10 July 2012

The Times Are 'a Changing For Aid Agencies

Stress tests have become popular in light of the 2008 financial crisis. Governments, particularly in the UK, force banks to undergo rigorous stress tests to ensure that stability can remain in the face of swift economic change. It is not surprising that the London-based Overseas Development Institute is applying some of the same principles to countries around the world.

ODI's Horizon 2025 looks into how changes over the next decade will impact development cooperation and individual countries. The report embraces the Schumpeter notion of 'creative destruction' as a phenomenon that may be experienced given the need for some institutions to survive. Predicted disruptions include the rise of South-South cooperation, the financing for climate change and the emergence of new philanthropy and social impact investors.

The report indicates that their "base case" scenario produces:

  • High per capita income growth and falling population growth in large, dynamic, MICs shrink the global poverty pool drastically.
  • Income stagnation and high fertility rates in selected low-income and fragile countries re-establish them as the main locations of global poverty.
  • Growth in emerging economies dominates global growth and they account for most new trade and foreign capital flows to poor countries, along with sizable increases in aid-like flows, competing for influence with traditional aid donors.
  • Availability of public and private resources for development, coupled with the fall in global poverty, imply that dramatically more funding is potentially available for each poor person.
The focal point for poverty eradication will continue to be Africa. ODI estimates that that 5/6ths of the world's poor will live in Africa by 2025. However, the continent right now only receives 1/3 of total net official development assistance. Changes will be necessary if donors aim to reduce the burden of poverty.

One part of that shift, according to ODI, could be in the very way that ODA is understood. Impact philanthropy may become the new lens with which money is distributed.
Private philanthropies and social impact investors are innovating in scalable social welfare delivery platforms. Consider Global Giving (www.globalgiving.org), which invites you to select projects, countries and amounts using simple drop-down menus. Or Give Directly (www.givedirectly.org), which goes further to use Kenya’s advances in mobile banking, M-PESA. You decide how much to give and the poorest families in the poorest villages are selected at random through census data to receive your money instantly and regularly via cell phones. Kiva, the microcredit clearinghouse (www.kiva.org), provides a similar service for ethical lenders. This matters, with over $2 million a week in new loans raised from the general public. 
Such platforms are not in themselves magic bullets for poverty reduction, although they do provide scalable platforms with low overheads for delivering resources to the poor.
Most interesting is how South-South cooperation will make an impact by 2025. The report says emerging economies provide $15 billion in aid today and could provide as much as $50 billion by 2025. Such a significant jump coupled with growth in the donor and recipient countries can change the landscape. ODI predicts that mutual trade and investments will serve as determinants of development cooperation. Given that, aid will be used to open up opportunities for market expansion and further investment.

The issue of public-private partnerships is raised. According to the authors, the evidence of its success in Africa is not very strong given the complex legislative and regulatory frameworks for each country. There is a call for more research to determine what actually works in order to inform how to go about private-public partnerships in the future.

As the report continues, it looks at the breakdown of traditional donor-recipient relationships and then concludes by examining the impact these changes will have on development agencies and donors. A look at the portfolios for each donor run against a stress test reveals who are most exposed to the baseline scenario changes for 2025 predicted by the authors.

The authors sum up their findings based on the stress tests writing:
The least exposed agencies are those that are engaged most heavily in the provision of global public goods (like the GAVI Alliance and the Global Fund) and those whose activities are focused in the high poverty gap and fragile countries (most DFIs). In the case of the former, scores are sensitive to the interpretation of their activities as ‘true’ global public goods or not. 
Highly exposed agencies are those now focused heavily on social welfare programmes as compared with either growth or global goods (the UN, the IDA, the UK to some extent) and MICs (Spain, Norway, France, the European Commission, the US to some extent).
“Aid agencies must adapt to new realities or face their own irrelevance. The increasing scope of philanthropic giving and peer-to-peer technology, the rise of southern economies and the scale of the challenge posed by climate change all pose questions for how traditional ‘aid’ can continue to yield catalytic effects,” says co-author Andrew Rogerson.

The predictions and data raise more questions than they answer. Rogerson adds his own questions, "Can the New Deal herald a breakthrough in how to work in fragile states? Will private philanthropy prove ultimately more effective than aid? Will the need for climate finance shrink the poverty reduction pot? Which development agencies can adapt quickest?" Furthermore one must ask, are the predictions right? It seems fair to assume that change is on its way, but how will these changes come in to play by 2025? To what extent are donors already preparing for such changes?

Have a gander at the report for yourself.