For developing countries and donors, new choices and challenges

Once dominated by traditional aid providers, the donor landscape has evolved to become a more diversified environment for developing countries. In a 2013 study, the Overseas Development Institute fittingly dubbed this new era “the age of choice.” For long-standing donors looking to make their presence more strongly felt in their partner countries, however, more sources of development finance could also mean an age of challenges. But a survey commissioned by the Organization for Economic Cooperation and Development and conducted by the Australian National University’s Development Policy Center shows that traditional donors are far from becoming obsolete in their partner countries. Instead, the survey, which covered 40 developing countries with varying levels of aid dependence, points to how partner governments see opportunities changing for different donors in the next five to 10 years. “It’s true that there is now a far greater number of development providers out there,” Hetty Kovach, policy analyst at OECD and co-author of the study, told Devex. “On the whole, most people find it a positive thing. What we did really clearly see is that partners are increasingly looking to different development providers for different qualities and strengths.” Leveraging strengths, limiting weaknesses For recipient governments, donors that fall under the umbrella of OECD’s Development Assistance Committee are valuable because of the sheer amount of aid they give, their public policy experience and their experience in the country. Still, survey respondents, 74 percent of whom said they were at least “satisfied” with DAC donors, noted that traditional donors could still improve funding predictability, increase sector budget support and boost local capacity. In certain countries from Latin America and the Caribbean, Europe and Central Asia, and the Middle East and North Africa, the level of satisfaction with DAC donors was the lowest — an unsurprising finding, according to the authors, given the limited presence of DAC providers in these countries. On the flip side, satisfaction with DAC donors is highest in East Asia and the Pacific, where respondents said DAC grants would be a critical source of development assistance in the medium term. Meanwhile, non-DAC donors, which 59 percent of respondents said they were at least “satisfied” with, are considered important because they represent additional sources of aid and mostly fund much-needed economic infrastructure. Lack of transparency and weak development dialogue, however, undermine the value they bring to partner countries. For instance, earlier this month, the Lowy Institute’s Philippa Brant told Devex that “decision-making in relation to Chinese assistance in Vanuatu is in many cases overtly political.” “Partner countries, and particularly those with medium to high levels of dependence on aid and relatively strong institutional capacity, welcome and want to capitalize on the increased choice that they have,” Robin Davies, associate director at the Development Policy Center and co-author of the study, told Devex. “They want emerging donors to help them fill infrastructure gaps, and they like the fact that their traditional donors are experiencing a sense of competition, but they continue to accord a central role to their traditional donors as sources of both finance and expertise.” Eighty-three percent of respondents said they were at least “satisfied” with multilateral institutions, primarily for these providers’ aid predictability, capacity to support large-scale and long-term programs, and high alignment with national priorities. Still, partner countries expressed frustration with the rigidity of the processes that these institutions employ. Multilateral groups, respondents said, could also do more to ensure that their country offices do not drain local capacity. From implementers to enablers The need to make donors’ aid priorities consistent with partner countries’ own goals is a crucial component of the demand for development assistance in the medium term. "Developing countries still want [donors] to finance, but they want donors to finance government-led sector programs to support them in delivering services,” Kovach said. The U.S. Agency for International Development, which for years has depended on U.S. groups to implement its projects in developing countries, is perhaps the agency that is most prominently pursuing this goal through its push for localization. That country governments with medium to low levels of aid dependency prefer to receive public policy support instead of funding in the next five to 10 years illustrates that reduced reliance on development assistance will not mean that donors will be rendered irrelevant in their partner countries. For particular recipients, the demand for policy support could even translate to a more vibrant role for donors. Helping countries strengthen private flows is part of the assistance that partner governments also want to see from donors. While not part of the scope of the study — Kovach said that they “didn’t register that highly” in the donor landscape of the countries surveyed, while Davis cited ODI studies to point out that “partner governments usually have very little awareness of the role that international foundations are playing in their countries” — international foundations could also open some opportunities for private finance for developing countries. “My own view is very much that as countries move a little higher up the income scale and build their institutional capacity, they should increasingly expect the nonprofit and private sector to share responsibility for the provision of basic services, and of course to develop markets for goods and services important for the poor,” Davies said. “International foundations and nongovernmental organizations have an important role to play, working directly with the nonprofit and private sector in partner countries, in this regard.” Cooperation among donors, which gained attention at the time of the Paris Declaration on Aid Effectiveness but was another area that was not covered by the survey, does not seem to rank highly among the interests of partner governments, according to Davies. “The governments we spoke to see themselves as managing their donors, or they aspire to be doing so,” he said. “Their concern is much more that all donors engage in the processes that they, the partner governments, establish to ensure that aid provided in line with national priorities and that labor is appropriately divided.” Evolution instead of exit As countries with medium to low aid dependency rely even less on assistance and become more interested in having ownership of their development programs, donors also need to plan smoother transitions for these partners. “Some partner countries found donors’ exits to be arbitrary and abrupt in a sector and country level,” Kovach said. A respondent from Burkina Faso, for example, noted how two donors’ termination of their programs in the country “has created huge problems in the neglected sectors.” While partner countries do not expect donors to provide aid indefinitely, they do hope for sufficient notice about major changes from development providers. Kovach pointed out that better communication — between donors and recipient governments and between donors and other aid providers in the affected country — could ease the impact of donors’ departure from partner countries. “The primary problem here is the way in which bilateral donors periodically prune their menus of aid partners in the name of strategic clarity or concentration of effort, or in line with shifting geographic and policy priorities,” Davies said. The issue is not limited to bilateral donors. Multilateral institutions, for instance, use per capita income thresholds to determine countries’ eligibility for concessional finance. “In both cases, the problem arises when an eligibility criterion is used in a 'sudden death' fashion,” Davies said. In a recent op-ed for Devex, Homi Kharas, senior fellow and deputy director for the Global Economy and Development program at the Brookings Institution, along with Annalisa Prizzon, ODI research fellow, and Andrew Rogerson, ODI senior research associate, noted that multilateral banks need a thorough reassessment of both their system and the process by which countries graduate from development assistance. “It would be preferable, no matter what criteria for eligibility might apply, to manage graduation in a staged fashion, as for example is done under the 'smooth transition' arrangements that apply to countries being removed from the United Nations’ list of least developed countries,” Davies said. Respondents are also not too fond of the use of international benchmarks or per capita income thresholds to identify which countries should be of diminished importance to donors. “Partner countries said that they were … more keen on indicators that were nationally determined — such as the adequacy of their government capacity," Kovach said. Halting the flow of aid to a partner country should not necessarily mark the end of the donor’s presence in that country, either. “Many countries we spoke to clearly want their relationships with former donors to continue in the arenas of trade, investment and multilateral and regional cooperation, rather than simply ceasing with the end of aid,” Davies said. What are your thoughts on the findings of the OECD and Development Policy Center survey? Let us know by leaving a comment below. 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