‘The Donors’ Dilemma’ – A Manifesto for International Public Finance in the 21st Century

This column by Jonathan Glennie is part of Global Policy’s e-book, ‘The Donors’ Dilemma: Emergence, Convergence and the Future of Aid’, edited by Andy Sumner. Contributions from academics and practitioners will be serialised on Global Policy until the e-book’s release in the first quarter of 2014. Find out more here

I take it as a given that financial transfers are only a very small part of what wealthy countries need to do to support development elsewhere in the world and achieve internationally agreed sustainability goals. Furthermore, flows of international public money are dwarfed by private money and domestic resources. But just because aid and other types of international public finance are less important, does not mean that they are unimportant.


In fact, as it becomes a smaller proportion of recipient country economies, international public finance (or IPF, by which I mean financial contributions by governments to support internationally agreed objectives) only becomes more important, in my view, not because of its quantity but because of its qualities, the characteristics that make it uniquely suitable to respond to particular challenges. The fact that it in the past it has done harm (via wrong-headed conditions and promoting dependency) as well as good means it is even more important to use the present re-ordering of the development industry, in the context of the post-2015 momentum, and with the welcome arrival of myriad new and re-emerging actors, to see if opportunities from international public monies can be enhanced and risks mitigated.


Why is public money so important?

The main difference between private money (which is mostly concerned with making a profit) and public money (which seeks to further mutually-agreed public objectives) is well understood by the general public. I am going to argue that while the purposes and mechanisms of international public finance are different to those of national level public spending, and somewhat more complex, there is an important analogy to be made, which gives us a clue to how we should be trying to reform (or transform) development cooperation in the 21st century.


The crucial role of public spending in national economies is now accepted by all but the maddest tea party hatters. Political debates regarding its size actually take place in quite circumscribed constraints, between say 35% and 50% of a given economy. But this consensus is relatively recent. Until the 19th century public spending (in the West at least) was responsible for little more than the army – it is only in the last century that social and economic issues have become core to its purpose. In Britain, for example, public spending grew from about 18% of GDP in 1900 to over 40% today.


I offer this brief history to justify my proposal that a similar progression needs to take place at the international level – international public spending has not been an unfortunate but necessary blip while countries catch up and private money takes over. It is here to stay, not just post-2015, but post-2030, post-2045 and beyond. It should become a permanent part of the fabric of our world, in just the same way as the public sector has become indispensable at the national level.


There will always be a need for international public money as long as there is a need to provide international public goods and respond to common challenges. The current obsession with the precise whereabouts of the world’s poorest people is not unimportant for prioritising scarce resources, but is encouraging a self-serving fallacy: that the objective of international development is limited to the eradication of the most extreme forms of poverty. It is not. We should be seeking to support a general convergence of living standards across the world, in an environmentally sustainable fashion, avoiding resource conflict along the way. This will require very high upfront costs for developing countries, including major middle income countries, especially in building and greening infrastructure (read this by Stern, Stiglitz, Bhattacharya and Romani) that they should not be required to meet themselves (as climate negotiations have made clear).


The need is clear and the role of international public finance (broadly understood, going well beyond grants and traditional ODA to include a range of other instruments, often reimbursable over the long term) will remain crucial not because it rivals private finance for quantity, but because of its inherent characteristics, furthering mutually agreed international goals, flexible and available counter-cyclically and in parts of the world where there is little profit to be made, bringing with it principles of social and environmental integrity and the expertise of public servants.


But it has to change if it is to increase its effectiveness and enhance its legitimacy and credibility. In the south aid is viewed with suspicion, while in the north support appears to be waning.


Five steps in the evolution from “aid” to international public spending

Building on the trust of the general public in the national-level public sector, I think there are five fundamental evolutions we should encourage in the coming years to build a new international public finance model for the 21st century.


1. From temporary to permanent


Conventional analysis: The era of international “aid” should come to an end as soon as extreme poverty is eradicated.


New paradigm: International public finance will remain useful for the foreseeable future, and probably in perpetuity.


Although the theories behind aid-giving have varied and evolved, there has been one constant – they have all been based on the idea that aid is temporary, a stop gap while poorer countries “caught up” with richer ones. At some stage in the future, it was assumed, aid agencies would “do themselves out of a job” as countries began to rely exclusively on domestic revenue and private international flows. But while it will certainly remain true that all countries will be keen to end aid dependency (whereby aid flows make up a substantial part of national spending for a prolonged period of time), a new vision for IPF would see it as a permanent fixture on the development landscape, as I have argued above, always at hand to support sustainable development, global public goods, poverty initiatives and humanitarian emergencies.


2. From quantity to quality

Conventional analysis: Aid is needed to fill a savings gap.


New paradigm: International public finance is useful because of its particular characteristics.


One of the common threads in almost all influential theories of aid is that it is required for “filling gaps” in the development and recurrent budgets of poorer countries where national revenue or international private capital is not enough to cover necessary (or desired) expenditure. The main focus of development campaigners has traditionally been the quantity of aid being transferred; it is only recently that a focus on aid quality has really emerged beyond the confines of academia with the slogan “more and better aid” becoming popular and the onset of the Paris Agenda for Aid Effectiveness. Quantity will always matter, of course – some of the challenges faced by the world require large-scale public investments. But as other sources of development finance become gradually more available to most countries, the trend to focus on the quality of the financing will continue; the development characteristics of IPF, rather than just its quantity, will be all-important, as it has been in many Low Aid countries for decades already.


3. From graduation to gradation


Conventional analysis: As countries get richer they will “graduate” from aid-recipient status.


New paradigm: A country’s ability to benefit from IPF does not end as it grows richer, although its needs evolve.


In the last 15 years or so there has been a mass migration of countries from one income category to another. There are now only 36 LICs, almost half the 61 LICS at the turn of the century, compared to 103 MICs and 75 HICs. As a consequence of these income per capita rises, many parts of the aid system are seeking to remove “graduates” from the recipient list. But, apart from the fact that the LIC-MIC cut-off point is arbitrary and stingy, it is a mistake to link the need for aid so strongly to an income per capita assessment. There are many other things that matter apart from income per capita, as the most sensible aid allocation equations recognise. The EU, for example, takes into account environmental factors in its formula and there are many others that merit attention, including (fears of) conflict, infrastructural needs, and large “pockets” of poverty. Given the host of challenges the world will face in the coming years, different types of IPF will be appropriate for different countries, not necessarily in a linear way corresponding to income per capita. Such an approach would be more akin to gradation than graduation (as Francisco Sagasti has put it).


4. From voluntary to contributory


Conventional analysis: Wealthy countries offer aid to poorer ones as a voluntary act of generosity.


New paradigm: All countries contribute to different parts of the IPF system, according to their ability.


The conventional understanding of aid, which has held firm since the 1940s, is that it is a transfer of resources from rich to poor, couched very much in terms of charity, although sometimes also recognising mutual benefit in the long term. It would be absurd, according to this understanding, for poor countries to contribute to global development spending, and even more absurd for a country to be engaging in international development activities in another country with a higher per capita income.


Nevertheless, this is exactly what we are seeing in more and more instances around the world. For example, in Latin America countries do not check to see which is richer in per capita terms before engaging in mutually beneficial cooperation. Bhutan, Ghana, Sri Lanka and Sudan were among India’s top ten aid recipients between 2005-2010; all have higher per capita incomes.


Development cooperation is evolving away from a patronising exercise in supporting countries poorer than one’s own into a more horizontal concept in which a host of new and possibly surprising relationships are emerging. While it is inevitable that the richer countries shoulder most of the IPF burden, it is plausible that in the near future all countries will contribute something to international development cooperation efforts. The involvement of even the poorest countries will be important for what it signifies – that this is a global effort involving all countries not just a few, and that all countries should take part in decision making. If you are part of the contributor list you will have more say in how IPF is governed – this won’t remove the fact the wealthiest will dominate, obviously, but it will somewhat ameliorate this historic problem.


Moves in this direction are already underway. The Rwandan government recently donated $1m to the Global Fund to fight Aids, tuberculosis and malaria, becoming the fourth African country to give financial support to the fund. It is a tiny amount compared to the $700m the fund has granted to Rwanda, but represents an important intent on behalf of the Rwandan government to be engaged in global development efforts as contributor as well as recipient.


Over time, country payments could evolve from being voluntary gifts to a stable contributions according to an agreed formula (the European Union is a regional example that could be emulated – don’t forget that redistributive payments are currently made to regions such as Wales and Portugal, among others). It is absurd that when disaster strikes a country, it should have to wait in hope that other countries are feeling generous in their response – there should be permanent funds available, just as there are at the national level in developed countries. And the same goes for other development priorities. An agreed formula could also replace the triennial begging-bowl rounds in which multilateral banks seek voluntary contributions from their members.


While it will be hard (and probably undesirable) to enforce such a system, peer pressure should ensure that it works sufficiently well to be useful. Countries would direct their contribution to the objectives and organisations that most tallied with their priorities. Financial contributions could be organised to tax global bads, as Thomas Pogge has suggested in this blog series.


5. From foreign to global


Conventional analysis: Aid is given to support development in other countries, often far away.


New paradigm: IPF is a contribution to our global common good


Especially as recession bites in many Western countries, the concept of sending money to far-flung places without even the assurance that it will achieve its objectives is proving a hard one for many politicians and their constituents to fathom. Surely, they argue, their limited resources should be focused on their own people rather than spent on foreign aid. But in most countries, wealthier parts pay a premium in taxes to support less well-off regions, or investment in public goods, even if they do not use them. Just as at the national level citizens accept the concept of taxation to pay for national public goods (welfare, conservation, national parks, policing and defence, infrastructure) so we need to develop language to make that analogy at a global level. Such contributions should not only be seen as support to other countries, but to the global commons. Poverty and conflict anywhere in the world can be a threat to global stability and prosperity, especially in the era of planetary resource limits. The concept of mutual benefit is already firmly embedded in south-south cooperation rhetoric, and needs to become more common among “traditional” “aid” “donors”.


In short, the evidence suggests that global public spending needs will rise in the next few decades, and climate uncertainty certainly implies that we should be ready for anything. But aid can’t go on as before. The rules of the new game will need to be multilaterally designed and bilateral aid should diminish in importance.


The era of international development and cooperation is not somehow coming to an end – it is still just beginning. Despite the title of this blog series, there is really no dilemma. The only question is whether we have the moral compass and political courage to take the difficult decisions required.

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