Foreign Aid

Hard currency

Nancy Birdsall and Brian Deese
Washington Monthly
March 23, 2004

Grading on a curve, the east African nation of Tanzania is something of a success story. While still as poor as most of its neighbors, Tanzania has in recent years kept inflation in check, achieved annual growth of over 5 percent, and launched an ambitious plan to reduce poverty and increase investment in its citizens’ health and education. Such progress has not been lost on such aid agencies as the U.S. Agency for International Development (USAID), the United Kingdom’s Department for International Development (DFID) and the World Bank. Beginning in the 1990s, new donors began to flood into Tanzania, while long-time donors branched out into new areas. The capital of Dar-es-Salaam was soon teeming with foreign consultants and aid missions, as the various donors broadened their portfolios to include projects in primary education, clean water, renewable energy, road building, civil-service reform, banking oversight, environmental sustainability, and almost every other area of development.

But this generosity soon became a double-edged sword. Where once Tanzania had hosted a few hundred discrete donor projects, by the mid-1990s it was hosting an estimated 1,500 projects – each with its own expert consultants, procurement deals, auditing arrangements, and reporting requirements – a number that has only increased since. By the end of the decade, the country’s Ministry of International Cooperation prepared 2,400 donor reports every quarter and hosted 1,000 meetings a year.

All this new red tape has not come with much new money: Between 1992 and 2002, real growth in foreign aid to Tanzania was almost nil. By 2003, donors’ demands on Tanzania’s small cadre of competent senior officials were undermining the government’s ability to manage its own resources – which, even with large donor inflows, still represented the large majority of total public spending. So, the government made a decision. The Tanzanian Ministry of Finance announced (with appropriate diplomatic courtesies) that President Benjamin Mkapa was declaring a four-month long "mission holiday" from April to July of each year, a so-called "quiet time," when foreign aid missions would be asked to stay home.

Enter President Bush, who in March 2002 announced a major new initiative – dubbed the "Millennium Challenge Account" (MCA) – to provide significant assistance to stand-out poor countries that were "ruling justly, investing in people, and encouraging economic freedom," including Tanzania, a likely recipient for the program’s first year of funding. (Under Bush’s plan, spending will increase to $5 billion a year by 2006.) As if to outdo himself, President Bush last year announced another new aid program: $10 billion over five years to combat the AIDS pandemic in Tanzania and 13 other poor countries in Africa and the Caribbean, roughly quadrupling current U.S. funding for AIDS treatment and prevention. These new initiatives reverse a 40-year downward trend in U.S. foreign aid as a percentage of the gross domestic product. But they are more noteworthy for their strong emphasis on targeting resources only to a select number of high-performing countries that can use resources effectively. That’s a welcome development in a business best known for such high-profile failures as when billions of dollars were spent by Western donors to prop up Mobutu Sese Seko’s regime, or the financing of so-called "white elephant" projects aimed more at doling out lucrative construction contracts than making any real progress in the lives of the world’s poor.

Yet the administration’s well-intentioned focus on performance and results, while innovative, does nothing to address – and may well aggravate – the problem of project proliferation. As currently conceived, both the MCA and Bush’s new AIDS initiative will either reinvent or overlap with efforts already underway at the international level, many of which are effective and, indeed, already supported by the United States. For Tanzania and its peers, that means more layers of bureaucracy with which to cope, more quarterly reports to file, and more visits from more officials.

There’s a better way to deliver aid. Focusing on performance and results would seem to require bypassing the crowded field of donors and aid agencies. But in fact, the opposite is true. The duplication, waste and inefficiencies of the worldwide aid business are largely a consequence of unilateralism – that is, of the unwillingness of many donor countries, including the United States, to coordinate development projects within the countries they aid. To get the most out of its newfound generosity, the Bush administration must adapt to the new world of foreign aid, in which going it alone is not the best way to help the poor.

Paper Trial

When the modern practice of assisting poor countries was launched at the end of World War II, the United States was the only game in town, committing 2.5 percent of GDP spread over three years – the equivalent of about $250 billion in today’s dollars – under the Marshall Plan to rebuild Western Europe. During the 1960s, at the height of the Cold War, the United States still dominated the foreign aid business, contributing about two-thirds of all such money given in order to win hearts, minds and basing rights in the developing world. But as a resurgent Japan and Europe, along with oil-rich states, got involved, the United States contracted its commitments, and today accounts for less than one-fifth of global aid spending.

The rest comes from a hodgepodge of more than 50 other bilateral and multilateral donor agencies, from the Swedish International Development Agency to the International Fund for Agriculture Development, none of which contributes more than 15 percent of the total. But where the world’s poor are concerned, that pie hasn’t gotten much bigger. The Marshall Plan involved a transfer of more than $1,000 in today’s dollars for every man, woman, and child in Western Europe in 1948. Tanzania today receives about $33 dollars per person per year from donors, and very large poor countries like Bangladesh get more like $5. Although total real aid budgets have grown in absolute terms, they are lower as a percentage of rich countries’ total GDP than they were at their peak 35 years ago, during which time the absolute number of poor people in the world has more than doubled. Thus, the splintering of aid has not brought more help, on average, for the world’s poor.

What it has brought is more headaches. Last year, the 50-plus donor nations financed 35,000 different projects in about 150 poor countries, which means 35,000 different sets of reports and evaluations each year. And most donors still employ the practice of "tying" aid; that is, requiring recipients to procure goods and services from the donor country. All U.S. aid officials and consultants, for instance, must fly on U.S. air carriers, regardless of whether they could find a cheaper flight on an international carrier. A number of aid watchdog groups have estimated that tying aid reduces its value by about 15 to 30 percent. In a world where a highly talented Indian or Brazilian civil engineer could be hired at one-tenth the cost of a Dutch one, this may be a conservative estimate.

Splintering and tying would not be so pernicious if most projects were well-targeted to areas where the recipient country has both a need for funding and a capacity to use it effectively. Yet, too often, they reflect donors’ preferences or bad habits more than the logic of recipients’ needs.

One problem is that donors’ interests often overlap or even conflict. In Haiti, for example, the Europeans and the United States both fund infant and child health programs, which are politically popular at home. If the different agencies had worked out an efficient division of labor for early-childhood health care, this overlap might not be a problem. But as a 1998 USAID report explained (in typical donor-speak), "the respective programs do not articulate well together to enhance the general impact of investments in health or to avoid duplication."

Moreover, all bilateral and even multilateral agencies are under constant pressure to demonstrate results and successes that resonate with their legislatures or other contributors who control the purse strings. And while agencies should be accountable for how they spend their money, that pressure often expresses itself in a preference for funding "new" projects over recurring expenses for old ones. New projects, particularly those that involve building something, are a visible sign of success for donors. But when you build new highways in countries that lack the equipment, training or administrative capacity to maintain them, soon enough the highways become useless to the people they are intended to help. Likewise, one of the most pressing health problems in Sub-Saharan African countries is chronic absenteeism from health clinics – facilities built by well-meaning donors who neglected the less visible but more intractable problem of doctors and nurses who, working at low pay and without the necessary supplies and equipment, often have little incentive to show up for work.

In addition, when every donor insists on funding construction projects – to be completed only by that nation’s construction companies under "tying" rules – the aid business suffers massive inefficiencies. In Guinea today, new primary school facilities cost anywhere from $130 to $878 per square meter, depending on which donor country is in charge. (If the countries that build schools at the high end of that cost curve paid their more efficient peers to do the job instead, they’d have an extra $748 per square meter of classroom to devote to Guinea’s pressing need for teachers and textbooks.) A similar problem extends across Sub-Saharan Africa, where most public investment in infrastructure is externally financed. Research suggests that in much of Africa, the return to the marginal dollar spent on public infrastructure investment is much lower than in other developing regions.

More broadly, as donor aid splinters, it scatters the time and attention of officials who ought to be focusing on broader or more persistent problems of governance. The finance minister of a poor nation may end up scrambling to manage a portfolio of thousands of disparate, unconnected donor projects, rather than, say, thinking about ways to crack down on corruption or developing a comprehensive plan for tax reform. (Funding for such efforts has declined from 17 percent of all aid during the mid-1970s to 8 percent in 1995-1999.) As Gerald Sendaula, Uganda’s minister of finance, recently explained, aid from donors can be "very expensive."

Learning from Bono – and the Pope

But there are approaches to delivering aid that make more efficient use of scarce donor dollars. Take the question of "debt relief." Many poor countries devote enormous chunks of their budgets to paying down old loans to official donor creditors, including the International Monetary Fund and the World Bank. For some countries, much of it constitutes so-called "odious debt" incurred by corrupt dictators or other government officials who siphoned the money off for personal gain. For others, even "good" loans made during periods of political or economic instability may not have produced the hoped-for results. Billions of these countries’ dollars are thus tied up in debt repayments. But for those that have instituted economic reforms and are reducing corruption, those dollars could now be fruitfully invested in education, infrastructure, civil service and other reforms that would make them more prosperous and eventually less dependent on future aid. That’s why programs to relieve such debt command support across the political spectrum, from rock star Bono to the Pope to former North Carolina Sen. Jesse Helms.

During the mid-1990s, facing a Republican-led Congress highly skeptical of aid programs, the Clinton administration turned its attention to supporting an innovative international approach to debt relief. Putting $800 million on the table, the United States worked closely with the World Bank and other donors to broker an unprecedented arrangement under which 24 bilateral donors and 21 multilateral institutions agreed on a single process for relieving poor-country debt. The United States used its influence to push for more discipline in awarding relief only to those poor countries with a prior track record of good policy. The United States also supported a more streamlined, but still comprehensive, approach advocated by the World Bank for the poor countries themselves. Under the debt relief initiative, debtor governments that have met the eligibility requirement develop a coordinated national plan, known as a Poverty Reduction Strategy, for how they will use newly available resources to fund domestic efforts in education, health and other areas. Once a plan is submitted and approved, all donors are committed to supporting financially the debt write-down. In short, rather than negotiating write-downs on thousands of different debt contracts held by dozens of different countries, poor countries who meet the standards enjoy one-stop shopping.

Despite the slow and sometimes agonizing process of bringing the nearly four dozen donors together and pushing debtor countries to prepare Poverty Reduction Strategies, this initiative has delivered results. Twenty-seven of the 42 eligible debtor countries are now receiving relief, and the World Bank estimates that social spending among that group increased by an average of 45 percent between 1999 and 2003. The debt-relief strategy not only provided those governments with more money to spend, but also forced each one to think carefully about how to spend it, coordinating the efforts not only of various ministries, but of local NGOs and private donors, too. Debt relief in Mozambique has enabled the government to immunize a half million children against tetanus, diphtheria, and whooping cough; allowed Honduras to offer three more years of free schooling to sixth graders; and helped Uganda hire more teachers and buy more textbooks even as the elimination of school fees led to a doubling of enrollment.

The example of debt relief demonstrates two important virtues of a multilateral approach to aid. First, because U.S. aid dollars have strong signaling power, involving many other donors allows us to leverage our own relatively modest contributions many times over. The act of putting $800 million on the table – besides spending some political capital on the international stage – was an important factor in convincing dozens of other donors that the debt relief initiative was serious, significant, and deserving of their new aid dollars as well. Our initial investment seeded an initiative that has already forgiven about $5 billion in debt payments, and is set to forgive more than $40 billion over the next two decades.

Second, the United States was able to use debt relief to ensure that its focus on disciplined lending would permeate the entire aid business. Discipline about county eligibility made it easier for donors to support those countries’ own strategies as a template for assistance, instead of persisting in their own multiple, uncoordinated efforts. That approach has since been adopted by several other bilateral and multilateral donors, from Scandinavian donor agencies to the World Bank. And it has inspired multilateral aid efforts in other areas, too, from the Global Fund to Fight AIDS, TB, and Malaria, which pools funds from 45 countries and 13 corporations and private donors, to the Education for All "Fast Track Initiative" for basic education, which invites selected developing countries to submit national education plans to a consortium of donors who fund them collectively.

Come Together

The multilateral debt-relief effort became a model for Bush’s MCA, which focuses on identifying and supporting those poor countries that have already demonstrated an ability to use foreign assistance effectively. And the criteria used to pick these high-performers – a set of 16 relatively non-controversial indicators of development progress – may well become the new standard for determining where to give the bulk of our aid budget. But unlike debt relief, Bush’s new effort appears to reflect the traditional disdain of former private sector CEOs for coordinating public-sector efforts, even those within the U.S. government. The MCA, for example, is creating a new public corporation, completely independent of our traditional aid agency, USAID, to disburse as much as $1 billion in 2004 to high-performing poor countries. To date, the administration has been reluctant to hold meaningful consultations with other donors – whether our allies in Europe and Japan, or the management of the World Bank and other institutions of which the United States is a member. The administration’s initial gesture at multilateralism – announcing the project during a press conference at Washington, D.C.’s Inter-American Development Bank, with Bush flanked by World Bank President Jim Wolfensohn and Bono – has, after two years, yet to be built upon.

Likewise, while many people have noted that Bush’s new budget includes far less money for AIDS than the $2.4 billion promised during last year’s State of the Union, fewer have noticed that the bulk of what remains will be spent unilaterally. A portion of the funding will go into the Global Fund, which allows poor countries and private aid organizations to appeal to several dozen donors with a single proposal – reviewed by an independent technical panel – rather than preparing separate proposals for each one. But most of the new aid will be spent on a new U.S. program to fight AIDS in 14 chosen countries, adding another layer of bureaucracy and paperwork to the worldwide fight against AIDS. Why not put all the money into the Global Fund, then push fellow donors to ante up while insisting on the kind of accountability provisions contained in the MCA? The Bush administration is right to demand hardheaded, businesslike approaches to finding the most effective solutions to bring positive change in the lives of the poor. But it needs to think hard about whether unilateral aid is really the most effective way to produce results. With the military effort in Iraq slowly shifting from invasion to reconstruction, the administration has begun to reach out to other donors through the United Nations to leverage the financial, diplomatic and logistical benefits of having a coordinated effort. There’s a lesson here for the U.S. foreign aid program, too. Finding more coordinated approaches on AIDS or MCA initiatives would not compromise any of the broader goals President Bush has established. It will take serious work, and a willingness to play nice with others. But engaging with our allies seems a small price to pay to transform the business of aid.

Nancy Birdsall is president of the Center for Global Development (CGD) and Brian Deese, currently a senior policy analyst at the Center for American Progress, is a former program associate at CGD.

Categories: Foreign Aid

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