2 The changing context of development |
4. Substantial progress has been made
towards achieving some of the Millennium Development Goals (MDGs),
most notably a halving of the proportion of people in the world
who are living in extreme poverty between 1990 and 2010. But countries
are falling short on other goals such as environmental sustainability,
and there has been slow progress in some regions and countries,
where inequality and extreme poverty persists. Projections indicate
that in 2015 almost one billion people will be living on an income
of less than $1.25 per day.
DFID is respected as an experienced and effective provider of
development assistance and is currently conducting a review of
how it should respond to the changes in the development landscape.
In this Chapter we review some of the changes which it may need
to address in order to remain effective in the future. There have
also been major changes in the financing of development assistance
which we discuss in Chapter 3.
The changing geography of poverty
5. The changing geography of poverty
is an important factor affecting the future role and provision
of aid. Currently, around half of the world's poor live in India
and China, a quarter in other middle income countries (MICs),
primarily populous lower MICs such as Pakistan, Nigeria and Indonesia,
and a quarter in the remaining 35 low-income countries (LICs).
Some academics believe that this will be a transitory phenomenon,
and that by 2025, poverty will increasingly be concentrated in
fragile and conflict-affected states.
Others argue that a significant amount of world poverty could
easily remain in stable MICs, or that it could become more concentrated
in fragile MICs such as Pakistan and Nigeria.
Development Initiatives points out that the depth of poverty is
also significant; that many people in Africa live a long way below
the poverty line and so will need greater effort and resources
to be helped out of poverty.
DFID's bilateral country programme
is primarily targeted at LICs,
but the number of non-fragile LICs is reducing and some experts
believe that these countries have a limited absorptive capacity
for aid. The UK has
promised more aid to fragile and conflict-affected states, with
the proportion of its Overseas Development Assistance (ODA or
'aid') going to these countries rising from 22% in 2010-11 to
30% by 2014-15.
6. There is debate about whether it
is appropriate to use ODA to help eliminate extreme poverty in
MICs, when these countries have the resources to do more for themselves.
The previous UK Government took the decision to close DFID's bilateral
aid programme in China. In recent months, DFID has decided to
end its bilateral programme in South Africa, on the basis that
it has reached an income level where it is no longer appropriate
to provide grant based ODA. DFID's bilateral programme in India
is also being scaled down significantly; financial aid will end
in 2015, with a shift towards technical assistance. The World
Bank categorises economies according to gross national income
(GNI) per capita, and currently sets the following levels: low
income, $1,035 or less; lower middle income, $1,036 to $4,085;
upper middle income, $4,086 to $12,615; and high income,$12,616
or more. There are considerable differences in the average annual
income levels of different MICs, ranging from for example $1,530
in India and $2,470 in the Philippines to $5,680 in China and
$11,630 in Brazil. The comparable figure for the UK is $38,500.
There are also considerable differences within countries; for
example, although India is defined as a MIC, DFID estimates that
around 300 million people in India still live on less than 80
pence a day. It is clear, nevertheless, that a MIC like India
has a much greater capacity than a LIC like Malawi, to fund development
and eliminate poverty by taxing its citizens on higher incomes
and using the revenue to lift poorer citizens out of poverty,
which, of course, India does as we noted in our 2011 report "The
Future of DFID's Programme in India.
7. As table one indicates, there have
been significant fluctuations in the percentage of bilateral aid
spent in LICs. Spending peaked at 85% in 2006-07, but fell
to 65% in 2011-12. DFID explained that The Table shows a 15 point
reduction in the percentage of country-specific non-humanitarian
bilateral spending going to low income countries in 2011-12 compared
to the previous year. DFID said this reduction was due to two
main factors: countries graduating from low income to lower middle
income status on the DAC list of eligible countries; and changes
to the countries to which DFID provided bilateral country specific
support. DFID informed us that
In 2011-12, three countries Nigeria,
Pakistan and Ghana graduated to lower middle income status. DFID's
total non-humanitarian bilateral assistance in these countries
totalled £394 million in 2011-12, the equivalent of 15.0%
of DFID's total country specific non-humanitarian bilateral assistance.
The reclassification of these countries as lower middle income
was therefore the main driver behind the reduction in DFID aid
to low income countries." Table
1. Percentage of country-specific DFID bilateral spending that
went to low income countries
|Including Humanitarian Assistance
|Excluding Humanitarian assistance
We were surprised to see a huge fall
in the percentage of UK bilateral ODA spending on Low Income Countries.
We note DFID's explanation that the main reason is the graduation
of countries to middle income status. Nevertheless, we recommend
that DFID maintain spending on Low Income Countries as its priority.
We further recommend that DFID review its programmes in all MICs
to examine the scope for reallocating bilateral aid from MICs
to LICs and to set a timetable for doing so.
8. Several witnesses argued that aid
was still critical for helping to reduce extreme poverty in MICs.
Owen Barder, Senior Fellow at the Center for Global Development,
said that "You simply could not redistribute all the money
from the wealthiest people in India and solve the poverty problem
Glennie, Research Fellow at ODI, argued that "Middle Income
Countries are where the vast majority of the poor live. ... They
are immensely important for security, climate and other sustainability
GB agreed, saying that:
it is crucial that donors continue
to provide ODA to MICs to tackle poverty and inequality, achieve
the MDGs and reach the poorest people where their basic needs
are unmet by the government or market. This does not absolve MIC
governments of their responsibility to pursue redistributive policies
to tackle poverty and inequality, but while extreme need exists
in MICs, DFID should provide aid whilst working more with national
governments to tackle poverty and inequality."
9. Some witnesses suggested that the
categorisation of LICs and MICs was no longer the best way of
determining which countries should receive aid. Andrew Rogerson,
Senior Research Associate at ODI, said "I think increasingly
the issue of at what point you cross a statistical line called
"middle income" will become irrelevant. The basic conditions"Is
the country well governed? Is it capable of making use of external
resources?"are the real drivers."
There are also suggestions that an overly narrow focus on extreme
poverty is unhelpful.
The World Bank now has a strategy which focuses both on fighting
extreme poverty (defined as an average daily consumption of $1.25
or less) and on boosting
shared prosperity, with the aim of helping all vulnerable people
lift themselves well above the poverty line.
10. Professor Stefan Dercon, DFID's
Chief Economist, explained that many MICs, including India, had
good growth and poverty reduction trajectories, and that DFID
was aiming to focus its bilateral programme on countries with
high levels of poverty, but less positive growth prospects, where
it could have a comparative advantage. DFID aimed to avoid spreading
itself too thinly, and its bilateral programmes would inevitably
not reach every country in need, but it was able to have a wider
geographical reach through its multilateral programme.
The Rt Hon Justine Greening MP, Secretary of State for International
Development, explained that for countries in transition out of
bilateral grant aid programmes, DFID aimed to continue to provide
support in the form of advice, help with economic development
and private sector investment, as well as continued support for
multilateral programmes such as those to tackle AIDS, TB and malaria.
Global public goods and the role
11. The Prime Minister, the Rt Hon David
Cameron MP, was one of three co-Chairs of the High-level Panel,
which was tasked with making recommendations on a post-2015 development
agenda. In its report,
published in May 2013, the panel proposed that the post-2015 agenda
should be driven by the following five objectives: ending extreme
poverty; halting the rapid pace of climate change; transforming
economies for jobs and inclusive growth; building peace, good
governance and increasing accountability and transparency; and
forging new global partnerships to underpin the new agenda.
These objectives are set in the context of a number of significant
global changes. DFID told us that it undertakes regular horizon
scans to explore these changes, and highlighted the following
five main trends: rapid population growth in developing countries;
increased urbanisation, leading to a risk of poorly-planned and
under-serviced cities; the increasing impact of climate change;
resource scarcity, such as potentially critical scarcity of water,
energy and land in some areas; and increasing access to technology,
and the potential to use technology to strengthen the impact of
12. The proposed post-2015 objectives
address a range of issues, such as economic growth and environmental
sustainability, as well as poverty reduction. In previous Reports
we have recognised the importance of these wider goals in helping
poor countries to grow.
The International Development Act 2002 requires UK development
assistance to be focused explicitly on the reduction of poverty,
whereas the Organisation for Economic Co-operation and Development
(OECD) definition of ODA refers more broadly to the promotion
of economic development and welfare of developing countries. The
provision of aid can have benefits for donor countries, as well
as recipients. A recent World Bank report noted that "trade,
finance and other links among emerging market and developing economies
are growing" and that "this shift offers opportunities
for new, mutually beneficial partnerships".
In her oral evidence to us, the Secretary of State explicitly
acknowledged some of the wider potential benefits to the UK of
providing aid, in terms of building beneficial trade with emerging
economies and reducing terrorism.
13. There is continuing debate about
the extent to which aid should encompass international cooperation
on global public goods.
The World Bank identifies five areas of global public goods for
its engagement: environmental issues; communicable diseases; international
trade; international financial architecture; and global knowledge
One of the key areas of debate is the management of climate change.
A recent report from the Intergovernmental Panel on Climate Change
noted that "It is extremely likely that human influence has
been the dominant cause of the observed warming [of the atmosphere
and the ocean] since the mid-20th century" and that "Continued
emissions of greenhouse gases will cause further warming and changes
in all components of the climate system".
The UK has a cross-Government approach to tackling climate change,
with DFID taking the lead on ensuring that the impact on the world's
poor is considered throughout.
The UK's climate finance contribution helps developing countries
incorporate climate change into their development strategies and
to support climate-compatible development. It is expected that
the Green Climate Fund, the capitalisation of which should take
place in 2014, will have a significant impact on development financing
and provide new opportunities for the Government.
14. There is also debate about the existing
OECD Development Assistance Committee (DAC) definitions, which
activities can be categorised as ODA and how the aid element of
different forms of development financing should be calculated.
Some of the issues under discussion include military and peacekeeping
activities, climate finance and private sector investment. The
DAC Expert Reference Group on External Financing is currently
considering whether and how to revise the definition of ODA.
The Secretary of State agreed that there was a need to review
DAC's ODA definition to ensure it remained effective, but that
"it would not be sensible to start broadening it out as a
concept so much that you end up losing sight of what you were
ultimately trying to achieve".
Professor Dercon said that spending on climate adaptation in developing
countries was generally recognised as contributing to poverty
reduction, but that it would be helpful to think carefully about
the proper accounting of this type of ODA contributions.
The 0.7% target
15. In 2013, the UK Government aims
to achieve the agreed international target of contributing 0.7%
of its gross national income (GNI) in aid. In 2012, the UK's total
aid expenditure reached £8.7 billion, or 0.56% of GNI, which
represents a doubling of the aid to GNI ratio since 1997 when
it was 0.26% of national income. Only five other DAC countries
have reached the 0.7% target in any one year: Norway, Sweden,
Netherlands, Denmark and Luxembourg. Although the USA gives the
largest amount of aid, it was ranked eighteenth in 2012 in terms
of ODA as a percentage of GNI.
16. Witnesses generally agreed that
it was helpful to have the 0.7% target. Jonathan Glennie said
that "If it incentivises countries/people/Governments to
do the right thing, then it is important".
Richard Manning, the former DAC Chair, suggested that "there
is some value in an international norm that incentivises countries
to move in a particular direction, particularly for a category
of spending that is not self-evidently in their very short-term
There was less certainty about whether the 0.7% target would deliver
sufficient resources. The written submission from ODI researchers
There appear to be two broad scenarios.
Either aid gradually declines as poverty is reduced globally and
countries rely more on non-concessional flows. Or aid continues
to be of importance, as objectives multiply and the unique character
of public finance at a global level is considered important. In
the former scenario, the 0.7% target would seem too high; in the
latter it may not be sufficient.
Holger Rothenbusch, Managing Director,
CDC, suggested that
factors other than the amounts of capital were likely to be of
increasing importance, saying that "... it is not only capital
that is required. It is also supportive technical assistance;
it is the effectiveness of the intervention that is being pursued
by the different entities rather than the amount of dollars, pounds
or Euros that you can ultimately put on your scorecard."
Peter Young, Director, Adam Smith International, agreed that provision
of finance was not sufficient on its own without resolving other
issues, and gave the example of Nigeria, where the majority of
the population do not have titles to their land and property and
so cannot provide collateral for bank loans.
17. DFID has noted that the "EU
is unlikely to meet 0.7% GNI target by 2015, but we will push
for continued EU commitment to 0.7% on an extended (ie 2016-2017)
The Secretary of State expressed continued support for the international
commitment to 0.7%. She said that other countries might take a
slightly different view of the benefits of investing in development,
but that the UK wanted to see them live up to the commitment,
and that it was in the UK's national interest to continue to meet
Ultimately, I believe that spending
this 0.7%, if done effectively, is absolutely in our national
interest. ... It is in our interest to help countries stay stable,
so that we can stay safe and have a better chance of reducing
terrorism. It is absolutely in our interest as a country to be
working in that next wave of emerging countries.
18. There has been huge progress
in developing countries. The number of people living in extreme
poverty since 1990 has halved, and the prospect of ending extreme
poverty by 2030 is within reach. Aid is still of critical importance,
especially for reaching the very poorest people in Low Income
Countries and we believe that they should remain the priority
for UK aid. Aid programmes can help to build mutually beneficial
trade and economic cooperation relationships with emerging economies
and we believe that a stronger emphasis on economic development
can be fully consistent with poverty reduction. As a first
step, we recommend that DFID work with the OECD DAC to review,
update and clarify the ODA definitions.
19. Members of the Committee, during
visits to developing countries, have observed repeatedly the enormous
inequalities in income, health, education and life prospects for
the people in developing countries compared to those in richer
countries like the UK and, frequently also, the gross inequality
between richer and poorer people within developing countries.
The High Level Panel drew attention to the continuing challenge
of addressing inequality and rightly emphasises the maxim "Leave
No One Behind". We recommend that DFID should set out
in its response to this report what steps it intends to take to
assist in the reduction of inequality globally and within the
developing countries in which it has bilateral programmes.
20. We recommend that, in general,
Middle Income Countries should graduate from aid, but in a controlled
manner which takes account of needs and resources. During the
transition period, we recommend that aid programmes make more
use of technical assistance, support to NGOs, and loans, as discussed
later in this Report. Meeting the needs of the poorest
in Low Income Countries should remain our priority, but supporting
transition in Middle Income Countries, and financing global public
goods all make the case for significant development finance. We
plan to hold a separate inquiry in the future into climate finance.
We fully support the international commitment to the 0.7% aid
target and believe that it should be maintained.
21. In this connection, we welcome
the Secretary of State's initiative of conducting a review into
how DFID should respond to the changes in the development landscape.
We recommend that this should include the publication of a development
finance strategy for the coming decade, setting out DFID's analysis
of the issues to which it must respond, the pros and cons of different
options, its preferred approach and the reasons for those choices.
It should include an assessment of the following issues:
· the function of aid, should
it remain focused on poverty reduction and economic growth, but
in the longer term should it also include international cooperation
on global public goods if so, what are the implications of this
for both future funding requirements and cooperation with other
· Climate finance, which
requires much more serious analysis, including the extent to which
aid is used to fund climate related projects and which countries
should be eligible for aid to fund such projects.
· The OECD definition of
ODA; how DFID will work with the OECD review to ensure that the
focus remains on addressing poverty? We believe that DFID should
make a statement about its proposals for change in the definition
before the Summer Recess 2014 to give Parliament and civil society
the opportunity to comment on the Government's objectives before
the OECD finalises any changes at the meeting of OECD Ministers
· Whom is aid for: just
for low income countries, or for people in poverty wherever they
live? Whether the existing definitions of low, middle and high
income countries are still useful or whether there are better
ways of defining priority countries and identifying financing
gaps? Should aid be targeted at extreme poverty, or at other levels
of poverty as well, or at countries with large financing gaps
and weak prospects for economic growth? How can aid help to reduce
inequality when average incomes are rising but poverty levels
are not reducing?
· The thresholds for defining
Middle Income Countries needs to be reviewed and updated. We urge
DFID to encourage the World Bank to examine them.
· DFID's strategy for aid
to middle income countries: how will DFID identify and respond
to the continuing development needs of these countries? What criteria
will it use to withdraw aid from countries as they transition,
and how will it decide to start different types of relationships
based on different instruments?
· The contribution of DFID
and its financial mechanisms towards addressing inequality, equalising
opportunities and ensuring that no one is left behind.
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