House of Lords - The Economic Impact and Effectiveness of Development Aid

The Economic Impact and Effectiveness of Development Aid - Economic Affairs Committee Contents

CHAPTER 3: The Aims of Aid

14. When in the 1940s "this concept of helping people in faraway lands took off"[18], the aims of aid were not codified. The underlying motive seems to have been charitable. Professor Adrian Wood of Oxford University, formerly DFID's Chief Economist, sees the "fundamental justification" for aid as "a moral duty to help our fellow citizens on the planet who are very much poorer than we are."[19] Ms Michela Wrong, a journalist and author with wide knowledge of Africa, calls it "utopianism and post-imperial guilt complex."[20]

15. The present consensus in the global aid community is that the first purpose of aid is poverty reduction. The first of the UN Millennium Development Goals (MDGs) adopted in 2000 by the United Nations and the OECD is to "eradicate extreme poverty and hunger."

Aid, growth and the private sector

16. Economic growth is generally seen as the indispensable means to achieve poverty reduction. Professor Wood said "The only way you will eliminate mass poverty in the long run is for those countries to grow faster ... for Bangladesh, India and most of Africa, the long-run poverty reduction agenda is a growth agenda."[21] Economic growth in itself is not sufficient for poverty reduction but it is necessary. As Professor Collier notes: "growth is not a cure-all; but the absence of growth is a kill-all."[22] Sustained economic growth depends ultimately on high levels of private investment and employment; appropriately delivered, aid can arguably play a catalytic role in supporting private sector-led growth. From this perspective, as Professor Jeffrey Sachs, Director, Earth Institute, Columbia University, noted, the role of aid is to "help low income countries [out of poverty] and on to their own self-sustaining growth path."[23]

17. Aid (and aid-financed technical assistance) is widely used to support private sector activity through a range of channels: by strengthening tax, audit and legal systems; supporting land reform and registration to facilitate greater collateralisation of assets; supporting efforts to reduce the costs of doing business in the domestic economy and to improve access to global markets; and, through research and technical assistance, supporting the development of macroeconomic, trade and fiscal policies capable of managing economic volatility, and delivering coherent strategies for sustained and inclusive growth.[24] These activities complement traditional donor support for health, education and skills, and basic economic infrastructure.

18. Economic growth is essential to bring about poverty reduction in developing countries. Aid is plainly not the main driver of their growth, since capital and trade flows are so much greater, but it can arguably play a catalytic role. We consider in this report what impact aid makes on recipient countries' growth.

Additional objectives

19. Although the global donor community subscribes to poverty reduction as the overarching purpose of aid, in practice aid has not always been for pure and immediate developmental or humanitarian purposes. East-West rivalry used to weigh on aid allocations that are today still heavily influenced by global security considerations. For example, as Mr Riddell pointed out, in 1999 Pakistan, Iraq and Afghanistan together accounted for less than 1% of global official aid; five years later they accounted for 25%.[25] Here and elsewhere aid is deployed, usually in conjunction with military and security expenditures, for the immediate purpose of conflict prevention and to secure the often fragile post-conflict peace, but it is increasingly being used in longer-run attempts at state-building (we look at the effectiveness of aid to fragile states in Chapter 5).

20. Donors have also used aid funds to support home industry, for example through projects tied to suppliers in the donor country (the UK abandoned the tying of aid in this manner in 1997).

21. More recently, DFID has reportedly spent £900 million in the past four years on tackling climate change in recipient countries, including £600 million in the past financial year, and has committed a further £533 million up to 2013.[26] Over the next four years £2.9 billion, or 7%, of ODA will be spent on tackling climate change in developing countries.[27]

Forms of Aid

22. Development aid takes four main forms—these are listed below with the identified amounts spent from DFID's bilateral programme in 2010-11[28]:

direct financing of projects (project aid)—£551m[29];
budget support (payments to the recipient government's general budget or sectoral budget such as health)—£644m;
technical assistance (funding of expertise of various types)—£468m; and
governmental debt relief—£66m.

At different times, different forms of aid have been judged most conducive to development. In recent years budget support has tended to replace projects. Mr Riddell said "we have moved from a situation where aid was for many years provided predominantly in project form to aid in programme form. The new aid modalities are predominantly sector and budget support."[30] Dr Alison Evans, Director of Programmes, Poverty and Public Policy, Overseas Development Institute (ODI), agreed that there had been "a shift away from ... growth-enhancing or growth-inducing sectors [such as] agriculture ... and to some extent hard infrastructure."[31] Mr Jonathan Glennie, Research Fellow, ODI, although acknowledging that aid to infrastructure and business leads to growth in the short term, argued that aid in support of health and education is also "fundamental to growth"—as did Mr Max Lawson, acting Head of Advocacy, Oxfam[32]—and that aid to institutions "supports growth and poverty reduction in the longer term."[33] Mr Riddell agreed that "institutions are a critical factor" in determining the impact of aid on growth.[34]