How new donor countries are reshaping the development aid landscape

06 December 2016

Gail Hurley - Policy Specialist on Development Finance, United Nations Development Programme, New York

Development aid is increasingly being provided by middle-income economies. This is a significant change in a shifting global aid landscape

A growing number of countries in Central and Eastern Europe (such as Croatia, Serbia, Poland and Romania) and in central Asia (e.g. Kazakhstan and Uzbekistan) are now opening formal development aid agencies.  I recently delivered a United Nations Development Programme (UNDP) training course in Istanbul, Turkey for many of these ‘new’ aid agencies. While some of them have offered financial assistance to other countries on an informal basis for some time (typically to neighbouring countries), for many this represents the first time they will have an official agency or department dedicated to development co-operation, as well as domestic legislation that sets out what the country aims to achieve with its development interventions (and where).

These countries can be added to the growing number of aid providers from middle-income economies such as Brazil, Mexico, India and most famously China.  Numbers on so-called ‘South-South co-operation’ are hard to find since most of these ‘new’ aid providers don’t publish comparable (or regular) data on their development co-operation activities, but the OECD recently estimated that at least US$25 billion in concessional finance is provided annually by non-traditional aid donors; this number is even higher if we add non-concessional finance to the mix.  Both are probably underestimates.

This recent development is symptomatic, in part, of what UNDP describes as ‘the rise of the South’; the idea that rapid economic growth in many parts of the developing world is transforming international trade and political relations and in so doing is radically reshaping the 21st century.  This transformation is now expanding into the development ‘aid’ space.

Nevertheless, bar a few notable exceptions, and in particular China, financial assistance provided by the so-called ‘emerging donors’ remains overall very small. This led a colleague from the International Finance Corporation (IFC) (the private sector development arm of the World Bank Group) to ask me recently what the value-added of small actors with limited knowledge and capacities in international development could really be.  And indeed, some are turning to well-established development institutions such as my own (UNDP) for advice on ways forward.

Clearly, my colleague had never heard the famous African proverb that reads: ‘If you think you are too small to make a difference, try sleeping with a mosquito.’  But in an increasingly crowded international development space, the continued entrance of new actors – public and private – raises many very valid questions as to co-ordination, efficiency, effectiveness, transparency and accountability.  The problem of aid fragmentation – whereby aid is delivered in too many small slices by too many donors creating considerable complexity and transaction costs for recipient countries – is well-documented.

These challenges have prompted renewed calls to ‘pool’ more development co-operation resources amongst donors and/or channel more resources via multilateral entities such as the UN development system and the World Bank.  Often these calls fall on deaf ears.  This is because there are typically multiple motivations at play when it comes to international development co-operation.

In addition to altruism or solidarity, these include: political influence over countries considered strategically important (the exercise of so-called soft power); new trade links and commercial opportunities for domestic companies; influence over the activities of major multilateral development institutions; new learning and skills development for your own staff; and security considerations.

For example, many South-South co-operation providers are very open about the ‘mutual benefit’ dimension of their assistance; China is well-known for its focus on infrastructure development across the African continent and elsewhere, but this has also been a boon for Chinese businesses, many of which are state or quasi state-owned. Out of 13 priority themes for Kazakhstan’s new aid agency, five are also linked to security objectives (e.g. actions to combat the drug trade and human trafficking).

Of course these motivations have always been (and continue to be) at play with development interventions from the so-called ‘traditional’ donor countries. Indeed, a recent trend for many is to reassert the trade and foreign policy dimensions of international development co-operation, with some countries restructuring previously autonomous aid departments into their foreign affairs and/or trade ministries (for example Australia, Canada and Denmark).  To the dismay of many aid practitioners, the UK’s new Secretary of State for International Development Priti Patel meanwhile has recently talked about aid as a potential tool to leverage trade deals for the UK post-Brexit.

These changes are illustrative of a dynamic and evolving international development co-operation landscape. While some traditional aid providers have been suspicious of the rise of donors such as China, India and others, by and large it is a development that has been welcomed and viewed as adding value.  Some emerging donors for instance are attempting to carve out a ‘niche’ for themselves, such as Croatia, which is positioning itself as a leader in post-conflict economic transformation and transitional justice – a distinctive niche based on the lessons learnt from its recent past.

It is also welcomed because it is seen to reduce the pressure (somewhat) on traditional aid donors who are reluctant to substantially increase the levels of development assistance they provide. Aid from them has remained largely stagnant at on average 0.3% of gross national income (GNI), far from the longstanding United Nations target of allocating 0.7% of GNI to official development assistance (ODA).  Some industrialised countries have even called for emerging donors to establish concrete targets to increase the levels of financial assistance they provide as well as improve the effectiveness and transparency of that assistance – something (not surprisingly) they have roundly spurned in UN negotiations.

More finance from all sources – public and private – is certainly needed for development. Estimates as to the annual cost of investing in the recently agreed UN Sustainable Development Goals (SDGs) are at least US$2.5 trillion annually according to UNCTAD, across areas such as education and health, infrastructure investment, peace and security, and climate change adaptation and mitigation.  Financing gaps are immense.

Globalisation and new technologies offer opportunities for an increased number of development partners to collaborate in meeting key public policy objectives such as the SDGs with enhanced effectiveness and efficiency. It may also create leverage for some developing countries; with increased competition in the aid ‘marketplace’, recipients can potentially play one provider off against the other to secure a more favourable outcome (e.g. to reduce the conditionality burden or insist that local labour be used to deliver a particular contract).  At the same time, the reverse is also true and it can accentuate chronic inefficiencies, such as duplication.  It is also clear that some countries will continue to be of little interest to many donors (the so-called aid orphan phenomenon) leaving multilateral entities to largely ‘pick up the tab’.

The rise of ‘new’ development agencies looks set to continue, playing a small but important role in reshaping international political, trade and economic relations. More transparency and public scrutiny, including by civil society actors, will help to ensure that the financial assistance all development partners provide support internationally-agreed development objectives such as those outlined in the SDGs.

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