The Humpty-Dumpty-ness of Aid

“Humpty Dumpty sat on a wall,
Humpty Dumpty had a great fall,
All the King’s horses and all the King’s men,
Couldn’t put Humpty together again.”

This children’s rhyme should be going through the minds of the 2,000 aid bureaucrats who are going to descend on the South Korean city of Busan next week for the OECD’s High Level Forum on Aid Effectiveness. The Busan meeting will confront the fact that the system the world’s official aid agencies created six years ago to manage development assistance to the poor has been shattered by events. Their aim is to try to patch it up and put it together again. They would be better admitting that, like Humpty, it is broken beyond repair.

The Busan event builds on a landmark meeting of the OECD’s Development Assistance Committee (DAC) in Paris back in 2005, when the world seemed a very different place. Rich countries were gearing up for the G8 Gleneagles summit, where they were to make big new aid commitments (ahem, egged on by the chair of the summit, the then British Prime Minister Tony Blair, and millions of citizens who had rallied behind the ‘Make Poverty History’ campaign). The Paris meeting of the DAC created a framework for how this new money would be spent. Known as the Paris Agenda, these new guidelines urged donors to co-ordinate their strategies around developing countries’ own plans and cut out the duplication of effort in the system. All laudable stuff.

Jump forward to 2011 and the world looks much more complicated. The Paris agreement described a development landscape that was dominated by governments of rich countries (and their agents, the multilateral development institutions like the World Bank and UN that get their money from rich countries) helping the governments of poor countries. Since then, the global financial crisis has stifled much of the generosity of the rich world. Emerging countries like China and philanthrocapitalists like Bill Gates have also entered this space as new, significant players. The host of the Busan meeting, DAC Chairman Brian Attwood, acknowledged the significance of these new actors in a recent article. But the development establishment is still reluctant to accept the implications.

The message from the aid aristocracy who designed the Paris Agenda seems to be that philanthrocapitalists need to get in line and behave like government donors. For some time now this argument has been used by some global health experts, who complain that ‘vertical’ interventions like GAVI on vaccination, or the Global Fund for AIDS, TB and Malaria, distract from the country-led, planned approach to development set out by the Paris Agenda.

That theme  is echoed by a number of the papers commissioned for the Bellagio Initiative, a project funded by the Rockefeller Foundation but managed by the Institute of Development Studies to figure out the role that private foundations should play in development. In one paper, Robert Picciotto (a former head of evaluation at the World Bank) advises that “philanthropic organisations should sign up to the Paris Declaration on Aid Effectiveness and adopt the policies and practices that it implies.” In another, Kevin Watkins (a campaigner on education) warns: “Too much of the limited philanthropic support for education is delivered outside of government systems.”

You cannot blame them really. Donor and recipient governments have invested a lot of energy in creating this planning based Paris system of managing development financing. They are understandably reluctant to accept that the entry of new actors means that their plans have to go out of the window. But they should not try to put Humpty back together again.

The Paris Agenda has brought some benefits by reducing ‘project-itis’ by donors (a focus on funding specific projects, often carried out as ‘tied aid’ by a firm from the donor country), but it has also been behind the push towards simply writing cheques to developing country governments, known in the business as budget support. Donors like budget support because it is an easy way to shift large sums of money and is supposed to help to strengthen countries’ public financial management. There is also evidence that budget support does not do much good because developing countries’ cash the cheque but do not use the money to increase spending on the things that the donors care about like health and education, recipient government ministers often using it instead to fatten their own bank balances. (Budget support is also really unpopular with the taxpayers of developed countries that are financing these cheques, which worries the aid experts little but is a big problem when trying to persuade voters that this is a good use of their money.)

Telling philanthropists that they should behave like government also misses the important point about philanthropy’s comparative advantage – taking risks to do things governments cannot. For the aid establishment worrying about whether government largesse is going to dry up, philanthropy looks like a good way to plug some of the funding gaps. But to limit its role to that would be a waste. Better to let philanthropy take risks to drive innovation. (Michael horrified the Bellagio Initiative team with one suggestion about what type of risks philanthropists should take.)

Admittedly, too much philanthropy is still too risk averse. But that is all the more reason to be clear about the proper division of labour between governments and philanthropy rather than trying to get foundations to be even more conservative.

(One point on which we agree with the Paris gang is on transparency. Many official donors have signed up to being open about where and what they are doing, under pressure from the  International Aid Transparency Initiative. Only one philanthropic organisation, the Hewlett Foundation, has joined them. This is a huge missed opportunity. Why not be transparent? We hope that other foundations will see the opportunity and sign up soon.)

An even bigger problem is that the aid technocrats are apparently blind to a potentially enormous shift in how the world tackles problems – impact investing. The aid system of the past half century that the DAC meeting is supposed to manage is essentially a rather rickety and under-funded global welfare state, where taxpayers in rich countries subsidise public services like education and health for taxpayers in poor countries. There are respectable moral arguments for this approach, but rich citizens do not want to pay for it and the governments of developing countries are all too often unwilling or incapable of using the money in this way.

This system is also based on some rather out-dated maths that a transfer of 0.7% of the national income of the rich world would be sufficient to lift people in the poor world out of poverty. Rich countries, as a group, have never come anywhere near this target, even in the boom times, and anyway it probably would be woefully inadequate in the face of new challenges like climate change.

Impact investing is the idea that a lot of the financing needed to help the poor could actually come not from governments but from private investors putting their money into schemes that generate social as well as financial returns. So far this idea has been most developed in microfinance, where for-profit investors are now providing financial services to millions of poor people in developing countries. Similar opportunities are opening up in water supply, sanitation, healthcare, education and energy supply. Yet as private capital seeking a financial return, the impact investment market lies outside the aid-based vision of the development orthodoxy.

Many development experts are hostile to such private-sector led approaches because they fear that it undermines their project of building state welfare systems akin to those of developed countries. Though we understand and sympathise with the sentiment, is this really the best way to serve the poor? Rather than dogmatically defending rich countries’ 20th century welfare models, development thinkers need to be ready to figure out what the most effective models will be for the 21st century. Sadly, such issues are not on the table at Busan. As we were saying, “All the king’s horses…”