Aid industry

Aid effectiveness

Aid effectiveness is the effectiveness of development aid in achieving economic or human development (or development targets).

Aid agencies are always looking for new ways to improve aid effectiveness, including conditionality, capacity building and support for improved governance.

Historical background

The international aid system was born out of the ruins of the Second World War and came of age during the Cold War era from the 1960s to the 1980s. During this time, foreign aid was often used to support client states in the developing world. After the end of the Cold War, the declared focus of official aid began to move further towards the alleviation of poverty and the promotion of development. It is against this background that the international aid effectiveness movement began taking shape in the late 1990s. Donor governments and aid agencies began to realize that their many different approaches and requirements were imposing huge costs on developing countries and making aid less effective. They began working with each other, and with developing countries, to harmonize their work in order to improve its impact.

The aid effectiveness movement picked up steam in 2002 at the International Conference on Financing for Development in Monterrey, Mexico. There, the international community agreed to increase its funding for development—but acknowledged that more money alone was not enough. Donors and developing countries alike wanted to know that aid would be used as effectively as possible. They wanted it to play its optimum role in helping poor countries achieve the Millennium Development Goals, the set of targets agreed by 192 countries in 2000 which aimed to halve world poverty by 2015. A new paradigm of aid as a partnership, rather than a one-way relationship between donor and recipient, was evolving.

In 2003, aid officials and representatives of donor and recipient countries gathered in Rome for the High Level Forum on Harmonization At this meeting, convened by the Organisation for Economic Co-operation and Development (OECD), donor agencies committed to work with developing countries to better coordinate and streamline their activities at country level. They agreed to take stock of concrete progress before meeting again in Paris in early 2005. In Paris, countries from around the world endorsed the Paris Declaration on Aid Effectiveness, a more comprehensive attempt to change the way donor and developing countries do business together, based on principles of partnership. Three years on, in 2008, the Third High Level Forum in Accra, Ghana will take stock of progress and build on the Paris Declaration to accelerate the pace of change.

Critiques of the impact of aid have become more vociferous as the global campaigns to increase aid have gained momentum, particularly since 2000. There are those who argue that aid is never effective. Most aid practitioners agree that aid has not always worked to its maximum potential, but that it has achieved significant impact when it has been properly directed and managed, particularly in areas such as health and basic education. There is broad agreement that aid is only one factor in the complex process needed for poor countries to develop, and that economic growth and good governance are prerequisites. The OECD has explored—through peer reviews and other work by the Development Assistance Committee (DAC)—the reasons why aid has and has not worked in the past. This has resulted in a body of best practices and principles that can be applied globally to make aid work better. The ultimate aim of aid effectiveness efforts today is to help developing countries build well functioning local structures and systems so that they are able to manage their own development and reduce their dependency on aid.

Related research on aid effectiveness

Micro-Macro Paradox

The major findings by Paul Moseley and others concludes that it is impossible to establish any significant correlation between aid and growth rate of GNP in developing countries. One reason for this is the fungibility and the leakage of the aid into unproductive expenditure in the public sector.

However, at a micro level, all donor agencies regularly report the success of most of their projects and programs. This contrast is known as the micro-macro paradox.

Moseley’s result was further confirmed by Peter Boone who argued that aid is ineffective because it tends to finance consumption rather than investments. Boone also affirmed the micro-macro paradox.

Research by Burnside and Dollar

Burnside and Dollar recently found that the impact of aid on growth is positive in countries with a good political environment for making policy. This is indicated by a significant and positive coefficient on the ‘aid’ policy interaction in the growth regression.

Burnside & Dollar advocated selectivity in aid allocation. This means that aid should be allocated in countries where it works best, then that would exclude countries that are less fortunate in terms of policies and require help most.

Burnside & Dollar’s findings have been placed under heavy scrutiny since their publication. Easterly and his colleagues re-estimated the Burnside & Dollar model with an updated and extended dataset but they could not find any significant aid-policy interaction term. New evidence seems to suggest that Burnside & Dollar’s results are not statistically robust.

Studies and Literature on Aid Effectiveness

One problem of the studies on aid is that there is a lack of differentiation between the different types of aid. Some type of aids such as short term aid do not have an impact on economic growth while other aids used for infrastructure and investments will result in a positive economic growth.

The emerging stories from aid-growth literature are that aid is effective under a wide variety of circumstances and that nonlinearities in the impact of aid reduce the significance of the aid-growth relationship. However, returns to aid show diminishing returns due to absorption capacity and other constraints. Also, geographically challenged countries would display lower effectiveness with respect to aid and that should be taken into account in allocation.

Therefore, the challenge to aid allocation is to identify and eliminate the overriding institutional and policy constraints that will reduce the impact of aid on growth. The real challenge is thus to develop a framework of ‘growth and development’ diagnostics to help identify the constraints.

Third High Level Forum on Aid Effectiveness, Accra, September 2008

The Third High Level Forum on Aid Effectiveness (HLF-3) will be held in Accra, Ghana from September 2-4, 2008. Its aim is to build on the work of the two previous meetings, in Rome and Paris, to take stock of progress so far, and to accelerate the momentum of change. The Forum will be attended by senior ministers from more than 100 countries, as well as representatives of multilateral aid institutions such as the World Bank, the United Nations (UN), private foundations and civil society organisations. It is the first of three major international aid conferences in 2008, all aimed at speeding up progress toward the Millennium Development Goals. It will be followed by the United Nations High Level Event on the MDGs in New York on 25 September and the Follow-up International Conference on Financing for Development in Doha, Qatar, 29 November-2 December.

The Accra Forum takes place against a rapidly changing international aid landscape. Donor countries such as China and India are becoming increasingly important and there are more global programmes and funds that channel aid to tackle specific problems, such as the Global Fund to fight AIDS, Tuberculosis and Malaria Private funding sources such as the Bill and Melinda Gates Foundation are becoming major players, and civil society groups are increasingly active. The new players bring substantial new resources and expertise to the aid process, but also increase the complexity developing countries face in managing aid. The HLF-3 aims to encourage the formation of broad aid partnerships, based on the principles of the Paris Declaration, that will encompass all players.

The Accra meeting is different from its predecessors in that developing countries have played a more active role in the preparations and the agenda. Some 80 developing countries took part in the regional preparatory events. Fifty-four developing countries participated in the OECD’s 2008 Survey of progress against the Paris Declaration targets. Civil society is also increasingly involved in discussions of aid effectiveness; globally, more than 300 civil society groups, including grass roots groups, have been involved in consultations in the lead-up to the Accra meeting.

There is broad acknowledgement that new global challenges, such as rising food and fuel prices and climate change, bring added urgency to efforts to make aid as effective as possible. On the first two days of the HLF-3, there will be a series of nine Roundtables covering the key issues in aid effectiveness, from country ownership to managing aid in situations of conflict and fragility. On the third day of the Forum, ministers will endorse the Accra Agenda for Action (AAA) This ministerial statement has been developed with support from a multi-national consensus group working under the auspices of the OECD’s Working Party on Aid Effectiveness It is intended to step up progress toward the commitments outlined in the Paris Declaration by committing signatories to accelerating the pace of change by focusing on key areas that should enable them to meet the 2010 targets agreed in Paris. Drawing on evidence from the latest evaluations, the 2006 and 2008 Surveys on Monitoring the Paris Declaration and on in-depth contributions from developing countries, the AAA identifies three main areas where progress towards reform is still too slow.

1. Country ownership. The Accra Agenda for Action says developing-country governments still need to take stronger leadership of their own development policies and engage further with their parliaments and citizens in shaping them. Donors must commit to supporting them by respecting countries’ priorities, investing in their human resources and institutions, making greater use of their systems to deliver aid, and further increasing the predictability of aid flows.

2. Building more effective and inclusive partnerships. The Accra Agenda for Action aims to incorporate the contributions of all development players—middle-income countries, global funds, the private sector, civil society organisations—into more inclusive partnerships. The aim is for all the providers of aid to use the same principles and procedures, so that all their efforts are coherent and have greater impact on reducing poverty.

3. Achieving development results—and openly accounting for them. The Accra Agenda for Action says the demonstration of impact must be placed more squarely at the heart of efforts to make aid more effective. There is a strong focus on helping developing countries to produce stronger national statistical and information systems to help them better monitor and evaluate impact. More than ever, citizens and taxpayers of all countries expect to see the tangible results of development efforts. In the AAA, developing countries commit to making their revenues, expenditures, budgets, procurements and audits public. Donors commit to disclosing regular and timely information on their aid flows.

The Accra Agenda for Action sets out a list of commitments for its signatories, building on those already agreed in the Paris Declaration. It asks the OECD’s Working Party on Aid Effectiveness to continue monitoring progress on implementing the Paris Declaration and the Accra Agenda for Action and to report back to the Fourth High Level Forum on Aid Effectiveness in December 2011. Many donor and recipient governments will have to make serious changes if the AAA’s aims are to be fulfilled. The fact that ministers will be asked to sign up to these changes in Accra makes the AAA a political document—rather than a technocratic prescription— to move from business as usual to a new way of working together.

Paris Declaration on Aid Effectiveness

In February 2005, the international community came together at the Paris High Level Forum on Aid Effectiveness, hosted by the French government and organised by the OECD. The role of aid in promoting development was attracting increasing public scrutiny in the run-up to the G8 Summitin Gleneagles, Scotland, and the global campaigns such as Make Poverty History

While some progress had been made in harmonizing the work of the different international aid donors in developing countries, it was acknowledged that much more needed to be done. The aid process was still too strongly led by donor priorities and administered through donor channels, making it hard for developing countries to take the lead. Aid was still too uncoordinated, unpredictable and un-transparent. Deeper reform was felt to be essential if aid was to demonstrate its true potential in the effort to overcome poverty.

At the Paris meeting, more than 100 signatories—from donor and developing-country governments, multilateral donor agencies, regional development banks and international agencies—endorsed the Paris Declaration on Aid Effectiveness The Paris Declaration went much further than previous agreements; it represented a broader consensus among the international community about how to make aid more effective. At its heart was the commitment to help developing-country governments formulate and implement their own national development plans, according to their own national priorities, using, wherever possible, their own planning and implementation systems.

The Paris Declaration contains 56 partnership commitments aimed at improving the effectiveness of aid. It lays out 12 indicators to provide a measurable and evidence-based way to track progress, and sets targets for 11 of the indicators to be met by 2010.

The Declaration is focused on five mutually reinforcing principles:

Ownership: Developing countries must lead their own development policies and strategies, and manage their own development work on the ground. This is essential if aid is to contribute to truly sustainable development. Donors must support developing countries in building up their capacity to exercise this kind of leadership by strengthening local expertise, institutions and management systems. The target set by the Paris Declaration is for three-quarters of developing countries to have their own national development strategies by 2010.

Alignment: Donors must line up their aid firmly behind the priorities outlined in developing countries’ national development strategies. Wherever possible, they must use local institutions and procedures for managing aid in order to build sustainable structures. In Paris, donors committed to make more use of developing countries’ procedures for public financial management, accounting, auditing, procurement and monitoring. Where these systems are not strong enough to manage aid effectively, donors promised to help strengthen them. They also promised to improve the predictability of aid, to halve the amount of aid that is not disbursed in the year for which it is scheduled, and to continue to “untie” their aid from any obligation that it be spent on donor-country goods and services.

Harmonization: Donors must coordinate their development work better amongst themselves to avoid duplication and high transaction costs for poor countries. In the Paris Declaration, they committed to coordinate better at the country level to ease the strain on recipient governments, for example by reducing the large numbers of duplicative field missions. They agreed on a target of providing two-thirds of all their aid via so-called “programme-based approaches” by 2010. This means aid is pooled in support of a particular strategy led by a recipient country—a national health plan for example—rather than fragmented into multiple individual projects.

Managing for results: All parties in the aid relationship must place more focus on the end result of aid, the tangible difference it makes in poor people’s lives. They must develop better tools and systems to measure this impact. The target set by the Paris Declaration is for a one-third reduction by 2010 in the proportion of developing countries without solid performance assessment frameworks to measure the impact of aid.

Mutual accountability: Donors and developing countries must account more transparently to each other for their use of aid funds, and to their citizens and parliaments for the impact of their aid. The Paris Declaration says all countries must have procedures in place by 2010 to report back openly on their development results.

A first round of monitoring of the 12 Paris Declaration indicators was conducted in 2006 based on activities undertaken in 2005 in 34 countries. A second survey was organised in early 2008 in which 54 developing countries examined progress against the targets at country level. This 2008 Survey covers more than half all the official development assistance delivered in 2007—nearly USD 45 billion. It will be presented at the Third High Level Forum on Aid Effectiveness in Accra in September 2008. The evidence so far suggests that progress has been made. For example, more than one third of developing countries surveyed had improved their systems for managing public funds; almost 90% of donor countries had untied their aid; and technical cooperation is more in line with developing countries’ own development programmes. Despite these improvements, however, the results of the Survey show that the pace of progress remains too slow to reach the targets set in 2010. In particular, although many countries have made significant efforts to strengthen their national systems (for instance by improving how they manage their public funds), in many cases donors are still reluctant to use them. The predictability of aid flows also remains low (with just over a third of aid disbursed on schedule), thereby making it hard—or impossible—for governments to plan ahead. In summary, whilst some progress has been made there are still many areas where the pace of change must be accelerated if the targets set for 2010 are to be reached.

In some quarters, the Paris Declaration is almost synonymous with aid effectiveness; it is expected that aid will be effective and achieve development outcomes when the principles are observed for government sector aid. However, there continue to be criticisms and alternative views, particularly from non-government aid organisations. Implementation of the Paris Declaration still needs to be significantly stepped up, according to the results of the 2008 Monitoring Survey. Concrete targets set for 2010 (such as an increased proportion of aid to be untied; establishment of "mutual accountability" mechanisms in aid recipient countries; and for two-thirds of aid to be delivered in the context of so-called programme approaches rather than projects) mjay be difficult to meet. Independent NGOs, such as Eurodad, also release their own evaluations, showing that the Declaration is not being implemented as planned. Measures for stepping up implementation will be agreed at the Third High Level Forum.

The OECD's work on aid effectiveness

The Organisation for Economic Co-operation and Development(OECD) is the main coordinating body for the international community’s efforts to make aid more effective. The OECD traces its roots to the Marshall Plan which sought to rebuild Europe after the Second World War. Today, it groups 30 member countries committed to democratic government and the market economy. It provides a forum where governments can compare and exchange policy experiences, identify good practices and promote decisions and recommendations. In addition to the analysis and advice it provides on a wide range of economic issues, the OECD is one of the world’s largest and most reliable sources of statistical, economic and social data.

The OECD’s work on aid effectiveness is undertaken by its Development Assistance Committee, known as the DAC. One of OECD’s oldest committees, the DAC was founded in the early 1960s to guide, promote and enhance co-operation with developing countries. Today, it comprises 23 members: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, United States and the European Commission (EC). These countries have significant aid programmes. The World Bank, the International Monetary Fund (IMF) and the United Nations Development Programme (UNDP) participate as observers.

Hosted by the DAC, the Working Party on Aid Effectiveness (WP-EFF) is the major international forum where developing countries join with multilateral and bilateral donors to work on improving the effectiveness of aid. It was set up in May 2003 to promote the global partnership for development agreed at the 2002 Financing for Development Conference in Monterrey and to accelerate progress towards the Millennium Development Goals. It is the body responsible for organising the Third High-Level Forum on Aid Effectiveness in Accra in September 2008.

The Working Party on Aid Effectiveness’ primary function is to measure and encourage progress in implementing the commitments of the 2005 Paris Declaration and provide guidance on policy and good practice. The Working Party comprises senior policy advisers from the 23 DAC members, 23 developing countries and 11 multilateral organisations. It has a unique “tripartite” chairing arrangement, including representatives of a bilateral donor organisation, a multilateral organization and a developing-country partner. This reflects the partnership commitments embodied in the Paris Declaration. The WP-EFF also engages actively with civil society organisations. In order to effectively cover its broad mandate, it has established a number of Joint Ventures to examine particular areas of interest, including monitoring the Paris Declaration, public financial management, procurement, and managing for development results.

In addition to the work of the WP-EFF, the DAC tackles aid effectiveness issues through its other working parties and regular activities.

The DAC maintains and makes available unique and definitive statistics on the global aid effort. Its Working Party on Statistics tracks official development assistance over time, providing a firm basis for analytical work on aid trends and for assessments of aid effectiveness. Beyond the traditional OECD aid donors, its data collection also includes other official and private flows to developing countries.

One of the DAC’s important tasks is to conduct regular peer reviews of its members’ development policies, strategies and activities. Each year, the DAC conducts regular peer reviews of four or five of its members. These reviews look at how members are putting into practice the policy work carried out by the DAC, and how they are responding to international commitments and to their own national goals. These reviews are designed to encourage positive change, support mutual learning and raise the overall effectiveness of aid throughout the donor community.

Other aid effectiveness work is carried out by the DAC’s networks—global fora that bring together experts in various fields.

The Network on Development Evaluation supports robust, informed and independent evaluation of aid activities. This Network promotes joint reviews of the effectiveness of aid, such as the Evaluation of the Implementation of the Paris Declaration. It also works to improve the standards and norms used in evaluations. The 30 Evaluation Network members include heads of evaluation from all DAC member countries and from the African Development Bank (AfDB), Asian Development Bank (ADB), European Bank for Reconstruction and Development (EBRD) and the World Bank.

The DAC’s Network on Gender Equality, GENDERNET, produces practical tools to help integrate gender equality and women’s empowerment into all aspects of development co-operation. It is currently focusing on the implementation of the Paris Declaration, designing a set of guiding principles to show how women’s empowerment can be clearly integrated into aid effectiveness efforts to increase their impact.

The Network on Environment and Development Co-operation, ENVIRONET, aims to enhance the coherence of OECD country policies in the areas of environment and development co-operation, as called for by the Paris Declaration.

The DAC’s Network on Poverty Reduction, POVNET, promotes economic growth for poverty reduction, stressing the importance of both the rate and the pattern of growth, and works to ensure that growth is broad-based and inclusive. Subjects of workshops held by this network have included applying Paris Declaration principles in agriculture and infrastructure.

The Network on Governance and Capacity Development, GOVNET, helps donors to be more effective in supporting democratic governance. It offers a forum to exchange experiences and lessons, identify and disseminate good practice, and develop policy and analytical tools. It has produced important publications on themes such as fighting corruption, building institutions and ensuring human rights are placed at the centre of aid effectiveness efforts.

The Network on Situations of Conflict and Fragility brings together experts on governance and conflict prevention from bilateral and multilateral development co-operation agencies, including the EC, the UN system, the IMF, the World Bank and regional banks. It helps to improve development co-operation and coherent international action in situations where the Millennium Development Goals are undermined by threats of violent conflict, human insecurity, fragility, weak governance and instability.

The DAC also works on emerging issues in aid effectiveness. In 2008, it published the first in a new series of yearly surveys to tackle two major information gaps that hinder increased aid effectiveness: future spending intentions of donors, and the proliferation of aid donors. The results of these surveys will help donors make more informed decisions about where they should focus their aid, and to improve aid predictability at the country level. New analyses of historical information are also showing where there is donor fragmentation within a country, prompting donors to seek a better division of labour amongst themselves.

The DAC is working to build recognition among the development community that trade is an important tool for development. Its aim is to increase support for “aid for trade” activities—aid that helps build poor countries’ capacity to trade successfully. Experts from the DAC and the OECD Trade Committee are disseminating evidence of trade’s impact on development and creating an analytical toolbox for improving the design and implementation of aid-for-trade programmes. This includes strengthening the application of the Paris Declaration principles to trade-related aid activities.

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