The Future of UK Development Cooperation

Written evidence submitted by the Department for International Development

1. The context for UK development cooperation has changed considerably in the past decade. Strengthened country ownership, a growing awareness of the importance of engaging in fragile states, and increased emphasis on results and the need to be accountable to the UK public are just some of the trends which have transformed the way DFID carries out its business. Current discussions on the post-2015 development agenda will raise further questions about how UK development cooperation should be shaped. In responding to these challenges, there will be a need for strong leadership. The timing and scope of this inquiry are therefore very timely.

Question 1: How the main global factors affecting poverty and well-being are changing and how this will affect development cooperation

2. DFID undertakes regular Horizon Scans to explore how global trends will affect the development landscape over the next ten to fifty years. These scans focus on the twenty-eight countries in which DFID works, although consideration is also given to wider issues. Five main trends are highlighted in this memorandum.

3. One trend is that populations in developing countries are rising, fast. For example, between 2010 and 2050, Nigeria will grow from 158 million people to 390 million; Pakistan from 173 million to 275 million; and Yemen from 24 million to 61 million [1] . This population increase is happening as many developing countries are also seeing dependency ratios fall, with a higher proportion of the population of working age. Between 2010 and 2020, 17 DFID focus countries will see an increase in the working age population of 30% or more [2] . These demographic changes are considered to be largely inevitable, although family planning services, and policies that give choice to women over their fertility, can still affect the precise magnitudes and timings.

4. A second trend is that many developing countries are urbanising. Projections suggest that, by 2030, both Africa and Asia will be more urban than rural [3] , with much of this urban growth in small towns and cities [4] . These trends run the risk of creating cities that are poorly-planned and under-serviced, with high inequality and large, young populations, with attendant negative welfare and climate implications. However, unlike demography, urbanisation trends are not inevitable and the pace of change can be affected by policy and investments. This offers opportunities for governments and development actors to ensure urbanisation is characterised by low carbon development, more efficient service delivery and poverty reduction.

5. The combination of demographic change and urbanisation also offers a unique opportunity to increase prosperity in developing countries. Young populations and low dependency ratios ("the demographic dividend") mean the economy has higher potential productivity, whilst urbanisation means easier access to jobs and public services. Urban medium- and large-scale enterprises also tend to be the most productive and offer the highest returns to labour; creating a sufficient number of jobs in such enterprises will therefore result in enormous welfare gains for developing countries. However, trends do not seem to be moving in this direction; even in Ghana, a strong performer in poverty reduction and growth, it is the least productive worst-paid jobs that are expanding fastest [5] . There is therefore a role for donors in encouraging diversified growth paths that promote sustainable poverty reduction.

6. A third trend is the increasing impact of climate change, with the International Energy Agency forecasting the world is on track for temperature rises of 3-6ºC by the end of the century, unless new policies are introduced. There will be a significant adverse impact on development and economic growth, with some regions facing a range of challenges including decreased water availability and agricultural yields, increased exposure to malaria and a higher risk of flooding [6] , although other regions may benefit (e.g. from increased agriculture). Africa is particularly likely to suffer due to the impact of poverty in restricting choices for response. Tackling the causes and impacts of climate change will therefore be a priority, with a focus on win-win solutions (such as low-carbon investments)which also contribute to poverty reduction.

7. A fourth trend is resource scarcity. On the positive side, there has been a mineral and extractives boom in Africa; already the world’s top producer of many mineral commodities and with the world’s largest reserves of many more, much of Africa is still to be mapped. Africa also has around 10% of proven global crude oil reserves and 8% of gas reserves, with recent discoveries adding to the total. As far as access to food is concerned, only one tenth of the world’s land surface is used to grow crops. A further 40% is grassland (of variable quality) and forests, some of which could be converted for agriculture. [7] It is also estimated that, using current technologies, average yields in many parts of Africa could be increased two- to three-fold. [8]

8. However, global growing demand for natural resources such as water, energy and land may lead to critical scarcity in some areas. For example, by 2025 parts of northern Africa may have withdrawn more than 40% of available water [9] ; and the emergence of 3 billion global middle class consumers by 2030 will further fuel demand for these resources [10] . These scarcity trends can overlap to create stress points, with more recent conflicts occurring in these areas of multiple stress [11] . Addressing this issue is therefore a priority for development actors.

9. A fifth trend is increasing access to technology. Currently 4 of every 5 mobile connections are made within the developing world [12] , and it’s estimated that 80-90% of people in some poor countries have at least minimal access to a mobile phone [13] .In terms of internet access, sub-Saharan Africa recorded growth of 500% between 2000 and 2011 [14] . These technologies provide a number of opportunities to strengthen the impact of development cooperation, including through opening up governments and increasing citizen participation, improving the delivery of vital services, boosting economic opportunities and making aid smarter.

Question 2: The role of development aid in the future

10. Alongside the global trends set out above, the financing needs of developing countries are changing. This is due partly to economic growth, partly to increasing domestic sources of finance (savings and taxation), and partly to the rise of alternative funding sources (both public and private) and increasingly lucrative interactions with emerging powers. From 2002-2007, domestic revenues in sub-Saharan Africa grew from 70.5 to 201.8 $billion and private flows grew from 9.7 to 53.3 $billion [15] . Meanwhile, between 1980 and 2010, trade between emerging powers and DFID-focus African countries increased by 40,000% and 10,000% for oil-exporting and non-oil-exporting countries respectively [16] ; and Chinese foreign direct investment stocks in these countries were $13 billion by 2010 [17] .

11. The impact of these changes is that ODA flows are relatively smaller as a proportion of total financial flows to developing countries than in the past. Different funding sources can also play different roles – for example, use of domestic resources to fund recurrent expenditure, whilst private sector finance focuses on productive expenditure and private philanthropy encourages innovation. This offers an opportunity to use ODA to unlock, shape and complement these wider financial flows, in order to address the risks and opportunities outlined in Section 1. One issue, particularly for multilaterals, is the potential role of ODA in promoting global public goods.

12. A further important factor affecting the role of development aid in the future is the geography of poverty. Low Income Countries (LICs) have systematically higher rates of poverty as a percentage of the population than Middle Income Countries (MICs). However, around two-thirds of the world’s poor currently live in MICs, highly concentrated in India, Nigeria and China [18] . Internal DFID analysis suggests that whether global growth is fast or at 1990s rates, extreme poverty will continue to be predominantly in MICs over the next 20 years (with 60-75% of MIC poor in India and Nigeria).

 Question 3: Whether DFID should offer concessional loans, and the balance between these and traditional grant aid

13. The vast majority of UK bilateral ODA is currently provided in grant form, with the exception of non-grant ODA provided through CDC [19] - and approach that has been broadly similar since the mid-1980s. However, other donors take different approaches; France, Germany and Japan provide between 18% and 54% of their bilateral ODA as non-grants while the US provides just 1%. Donors who give a larger proportion of non-grant aid generally use a bilateral development bank to deliver their loans. These banks are able to borrow commercial funds to leverage the publicly provided capital. The use of non-grant instruments is heavily weighted towards productive sectors; on average 15% of bilateral ODA flows to economic infrastructure, but the figure is 56% for non-grant instruments.

14. DFID currently provides grant support to a number of intermediaries who in turn use non-grant instruments, the largest of which are the multilateral development banks. Increasingly DFID has been using intermediaries to deliver innovative non-grant instruments in its private sector work. Non-grant instruments have a number of potential advantages in terms of value for money, including enabling funds to be recycled, allowing donor finance to receive its share of any upside realised and leveraging in private finance to support development outcomes.

Question 4: The impact of non-aid policies and instruments, including trade, migration and climate on development, and how effective cross-Government work on these is

15. According to the Centre for Global Development’s Commitment to Development Index, which ranks 27 of the world’s richest countries based on their dedication to policies that benefit poor nations, the UK currently ranks 9th (compared to 2011, when we ranked 12th out of 22 countries). Moreover, the UK Government scores particularly highly on promoting investment in poor countries, demonstrating it is looking at long-term measures to enable developing countries to escape from poverty.

16. With regards to trade, the stalling of the Doha Development Round has resulted in a growing trend towards bilateralism, with the risk that poor countries will be largely excluded from the negotiations that will define future rules and standards. The case for open markets was also made more challenging by the 2008 crisis, and protectionist sentiments in developed economies are being reinforced by increasing competition from Asia and other emerging markets. The increasing complexity of the global trading system has underlined the value of the UK’s joint DFID/BIS trade policy unit which is able to bring together development and national concerns in one place, and ensure the interests of poor countries are not neglected in these new negotiations.

17. The links between migration and development were discussed in the IDC’s Sixth Report of Session 2003-04 on Migration and Development: How to make migration work for poverty reduction. Internationally, the Global Forum on Migration and Development offers a process through which states affected by international migration can meet to discuss common concerns. DFID is the lead UK department on migration and development, and liaises closely with the FCO and Home Office on inputs to these discussions.

18. On climate change, the UK is working hard to agree a global deal covering all emissions as the most effective way of tackling climate change, and reducing the adverse impacts on climate change on development. We are also working to ensure that any deal, and the policies and frameworks within it, is structured in a way that takes account of the capacity of countries to act. The UK formulates such policies across Whitehall, with DFID playing a key role in ensuring that the impact on the world’s poor is considered throughout. DFID also works jointly with other Departments in overseeing implementation of the £2.96 million Investment Climate Fund and in the new climate units established in HMG’s Embassies in Delhi and Jakarta.

19. Other non-aid policies which impact on prospects for development include domestic and international policies on tax collection and transparency and accountability. Some action can be taken to address these issues through the provision of development assistance. However, other actions require agreement across Government Departments. The UK’s forthcoming Presidency of the G8 provides an opportunity further to strengthen cross-Government working on these important issues.

Question 5: How the UK works with international organisations and other donors, and its ability to influence the future global development agenda

20. With permanent membership of the UN Security Council, the Commonwealth, the EU, the G8 and the G20, and a strong and respected tradition of commitment and expertise on international development, the UK is well placed to help to shape the future global development agenda.

21. The UK works extensively with international organisations, in partnership with others, to achieve our development and humanitarian objectives. Multilateral organisations provide a critical complement to our bilateral work. They provide a fast, effective response to humanitarian and security situations, and financial support to help cushion poor countries from economic shock. They deliver aid on a large scale to a broad number of countries, have the power to broker international agreements, set international standards on cross-boundary issues, and make a substantial investment in research, analysis and dissemination. By working through multilaterals we can achieve development outcomes and influence the global development agenda in ways that would be difficult to achieve bilaterally.

22. HMG works with multilateral organisations in three main ways – (i) as shareholders and/or providers of core funding (in 2011/12, 44% of DFID’s programme expenditure was delivered in this way), (ii) as funders of specific programmes through our bilateral work, and (iii)as contributors to international development policy debates (for example, working with UN agencies and the World Bank in providing analysis to help shape the successor to the MDGs). The March 2011 Multilateral Aid Review was critically important in highlighting the weaknesses as well as the strengths of the multilateral system, and a September 2012 NAO report noted that the MAR has contributed significantly to promoting reform in the multilateral organisations. DFID also works extensively with international organisations and other partners to reshape and re-energise the international system, developing new partnerships and leveraging new sources of finance.

23. DFID also engages with a range of other bilateral and non-governmental donors to achieve its objectives; for example, at the Family Planning Summit the Gates Foundation doubled its support alongside the UK. Bilateral agreements are in place with a number of countries including the US and France to work together to achieve common goals. The UK’s Presidency of the G8 in 2013, the Prime Minister’s role as co-chair of the High Level Panel on the post-2015 framework and the Secretary of State’s role as co-chair of the Global Partnership for Effective Development Cooperation also provide specific opportunities to help shape the future development agenda with others.

24. DFID has also begun to work in partnership with emerging economies, such as Brazil, China, India, South Africa and the Gulf States, on promoting development in low income countries and addressing global development challenges. These countries are having a significant impact on development of low income countries and are active contributors to discussions in international fora on poverty reduction and global development. DFID has signed Memoranda of Understanding with Brazil, China and the United Arab Emirates and has in place a number of joint programmes combining UK expertise and emerging power experience.

Question 6: What should UK development cooperation look like in the future?

25. As noted above, the context for development cooperation will be changing significantly in the coming years, and it is important that the UK is fully prepared to respond. DFID is currently focussing a significant amount of its attention on three priority issues:

i. securing a global agreement setting out the post-2015 development agenda. Securing agreement to a new international framework will ensure international efforts to eliminate extreme poverty will be better coordinated and focused on an agreed set of goals.

ii. delivering the results and commitments we have agreed in delivering the current set of MDGs, as part of the Spending Review. Ensuring the UK has a strong track record on results allows us to demonstrate our comparative advantage.

iii. constantly assessing and strengthening the value for money and evidence base of our programmes, with plans already underway to update the MAR in 2013.

26. Work is also ongoing in the run-up to the next Comprehensive Spending Review on future priorities and the future shape of the organisation, taking account of changing needs at the global, regional, national and local level. DFID stands ready to update the Committee as this work progresses.

February 2013

[1] World Population Prospects 2012

[2] ILO, Key Indicators of the Labour Market, 2012

[3] World Urbanisation Prospects, 2009

[4] World Urbanisation Prospects, 2009

[5] Nsowah-Nuamah , Teal, Awoonor -Williams (2010)

[6] See, for example, the 2006 Stern Review

[7] Estimates of available land vary enormously due to different methodologies, diverging views on how much cultivated land is degraded and whether forests are counted as available for arable land. FAO- UNEPhave suggested there is only 12% more arable land available worldwide that is not either forested or subject to erosion or desertification. In contrast, Buringh and Dudal estimated in 1987 that only 77% of potentially arable land in developed countries is already cultivated and as little as 36% in developing countries. See Evans, A. The Feeding of the Nine Billion: Global Food Security for the 21 st Century (Chatham House, 2009), pp.20-21.

[8] Foresight Global Food and Farming Futures, p.80 .

[9] UNEP

[10] OECD

[11] Stress Zones (DCDC Strategic Trends, 2007)

[12] )

[13] Zuckerman ( 2009 )


[15] ECA and APF (2008). Development finance in Africa: from Monterrey to Doha. Document prepared by the Economic Commission for Africa and Africa Partnership Forum for the Eleventh meeting of the Africa Partnership Forum, held on 17-18 November 2008 .

[16] UNCTAD (2012) :These magnitudes are so large because they start from a very small base, but do reflect a real and large increase in the strength of these economic relationships.

[17] 2010 Statistical Bulletin of China’s Outward Foreign Direct Investment

[18] World Bank, Global Poverty Update, March 2012

[19] OECD DAC, International Development Statistics

Prepared 8th February 2013