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

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

[youtube height=”HEIGHT” width=”WIDTH”]https://www.youtube.com/watch?v=6BDtZvNKQQ0[/youtube]

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7 Responses to “Why do countries need aid when the world is awash with capital? Latest thoughts from the OECD”
  1. Juana de Catheu

    Thank you for this to-the-point summary of a what seemed like a well-chaired meeting.

    I am only surprised to see the three purposes of aid in a world “awash with capital” are
    – funds and backing for the fragile and least developed countries
    – using aid to make investment attractive in high-risk situations
    – technical assistance for a positive development and investment environment.

    What happened to poverty reduction? When Zambia raised US$1bn from a bond last April, everyone cheered, but the country still has among the world’s highest malnutrition rates. Aid is also leverage to make the Government’s agenda pro-poor. Which is much better than using aid to fight poverty directly: look what happened in Angola where government was happy to let internationals deal with vaccinations and stopped its cofunding.

  2. Luc Lapointe

    Yes you are right (or they are) — the problem is not the money! One of the major problem in LDCs/MICs is often the lack of local capacity to deliver on projects. The second one is not to move money south to developing countries – it’s the lack of ability for countries to innovate and help protect the investment against currency flows.

    Some good reading on this goes back to 2011 – Multipolarity: The new Global Economy. The reality of global finance market goes beyond economics formulas. Countries like Colombia are full of economics opportunities but FDI trickles in and focuses on the big sectors (mining and oil) which are not job creators but they do look good on GDP figures.

    Will the next phase of ODA or public financing for development be to reduce the risk for big pension funds to invest in LDCs/MICs? Being able to reduce currency and political risk will be important but who will pay for this? Believe me if it would be profitable the investment would be here already. The OECD report did not uncover anything new but there seem to be an appetite to make investing attractive by mitigating the risk.


  3. Sam Gardner

    I am all in favour of a real ranking for donors. Dara just did this for humanitarian aid: it was very good, good enough to ask difficult questions to donors. It was also good enough to focus reform within a donor administration: we all know what is wrong, but it puts the different issues a donor has in perspective and compares them. However the donors hated it: they whined about the methodology without hard specifics.

    More importantly, the ranking was useful. Who cares about the methodology if it leads to better humanitarian aid?

    Belgium managed to work on a “teaching to the test methodology” and rise from 18th to 12th in one year. Dara stopped, I think they might have risen to 8th place by now. Not only the ranking is better, the aid is much better too.

    What I mean is: clear rankings with to do lists work. Going through the motions with a checklist works to eliminate the most important flaws, and once you get at a certain level, the administration will have opbtained the capacity to deal with the more complex issues.

    But I repeat: donors hate it. They don’t want to be accountable to an independent external actor. They prefer the peer review mechanism. If you have been part of a peer review, you will know why external oversight is important.

  4. Matti Kohonen

    Government Revenue collected in Africa in 2012 was around $579.5 billion according to the African Economic Outlook database (you can search “tax” and you’ll find an interesting excel sheet), but then only $285.4 bn of this is tax revenue. Almost half of th total ($242.2 bn) is natural resource revenues which only rarely help to health and education. The remaining $51.9 bn is other types of revenues, for instance from state owned companies.

    So just raising tax rates by 1% would raise much additional government revenue (tax or non-tax, resource revenues are about royalty rates anyway), and the debate is not about tax rates but it’s all about 1) capacity, 2) willingness and consent of taxpayers, 3) exemptions and loopholes, 4) international tax co-operation.

    So instead of everybody raising tax rates by 1%, what’s needed is a “fiscal revolution” where we tackle those issues on the revenue side and link revenue with good expenditure in health, education, agriculture and a whole host of essential services. You’d be surprised to see how countries that have raised thei tax per GDP have done much better in MDGs as well. What has worked in the past should be reinforced in the SDGs as well.

    What’s amazing in the OECD report on future Domestic Resource Mobilisation trends, but it doesn’t break it down by type of tax (which makes it easy to mix governmetn revenue with tax revenue), and they don’t look at the future trend of domestic resource mobilisation and its relationship with ODA. While ODA can boost tax and non-tax revenue, it’s much more than tax capacity and tax educatio nthat’s needed, we need also international tax reform and new forms of tax co-operation to tackle the big fish that are beyond the tax net.

  5. Luc Lapointe

    Well ..it does make sense that raising taxes (or Domestic Resources Mobilization) is key to future development but that doesn’t mean that the money will be better spent by government. Taking this money out of the economy (discretionary spending) — just takes money out of the local economy to support bad spending and uncoordinated policies. I am sure that same goes in most MICs — While the poorest 10 percent of Colombians pay 8 percent of their income in taxes, the richest 10
    percent pay just 3 percent.

    Other than that government have been very clever in installing PhotoRadar at most intersections to generate new income. The same “tax argument” is being made in the innovative financing world? What? taxes as innovative financing mechanisms? That should be next in line for a Nobel Prize!

    A little common sense and coordination could go a long way!

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