How do you quantify the benefits of aid effectiveness?

By Tim Strawson, Analyst/Policy Advisor

One of the key outcomes of the meetings in Busan last year was the creation of a Global Partnership for Effective Development Assistance, which marked a major step towards a more inclusive international aid system. The working party tasked with establishing the Global Partnership held its first meetings last week and nominated Andrew Mitchell as a co-chair on its panel; he is expected to be joined by additional leaders from emerging and developing economies later this month.

The Global Partnership will play an important role in leading the aid effectiveness agenda. There have been significant commitments in this area in the past – over 100 countries signed the Paris Declaration in 2005, but research shows that just one of the targets was met on-time.

Last month the Overseas Development Institute (ODI) hosted a roundtable event to discuss the benefits of aid effectiveness. To date the debate has been largely discursive, but this event discussed important research that attempts to quantify the benefits of change. Two key papers were discussed; a report commissioned by the European Commission (EC) that estimates the gains that would be achieved if the European Union (EU) met the existing Paris targets, as well as an ODI commentary on the paper.

The EC paper models three types of gain. Direct benefits included:

• lower transactions costs from reducing the number of partner countries and increasing programme aid
• eliminating tied aid
• eliminating aid volatility.

Indirect benefits modelled the growth effects for recipient countries of implementing the above. Finally, a third area not directly covered in the targets was evaluated – reallocating aid solely on the basis of poverty and governance.

The results?

The results indicated a headline efficiency gain of 6% of EU Official Development Assistance (ODA) for the direct and indirect effects, and 9% of ODA for the reallocation of aid. Of the direct and indirect effects, boosts to recipient-country economic growth provide the largest impact, followed by the direct effects of eliminating volatility. Untying aid and reducing transactions costs were found to have roughly equal benefits.

How can we make use of these numbers?

First, there are a number of caveats. The figures are difficult to use, as the scenario modelled in each estimate is different. For some components, the paper models full implementation of the Paris targets while in others the scenario is more arbitrary. This means that it would be inappropriate to use the figures in a policy debate – as they don’t model a consistent policy change, but it does not stop them being useful as order-of-magnitude estimates for the impacts of aid efficiency improvements.

Another key point to note is that the paper isn’t comprehensive. At best it touches on 3 or 4 of the 12 Paris targets, leaving 8 or 9 unquantified. And these 12 targets themselves are only a subset of the full 56 commitments. So at best, the estimates represent only a partial evaluation of the existing commitments to improving aid effectiveness.

So, given the caveats, how can we contextualise the numbers? As noted, they are not comprehensive and probably significantly underestimate the benefits of full implementation. The existing agreements – the Paris Declaration and Accra Agenda for Change – represent fundamental change in the way the international aid system is structured, managed and delivered. So the benefits of implementing such wholesale change probably exceed 6% efficiency gains. However the estimates are still substantial, particularly in a time of budget constraint and reduced political will towards outward-looking issues. So it is important to consider the political feasibility of these changes going forwards.

The ‘prevailing winds’ for most donors are probably moving away from, rather than towards, increased programme aid. Many donors feel that their public want more information and control over aid, and this is partly grounded in worries about fungibility and corruption associated with programme aid. However, the EC is in favour of increased programme aid and has proposed increased use of this instrument over the next financial framework, which covers 2014 to 2020. Untying aid is an issue that has dropped off the agenda somewhat and is not a priority for many donors. Some see tied aid as a way of maintaining high overall levels of aid – by including the domestic population in the implementation, a donor can maintain support for money given overseas.

Volatility, a measure of predictability, remains a challenge. However, progress has been made, not least through widespread commitment to publish aid data through the International Aid Transparency Initiative (IATI) standard, which will provide forward-looking data and aims to improve predictability for the recipient. Finally, a full-scale reallocation of aid on the basis of poverty and governance alone is unlikely to happen. However, many donors are re-evaluating how they allocate aid. In part this is motivated by the understanding that a substantial number of poor people are now in middle-income countries that are better equipped to support them: this motivates a shift towards the remaining body of poor people, who still live in low-income countries. The EU is one of these donors and has proposed changes to the way it manages its own aid budget, with the differentiation policy that will reprioritise aid over 2014-2020.

Although there are shortcomings in the comparability and comprehensiveness of these estimates, they represent a significant step forwards in our understanding of the benefits of effective aid. As the post-Busan agenda develops they will help to strengthen the arguments for reform. The research shows that the benefits of reform are substantial, a finding which is particularly relevant in the current economic climate.