3

Privatizing Development Aid

LONDON – Much has changed about official development assistance (ODA) over the last 50 years. Since it originated during the Cold War, when members of the OECD’s Development Assistance Committee spent roughly $60 billion annually (an amount that the Soviet Union undoubtedly matched), recipient countries have been called “backward,” “developing,” “southern,” and, lately, “emerging.”

Indeed, what defines a recipient country has increasingly been called into question in recent years. The United Kingdom is debating whether to discontinue aid to India, the third-largest recipient of capital inflows and the home of the UK’s largest manufacturing employer, the Tata Group. Likewise, eurozone countries have been looking to long-time aid recipient China, which holds $2.5 trillion of US government debt, to help them overcome their own debt crisis.

Furthermore, development itself has been redefined, with the policy focus shifting to good governance, transparency, accountability, and human rights. As a result, initiatives aimed at improving health, education, and gender equality have replaced large-scale construction projects.

Now it is time to re-examine the ODA system. After all, donor countries are mired in debt and stagnation, while some recipient economies are growing 5-7 times faster than they are.

In 1969, Canada’s former prime minister, Lester Pearson, recommended that developed countries should spend 0.7% of their GDP on ODA by 1975, and that they should eventually increase the proportion to 1%. Although Norway, Sweden, Denmark, the Netherlands, and Luxembourg have achieved the 0.7% target, the global average has actually declined, from 0.5% of GDP in 1960 to 0.3% today. The UK has pledged 0.7% of its gross national income, but is debating who will receive it. America’s annual contribution of $30 billion, the world’s highest in absolute terms, amounts to less than 0.25% of its GNI.

But, while international organizations encourage additional ODA spending, donor-country citizens are increasingly resistant. Critics argue that the money does not reach those who truly need it; that it creates dependency, and thus harms recipient countries; that it is needed at home; and that it generates income primarily for consultants and source-country vested interests.

To be sure, it is widely agreed that aid for disaster relief and assistance to conflict-affected countries are effective. Moreover, almost 10% of total ODA is allotted for humanitarian relief, which should be similarly uncontroversial.

But the overall impact of ODA remains dubious. In a report released last March, the UK’s House of Lords Select Committee on Economic Affairs cited disagreement among experts on the issue, with estimates ranging from a 0.5% boost to annual GDP growth in recipient countries to no effect on growth at all.

There are several possible explanations for the fact that development aid has not always translated into GDP growth. Recipient governments might misuse the aid, preventing it from trickling down to those who would spend or invest it, or the money may be given on the condition that it is spent on goods or services from the donor country. And, even if development aid does spur GDP growth, this does not necessarily lead to better lives for the poorest citizens, especially in the short term.

While eliminating extreme poverty is undoubtedly an urgent moral imperative, ODA may not be the best way to achieve it. In fact, there is a strong case for involving the private sector in development assistance.

Over the last two decades – a period when globalization opened up the world financial system – private capital flows have contributed more to developing economies’ growth than has ODA. Indeed, in 2009, more than $1 trillion in private capital flowed to developing countries – nine times more than total aid.

Moreover, privately funded organizations like Oxfam or Medecins Sans Frontières (Doctors Without Borders) tend to allocate resources more effectively than governments, delivering genuine gains where they are needed most. Following this model, countries’ aid budgets could be opened up for bids from development NGOs, which would assume responsibility for allocating and delivering the funds as efficiently as possible – and would be required to provide a careful accounting of how they spent the money.

A bolder solution would be direct cash transfers to the poor. With global aid totaling roughly $130 billon, each of the 1.3 billion people living in extreme poverty (less than $1 per day) worldwide would receive $100 in cash. Some countries have already experimented with such programs, and India is preparing to begin providing cash transfers to its 300 million poor citizens. In other words, a global cash-transfer scheme could be very effective, and would be feasible if donor countries pooled their aid budgets.

The simplest – and most radical – solution would be to stop all official aid payments. Instead, the money could be returned to donor-country citizens through tax deductions or income transfers, and they could decide how to help those in need. Given the prevalence of poverty and disease, many of these citizens would be motivated to contribute to global poverty-reduction efforts.

Allowing citizens to choose how to donate may help to tackle corruption in countries where politicians often misappropriate ODA, while discouraging wasteful or impractical projects. In addition, people would be far less likely to complain that their money is being wasted or misused if they chose where it went.

ODA has, at best, a patchy record. After 50 years of inefficiency, it is time to try something new. In the near term, at least, cash transfers seem to be the best option. Only by allowing each recipient to decide how best to use the money can we ensure that development aid actually enables the world’s poorest citizens to improve their lives.

Read more from our "Visionary Voices" series