Development Aid

1
Development Aid

• Punam Chuhan-Pole
• DECVP

Global Issues Seminar Series--Fall 2007 October
3, 2007
2
Overview

• I. Trends in aid
• - the 0.7 target of donor aid effort
• - how much of the increase in aid represents
  additional resources?
• - proliferation of aid channels and aid
  fragmentation
• II. Aid and development
• - the challenge of measuring aid effectiveness
• III. Making aid more effective
• - selectivity in aid allocation
• - focus on harmonization, alignment, and
  results in aid delivery
• - scaling up aid and absorptive capacity
  constraints
• IV. The international communitys response to
  the aid challenge
• V. The evolving aid architecture

3
I. Trends in aid
Evolution of aid 1990-2006 and prospects

• Aid from DAC donors
• In the 1970s and 1980s aid from DAC countries
  rose steadily.
• In 1970 rich countries pledged to move toward an
  ODA/GNI target of 0.7 percent.
• After declining in the 1990s, aid is rising
  again.
• - In 2002 189 countries adopted the Monterrey
  Consensus in which developed countries were urged
  to achieve the 0.7 target.
• In 2005 donors promised to double aid to SSA by
  2010 and to provide an additional 50 billion a
  year in aid to developing countries by 2010.
• By 2006, only 5 countriesDenmark, Luxembourg,
  Netherlands, Norway, Swedenhad achieved or gone
  beyond the ODA/GNI target of 0.7.
• Most of the recent increase in aid is due to debt
  relief.
• Importance of non-traditional donors - newly
  emerging donors such as Brazil, China, India
  NGOs, foundations and other private donors.

Source Global Monitoring Report 2007.
4
I. contd. Proliferation of aid channels
and fragmentation of aid
Number and average size of donor activities
The rise of new aid sources is increasing the
complexity of the global aid architecture. Donor
proliferation has risenthe number of countries
with over 40 active bilateral and multilateral
donors has grown from 0 to over 30 since 1990.
Newly emerging donors are adding to donor
proliferation. The problem of proliferation is
compounded by the trend toward small average size
of aid activities. Excessive fragmentation
raises transaction costs for recipients and
donors and negatively impacts aid quality.
Recent trends in proliferation and fragmentation
present a challenge to the quality and
effectiveness of aid.
Source Aid Architecture An Overview of the
Main Trends in Official Development Assistance
Flows, 2007. Note Data are from the OECD-DACs
Creditor Reporting System.
5
II. Aid and developmentHow does aid contribute
to development?

• A stated objective of aid is to promote
  long-term development.
• The standard way of thinking about how aid
  impacts growth by easing resource constraints
  facing countries and financing higher public
  investment and through transfer of new
  technology and knowledge.
• Long-term economic growth is a complex
  phenomenon. Considerable progress has recently
  been made in understanding the central role of
  institutions in the development process. Aid can
  impact growth by influencing the drivers of
  growthinstitutions, governance.

The deep determinants of growth
local policies and actions shape trade,
institutions
Donors/ IFIs
Adapted from Institutions, Integration, and
Geography In Search of the Deep Determinants of
Economic Growth by Dani Rodrik (2002)
6
II. contd. The challenge of
measuring aid effectiveness

• Cross-country evidence of the effectiveness of
  aid in promoting development is mixed
• - relationship between aid and growth is
  positive
• - effect of aid is dependent on
  policy/institutional environment
• - aid has no effect on growth
• Limitations of cross-country analyses.
• Need to go beyond cross-country analysis to micro
  evidence and country studies to understand how
  aid can influence growth and poverty.
• - A growing body of research findings (including
  by the World Bank) from country case studies and
  project and program impact evaluation suggests
  that strong country ownership of national
  development strategies and priorities, good
  policies and governance, rigorous analytic
  design, a focus on results, and developing
  country ownership of the aid process are central
  to the effectiveness of aid in fostering
  development and alleviating poverty.

7
III. Making aid more effective Aid
effectiveness is central to the global
development agenda

• Improving the allocation
• of aid
• Donors have multiple objectives-geostrategic
  reasons, trade
• interest, former colonial ties.
• Selectivity of aid donors need to
• allocate aid on the basis of need, policy
  performance, and emphasis on institutions and
  governance.
• The heightened emphasis on aid effectiveness is
  beginning to transform the way aid is allocated.

Source Global Monitoring Report 2006.
8
III. contd. The way aid is delivered is
crucial to its effectiveness

• Improving the way aid is delivered - the Paris
  Declaration
• Aligning with country priorities - There is now
  an increasing emphasis on strong local ownership
  of reforms and development strategies.
  Development experience and analysis suggest that
  aid can only be productive when it supports
  country-owned and -led development strategies
  that are focused on sustained broad-based growth.
  A well-functioning budget system is critical
  for better aligning public resources with
  development priorities.
• Coordination and harmonization - Aid practices
  that yield fragmented aid delivery structures and
  overlapping duplicative administrative efforts
  increase the transaction costs of aid. The
  effectiveness of aid is enhanced when donors
  coordinate assistance and when they harmonize
  their policies and procedures around country
  systems.
• More predictable aid and longer term aid
  commitments.
• Focus on Results.

9
III. contd.Sharper focus on
results requires a strengthened role for impact
evaluation

• Impact evaluations are being implemented for a
  growing number of development programs
• Through the Development IMpact Evaluation
  initiative the World Bank is
• increasing the number of Bank projects with
  impact evaluation components
• increasing staff capacity to design and carry out
  such evaluations
• building a process of systematic learning based
  on effective development interventions with
  lessons learned from completed evaluations

10
III. contd. Scaling up aid and absorptive
capacity constraints

• Addressing absorptive capacity constraints
• - Recipients absorptive capacity limits the
  amount of additional resources that can be used
  effectively
• - Capacity constraints manifest themselves at
  many levels - national policy, public budget
  management, local service delivery
• - Capacity constraints manifest themselves in
  many ways -Macroeconomic management,
  institutional capacity, infrastructure, human
  capital, social and cultural factors
• - Constraints are not equally binding
• - Capacity constraints point to the importance of
  properly sequencing interventions in capacity
  building. Analytical tools such as the Banks
  Maquette for MDG Simulations (or MAMS) use an
  economy-wide framework to help illustrate the
  importance of absorptive capacity and the lags
  inherent in expanding capacity.

11
IV. The international communitys response to
the aid challenge

• Providing more and better aid
• 2005 was the year of development
• At Gleneagles G-8 leaders pledged to double their
  aid to Africaan increase of 25 billion a
  yearby 2010.
• Donors worldwide agreed to expand their aid to
  all developing countries by about 50 billion by
  2010.
• Major progress was also made in 2005 in extending
  and deepening debt relief to the poorest
  countries through the MDRI.
• Paris Declaration on Aid Effectiveness, signed by
  more than 100 countries and donor organizations,
  adopted 12 monitorable, time bound indicators of
  progress on aid effectiveness ownership,
  alignment, harmonization, managing for results,
  mutual accountability.
• At their summit in Heiligendamm (2007) G8
  leaders focused on
• promoting sustainable development in Africa.

12
IV. contd. Role of the World Bank

• Key source of official development
  financeconcessionary financing through IDA loans
  and grants, and nonconcessionary financing
  through the International Bank for Reconstruction
  and Development (IBRD)
• IDA commitments totaled 9.5 billion in FY06 and
  11.9 billion in FY07.
• Africa received 5.8 billion in new commitments
  in FY07, compared to 4.7 billion in FY06.
• IDA allocates resources to individual countries
  on the basis of their need and performance. The
  performance factors include the quality of
  policies and institutions, with a particular
  emphasis on governance.
• IBRD commitments were 14.1 billion in FY06 and
  12.8 billion in FY07.
• In all, the World Bank Group committed 34.3
  billion in loans, grants, equity investments, and
  guarantees in FY072.7 billion higher than in
  FY06.

13
IV. Role of the World Bank
contd.

• Provide a wide range of policy advisory and
  analytic services and technical assistance to
  assist countries to develop policies and programs
  to promote sustained development and reduce
  poverty.
• Through its research and analysis, the Bank has
  been in the forefront of the effort to
• improve the paradigm for delivering aid
• enhance monitoring and evaluation
• sharpen the focus on results
• provide rigorous impact evaluations of programs
  and projects
• raise the profile of governance
• Convening and coordinating role.
• The Banks multi-sector perspective, its
  convening power, and its global reach combined
  with local presence help the institution to play
  a platform or glue role to provide strategic
  coherence to other forms of aid.

14
V. The evolving aid architecture

• A changing global environment and our evolving
  knowledge of what works is re-shaping the global
  aid framework and transforming the way that aid
  is provided and used.
• A proliferation of aid channels are increasing
  the complexity of the global aid architecture a
  more coherent aid architecture calls for closer
  coordination among a wide donor community, as
  well as greater harmonization and less
  fragmentation.
• The new aid framework of development assistance
  embodied in the Monterrey Consensus places an
  increased focus on aid effectivenessrecognizing
  that the quality of aid is as important as its
  volume and that aid effectiveness is central to
  the development agenda.
• The focus on aid effectiveness calls for
  careful monitoring of how aid is allocated,
  delivered, and spent, and of the impact of aid on
  outcomes.
• It also calls for greater coherence in
  developed countries policies in terms of the
  impact on development.

15
Thank you