Demise of the Aid Industry?

The structure of international development, or the aid industry, has remained remarkably stable since its post-War origins. The 1980s with its Washington Consensus strengthened the structure, by enhancing the role of International Financial Institutions. The critique changed some of the practices, but not the institutional set up. The late 1990s debt relief movement, and following Poverty Reduction Strategy Papers and Millennium/Sustainable Development Goals further embedded aid as a key part of international relations. The number of institutions have grown, but to a great extent they have been moulded into the existing architecture.

In 1990, aid – the grants and concessional loans Northern governments provide to Southern partners for development purposes – was really important. Remittances were already becoming a big part of total financial flows from North to South, but aid formed about half of the total recorded flow (and as remittances do not necessarily have the same ‘development’ focus, the qualitative importance and visibility of aid were larger).

But over the last two decades, this financing picture has changed dramatically. Private philanthropies now form a big and often integral part of aid efforts. For example, the Gates Foundation is globally the fourth largest funder in the health sector, and business coalitions articulate intentions to contribute to development goals. These have not only brought the additional money, as have new bilateral donors like China and Brazil, but also new ideas and motivations to a sector many thought was plagued by aid fatigue.

But there are even bigger changes to the field of aid. In 1990, aid was the single largest part of international flows. By 2007 it was perhaps only 10 per cent of that. Domestic finance in developing countries also has expanded, thus rapidly making aid less important. Estimates of amounts of impact investment are uncertain, but have become considerable and are continuing to grow, and receive growing endorsement by world leaders, including recently the Pope. Development Finance Institutions (DFIs), according to one estimate, forms about half the amount of global ODA, having grown from about $10 billion to over $60 billion in ten years.

Alongside this the emphasis on untying aid has changed. While during the 2000s the amount of aid that was provided untied increased significantly, political changes and the rise of new donors have led to a growing emphasis on ensuring donor countries’ aid also supports the donor countries’ economies and business.

The growth of private finance, and the growing inter-linkage between aid and business, call for a better understanding – amongst those in the old aid industry – of what these private sources of finance imply for development, and how public-private partnerships can be made to work. It also means we need to rethink what in this new context aid should focus on.