The Future of UK Development Co-operation: Phase 1: Development Finance - International Development Committee Contents

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.[2] 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.[3] 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).[4] 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.[5] 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.[6] 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.[7] DFID's bilateral country programme[8] is primarily targeted at LICs[9], but the number of non-fragile LICs is reducing and some experts believe that these countries have a limited absorptive capacity for aid.[10] 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.[11]

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.[12] 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." [1]
Table 1. Percentage of country-specific DFID bilateral spending that went to low income countries
Year 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13
Including Humanitarian Assistance 6881 8485 7577 7982 6768
Excluding Humanitarian assistance 7281 8385 7375 7780 6567

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 there."[13] Jonathan 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 issues."[14] Oxfam 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."[15]

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."[16] There are also suggestions that an overly narrow focus on extreme poverty is unhelpful.[17] 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[18]) and on boosting shared prosperity, with the aim of helping all vulnerable people lift themselves well above the poverty line.[19]

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.[20] 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.[21]

Global public goods and the role of aid

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.[22] 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.[23] 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 development cooperation.[24]

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.[25] 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".[26] 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.[27]

13. There is continuing debate about the extent to which aid should encompass international cooperation on global public goods.[28] 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 for development.[29] 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".[30] 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.[31] 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.[32]

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.[33] 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".[34] 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.[35]

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.[36]

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".[37] 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 interests".[38] There was less certainty about whether the 0.7% target would deliver sufficient resources. The written submission from ODI researchers suggested that:

    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.[39]

Holger Rothenbusch, Managing Director, CDC,[40] 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."[41] 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.[42]

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) timetable".[43] 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 the target:

    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.[44]

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 Government Departments?

·  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 in December.

·  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.

2   United Nations, The Millennium Development Goals Report 2012, pp4-5 Back

3   Q 238 Back

4   Institute of Development Studies, Working paper 393, Where do the world's poor live? 2012 Back

5   ODI, Horizon 2025: creative destruction in the aid industry, July 2012, Homi Kharas and Andrew Rogerson Back

6   Edward, P and Sumner, A (2013) Global Poverty in a Multi-Speed World, CGD: Washington, DC Back

7   Development Initiatives, Investments to end poverty, September 2013, p20 Back

8   DFID provides both bilateral assistance (aid provided to specified developing countries) and multilateral assistance (aid provided via contributions to international organisations) Back

9   As defined by the World Bank's annual classification of the world's economies, based on estimates of gross national income (GNI) per capita for the previous year Back

10   Ev w30 Back

11   House of Commons Library, Standard Note ,SN/EP/5880, UK overseas aid expenditure, 14 June 2013 Back

12  Back

13   Q 46 Back

14   Q 11 Back

15   Ev w5 Back

16   Q 43 Back

17   Q 2 Back

18   This is calculated on the basis of purchasing power parity, and therefore means people who are living on the equivalent of what $1.25 (or $2) would buy in the USA. Back

19   World Bank Group, Ending extreme poverty and promoting shared prosperity, 19 April 2013 Back

20   Q 224 Back

21   Q 226 Back

22   The other co-chairs were President Susilo Bambang Yudhoyono of Indonesia and President Ellen Johnson Sirleaf of Liberia Back

23   Report of the High Level Panel on the post-2015 development agenda, A new global partnership: eradicate poverty and transform economies through sustainable development, May 2013 Back

24   Ev 88 Back

25   International Development Committee, Eighth Report of Session 2012-13, Post-2015 Development Goals, HC 657, para 38 Back

26   World Bank Group, Financing for development post-2015, October 2013, p ix Back

27   Q 227 Back

28   A global public good is a public good, such as the eradication of a disease , which is available throughout the world, rather than benefiting only a specific region Back

29   World Bank Group, What are Global Public Goods?,  Back

30   Intergovernmental Panel on Climate Change,Working Group 1 contribution to the IPCC Fifth Assessment Report,  Back

31   Ev 88 Back

32   The Green Climate Fund is a new multilateral fund which was agreed by countries at the 2010 United Nations Framework Convention on Climate Change conference. Its purpose is to make a significant contribution to the global efforts to limit warming to two degrees Celsius by providing support to developing countries to help limit or reduce their greenhouse gas emissions, and to adapt to the unavoidable impacts of climate change. Back

33   OECD Expert Financing for Development, Expert Reference Group Meeting, 3-4 October 2013, Discussion Paper - Revisiting the ODA concept  Back

34   Q 231 Back

35   Q 233 Back

36   DFID Statistics 2013, p72. ODA statistics are provided for calendar years. Back

37   Q 18 Back

38   Q 2 Back

39   Ev 114 Back

40   CDC is the UK's development finance institution which is wholly owned by the Government but operates independently Back

41   Q187 Back

42   Q 50 Back

43   DFID, Global Partnerships Department, Operational Plan 2011-2015, June 2012 Back

44   Q 227 Back

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Prepared 13 February 2014