What the Financial Chaos Means for Foreign Aid

With the chaos in the financial markets, I've been fielding lots of questions from professionals in the international development community who want to know if they should be concerned. The answer is: yes and no.

Foreign aid is one of the most reliably stable sectors - historically growing about 5 percent a year with relatively minor ups and downs. That is, until recently. A global consensus emerged in the past years on the need for larger aid budgets, and total spending has more than doubled. By my back-of-the-envelope estimate, foreign aid has reached approximately $200 billion per year, with about one-third of that coming from foundations, non-governmental organizations and corporations. The Organization for Economic Cooperation and Development says it's less than that, but its measure - $104 billion in official development assistance in 2007 - does not include non-OECD donors and a lot of private money.

This sudden uptick in aid spending does make our community more vulnerable to an economic slowdown than ever before, but it remains a fairly stable sector.

Short-term effects

Fear of recession often leads people to cut back on spending even when they haven't actually experienced a real change in their income. This may mean that corporate social responsibility programs get a haircut and NGOs that rely on individual and corporate donations experience a dip in contributions. Foundations that have some of their money in the markets may reduce their spending to account for a reduction in the size of their endowments.

These relatively minor cut-backs will have some short-term impact: Some NGOs may slow down hiring for a few months to see how the economy progresses. Foundations may be somewhat slower to give the final green light on grants. Service providers to NGOs and CSR programs may experience a slowdown in their business.

But by-and-large, aid money has been programmed well in advance and most of it comes from government sources. We shouldn't see much of a short-term impact there.

Medium-term blues

Most economists think a pretty nasty global recession is ahead of us, but we may not feel the full brunt of the pain for another six months or so. That's when the credit squeeze and resulting business slowdown will have finally caused some businesses to go bankrupt and people to lose jobs. Of course, foreign aid is mostly government money, so it should feel almost no direct effect from this economic slowdown. Instead, the impact will be from budgetary belt-tightening in the capitals of the richest countries in the world.

As economies slow, rich governments will likely increase domestic spending and expand their budget deficits. There will certainly be calls to reduce government deficits, in part by cutting aid spending. But since so many countries have made very public commitments to large aid increases and to achieving the Millennium Development Goals, I think we are more likely to see a freezing of aid budgets rather than cuts - at least from most countries. In the United States, for example, both candidates for president are calling for increased aid budgets. This may no longer be practical when budget deficits are rising fast, but given how small aid budgets are compared to a government's overall budget, it's unlikely we'll see significant cuts in the next couple of years.

Long-term rebound

Looking ahead a few years, there is reason to be cheery about international aid prospects. First, there is now a global consensus on the need for expanded aid budgets. Second, the challenges of global health, fragile states, climate change et cetera are only getting bigger and globalization is bringing these problems to the doorsteps of the industrialized world. We all know something has to be done, so even if there is a temporary pause in aid growth, I think we'll see a chorus calling for greater development spending once the recession is behind us.

Finally, the private sector and civil society role in aid - through CSR, NGOs, private and corporate foundations - have become part of the fabric of global society. Look out for the many multi-billionaires created during economic boom times to create their own mini (and not-so-mini) "Gates Foundations." Watch global corporations compete by showing how committed they are to being green and socially responsible, especially after a global recession, when the poor will face urgent challenges. Witness more and more young people seeking a career in global development rather than a job in an investment bank.

I don't want to suggest there is no cause for concern - a global recession should give all of us pause. But as I look at the prospects for a lot of other industries, there are many reasons to be thankful we are part of such a stable sector, and one with such an important mission for the world's poor.

About the author

  • Raj Kumar

    Raj Kumar is the Founding President and Editor-in-Chief at Devex, the media platform for the global development community. He is a media leader and former humanitarian council chair for the World Economic Forum and a member of the Council on Foreign Relations. His work has led him to more than 50 countries, where he has had the honor to meet many of the aid workers and development professionals who make up the Devex community. He is the author of the book "The Business of Changing the World," a go-to primer on the ideas, people, and technology disrupting the aid industry.