Some may dispute the effectiveness of aid. But few would disagree that aid delivered to the right source and in the right way can help poor and fragile countries develop. It can be a catalyst, but not a driver of development. Aid now operates in an arena with new players, such as middle-income countries, private philanthropists, and the business community; new challenges presented by fragile states, capacity development, and climate change; and new approaches, including transparency, scaling up, and South-South cooperation. The next High Level Forum on Aid Effectiveness must determine how to organize and deliver aid better in this environment.
Catalyzing Development proposes ten actionable game-changers to meet these challenges based on in-depth, scholarly research. It advocates for these to be included in a Busan Global Development Compact in order to guide the work of development partners in a flexible and differentiated manner in the years ahead.
Contributors: Kemal Dervis (Brookings Institution), Shunichiro Honda (JICA Research Institute), Akio Hosono (JICA Research Institute), Johannes F. Linn (Emerging Markets Forum and Brookings Institution), Ryutaro Murotani (JICA Research Institute), Jane Nelson (Harvard Kennedy School and Brookings Institution), Mai Ono (JICA Research Institute), Kang-ho Park (Ministry of Foreign Affairs and Trade, Korea), Tony Pipa (U.S. Agency for International Development), Sarah Puritz Milsom (Brookings Institution), Hyunjoo Rhee (Korea International Cooperation Agency), Mine Sato (JICA Research Institute), Shinichi Takeuchi (JICA Research Institute), Keiichi Tsunekawa (JICA Research Institute), Ngaire Woods (University College, Oxford), Sam Worthington (InterAction)
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About the Author
Homi Kharas is a senior fellow and deputy director of Global Economy and Development at the Brookings Institution. Koji Makino is the senior adviser to the director general in the Operations Strategy Department at the Japan International Cooperation Organization (JICA). Woojin Jung is a policy analyst at the Korea International Cooperation Agency (KOICA).
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Catalyzing DevelopmentA New Vision for Aid
BROOKINGS INSTITUTION PRESSCopyright © 2011 THE BROOKINGS INSTITUTION
All right reserved.
Chapter OneOverview: An Agenda for the Busan High-Level Forum on Aid Effectiveness
HOMI KHARAS, KOJI MAKINO, AND WOOJIN JUNG
Today's world is shaped by growing economic integration alongside growing economic divergence. Over two dozen developing economies are expanding at rates that previously appeared miraculous, reducing poverty at unprecedented rates. Conversely, thirty-five developing countries with a combined population of 940 million can be classified as "fragile," or at risk of suffering de bilitating internal conflict. The potential for globalization to act as a positive force for development contrasts with the prospects for globalization to threaten, or be unable to protect, development through a failure to deal with the challenges of hunger, poverty, disease, and climate change. Many developing countries have neither the safety nets nor the macroeconomic institutions to manage global economic shocks. Developing countries today are quite differentiated in terms of the challenges they face and their capacity to respond.
International support for global development is now couched in terms of a broad strategic vision of long-term engagement to assist countries to sustain progress and evolve into partners that can help build a stable, inclusive global economy. This support is built on three pillars:
An understanding that the responsibility for sustained development lies principally with the governments and institutions of each developing country, with foreign assistance playing a supportive, catalytic role.
A recognition that a broad array of engagements between countries contribute to development, principally through trade, investment, finance, and aid.
A desire to fashion an improved operational model for development cooperation that reflects the differential challenges of sustainable development, the diversity of state and nonstate development partners, and the dynamics of sustained development.
Aid must be understood in this context. It can only play a catalytic role, not a leading role, in development. Development will not happen because of aid, but aid can make a difference. Developing countries are responsible for their own development. Aid is but one of many instruments of development, and the catalytic impact of aid is often seen when other forces like trade and private investment are unleashed because of better economic policies and institutions supported by aid programs.
There have been many visible improvements in the operational model for aid since the late 1990suntying, greater alignment with global priorities such as the Millennium Development Goals, more decentralized operations, use of country systems and budgets, and better donor coordination. But other problems with the operational model have emerged:
The mandates for aid have expandedgrowth, debt relief, humanitarian assistance, anticorruption and governance, delivery of public services, state building, and climate change adaptation, to name a few. With such broad mandates, there are no simple metrics of success by which to measure the impact of aid. Some suggest the need for a new architecture, in which aid is measured in a different way and oriented toward specific targets.
Aid is terribly fragmented, with the number of official development assistance (ODA) projects surpassing 80,000 annually, delivered by at least 56 donor countries, with 197 bilateral agencies and 263 multilateral agencies. The number of tiny aid relationships is daunting and, with more players, aid is becoming less predictable, less transparent, and more volatile. Despite an advisory from the Accra High-Level Forum on Aid Effectiveness to "think twice" before setting up new multilateral aid agencies, the number continues to grow. Only one multi lateral development agency is known to have closed since World War II (the Nordic Development Bank). Alongside this, a new ecosystem of private development agencies has emergedphilanthropic foundations, international NGOs, church groups, corporations, and universities which command significant and growing resources. The actions of these groups are little understood, and they remain on the fringes of official development cooperation.
The governance of aid is seen as bureaucratized and centralized at a time when more attention is being focused on the quality of aid because of pressures on some large donors to cut back on (or slow growth in) aid volumes. The result is overlap, confusion, and a lack of leadership in some areas.
Against this background, a major international forum on aid effectiveness will convene in November 2011 in Busan, Korea, under the auspices of the Development Assistance Committee of the OECD (OECD/DAC). The Busan meeting comes at an important juncture. Because aid is clearly not sufficient to achieve development, it is sometimes misconstrued as being unnecessary, despite the growing evidence that aid is working at both micro and macro levels. The simple conclusion that aid does not work, while true in selected cases, is crowding out the more complex story of how aid helps in numerous differentbut often unmeasurableways. Aid, as a government-to-government form of development cooperation, can also be perceived as an inferior alternative to private sector, market-determined processes and hence less relevant for development in today's world. Against this antiofficial aid movement, the Busan meeting must recapture the idea that ODA is a major instrument of development cooperation and can be made more effective if the right lessons are learned and if operational models are improved.
The goals of the Busan meeting are ambitious. They are nothing less than an attempt to generate a better understanding of how to improve the human conditiona twenty-first-century charter for global development cooperation by generating sustainable growth, achieving the Millennium Development Goals, and investing in a range of global public goods, like climate mitigation. Ultimately, that means cooperating to achieve sustainable results at scale. That can be done by nation-states organizing and leading development cooperation by generating the right enabling environment for development, by promoting productive businesses in a competitive setting, and by, through an inclusive process, tapping into the energies of billions of citizens worldwide engaged with development. Figure 1-1 illustrates this proposition for better contextualizing the role of effective aid in supporting development.
Asian Experiences with Aid and Development
In many ways, the vision for aid expressed in figure 1-1 has already been implemented in much of Asia (although Asian countries have not had to confront climate change until recently). In a number of Asian countries, the development experience shows a limited, yet pivotal, role played by aid. The host country for the Busan High-Level Forum (HLF4), the Republic of Korea, perhaps best exemplifies the contributions that aid can make when targeted in the right way and tailored to country circumstances. Korea brings a unique perspective in moving through the entire spectrum of aid, from being a major recipient to being a major donor within a span of fifty years (see the case study for Korea in box 1-1).
Other Asian experiences also provide a reminder that the lessons drawn from Korea's experiences with aid are applicable to other countries; a sustainable development trajectory must encompass self-reliance, the building of local capacity, and the evolution of development assistance to fit changing development priorities. Brief case studies of Cambodia (emerging from a fragile state), Indonesia (a large country trying to scale up development), and Vietnam (development partner with a strong national strategy) show aid working successfully in very different environments (see boxes 1-2 to 1-4 below). These studies reveal common themes and lessons that illustrate three important principles of the successful use of aid to catalyze development, despite vastly different circumstances and economic policy approaches by recipient governments.
First, diverse aid providers can bring complementarities, resources, and expertise, and Asian countries benefited from the broad array of development partners. At times they were able to secure assistance from one partner even when another was unconvinced of the development approach. Such "competition" among development partners goes back to U.S.-Japanese differences in approaches in Korea, World BankIMF differences in approaches in Vietnam, and the division of labor among donors in Indonesia. In each Asian case study, aid has been leveraged with private corporate sector investments and an emphasis on trade as a key development strategy.
Second, differentiated aid approaches are needed to take into account recipients' characteristics, histories, and priorities. This is the essence of country ownership. For the most part, Asian countries have been able to receive aid in a form appropriate to their situation. This has been driven by strong expressions of country needs, expressed by government leadership of the development agenda and over aid resources.
Third, dynamic approaches are needed to adjust assistance over time as development conditions evolve. Graduation strategies and hard timetables can provide a sense of urgency and the need for speed in development programs. As the examples below show, aid in Asia has constantly adapted its approach to the evolving needs of countries, whether it be the move from grants to loans in Korea as the purpose of aid shifted, or the evolution of aid instruments toward budget support in Vietnam, or the sequenced approaches to capacity development in Cambodia, or the scaled-up approach to hydrological management in Indonesia.
The conclusion: aid works, when done right. That requires starting from an assessment of development needs and only then developing an aid strategy. Too often today the process is reversed, with donor-defined aid strategies driving development outcomes.
Our case studies suggest that in Asia aid has been effective in countries that have stable long-term donors who are invested in the success of their projects and in the development of their partner. The Asian examples point to the need for aid to be sustained over time but with graduated modalities to capture fully all development benefits. Strong local leadership is critical to align aid with evolving national development priorities. This does not always mean full agreement with donors on all aspects of development, but it does imply finding the right avenues for mutual cooperation. And capacity development beyond improvement of specific technical talent emerges as a key success factor in all the Asian cases.
The Aid Effectiveness Agenda Today
Since 1960 rich countries have given $3.2 trillion in aid to poor countries, mostly through a handful of bilateral and multilateral institutions. Despite misgivings as to its effectiveness, aid continues to enjoy strong political and public support in rich countries. Emerging economies also have substantial development cooperation programs. And a variety of private international NGOs (INGOs), foundations, corporations, and individuals are actively engaged. Aid has become a $200 billion industry: $122 billion from the OECD/DAC donors, $53 billion to $75 billion from private donors, and $14 billion from emerging economy donors. The last two components are growing rapidly. China, India, Brazil, Venezuela, Turkey, and the Republic of Korea, to name just a few, have developed aid programs that could soon each surpass $1 billion annually.
For most of the past decade the aid agenda has focused on increasing the volume of aid flowswith considerable success. Net ODA disbursements from members of the OECD/DAC rose from $54 billion in 2000 to $122 billion in 2008. This is a substantial increase even if it is not as high as hoped for when significant pledges were made at Gleneagles. The experience of the last decade is that ambitious targets for increasing aid volumes can work if there is strong leadership. Gratifyingly, prospects for aid volumes in 2010 are not as bleak as feared, despite the gravity of the public finance situation in many donor countries. With the growth in aid from private and non-DAC donors, as well as resources from hybrid financing, issues about the quantity of aid revolve around questions of ensuring a better division of labor and better coordination of activities so as to avoid overlap and waste.
As scrutiny over public funding has grown, more attention has shifted to the quality of aid. Much of this agenda revolves around assisting partner countries to achieve self-reliant development. The prevailing framework for action on aid effectiveness has been articulated in high-level conferences at Rome (2003), Paris (2005), and Accra (2008). The Paris Declaration on Aid Effectiveness, endorsed on March 2, 2005, committed over one hundred countries and organizations to enhance aid effectiveness by 2010 by respecting five principles: ownership by recipient countries, alignment of development partners with country-led poverty strategies, harmonization of activities among development partners to avoid duplication and waste, results in terms of development outcomes, and mutual accountability for performance.
While there has been significant progress under the Paris-Accra agendas, a number of challenges have emerged. The growth of aid resources and aid donors has been accompanied by a fragmentation into ever smaller projects, with the mean project size falling from $2.01 million to $1.46 million between 2000 and 2008 (in real terms). Small can be good if it is innovative and later results in scaling up, but each project also has fixed costs of design, negotiation, and implementation, which reduces dollars available for final beneficiaries.
Recipient countries each received an average of 263 donor missions in 2007. Their senior finance officials spend one-third to one-half of their time meeting with donors; in the case of Kenya, Ghana, and others, governments have resorted to "mission-free" periods to allow officials time to handle their domestic obligations. The efficiency losses from this set of transaction costs are estimated at $5 billion by the OECD, prompting calls for more serious attention to be paid to issues of division of labor among donors. Better division of labor would result in larger aid flows between a given donor and recipient and would reduce the number of donor-recipient aid relationships, as some donors would exit from some countries. In fact, the OECD/DAC estimates that, if half of the smallest donor-recipient relationships were abandoned, only 5 percent of country programmable aid would have to be rechanneled. In some countries with strong leadership, like Vietnam, donor coordination has made good progress, leading to more effective use of aid, but this model cannot be readily applied to all countries, especially not to fragile states (box 1-2).
In the old aid architecture, coordination at the country level was done through UN Roundtables or Consultative Group meetings. The ten largest donors could be gathered in a single room and would collectively represent 90 percent of all aid to that country. Today, the share of the largest ten donors typically covers around 60 percent of aid. It is not easy for recipient countries to host a forum that is representative and inclusive of the experiences of all development partners while at the same time being effective in coordinating, harmonizing, and prioritizing activities.
In fact excessive coordination can alienate small donors. Large recipient countries, like India and Indonesia, have already expressed their unwillingness to debate national policy issues with small donors, and several donors have reduced their support to these countries. But small developing countries cannot afford the luxury of alienating any potential donors. They need to find ways to ensure that small donors are not marginalized by building a relationship of development cooperation that is about more than just provision of money.
If aid is to be seen as a mechanism of development cooperation, an instrument for achieving results on the ground, it follows that aid must be governed and managed through processes within each recipient country, not just at the global level. Two types of aid relationships have matured: government to government and civil society to civil society. In each case, there is more to be done to reinforce these relationships, especially in situations where governments are weak and lack either capacity or legitimacy. But what urgently needs strengthening is links across these relationships: civil society donors to government recipients and government donors to civil society recipients. These links are weak and sometimes confrontational but cannot be ignored.
Excerpted from Catalyzing Development Copyright © 2011 by THE BROOKINGS INSTITUTION. Excerpted by permission of BROOKINGS INSTITUTION PRESS. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents
1 Overview: An Agenda for the Busan High-level Forum on Aid Effectiveness Homi Kharas Koji Making Woojin Jung 1
2 New Development Partners and a Global Development Partnership Kang-ho Park 38
3 Private Development Assistance: The Importance of International NGOs and Foundations in a New Aid Architecture Samuel A. Worthington Tony Pipa 61
4 The Private Sector and Aid Effectiveness: Toward New Models of Engagement Jane Nelson 83
5 Rethinking Aid Coordination Ngaire Woods 112
6 Capacity Traps and Legitimacy Traps: Development Assistance and State Building in Fragile Situations Shinichi Takeuchi Ryutaro Murotani Keiichi Tsunekawa 127
7 Development Aid and Global Public Goods: The Example of Climate Protection Kemal Dervis Sarah Puritz Milsom 155
8 Inside the Black Box of Capacity Development Akio Hosono Shunichiro Honda Mine Sato Mai Ono 179
9 Scaling Up with Aid: The Institutional Dimension Johannes F. Linn 202
10 Transparency: Changing the Accountability, Engagement, and Effectiveness of Aid Homi Kharas 233
11 Promoting South-South Cooperation through Knowledge Exchange Hyunjoo Rhee 260