When Aid Shrinks

Can government aid budgets survive the financial crisis and, if not, what next for the billion people living in poverty?

Michael spoke at a couple of fringe events at the British Labour Party’s annual conference in Brighton this week. Beleagured Prime Minister Gordon Brown used his main speech to make a raft of spending commitments, including a pledge to pass legislation to force future governments to spend 0.7% of national income on international aid.

In a sense this is not controversial – all of Britain’s major political parties have said that they are committed to the same goal.

Or maybe not, according to international development Minister, Gareth Thomas, who shared a platform with Michael at an event organised by the Foreign Policy Centre. Minister Thomas complained that the aid community was “sleepwalking” if it believed that the Conservative party, the most likely victors of (probably)next year’s election, will maintain aid spending.

Well, he would say that wouldn’t he? But there is also a big question about whether a government of any colour can defy fiscal gravity and keep pumping more money into aid, while making the drastic cuts at home in public expenditure necessary to restore the finances to some kind of health. And even if the Brits kept their aid promises, how many other countries would join them?

The aid world needs an urgent rethink on how to live with less money, which means that every pound or dollar of assistance must go further. Of course, philanthropic donations cannot plug the aid gap but working with philanthrocapitalists has to be part of the answer, to lever new sources of finance and make aid smarter.

First, if grant money from government is going to dry up, developing countries will have to look for private funding for investments in health, education, water and sanitation, and so on. Fortunately, as Matthew wrote recently in The Economist, there has been an explosion of interest in the idea of social investing – using capital invested to get a financial return to achieve development goals. The British Government was a pioneer in this area through the Task Force on Social Investment, chaired by private equity titan Sir Ronald Cohen, that looked at how to use these tools to address social problems at home. Sadly, the government (and the opposition) has been slow to realise the potential of social investing internationally.

This opportunity needs to be grasped now. The government should create a new Task Force on Development Investment to bring together the business leaders and philanthrocapitalists already working in this area, to see how government can work with them to get this idea to scale as quickly as possible. Some reneging on aid pledges may be inevitable. Failing to take up the opportunities available to make up for the shortfall in aid would be an unforgiveable betrayal of the poor.