The challenges for traditional and new donors

Development Policy11 Sep 2011Dweep I. Chanana

The development aid universe has, over the past several years, been disrupted by the emergence of countries such as Brazil, China and India – that both receive substantial ODA and are building their own foreign aid programs. As these new programs have grown, in line or sometimes ahead of the country’s actual global influence, they have threatened the monopoly of traditional donors. This has raised concern that new donors risk undermining the influence of traditional agencies and simultaneously undoing the work done in improving ODA effectiveness over the past several years.

The move towards collaboration amongst donors followed heavy criticism of how aid works. Recognizing many of the problems, some of which were pointed out by influential insiders such as William Easterly and Dambisa Moyo, traditional donor agencies have done much to improve transparency and coordinate their practices.

New donors have, however, stayed away from this debate and have worked with traditional donors only when convenient. Rather than participate in existing coordination mechanisms such as the DAC, for instance, India has chosen to create its own frameworks – such as the G-NEXID and the Development Cooperation Forum. The only case where India consciously coordinated its practices was for emergency relief as part of a “Group of Four” following the Indian Ocean tsunami in December 2004.

India, like other emerging donors, shows no enthusiasm for embracing the developed world’s coordination efforts for two reasons.

First, the goals of these two sets of donors are substantially different. Traditional donor aid is meant to trigger socio-economic development in the recipient country and is supposed to be apolitical (whether it is actually so is open to debate). Foreign aid by new donors, by contrast, has explicitly political and economic goals – such as increasing political influence or ensuring access to resources such as oil. For them, foreign aid is often a zero sum game with competition, rather than collaboration, the natural mode of operation.

Second, new donors operate outside the scope of existing frameworks because till recently they have been excluded from many global multilateral institutions. That balance has yet to be corrected in the eyes of some countries. India, for instance, has long been calling for a permanent seat on the UN Security Council and greater representation at the IMF. Till these countries see themselves treated as equals, even when they are not, they are unlikely to reciprocate respect.

It should be mentioned that not all aid by traditional donors is coordinated. Explicitly political aid such as by the USA to Pakistan is seldom subject to any discussion within the DAC. It can also be argued that at present coordination is not in the interest of new donors. They gain little by working with traditional donors but risk undermining their political objectives by limiting their rules of engagement. Therefore, coordination will only happen when new donors’ giving practices start to collide, or when they start to make the same mistakes that traditional donors have already made.

Another view is that aid by new and traditional donors is already coordinated, if not explicitly. Money spent by China, for instance, often goes to build basic infrastructure such as roads and ports, assuming this will give Chinese companies a head start in new markets. India’s aid program has an explicit goal of improving economic and political links with recipient countries – with the assumption that such links and greater trade are mutually beneficial. New donor aid is therefore, often first-loss risk capital for private enterprise and does not overlap in its target and delivery mechanism with traditional aid.

This dynamic is important given that private investment is increasingly more important than ODA. FDI flows to Africa have outstripped ODA since 2005 and governments, particularly in Africa, are increasingly looking to the bond market to supplement expected reductions in aid. Despite high volatility such flows are increasingly attractive for the more successful emerging and frontier markets.

Where the two groups can work together, therefore, is to understand the dynamics of each type of foreign aid model – supporting social service provision, civil society, and private enterprise and trade.

The current debate on collaboration ignores that not all aid is coordinated, nor recognizes the different objectives of new versus traditional donors. Most important, it ignores that traditional donors want coordination but offer nothing in return. Till they can do so, the debate on coordination will go nowhere.