its standards and the quality of aid makes it the best fit for the partner country’s needs. The DAC could, accordingly, develop fitness cards to make the case for its offer.
In sum, all pillars of current development cooperation will need to be redesigned to reflect the developing countries’ perspective while maintaining buy-in for donor countries (ie, a win-win).
6. A market approach to financing development
6.1. Matching demand and supply
This Copernican revolution of aid will require the development of new tools and practices to better assess and match demand and supply of different types of financing for development.
Regarding the assessment of demand, the discussions in the lead-up to Seville stress the need to better manage transitions through the development process (paragraphs 30 and 31 of the first draft FfD4 outcome document). The OECD has developed a transition finance methodology that allows to identify the optimal financing mix of public/private and domestic/external financing for countries at different stages of development and in different country contexts. It contributed, among others, to the policy toolkit of INFFs at the disposal of developing countries designing or implementing their financing strategies. Such an approach allows for a dynamic assessment of the needs with a holistic picture of all types of financing available in different country contexts. Country financing diagnostics are essential to inform government strategies and choices; they should not, however, add to the burden of countries (diagnostic fatigue) and should avoid duplication across platforms. Diagnostics should be harmonised and it should be the country’s choice to opt for one institution or the other to inform their strategy.
With regards the assessment of the value-proposition, the new approach would build on the concept of fitness: who can offer what to whom? The proliferation of development cooperation actors requires transparency about the ‘offer’ of each potential partners, either DAC or non-DAC. Often, the choice to choose a specific development cooperation provider is based on non-objective criteria and/or non-transparent processes, with the risk that the country (or a member of its government) makes an uninformed choice driven by political or other considerations with sometime long-lasting consequences. Each donor has its comparative advantages and faults, each can provide different services, each follows different processes and applies different rules and standards. Thus, there is not an upfront choice that is better than the others; however, the choice should be informed and ensure ‘fitness’ of the provider’s offer with the country’s financing and development needs. Anecdotal evidence is not enough to guide choices, therefore a more systematic approach allowing a comparison of offers is needed. Key questions for fitness cards include:
- What should a country pay attention to when engaging with a donor?
- What are the major elements to weigh in a decision to engage with a specific donor, knowing there are necessary trade-offs, eg, between speed and due diligence?
- How could donors improve using performance indicators, benchmarking and best practices to best fit prospective partners’ needs?
6.2. Optimising the functioning of the market
Then, the objective should be to better match demand with supply through a more effective financing for a development ‘market’. The above would already allow for a greater transparency of demand (country strategies) and supply (mapping of different sources of financing and assessment of their fitness), but mechanisms would need to be in place to improve the functioning and better regulate the market, as needed.
Once again, country platforms should play a major role in matching demand with supply and ensuring a uniform mobilisation and access to all sources of financing based on the country’s needs. A new role could be assigned to established institutions such as the OECD DAC to help a better regulation of the market, for example through:
- Diagnosing: helping countries at all stages of their development strategies with rigorous and neutral assessment of the needs and solutions that are fit-for-purpose.
- Pooling and matching resources: facilitating the matching of demand with supply through coordinated actions or match-making –for example, through digital platforms or targeted donor-coordination meetings–, and encouraging co-financing or complementary actions in support of the countries’ strategies, adjusting the offer to the countries’ needs.
- Developing new rules for improving the market’s functioning: currently, the DAC is establishing a number of standards for its members, but it lacks opening to non-DAC actors, and would benefit from a broader discussion of its standards for the sake of adjustment and harmonisation: building on fitness cards, discussions with non-members could lead to either adjustment of DAC standards (understanding the different approaches) or design of ‘competition’ rules to level the playing field with other actors.
Deeper analysis would be required to make the adjustments to the governance and architecture of aid and identify a new role for institutions like the DAC. Also, these reflections should include the complexity of the financing for development market and variables like prices (levels of concessionality, debt management, risk-sharing and guarantees, etc).
6.3. Remedying market failures
Current financing trends reveal market failures: some countries are at threat of being left behind with great difficulties to attract private finance and mobilise domestic resources. This results in a higher dependence on fewer sources of financing and an exposure to financing shocks in case those resources get scarcer. This is the case for many LICs and countries most in need (LDCs, Small Island Developing States, SIDS, Landlocked countries, LLDCs, and Fragile and Conflict-Affected Situations, FCAS) that are highly dependent on ODA, and are exposed to aid cuts. The same reasoning applies to sectors, with, for instance, more difficulties to attract private finance in the social sectors, such as health, except for infrastructure. Thus, some rules or mechanisms should be put in place to remedy those failures. It could be the role of ODA to focus on those countries or sectors, with a ringfencing of certain resources, at the same time other resources are unleashed at the investment margin to allow for redistribution.
In 2017 the World Bank Group adopted the cascade approach to optimise financing for development, distinguishing areas where the private sector could intervene alone, where it required public support, and where only public financing would be available. This approach should be reconsidered in the new financing for development landscape for optimisation of the financing mix taking into consideration specific country contexts and the respective roles of donors (multilateral and bilateral), philanthropies and the private sector (business and finance). Such optimisation could only take place through an enhanced dialogue among actors building probably on the convening role of the United Nations.
Conclusions
Beyond financing: aid as a policy
Aid is not only about financing, but also a policy. As discussed above, it could have many objectives, some responding more or less to a market logic. Even though policy reforms have a cost and could respond to a market logic with demand and supply of budget support, technical assistance and capacity building. A unilateral offer without real demand can result in situations, as in West Africa, where the misalignment of some donors’ and recipients’ objectives can lead to a trust crisis and rejection of aid. Development cooperation should only take place where demand meets supply, with due respect to policy space in the recipient country.
The challenge is therefore to bring together the two perspectives and ensure the compatibility of donor and recipient objectives. The win-win that is called for would therefore not be limited to financial considerations but include foreign policy and other dimensions. Here again, a demand-driven approach with an increased competition among donors would avoid imbalances in the ‘wins’.
[1] Opinions expressed or arguments are personal and do not necessarily reflect the official views of the OECD or of its Member Countries.
