Chapter 7: Using Development Assistance More Effectively

Focusing development assistance on poverty reduction
Debt relief for poverty reduction
Nationally owned poverty reduction strategies
Improving the way development agencies deliver assistance
Untying aid and promoting local procurement
Driving forward reform of European Community assistance
Reforming the World Bank and the Regional Development Banks
A more effective development role for the United Nations

The UK Government will: · Increase its development assistance to 0.33% as a proportion of GNP by 2003/04, and continue to make progress towards the 0.7% UN target. · Work to increase the proportion of global development assistance spent in poor countries, help to improve its effectiveness and to reduce the burdens placed on recipient countries, end UK tied aid and work for multilateral untying. · Introduce a new Development Bill to replace the outdated Overseas Development and Co-operation Act (1980), to consolidate our poverty focused approach to development. · Provide faster and more substantial debt relief for heavily Indebted poor countries that are committed to poverty reduction.

Focusing development assistance on poverty reduction

280. Globalisation has led to a huge growth in private financial flows, including to developing countries, but many of the poorest countries are failing to attract these flows.

281. Domestic savings are the main source of finance for investment throughout the developing world (see figures 7.1 and 7.2). Many middle income countries, such as those in Latin America and Eastern Europe, are better able to supplement these resources by attracting private investment and loans from developed country governments and international financial institutions. Poorer countries, such as those in south Asia and sub-Saharan Africa, not only have much lower savings but have little or no access to foreign investment and lending.

282. Development assistance is a vital resource that can help put in place the reforms necessary to attract inward investment, improve government services, boost economic growth, and equip them to take advantage of new opportunities in a global economy.¹⁸

¹⁸ ‘Development assistance’ is used interchangeably with ‘aid’ to mean concessional financial flows to developing countries - termed Official Development Assistance (oda) - and countries in transition (principally certain countries in Central and Eastern Europe and the new Independent States of the former Soviet Union) - termed Official Aid (oa). Concessional flows are grants or loans with at least a 35% grant element. Developing countries which are partially creditworthy (primarily middle income countries) also have access to loans on near commercial terms (ie non-concessional flows) from developed countries and international financial institutions.

FIGURE 7.1 Total flows per capita by region, 1998 Source: World Bank, World Development Indicators 2000, and OECD-DAC FIGURE 7.2 Total flows per capita by income group, 1998 Source: World Bank, World Development Indicators 2000, and OECD-DAC

284. Too much global development assistance is still used to sweeten commercial contracts or to serve short-term political interests. Too much is allocated to middle income countries at the expense of the poorest. A significant proportion remains tied to the purchase of goods and services from the donor country, reducing the value and distorting the use of that aid. And too much development assistance is used to fund isolated donor-led projects rather than helping governments to implement long-term programmes of poverty reduction.

BOX 13

IMPROVING THE ALLOCATION OF DEVELOPMENT ASSISTANCE Development agencies have taken notice of the link between aid effectiveness, poverty and the policy environment. Over the last ten years there has been a striking improvement in the targeting of development assistance on poor countries with broadly acceptable policies. But we could do better. Recent research by the World Bank suggests that a further refocusing of global development assistance on this basis could lift as many people out of poverty as could be achieved by a 50 per cent increase in present development assistance budgetsxxxiv. Too much assistance is still allocated to relatively wealthy countries with poor policies and there remains a bias towards small countries which means that countries with very large numbers of poor people receive less assistance per capita. For example, figure 7.3 shows that large countries in south Asia receive only $10 of development assistance per poor person per year, compared to $950 in the Middle East and North Africa. Moreover, this understates the extent of the distortion, as assistance going to the Middle East and North Africa is less well targeted on poor people.

285. There has been a shift in the policy of some development agencies in recent years, but there is still considerable room for improvement - in focusing more aid on the poorest, particularly on those developing countries that are pursuing good policies and where there are large numbers of poor people (see box 13). We have also learned by experience that development assistance works best when it supports a development strategy designed and led by the national government in consultation with its civil society^xxxv. Both national governments and development agencies need to adjust their strategies to meet the challenges of globalisation.

FIGURE 7.3 Global aid flows per poor person, 1998 Notes: A poor person is defined as a person living on less than $1 a day at 1993 purchasing power parities (see footnote 2). Aid includes Official Development Assistance and Official Aid. (see footnote 18) Source: World Bank, World Development Indicators, 2000

286. The UK Government has already made a radical shift in its own approach to development assistance. Between 1997/98 and 2003/04, our development assistance budget will rise by 45 per cent in real terms, totalling £3.6 billion in the final year - the largest UK development assistance budget ever in real as well as cash terms. Development assistance as a proportion of GNP will rise to 0.33 per cent in 2003/04, up from 0.26 per cent in 1997. We are thus beginning to fulfil our commitment to meet the UN 0.7 per cent oda/gnp target.

287. We are also focusing these resources on systematic poverty reduction. In 1999/2000 we spent 74 per cent of the UK's development assistance in low income countries, up from 68 per cent in 1996/9719.¹⁹ We will further increase the focus on low income countries over the next three years. And we have increased our capacity to provide more resources to countries that implement pro-poor policies by establishing policy and performance funds for Africa, Asia and for the multilateral development institutions. We will continue our work with multilateral institutions and through the Development Assistance Committee of the OECD to encourage a similar shift in the focus of development assistance globally.

¹⁹ Excluding humanitarian aid.

²⁰ Most middle income countries also receive non-concessional flows from developed countries and the international financial institutions to compensate for the partial nature of their access to foreign private finance, particularly for social sector investment.

²¹ Further details are provided in the Government White Paper, ‘Partnership for Prosperity: Britain and the Overseas Territories’, March 1999

291. Conventional government-to-government aid tends to be ineffective in such circumstances and may even help to perpetuate policies that hinder economic development. However, selective use of aid may still have an important role - in relieving the distress of the poor in the short-term and in helping to encourage social and political change. This includes both humanitarian assistance for those in dire need, and support for independent media, NGOs and other parts of civil society.

BOX 14

GLOBAL PUBLIC GOODS 'Public goods' are goods which benefit society as a whole. The concept of 'national public goods', such as the maintenance of law and order, is not new. But in an increasingly interconnected and interdependent world much more attention is now being paid to 'global public goods'. Examples range from the control of communicable diseases, to the provision of global financial stability, the protection of the environment and the prevention of conflict. These are all issues in which the international community has a common interest. Some are particularly important to poor countries and people. Action to combat global warming is an example. Developed countries are a major source of this through emissions of carbon dioxide. But the consequences are most severe in developing countries - as shown by the floods in Bangladesh and Mozambique. In some cases, the key requirement is a commitment to closer international co-operation. In others more finance is needed too. In those cases where there is a clear link to the central task of poverty reduction, development assistance can be an appropriate source. But finding the right financing mechanisms - and the appropriate institutional framework - requires a case by case approach. In some cases a co-ordinated approach through a shared public facility may be the best answer, such as the Global Environment Facility (GEF). There are also other opportunities to build coalitions between the public sector, private industry and voluntary foundations, to make a concerted attack on a specific global problem - as for example through the Global AIDS Vaccine Initiative (GAVI).

292. In some circumstances it may also be possible to work with local or regional governments or even individual Ministries that are pursuing good policies. Selective use of aid is likely to be more effective in building the foundations for change if countries ensure that their policies in other areas, such as trade and arms sales, are consistent with this agenda.

293. The current legislative basis for most of the UK's development assistance programme is the 1980 Overseas Development and Co-operation Act. This Act is outdated, reflecting a number of now discredited approaches to development. The Government is committed to introducing a new International Development Bill to consolidate our poverty-focused approach.

294. We will also use the legislation to broaden the range of activities the Government can support to further our development objectives. These might include the promotion of development awareness by groups outside government, the ability to take share-holdings in companies, and the use of guarantees to enable financial institutions to support high-risk small-scale activities. We will publish a draft bill early in 2001.

Debt relief for poverty reduction

295. In many of the world's poorest countries the heavy burden of servicing debt reduces the resources available for tackling poverty and offsets the benefits of development assistance.

296. The UK has been at the forefront of international efforts to deliver substantial debt reduction to the poorest countries. The Heavily Indebted Poor Countries Initiative (HIPC) was launched in 1996 to address the problem of unsustainable debt. 41 countries were identified as potentially eligible for this exceptional relief.

297. A powerful international campaign - involving church and other faith groups and NGOs - led the call for more generous debt relief focused on poverty reduction. And this helped lead to agreement on an enhanced HIPC in 1999, that would deliver faster, deeper and wider debt relief. The focus of the HIPC Initiative was widened at this time from assisting countries to improve their economic position to ensuring that the debt relief process benefited the poor.

298. Debt relief is now being linked to national Poverty Reduction Strategies, that HIPC governments are preparing in consultation with civil society. The G7 summit in Cologne in 1999 pledged to deliver $100 billion in debt relief, through HIPC and traditional debt relief measures, including the cancellation of aid debts. This would cancel two-thirds of the debt owed by HIPC countries that could qualify for relief.

299. Progress has been made. A year after the revised HIPC Initiative had been agreed, ten countries were through to their Decision Point, the milestone at which they begin to receive debt relief. This meant that in one year, almost twice as much debt relief was pledged than in nearly four years under the previous initiative. Even though this represented greater progress than under previous initiatives, we have pressed strongly for the process to be accelerated. It has now been agreed that greater flexibility will be shown in assessing countries' eligibility for debt relief, with the focus on those conditions that are essential for poverty reduction and growth. The aim is to get 20 countries through by the end of 2000.

300. We are keen that the remaining HIPCs should qualify for their debt relief as soon as possible. However, there are a number of countries that are some way from qualifying for their HIPC relief - and the overwhelming reason for this is the persistence of violent conflict in these countries. This underlines the need to end conflict in many of the world's poorest countries if development is to take place.

301. The UK contributes financially to HIPC in two ways. The first is by writing off its own debts. The UK has pledged to go beyond the requirements of HIPC, and write off 100 per cent of the debts owed by HIPC countries as they pass through the process. UK aid debts worth £1.2 billion have already been cancelled. The remaining debts are owed to ECGD and the CDC, which total approximately £2 billion.

302. The second is by pledges to assist the multilateral development banks and the IMF with the costs of providing their share of debt relief. The UK has pledged $385 million, of which $316 million is for the HIPC Trust Fund, the second largest pledge of any country. The Trust Fund currently has $2.6 billion in total pledges. More will be needed, but we anticipate that the political will behind the process is sufficient to generate the necessary funding when it is required.

303. It is obviously important that once a country has received its debt relief, it avoids running up huge debts again. To help avoid this, the UK is helping countries develop their debt management expertise through its funding of the HIPC Capacity Building Programme. But responsible lending by creditor governments is also important.

304. As discussed in Chapter 4 (paragraph 208), such as natural disasters or a marked decline in terms of trade, which can worsen a country's debt position. The UK is currently providing additional budgetary support for a number of countries in Africa which are suffering from a deterioration in their terms of trade, largely as a result of the increase in oil prices.

305. Debt relief for the HIPC countries is important, but it is not enough. Many other forms of assistance by the international community are needed to eliminate poverty. Moreover, huge numbers of people live in countries which are not highly indebted, particularly in south Asia. It is vital that their needs are not neglected as a result of our efforts to help the HIPC countries.

Nationally owned poverty reduction strategies

306. The international community has stated strongly that the rationale for debt relief is to allow countries to tackle poverty more effectively. At the meetings of the World Bank and the IMF in 1999, it was agreed, at UK prompting, that the support provided by the World Bank and the IMF to developing countries should be focused around poverty reduction strategies. These would be drawn up by the developing country government in consultation with its civil society.

307. This new approach will be applied not only to the Heavily Indebted Poor Countries, but is intended also to become the basis for all concessional resource flows from the World Bank and the IMF and other development agencies. Implementation has so far focused on low income countries in Africa. We believe that the principle of a country-led poverty reduction strategy should apply to middle income countries and to other developing country regions too. But we recognise that the approach will need to vary according to national circumstances. What should not vary is a clear focus for the World Bank and IMF on poverty reduction. If achieved this will be a major reform.

308. The process of developing poverty reduction strategies is putting developing countries in the lead, devising and driving forward their own development strategies. But international support is conditional on economic, social and environmental policies which will systematically reduce poverty. The UK will work with other development agencies to provide support to at least 12 partner countries by 2004 to develop and implement poverty reduction strategies. The UK's country strategy papers will follow this approach, and will be broadened to address the full range of policy reforms needed to enable countries to adapt successfully to the challenges of globalisation.

309. The Poverty Reduction Strategy process is a response to a number of lessons drawn from development experience over recent decades. First, development co-operation requires a supportive policy environment: progress is next to impossible if the economic and political fundamentals are wrong. Second, over-prescriptive aid conditionality has a poor track record in persuading governments to reform their policies.

310. Third, development agencies themselves can be part of the problem. If development agency efforts are not set within a coherent development plan, the result can be wasteful duplication, inconsistency and ineffectiveness. This process also reflects the principles underlying the Comprehensive Development Framework - the importance of a long-term strategy led by the developing country, consulting with civil society and development agencies, and with a strong focus on results.

311. The UK Government is committed to working with others to build the capacity of governments to lead the formulation, implementation and monitoring of the Poverty Reduction Strategy process, and to ensure full participation of civil society. We will encourage development NGOs to strengthen their links with civil society in developing countries - so that faith groups in particular are empowered to lobby for a strong poverty reduction focus in government policy. We will continue to encourage the World Bank and the IMF to make the necessary changes to their own structures and working methods in a way that is consistent with their commitment to the Poverty Reduction Strategy process.

312. The first Poverty Reduction Strategy papers (PRSPs) have so far focused on short-term goals. Clear targets for better economic management and poverty reduction will need to be matched with more specific policies and programmes. Future poverty strategies should be framed within the global economic context with links to trade, finance, investment and the new technologies and take full account of environment sustainability. PRSPs must also become implementation mechanisms for countries' long-term development strategies.

313. These are still early days. This process is new and radical. There have inevitably been practical difficulties with putting it into practice. But the UK Government believes that it represents an enormous conceptual shift from the structural adjustment of the 1980s and early 1990s. With continued support, this process could help to strengthen the international development community's contribution to poverty reduction and sustainable development.

Improving the way development agencies deliver assistance

314. If assistance is to help developing countries reduce poverty in a global economy, there needs to be a real improvement in the way that assistance is delivered. That means reducing support for stand-alone projects, and increasing support for sector-wide reforms^xxxvii. Where governments have a strong commitment to poverty reduction and good policies in place, it means moving towards providing financial support directly to recipient government budgets using their own systems.

315. It also means helping to strengthen developing country planning, financial and procurement systems to provide the assurances necessary to enable development agencies to provide such direct budgetary support. Development agencies should simplify and harmonise their own procedures to reduce the burden imposed on developing countries. This will assist in building government systems that prevent corruption. The UK Government is committed to working in this way.

316. We have worked hard to promote greater harmonisation among development agencies. For example, we have worked very closely with Germany, the Netherlands and Norway in co-ordinating our development efforts in Tanzania using the sector-wide approach, as a model for how we and other development agencies might work elsewhere. We have also agreed to work with Sweden, Denmark and Norway in Malawi. We are keen to adopt this approach in other countries, and to involve other development agencies. Different approaches are required in countries where aid is a much smaller proportion of national income and where there is strong government commitment to domestic planning processes. We are responding to these conditions in India by working with multilateral banks at a state level (see box 15).

BOX 15

SIMPLIFYING AND HARMONISING DELIVERY OF DEVELOPMENT ASSISTANCE We are working with other development agencies to reduce the burden on developing countries of the differing accountability requirements of individual agencies. In Malawi four development agencies - UK, Sweden, Denmark and Norway - have agreed on a common mechanism for disbursing aid and joint reporting arrangements. Development assistance from all four agencies will be provided in support of the government's budget with the government reporting quarterly on expenditures. The four development agencies have committed to using simplified and common administrative procedures for disbursement, co-ordinating their requests for information and undertaking joint meetings. In India we are developing effective partnerships with the World Bank and Asian Development Bank at state level. We are working alongside the World Bank with the Governments of Andhra Pradesh and Orissa to improve economic performance and deliver a greater level of resources in support of pro-poor polices in these states. If good progress is made on policy reform, we will consider providing financial aid through the state budget alongside World Bank loans. In Madhya Pradesh we are working in a similar way with the Asian Development Bank.

317. All development agencies, including non-governmental organisations, should reduce the proliferation of small programmes. For developing countries, the bureaucracy involved in dealing with a plethora of different agencies ties up valuable administrative capacity and fails to encourage reforms in government effectiveness.

318. There needs to be greater transparency in the operation of all development programmes. Developing country governments should be involved in deciding how funds are allocated and be kept informed on commitments, disbursements and missions. And reviews of programmes should be broadened beyond other development agencies to representatives of developing countries and civil society.

319. The UK Government will follow these principles in our own programmes and push for a greater role to be played by developing country representatives in the Development Assistance Committee's peer reviews.²² We will also encourage independent evaluations of the effectiveness of development agencies.

²² The Development Assistance Committee (DAC) conducts periodic reviews to improve the individual and collective development co-operation efforts of DAC members. The policies and efforts of individual members are critically examined approximately once every three years. Six programmes are examined annually.

Untying aid and promoting local procurement

320. The UK Government is totally committed to the multilateral untying of aid. Tied aid is one of the most damaging carry-overs from the past. It is damaging for three reasons. The first is value for money. It is estimated that tying aid to the purchase of goods and services from the donor country reduces the value of that aid by around 25 per cent^xxxviii.

321. Second, it is grossly inefficient. It leads to developing countries being supplied with incompatible pieces of equipment provided by different development agencies, each with separate requirements for spares and back-up. For example a country committed to reform the effectiveness of its health sector is required to divide up procurement to fit the differing requirements of perhaps half a dozen development agencies rather than procure the most cost-effective supplies available.

322. Third, it encourages a donor driven approach to development. It signals that development agencies' major concern is not development, but their national contracts. This practice is inconsistent with the new approach to development co-operation encapsulated in the Poverty Reduction Strategy process.

323. It is for all these reasons that the UK Government has worked hard to reach international agreement on aid untying. To show our commitment to this objective and encourage others to follow the UK lead, we have in the meantime decided to untie all UK development assistance from 1 April 2001^xxxix. Building on our commitment to aid untying, we will vigorously pursue successful completion of the agreement being negotiated with the OECD to untie financial assistance to the least developed countries from 1 January 2002. We will work for early and complete EU-wide untying of member states' bilateral aid, and will press this strongly both with the Commission and with other member states.

324. We will also work to strengthen procurement capacities in developing countries. Sound local procurement can bring real development benefits, by strengthening the local private sector and other local institutions. In addition, local procurement very often brings better value for money: goods that are more appropriate to local needs, services available on the spot, and reduced shipping costs and airfares.

Driving forward reform of European Community assistance

325. Around 30 per cent of the UK's aid budget is spent annually through the European Community's (EC) development programmes. In 1998 the EC was the fifth largest provider of aid, the largest provider of humanitarian assistance, and the largest multilateral grant provider. Taken together, EC programmes and the programmes of member states account for two-thirds of global development assistance.

326. But Europe's development effort currently falls well short of its potential and its capacity to be a force for good in the world. If Europe is to make a greater contribution to poverty reduction and the equitable management of globalisation, far-reaching reforms are needed.

327. The present Commission has acknowledged many of the weaknesses in existing programmes and begun to implement an ambitious reform agenda. The successor to the Lomé Convention - the Cotonou Agreement, signed by the European Union and 77 African, Caribbean and Pacific countries in June this year - now has poverty reduction as a central objective, as does the EC's new development policy statement.

328. The UK Government has worked strongly to generate support for the reform efforts. We also believe that it is disgraceful that the proportion of EC development aid going to low income countries has fallen from 75 per cent in 1987 to 51 per cent in 1997. Whereas a decade ago poor countries in Africa and Asia were the major recipients, now middle income countries have pushed most low income countries out of the top of the recipient list. The Government will work to increase the proportion of EC development aid allocated to low income countries - with a target of 70 per cent by 2006. We will also work to improve the targeting of EC aid in low and middle income countries on poverty reduction.

329. We welcome the Commission's intention to focus its programmes on sectors where it has a comparative advantage and efforts to develop new ways of working with the development banks. We welcome the proposals for improved management and evaluation of EC programmes, a better skills mix amongst staff, more decentralisation of decisions to the country level and more emphasis on monitoring outputs. And we are committed to working for greater coherence between the Commission's development policies and its policies on trade, investment, agriculture, finance and foreign policy.²³

²³ For a more detailed outline of the UK’s policy towards the EC to promote the International Development Targets, see the DFID Strategy Paper: Working in Partnership with the European Community, DFID 1998. www.dfid.gov.uk.

Reforming the World Bank and the Regional Development Banks

330. The Development Banks - the World Bank and the Regional Development Banks for Africa, Asia, Latin America, Eastern Europe and the Caribbean - also play a central role in international development. Through the scale of their lending, and their expertise, they have considerable influence on the policies and priorities of their borrowing member countries.

331. The UK Government, which is a shareholder in all the Banks, is working to ensure that there is a clear focus on poverty reduction in their lending programmes. It is important that lending in middle income countries, many of which have substantial resources of their own and have access to private sector lending, is more focused on the reforms needed to reduce poverty and inequality.

332. We believe that the World Bank and the Regional Banks usefully complement each other. While the World Bank has a global perspective, the RDBs have a particular knowledge of, and loyalty from, countries in their region. But it is important for each to develop a better understanding of its comparative advantages and not duplicate effort.

333. At the institutional level, the development of a common understanding of respective roles - such as that between the World Bank and the African Development Bank - is a useful way forward. At the country level, we want to see the Banks working better together and with other development partners, through the Comprehensive Development Framework and Poverty Reduction Strategy processes.²⁴

²⁴ For a more detailed outline of the UK’s policy towards the World Bank Group and Regional Development Banks to promote the International Development Targets, see the DFID Strategy Papers: Working in Partnership with the World Bank Group, DFID 2000; Working in Partnership with the African Development Bank, DFID 2000; and Working in Partnership with the Asian Development Bank, DFID 2000. www.dfid.gov.uk.

A more effective development role for the United Nations

334. The UN has an important role to play in poverty elimination both through its programmes and its ability to help build international consensus on development issues. In recent years, since the Secretary General launched his reform package, considerable progress has been made. The Millennium Assembly was a milestone in terms of gaining international recognition of the International Development Targets. But the current UN system is not as effective as it should be.

335. Each individual UN agency needs to identify and concentrate on its areas of comparative advantage in delivering the International Development Targets. The UN can help to promote greater co-ordination and coherence in the international system, through improving its own collaboration around country-led programmes and harmonisation of its administrative systems with other development agencies. Beyond this, the proliferation of independent, issue-based institutions creates a strong case for looking at the effectiveness of the overall structure of the UN system for meeting the challenges of the new millennium.

336. The UN has already taken steps to co-ordinate its work more effectively, through the UN Development Assistance Framework (UNDAF). But it is important, too, that the UN should collaborate more with other development agencies, notably the World Bank and regional development banks. This needs to become over time a coherent strategy for the UN system as a whole at country level, supporting countries' own poverty reduction strategies.

337. The UN's 2001 Financing For Development conference provides an opportunity to generate greater international understanding of how we can make better use of development assistance, government revenues, debt relief and domestic and foreign investment. Improved effectiveness will also help to win stronger public support for increased aid budgets.

THE UK GOVERNMENT WILL: · Ensure that UK development assistance as a proportion of GNP rises to 0.33 per cent by 2003/04 and continue to make progress towards the 0.7 per cent UN target. · Introduce a new International Development Bill to replace the outdated Overseas Development and Co-operation Act (1980), to consolidate our poverty focused approach to development, and to broaden the range of activities that the Government can support. · Allocate more of our development assistance to low income countries and promote a more poverty-focused approach to middle income countries. · Broaden our country strategy papers to take account of all the policy reforms needed to enable countries to meet the challenges of globalisation. · Work with other donors to channel more of our support through developing country budgetary systems, where governments have a strong commitment to poverty reduction, and help strengthen their planning, financial and procurement systems to make this possible. · Work to simplify and harmonise aid delivery amongst development agencies collectively, and increase the transparency of development programmes. · Untie all UK development assistance with effect from 1 April 2001. · Vigorously pursue successful completion of the agreement being negotiated within the OECD to untie all forms of financial assistance to the least developed countries from 1 January 2002, and work vigorously for EU wide untying. · Work for improvements in the effectiveness of EC development assistance with a target of 70 per cent of EC aid going to low income countries by 2006. · Press the Development Banks to design programmes which focus on reducing poverty in all borrowing countries, and to clarify their comparative advantages. · Press for a more co-ordinated approach by the UN system as a whole and a more effective focus on poverty reduction and collaboration with all parts of the international development system.