DFID’s Private Sector Development strategy on the lights of aid effectiveness principles

Entrepreneurship in DRC (January 2014)

The Independent Commission for Aid Impact (ICAI) released last may a report reviewing DFID’s private sector development work. The overall assessment was “amber-red”, meaning that: “The programme performs relatively poorly overall against ICAI’s criteria for effectiveness and value for money” and suggesting that “significant improvements should be made”. While the report recognised that DFID’s approach is ambitious it also stressed that it does not translate into a coherent and joined up country level portfolio. It also outlined a concerning lack of focus, a weak evidence base and a failure to articulate what success could look like and thus supporting an appropriate theory of change. In many ways, ICAI’s report mirrored several NGO’s concerns.

Given that Private Sector Development (PSD) is a top priority for DFID, ICAI’s report should be seen as an urgent call for DFID to put its work on hold, while starting open and constructive discussions with a much wider array of CSOs, businesses and parliamentarian representatives in the UK and abroad. Despite this, there seems to be a big silence among many stakeholders around this major DFID’s aid strategy shift. In addition, if ODA is – and that’s a big ‘if’ - appropriate for PSD as an effective way to produce growth that in turn reduces poverty in developing countries and if the UK government is to lead globally on this approach, then it has the responsibility to ensure aid is used in a way that actually achieves what it is intended for.

Economic growth is a necessary but insufficient condition for poverty reduction. The sustainability and pattern of this dynamism crucially determines its ability to be pro-poor. As such, the private sector, from entrepreneurs to large businesses, but also the rules of the game that determine their behaviour and market outcomes play decisive roles. The debate around whether or not donors like DFID can actually facilitate economic growth with aid has been going on for many years as many other determinants out of donors’ control play a crucial role. As long as DFID is not be able to demonstrate what aid works best or not in this area (it will always depend on every country’s conditions), it must at least ensure that aid is channelled in the most effective way as possible. Is aid best used to that end by promoting the private sector or are there more effective ways to encourage inclusive economic growth in developing countries, like investing in health, education or infrastructure where we can be more confident about its impact?

Until DFID can show greater focus, following evidence of what has worked, it must at least abide by the aid effectiveness principles that it itself has worked so hard to establish.

As regards the aid effectiveness agenda, key concerns about DFID’s strategy so far include:

This new approach in the fight against poverty is not sufficiently evidence based when it comes to deliver results. As already stated, not every growth delivers on poverty reduction and broader economic opportunities. DFID says it wants inclusive growth, but this is relegated to the last and rather hollow looking pillar in its strategy. Among others, this pillar pays scant attention to the quality of the jobs created as well as to how women and youth, often excluded from new economic opportunities will benefit from them. Should they not in fact be the main territory of a development strategy? DFID must clarify how the strategic framework will attain the expected results, on which basis, and develop adequate monitoring indicators to facilitate proper assessment.

Another important issue concerns transparency. In its review, ICAI highlights how difficult it is to know exactly how much money is being devoted to this tranche of work. By this, any attempt to establish proper impact assessments becomes a daunting task, weakening also democratic accountability mechanisms. In addition, this new approach suggests that some aid is not directly targeted to the poor, but to businesses, and then… how do we ensure their use of aid is transparent?

A final concern is about country ownership. In some parts of the strategic framework DFID seems to be much more worried about UK businesses and not about recipient countries´ own priorities which are surely to build enterprises that bring most benefit to their countries and economies. Jobs and taxes are two of the most important dimensions linking the private sector, economic growth and poverty reduction. As such, targeting this aid to domestic businesses, helping them to achieve a bigger size so as to take advantage of economies of scale and facilitating the movement towards the formal economy should arguably be central. In order to make this approach properly led by recipient countries, DFID must support national economic development priorities and use the current national systems already in place, enabling recipient countries to experiment and decide on how better achieve inclusive economic development. Foreign Direct Investment (FDI), as it is argued in the strategy, is another important source of external finance, also playing a crucial role in sparking and supporting the private sector. However, FDI flows tend to be volatile and less accessible to the poorest countries. This kind of investment prioritises large companies operating mainly in already tradable markets. Given its expertise and experience in promoting development, DFID should support the establishment of clear social, environmental and corporate standards to ensure all UK FDI flows to developing countries have the most positive impact on the growth and welfare of the host economy. But all this should be country led and aid only used where clear impacts, in terms of generating additional positive development impact.

The private sector is just one key ingredient to achieve inclusive economic growth. This relies on many other elements; education, health, a solid institutional framework (just to name a few) that also play a crucial role. However, while many of the ingredients are known, far less is known about the recipe on how to best combine them all. And yet, as the recent economic crisis has surely taught us, the level of inclusiveness of growth, i.e. the capacity of growth to include those left behind will crucially depend on this mix.
 
DFID has to make sure it knows what it is looking to achieve, and focus its aid on where it can have greatest impact for developing countries. And while the UK aid has reached the 0.7% of GNI target, it is still a precious resource. DFID should ensure it is spent in the most effective way. Framing this new framework within the guidelines set up by the aid effectiveness agenda would be a good start.

Is giving cash directly to the poor the solution to aid problems?

Poor results and management and agency problems associated with traditional approaches to aid have led some practitioners to propose new ways of disbursing resources. Giving cash directly to the poor represents one of these new proposals and it is seen by some as the new best approach in development cooperation. However, although it might solve some common problems such as the poor management of aid resources, this new modality still lies behind the curve in terms of providing long term sustainable solutions to the lack of development.

Aid cooperation has been operating more or less in the same way since its inception half a century ago: a rich country government transfers resources, levied by taxes among its population, to a poorer one. These resources take a varied range of forms including money, technical assistance, goods (like medicines or food) and services (provided by rich countries’ doctors and teachers). Typically these were received by the country government or the local community and then used to help those most in need by providing them with different services and goods: for example education, health or food security. Underlying this approach to aid was the idea that the poor needed a great number of things and that development experts (mostly from rich countries) together with recipient countries’ governments knew best what these things were. The poor, it was thought, were not capable of using aid money well and would therefore waste resources if they were given them directly. Conditions were also attached to make sure recipients used it appropriately. Governments, charities and development banks –among many others- were then needed to better decide how to spend aid money and to develop the required services to lift poor people out of poverty. Large teams of people and procedures were necessary to make sure proper monitoring was in place to ensure aid was properly used. And yet, despite these big bureaucracies and after more than 60 years, aid has not been able to meet the expectations placed on it. Poverty and lack of opportunities are still a major problem around the globe, even in countries that have received large amounts of aid.

Helping the poor in such a way has gone through a major paradigm shift since the beginning of this century. It was during that period that some governments, especially in Latin America, started giving small amounts of money directly to poor families to spend on what they wished on the condition that their children attended school or visited a doctor on a regular basis. Known as Conditional Cash Transfers (CCTs), they were not meant to replace aid, but instead, to support poor households, more concretely poor women, directly. At the operational level these programmes are cheaper to run when compared to the classical approach of aid. Most costs are incurred during the identification of poor individuals and the provision of vouchers; but it is then relatively cheap to know whether these families are complying with the conditions imposed as they are quite straight forward. Evaluations done of CCTs have been fairly positive. Not only are children better educated and in better health (and not just in the short term), but also household income improved. 

An initiative called GiveDirectly has taken these ideas one step further. Through its simple website, anyone can transfer cash money to a person or family living in poverty, but this time, without attaching any condition. With a credit card and with four clicks on the site your donation will end up in the hands of someone in need living in a lost village in Kenya or Uganda. As simple as that.

In addition to facilitating the transfer of money, the charity has previously carried out exhaustive work to recognise people’s needs and identify those suitable of receiving the funding. This approach gives more freedom to poor people so they can decide how to spend their money. Whether to acquire more cows to increase their milk production or buy additional books for their kids, those receiving the cash feel much more empowered. It is the poor people who choose on what to spend aid. And compared to the CCTs, the fact that there are no conditions attached means the management requirements are less, and the process cheaper. 

Results from evaluations done so far on these kinds of initiatives seem very encouraging. Like conditional cash transfers before, money given directly to poor people without conditions has helped them pull out of poverty. Contrary to what some thought might happen, the cash given directly has been well used, and not wasted on unproductive purposes. There have also been limited cases of corruption and poor management, which is –let’s not forget-, one of the main criticisms of aid. Given that is cheaper, and that the experience so far is that it helps poor farmers, women or communities, should donors get rid of their development agencies and multilateral organisations and just send cash directly to the poor? Not so fast. 

Cash can help poor people if they have the chance to exchange this money for something they value. Markets for different services and goods must exist so those receiving cash can meet their needs. The existence of these will depend upon the overall level of economic development of the country where the programmes are implemented, so not all people in every developing country would be suitable. Most critically, supporting people directly instead of states and local governments has serious implications, as it undermines the formation of the institutions that can provide adequate public services such as education and health, roads and energy in the long-term. 

Overall, new ways of giving aid are to be welcomed. They support the provision of products and services by local providers, encouraging the local economy. Giving cash directly can easily complement other traditional ways of giving, however other complementary services have to be in place so poor people with fresh cash in hand can take advantage of it. Cash transfers might solve some of the management and agency problems frequently identified by aid critics such as Bill Easterly or Dambisa Moyo, as poor people are the real beneficiaries of the aid intervention, but supporting economic development requires more than increasing people’s purchasing power.

Short cuts (XVII)

Back with some short cuts...

1. Research about private aid is very scarce. this interesting article titled Uncharted Territories by a friend in the Netherlands is an exception. It analyses how NGODs geographically allocate the money they spend. According to a new database specifically built for these research, they show that although "non-governmental development organizations are expected to focus on countries with poor governance, new evidence shows that they do not. While they do tend to focus more than bilateral donors on poor countries, they make some curious geographical choices. It seems that they too have their ‘donor darlings’. It seems that "the more an organization depends financially on its official donor, the greater is the correlation between their choices of countries". Very useful for those working in non-governmental organisations or bilateral agencies!

2. I have been playing with this interesting website developed by the Inter-AmericanDevelopment Bank that gathers very useful information on governance, social and economic conditions, etc... in a very user-friendly way. It is called Datagob.

3. Krugman on Milton Friedman... an interesting approach to one of the most influential and polemic figures in the economics and the political economy of the past century. Latin America was one the most important playing fields for his acolytes!

Between Sachs and Easterly... you find Collier!

I just read this very, very interesting essay written by Michael Clemens from the Center for Global Development. He reviews Paul Collier's new book The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It.

Mr. Collier knows a lot about development and how to proceed to fight poverty and abjection. On other side, Clemens has made a great effort to critically summarise and analyse Collier's main points. According to the former, Collier seems to stuck in the middle between Sachs and Easterly's fightings (that is, between planners and searchers). Collier basically focuses its efforts towards that billion of people living in those developing countries economically stagnant and caught in any of the different poverty traps he considers: armed conflict, natural resource dependence, poor governance and geographic isolation. I haven't read the book yet, but after reading this essay, everybody interested in development should have a deep look at it. I really liked Clemens' conclusion:

Helping the bottom billion will be a very slow job for generations, not the
product of media- or summit-friendly plans to end poverty in ten or 20 years. It
will require long term, opportunistic, and humble engagement, much of it through
public action—built on a willingness to let ineffective interventions die and on
a sophisticated appreciation of the stupendous complexity of functioning
economies. The grievous truth is that although arrange of public actions can and
should help many people, most of the bottom billion will not—and cannot—be freed
from poverty in our lifetimes.

UPDATE: here, you can find Simon Maxwell's (Director of the Overseas Development Institute) opinions on the book.

It seems to be a must-to-have book!

Myanmar: time for int'l (economic) policy

How things will evolve in Myanmar is a mystery, but it seems that the near future, as it was in the 1988 pro-democracy demonstrations, will be written with blood. Recent demonstrations in the country began because the military junta decided, in mid August, to rise fuel prices.

Despite this decision, the growing discontent among Myanmar's people lies in the lack of advancements in terms of political and civil rights as well as in the lack of improvements in the social conditions in a country blessed with nowadays highly profitable natural resources such as oil, gas and precious metals but also with rampant corruption, as stated by a recent report on this issue written by the NGO Transparency International. Moreover, at the beginning of September, a constitutional commission appointed fourteen years ago by the Myanmar's military junta to outline the principles of a new constitution finished its works. The result was really disappointed given the proven anxiety of freedom revealed by the population.

Last day, George Bush said, at the UN General Assembly, that the US would tighten existing economic sanctions on the country. Bla, bla, bla. Unfortunately, the solution seems to lie far away from the UN, and even further from the US or the West. Solution lies within Myanmar's borders. Contrary to Arab countries, this seems to be a bottom-up revolution but international pressure can help.

However, recent years of isolation imposed from this side of the world have been used by other countries from the region to obtain profitable contracts to extract those so-demanded energy primary sources. The principal trade partners of Myanmar: Russia, India, Thailand and other country members of the Association of Southeast Asian Nations - ASEAN but especially China, should play a major role in this issue. Only a coordinated action from the world can avoid bloodshed

On our side, and given the lack of capacity that we normal dwellers have to impact on these kind of issues in the international arena, we, consumers in developed countries, should investigate and check whether any of our companies is operating there and force them to quit countries with the political characteristics of Myanmar.

And now we ask for more interventionism...

Last Monday the city of Barcelona suffered from a massive blackout! The impact and the consequences, be they economic and social, for the city are now beginning to be estimated. The Chamber of Commerce of Barcelona has been the first one in offering an estimation. According to them, the economic loss for the approximate 30.000 shops, small firms and businesses affected by the power cut has been of 62 millions of euros, approximately.

After a week, the city seems to have recovered a certain level of normality. However, this situation seems to be very fragile. In certain parts and neighbourhoods of the city, the electricity is available thanks to portable power generators that, like big batteries (see the pic), provide electricity but also more noise and pollution. In addition, the numerous and frequent power cuts remember us that this is not more than a transitory solution.

The fall of a big electricity transportation cable over a distributional plant seems to have been the trigger for the blackout. However, the (political) circus begins when the different political parties start to analyse and determine the reasons as well as the "guilties" for what has happened. It is not an easy thing, as this is supposed to be a publicly supervised sector.

One SOE (state owned enterprise), Red Eléctrica Española is the one in charge of transporting the electricity, whereas a private firm FECSA - ENDESA is the one in charge of distributing and service the power to households and firms. Due to the singularities and characteristics of this market we are in front of a natural monopoly. Because of the perverse incentives associated to a monopoly, this sector is regulated by the National Energy Commission (Comisión Nacional de Energía or CNE). As it states in his web:

"The goals of the Commission are to ensure the existence of effective competition in Spain's energy systems and their objective and transparent functioning for the benefit of all agents operating in those systems and that of consumers"

Well, after almost 10 years of the creation of this regulator body, neither transparency nor the existence of effective competition have been achieved in the sector. FECSA keeps on reporting more benefits from its activities and REE seems to be an untouchable firm. Could have the accident be avoided with more and better infrastructure investments? Was the CNE aware of the fragile situation of the electricity network in Barcelona? Isn't there the appropriate mechanisms to force firms to invest in the network?

It seems that the CNE hasn't done the job properly, and has not forced the two firms involved to spend more of their profits in adequating the network... but who watches the watchdog? Another great issue to be solved in democracies with "perfect markets"!

Addendum: for less in countries like Bolivia presidents were forced off the top job.

Colombia's impressions (1/2) Cartagena de Indias

Just landed from a two-week trip to Colombia and Venezuela. Very intensive, but not enough to really realise about the disparities within both countries. Let me talk a bit, first, about Cartagena de Indias and then about Bogotá. In a later post I will drop my impressions on Caracas.

The first one, Cartagena is a historical city and a very beautiful one (if you move far away from the walls, things change!). It has colourful colonial buildings and very charming squares full of history. Sea food is really good (I really loved Las Muelas de Cangrejo) and the sorrounding islands, called Islas del Rosario, are really close to an objective idea of how the paradise should look like and a good place to dive. Within the walls and the Getsemani Neighbourhood are really good restaurants but also nice "terrazas" to taste good Rhum (try el rincón de Fidel!). Beaches like Boca Grande o la Boquilla are a good start to get the pulse of the local life. You shouldn't miss them! However, besides these beautifuls sights there are others like the Bazurto market, or the Manga neighbourhood, which I'm sure they don't appear in leaflets of travel agencies. They are parts of "the other Caribbean" and show two important features of latinamerican cities: 1. "the missing middle", that is, the inexistence of a consolidated middle class and 2. the high levels of polarization, by which one can find two different societies living in the same city, but doing two completely different lives. One characterised by the opulence and the other by the lack of opportunities.

Short Cuts (XVI)

After a few days of holidays, shortcuts are back!

1. The magazine Foreign Policy and The Fund for Peace have released the latest edition of the Failed States Index. The whole article can be found here. As everybody should expect, African countries lead the ranking.

2. An interesting article from the NY Times sum up the main important trends in economics teaching nowadays (thanks David for illuminating us!). I really like these two quotes:

1. Economists can’t pretend that the consensus for free markets and free trade that existed 30 years ago is still here (from Robert B.Reich @ Berkeley)
2. I fall into the methods of the mainstream, but not the faith (from Rodrik, referring to mainstream econ)

3. Last Wednesday I saw part of the movie "The Corporation" on tv. You can watch it on youtube. Even though I agreed with some of the comments, I thought it was somehow biased. I was especially concern about the comments on the (in)famous water war of Cochabamba. I came across this interesting article from the IADB about the issue a few years after. It somehow summarises my thoughts on the issue.

Some facts about Colombia...

In a few days, I'll be heading towards Colombia, a country I don't know too much about, besides those news insistently talking about violence and cocaine laboratories in the middle of the jungle. I'm really excited about it. I've travelled to Ecuador, Peru and Bolivia for professional issues, but never to this country nor Venezuela (in august I'll travel there for a wedding). These five countries conform the Andean region, a place in the world characterised by its diversity, both human and geographical.

I've been searching in the Internet about some info, and I came across this article written by James A. Robinson from Harvard University, which look pretty interesting: "A Normal Latin American Country? A Perspective on Colombian Development"

Besides that, there are some main characteristics which I think Colombia share with its neighbours (I'll test them out while listening to cumbia) and crucially weaken its institutions and thus, its development prospects:

• States are fragile and do not reach the whole country (important levels of corruption, inefficacy of the public initiatives,
  
• Inequality (economic and social) hampers the consolidation of a common and shared view of the country in the social imaginary. Consequences: the most important source of state revenues are indirect taxes and all five countries are major exporters of labourers.
  
• Geographic disparities within these countries determine important economic and social development differences across regions
  
• The political systems of representation are fragile and incapable of aggregating the different needs of country
  

Unfortunately, Colombia suffers from another two crucial issues: high levels of violence from paramilitary forces, revolutionary groups and the army, as well as from the illicit activities related to cocaine production. Both seem to be closely related. Besides the instability that both issues generate at the institutional level, they have generated around of 3 million of displaced people!

@ marginal revolution there is another interesting post (and discussion) about this country.

Short Cuts (XV)

Brief ideas to think about during the weekend, short cuts to things happening around the world...

1. The giant, even more giant. According to the Netherlands Environmental Assessment Agency China has become the world champion in CO2 emissions:

In 2006 global CO2 emissions from fossil fuel use increased by about 2.6%, which is less than the 3.3% increase in 2005. The 2.6% increase is mainly due to a 4.5% increase in global coal consumption, of which China contributed more than two-third. China’s 2006 CO2 emissions surpassed those of the USA by 8%. This includes CO2 emissions from industrial processes (cement production). With this, China tops the list of CO2 emitting countries for the first time. In 2005, CO2 emissions of China were still 2% below those of the USA. These figures are based on a preliminary estimate by the Netherlands Environmental Assessment Agency (MNP), using recently published BP (British Petroleum) energy data and cement production data. In the 1990-2006 period global fossil-fuel related CO2 emissions increased over 35%.

Is China currently eating its future?

2. The Clinton Foundation strikes back! This new initiative, named the Clinton Giustra Sustainable Growth Initiative (CGSGI) is founded by philantropists from North and South America and according to Clinton:

"This initiative will focus on improving living conditions in Latin American countries and other nations, in partnership with the mining industry and other sectors. Ultimately, our goal is to bridge the gap between the rich and poor, and give all people a shot at a better life.”

At first sight, good news as competition in the "development market" increases. On the other hand, all these initiatives too often lack the necessary transparency to work properly!

3. Fifteen commandments every development economist should bear always in mind... according to Rodrik and YounotSneaky!. The one I like most is the first one:

1. The answer to most questions in economics is usually “It depends”.

4. The always great band "Beastie Boys" are back with a new LP... have a look at their new video in their home page... Yes, it's instrumental, something I admired when I first came across with "ill communication", another great LP.