AT A GLANCE: - The global aid landscape is changing fast, marked in part by the emergence of bilateral donors who are not members of the OECD’s Development Assistance Committee, or DAC. In addition to the entry of so-called non-DAC donors, aid today is characterized by the rise of global funds, the growing prominence of private philanthropic foundations, and more public-private partnerships.
- For most low-income countries, aid from DAC members, known as official development assistance, or ODA, remains a major source of development finance. In Sub-Saharan Africa, home to most of these countries, official flows account for about two-thirds of all capital inflows. These countries will need a substantial increase in ODA to improve their prospects for reaching the Millennium Development Goals (MDGs).
- In middle-income countries, aid plays a much smaller but still important role, by catalyzing reforms, supporting efforts to tackle concentrations of poverty, helping to counter negative shocks, and assisting with global or regional public goods such as climate change.
- As costly challenges such as adapting to climate change are added on top of key development problems like expanding education, reducing child mortality, tackling AIDS and malaria and ensuring access to water and sanitation, the need to scale up aid has taken on a new urgency.
- International financial institutions (IFIs) are shrinking in terms of their relative financing role, yet the multilateral development banks are still expected to bring order to an increasingly crowded aid field. And, since 2008 is the halfway point to the 2015 deadline for most of the MDGs, IFIs’ impact through leverage remains key in achieving collective action on development and the increasingly important global and regional public goods such as climate change.
- Two events in 2008 offer unique opportunities to leverage IFI influence, improve aid architecture, and scale up aid. The first is the September 2008 meeting in Accra, Ghana. of the Third High Level Forum on Aid Effectiveness (HLF3), where over 150 countries will be represented. These same participants will then meet in Doha, Qatar, in December to follow-up on the financing for development arrangements started in Monterrey in 2002.
Overview The world of aid is increasingly diverse – from corporate philanthropy, to specialized “vertical funds” focused on specific pandemics, education, health, or agriculture, to large bilateral aid agencies driving special agendas. On the one hand, this means more resources are available for poor countries and it spurs new and innovative ways of tackling pressing development needs. On the other, it complicates efforts to achieve policy coherence and can distort national priorities in poor countries. The volume of ODA stalled over the past two years, with total official flows reaching $103.7 billion in 2007, as major debt relief operations tapered off. This compares with $104 billion in 2006. To meet the Group of Eight commitment (made at the 2005 Gleneagles Summit) to increase aid by $50 billion (from 2004 levels) by 2010, donors will need to quickly expand core development aid by an estimated 12 percent a year. However, preliminary evidence from a forward survey of donors’ aid allocations suggests that these are not yet sufficiently ambitious to meet the 2010 aid targets. Efforts to expand aid Setting up new channels to disburse aid effectively is difficult. One of the fastest growing programs, the Global Fund for AIDS, TB and Malaria (GFATM), was able to reach $1 billion in disbursements in its fourth year of operation. Another recently established agency, the United States’ Millennium Challenge Corporation, had committed $5.5 billion in multi-year aid compacts to 16 countries as of January 2008, but had disbursed only about $180 million. While the new channels are making a contribution, the bulk of the increase in aid flows in the short- to medium-term will have to pass through traditional channels. However, the planning in most agencies to scale up to the required degree is not yet under way. Donors’ funding commitments to the replenishment cycles of the World Bank’s International Development Association (IDA), which assists the world’s poorest countries, and the concessional windows of other regional development banks and GFATM are encouraging. New donor pledges for IDA 15 (covering the period mid-2008 to mid-2011) amount to $25.1 billion, representing the largest expansion in donor funding in IDA’s history and signaling strong support for IDA. The latest replenishment of GFATM also points to bigger contributions by donors. Innovative financing approaches can help raise funds for short-term needs, or provide long-term, sustainable funding for development. For example, the solidarity tax on airline tickets was introduced in France in mid-2006, and has been implemented since then in Chile, Cote d’Ivoire, Congo, Republic of Korea, Madagascar, Mauritius, Niger, and Norway. Another 15 countries are in the process of implementing the tax. The funds are used to finance UNITAID, a purchase facility for drugs and treatments for HIV/AIDS, malaria. and tuberculosis. Contributions from air ticket taxes are expected to total over $360 million in 2008. The International Finance Facility for Immunization (IFFim), which provides frontloading to support development investments, was set up in 2006 with some $4 billion in assets in the form of irrevocable donor grants paid over 20 years. IFFim’s first triple-A rated $1 billion bond issuance funded immunization programs of the Global Alliance for Vaccines and Immunizations, or GAVI. New players such as non-DAC bilaterals, private entities, non-governmental organizations, and vertical funds are the fastest growing sources of funds. Nations like Brazil, China, India, Korea, and Middle East and OPEC countries are all providing sizable amounts of aid and plan to increase their contributions in the run-up to 2015. Private players, meanwhile, are providing significant sums of money to complement official aid and prospects for continued strong expansion are good. For example, the Gates Foundation alone disbursed over $1 billion in 2006 and the outlook is for a ramping up of disbursements to about $3 billion annually in a few years. Leveraging through the international financial institutions Because they now account for only 8 percent of net ODA, the true measure of the impact of IFIs is increasingly about leverage. This means institutions like the World Bank and International Monetary Fund have to achieve collective action and development and implement an ever-more important global and regional public goods agenda. As part of this, the IFIs should be assessed on results, on policy change at the country level, on institutional learning, on harmonization and improved effectiveness of the aid architecture. In 2007, IFIs shifted their strategies in response to the changed global environment. They defined new priorities for differentiated clients, introduced new lending and non-lending instruments, and added more emphasis to regional and global public goods to complement their country-based approaches. At the same time, the IFIs continue to play their traditional roles in helping countries manage market turbulence, high and volatile commodity prices, as at present, and providing financing, knowledge, and technical assistance to countries. MDB operations increased in volume in 2007, with a record $48 billion of gross disbursements, reflecting higher concessional flows and non-concessional, non-guaranteed flows to the private sector. Total net non-concessional flows turned slightly positive in 2007 after four years of large negative net flows. Additional financing was provided by the leverage obtained through co-financing and guarantee operations which have been growing. Replenishment of concessional windows in 2007 constitutes a significant achievement, and should sustain the IFIs’ recent increase in concessional flows to poor countries. Growth in MDBs’ non-sovereign, non-guaranteed disbursements shows a shift towards greater support for the private sector. Africa, Asia, infrastructure, and higher education are areas seeing the most rapid increase in financial support. IDA financing for primary education fell, even though IDA commitments and spending for education rose. IFI independent evaluations suggest that there has been a significant underinvestment in regional public projects. The IFIs are devoting large and growing amounts of their own and Trust-funded resources to knowledge activities, and are decentralizing operations to strengthen dissemination. But the practical experiences of middle-income developing countries are only just starting to be tapped. There appears to be strong demand for IFI knowledge services from all types of clients, but the business model for financing knowledge needs to evolve. IFI revenues traditionally are based on lending, and may not be easily deployed in middle-income countries where lending has declined or for regional and global public knowledge goods. IFI results improved in 2007, in terms of selectivity, harmonization, and managing for results. But much remains to be done in terms of strengthening relevance and enhancing support to meet the MDGs. Updated April 2008 Media Contact:
Merrell J. Tuck-Primdahl (202) 473-9516, E-mail: mtuckprimdahl@worldbank.org |
RSS