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COPYRIGHT 2006 C.D. Howe Research Institute
In 2005, then Prime Minister Paul Martin reiterated Canada's pledge to increase foreign aid spending to more than $5 billion by 2010, which represents an annual increase of 8 percent in the foreign aid budget and a 40 percent real increase in aid spending between 2004 and 2010 (OECD 2006). The new Conservative government's election platform pledged to increase aid spending by $425 million over five years and move toward the average of member countries of the Organisation for Economic Co-operation and Development (OECD). (1) If Prime Minister Stephen Harper and Josee Verner, the minister responsible for the Canadian International Development Agency (CIDA), honour their predecessors' commitments, foreign aid will be one of the fastest-growing federal spending items for years to come.
CIDA, which manages most Canadian aid spending, says it is committed to achieving the United Nations' Millennium Development Goals established in 2000, including halving world poverty by 2015. However, although CIDA's stated mandate is to reduce poverty, past aid efforts have failed to do so, and the agency has been criticized for ineffective policies and a lack of leadership. As Robert Greenhill notes in a report written before he became CIDA president, "Canada is seen to have lost [its] leadership role [on development policies], both in absolute terms and in comparison with other countries" (2005, 14).
The government's April 2006 Throne Speech promised "a more effective use of aid dollars." If Canada's relatively small but rapidly growing aid program is to be successful, policymakers need to think carefully about how Canada can best deploy its aid dollars to have the greatest impact on poverty. To contribute to this dialogue, this Commentary compares the development aid strategies of a small group of countries whose development agencies are widely respected as relatively effective and are mostly similar in relative size to Canada's. From this analysis, we attempt to draw broad lessons for Canadian policymakers. (2)
Canada's aid policies stand out as less effective than those of other countries with which we compare them, in several ways. CIDA invests comparatively little in research, particularly of strategic or long-term value. The agency tends not to encourage debate or draw effectively on external feedback. Since the effectiveness of aid can depend on country-specific knowledge, other agencies have decentralized to the field, but most CIDA staff is at headquarters. Yet, even without a large field presence, CIDA's administrative costs as a share of aid are the highest in the OECD. Moreover, CIDA's decisionmaking is highly centralized and its few field staff has little authority to design, analyze, or manage projects. The agency is also the most geographically dispersed of the agencies we compare and has a myriad priorities. This dispersion makes Canada a relatively insignificant donor even in its top recipient countries and spreads CIDA's managerial expertise thinly across many recipients. CIDA also greatly lags international practice by tying half of its aid to purchases from Canadian suppliers, despite evidence that such aid is less effective.
There are no magic bullets for an effective aid policy, and policymakers should temper their expectations about what aid can reasonably accomplish. Still, effective development aid agencies have some general characteristics that CIDA could usefully emulate. The new federal government has a choice. It can follow the Scandinavians, the British, and the Dutch examples by making CIDA a leading development agency. This would mean increasing in-house research and openness to outside researchers, narrowing its focus by both country and issue in a way that builds on current expertise, increasing its presence and decisionmaking authority in the field, and eliminating tied aid. Alternatively, the new government can choose to invest less while still making aid policy more effective. This would mean drawing more effectively on others' research and shifting more aid toward multilateral agencies that have greater analytical capability and that target their aid more effectively than has CIDA in the past.
Why Give Development Aid?
The overwhelming majority of Canadian foreign aid is targeted at long-term development, rather than short-term humanitarian relief. Most development experts and aid agencies agree that the key goal of development aid is to reduce poverty. (3) Indeed, the key stated purpose of CIDA's aid is to "reduce poverty in the poorest countries." Accordingly, we focus on aid aimed at development and poverty reduction as the primary goal for aid.
Of course, donors may have other aid objectives. The UN's Millennium Development Goals, for example, in addition to targeting poverty, also focus on health, education, gender equality, child mortality, and environmental sustainability. Broader political and commercial motives also underlie CIDA policy, as some analysts observe (see, for example, Pestieau and Tait 2004). CIDA's mandate explicitly includes a broad set of political and economic goals, such as contributing to a "more secure, equitable and prosperous world," developing democracies, opening markets in transition economies, and reducing "threats to international and Canadian security" (CIDA 2005b). Political priorities, for example, have made Afghanistan and Iraq Canada's top bilateral aid recipients over the past few years, even though they are not necessarily among the poorest countries. Also, as we discuss later, a large part of Canada's aid is tied to purchases from Canadian suppliers, reflecting domestic commercial interests rather than development priorities of recipients.
Canadian political and commercial objectives need not always conflict with development goals, however. They can be reinforcing if, for example, poverty reduction helps bring about stability in countries of strategic interest or if poor countries successfully develop and are able to buy more Canadian exports.
What Makes Development Aid Effective?
Assessing aid effectiveness is a difficult task. (4) Even if we assume aid should aim to reduce poverty, many factors affect a country's economic development-including education, health, geography, politics, conflicts, and governance-making it difficult to tell whether a change in poverty is due to aid or to something else. In addition, there is no consensus even on how we should measure poverty or development. (5) Despite these complications and valid concerns about the accomplishments of previous aid, (6) experience from the past 50 years of development aid provides some valuable lessons about what makes aid effective--and our knowledge is constantly expanding.
Several factors can hinder aid effectiveness. Rajan and Suramanian (2005b) find, for example, that large aid inflows can negatively affect a recipient's competitiveness by driving up the real exchange rate, which hurts exporters. Aid spending by donors and nongovernmental organizations (NGOs) on, say, education or health care can also crowd out domestic spending by recipient governments, diverting it to less productive uses. And aid may fail when governments are corrupt and poorly governed.
Yet, aid can also work, as other research shows. According to Clemens, Radelet, and Bhavnani (2004), for example, the common finding that aid does not improve incomes incorrectly groups together all types of aid--that is, humanitarian aid, aid aimed at short-term growth (such as roads, energy supply, and financial service improvements), and aid aimed at long-term investments (such as health, education, and democratic reform). When the authors look at aid by objective, they find that aid aimed at short-term growth does lead to positive economic growth in the near term.
Moreover, aid can work where there are sound institutions and effective government. (7) For example, a widely cited World Bank study (1998) finds that, all else being equal, aid has had a significant positive effect on economic growth in countries with competent macroeconomic management, effective institutions, and an efficient and accountable public sector. The study also discovers that aid has not been given systematically to countries with better policies, and recommends it should be. (8) In a more recent study, some of the authors of the World Bank report argue that aid allocations are now more efficient in addressing poverty because donors are becoming more selective in allocating aid to better-governed countries (Dollar and Levin 2004).
In recent years, the OECD has placed considerable emphasis on aid effectiveness, identifying a number of characteristics that can make aid more effective (OECD 2005b). The organization notes that bilateral aid is more effective if donors coordinate better to avoid project overlap and lower administrative costs, if programs are better aligned with local priorities, if there is a stronger emphasis on results, and if aid is untied from the purchase of goods and services in the donor country. (9) The 2005 Paris Declaration on Aid Effectiveness signed by all OECD countries and endorsed by many developing countries--initiates the task of setting goals and timelines to meet key measures of aid effectiveness. The OECD is considering 12 indicators as measurable benchmarks, and has proposed specific targets or timelines for 11 of them. One target, for example, is to have 75 percent of recipient countries with a result-oriented national development strategy by 2010. These efforts are a good start, even if some benchmarks are not yet sufficiently well defined.
Although we are unaware of any empirical studies that examine the benefits of focusing aid in fewer regions or countries or on more specific development issues, such as health care, logic suggests that a narrower focus should improve aid effectiveness. Rather than superficially supervise a host of projects around the globe, donors that focused their aid would make a stronger contribution to a particular country, region, or development issue. They would also develop a deeper knowledge of the environment in that country or of that development issue, enabling them to better design effective aid programs and evaluate them. More focused donor aid reduces administrative burdens of both recipients and donor.
Another determinant of the effectiveness of aid is the degree to which aid goes directly from donor countries to recipients or through multilateral institutions to recipients. Bilateral aid is potentially more flexible in response to local conditions, but may be more vulnerable to capture by domestic politics or overlap with other donors. Alternatively, multilateral agencies tend to have richer field expertise and analytical capacities, as well as larger projects in recipient countries. Multilateral aid agencies have also been more selective than bilateral agencies in allocating aid based on poverty and sound policy criteria (Dollar and Levin 2004), although such programs may not serve the political or development objectives of a given donor.
The direction of future aid policy has prompted numerous proposals. Sachs (2005), for example,...
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