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 community’s response to the aid challenge » V.The evolving aid architecture

3. Evolution of aid: 1990-2006 and prospects I. Trends in aid 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 countries—Denmark, Luxembourg, Netherlands, Norway, Sweden—had 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 risen—the 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-DAC’s Creditor Reporting System.

5. II. Aid and developmentHow does aid contribute to development? The “deep” determinants of growth » 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 growth—institutions, governance. 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 effectiveAid 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 Bank’s 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 community’s 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 Africa—an increase of $25 billion a year—by 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 finance—concessionary 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 FY07—$2.7 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 Bank’s 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 effectiveness—recognizing 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