Germany’s Cooperation Minister Niebel wants to raise the share of bilateral to the detriment of the multilateral aid that Germany allocates in its budget. There has been pressure, all in favour of multilateral, that I ‘behave’ on 28th March in the Bundestag Hearing. But Minister Niebel has a point...Here is a short English version of my statement which will be in German.
Central Message
The desire for visibility, control and positive economic effects for the donor economy may militate for bilateral aid; positive scale effects in combining Know How and resources, better local presence and supplying regional and global public goods favour allocating a higher share of aid to multilateral delivery. Donor agencies that let a certain share of their aid budgets to the multilaterals are torn between giving up control and identifying with multilateral development goals. Germany can reduce that tension by either raising the bilateral share of its aid delivery or by proactive scripting of multilateral objectives. Germany should make active use of debate on the post-2015 follow-up to the Millennium Development Goals to align the new development goals clearly to specific multilateral institutions: The time for multilateral mission creep, overlap and dissociation of multilateral competence and liability is gone under a regime of tight aid budgets.
Some Facts
Table 1 compares Germany with its peer group – DAC donor average, France, United Kingdom and the United States on the amount and relative share of their multilateral aid budgets (in 2010).
Table 1 Multilateral Aid: A Comparison, 2010
Donors | multilateral aid, in bn $ | in % donor’s total aid |
DAC- average | 37,88 | 26,8 |
Germany | 4,95 | 34,4 |
France | 5,22 | 36,3 |
United Kingdom | 5,04 | 37,6 |
USA | 3,77 | 12,1 |
Source: OECD, http://dotstat.oecd.org/Index.aspx
Germany, the world’s third biggest provider of multilateral aid, is one of the very few donors to have guidelines to cap the share of its multilateral aid, at one third. Still, its multilateral share is quite above DAC average; the outlier is the USA, with a share of 12.1% of its aid budget devoted to multilaterals. Of Germany’s multilateral aid, almost 5 bn $, the EU received 3 bn, while an important (1 bn $) but shrinking share went to finance the World Bank. The UN system, regional development banks and vertical funds received the little that remained.
An important – and positive – trait of Germany’s multilateral aid is that it mostly finances core budgets – 93.4% compared to a DAC average of 71.3% (Source: OECD, DAC Peer Review Germany 2010). The high share to the core budgets fosters transparency, control and incentive compatibility of the multilaterals. Earmarked contributions, by contrast, or cherry picking, undermine the governance of multilaterals by the principal, weaken transparency of the agent, and hence intensify the double delegation problem that characterizes principal-agent dilemma in governing multilaterals; moreover, cherry picking weakens core budgets and long-term work programmes.
Germany’s bilateral aid is typical project and programme related; it is supported by a unique set of implementation agencies such as the GIZ and by a bilateral development bank, the KfW. This set-up of German bilateral aid helps visibility and monitoring. Klasen (2011)[1] cites studies that show for one € of bilateral aid to translate into additional exports between 1.30 and 1.80 €. Not because of tied aid, but because bilateral aid improves bilateral political relationships that then act to stimulate bilateral trade links.
Table 2: Aid Quality 2009: Rankings of selected donors by CGDev
Donor | Efficiency | Poverty Or. | Governance Or | Institution Building | Administrative Burden | Aid Tying |
Germany | 4 | 4 | 2 | 2 | 3 | 4 |
EU | 2 | 3 | 1 | 3 | 2 | 3 |
World Bank | 1 | 1 | 3 | 1 | 1 | 1 |
UN | 3 | 2 | 4 | 4 | 3 | 1 |
Table 3: Aid Quality 2000-2007: Rankings of selected donors in empirical studies
Geber | Knack et al | Easterly/Putze | Roodman/CGD |
Germany | 2 | 2 | 4 |
EU | 3 | 3 | 2 |
World Bank | 1 | 1 | 1 |
UN | 4 | 4 | 3 |
Source: Easterly, W., & Pfutze, T. (2008). Where Does the Money Go? Best and Worst Practices in Foreign Aid. Journal of Economic Perspectives, 22(2), pp. 29–52.; Knack, S., F.H. Rogers & N. Eubank (2011), Aid Quality and Donor Rankings. World Development ,39(11). 1907–1917; Roodman, D. (2006), An Index of Donor Performance, Center for Global Development Working Paper Number 67; Data set updated 2009.
On the basis of empirical studies (rather than DAC Peer Reviews that result from political interaction and lack credibility), Germany’s bilateral aid does not get good marks (see tables 2 and 3). If Germany wanted to maximize efficiency and effectiveness of its aid programme, it should increase the share for multilateral delivery, according to the empirical evidence cited. In particular, the World Bank should benefit from a higher allocation of multilateral aid. Note, however, that all authors involved in the empirical studies are presently or have been collaborators of the World Bank.
And this is not the end of story. Fresh evidence provided by the Kiel Institut für Weltwirtschaft[2] found that neither the World Bank nor the EU had made any significant progress in translating the Paris Declaration into acts, namely through reducing overlaps with other donors or through specializing more on specific countries and sectors. Germany, by contrast, has made progress in producing a stronger sector and country focus.
Current Challenges to Multilateral Aid
To be sure, multilateral institutions[3] are better at supplying global public goods than bilaterals; but Germany’s bilateral development bank KfW, for example, finances green cities in China and contributes to global climate policy. And yes, multilateral lending has been argued by Rodrik to better cope with information asymmetries and to more forcefully impose conditionality than bilateral lenders[4]; but the 1990s have revealed that it were the multilateral finance institutions that prolonged their defensive lending to the highly indebted poor countries much longer than the bilateral lenders.
Today, multilateral aid faces two challenges, and Germany and other donors have to cope with those challenges:
· The rise of the emerging partners that prefer a bilateral mode of development cooperation with poor countries; cooperation is often tied and the financing is a mix of various forms of export buyer credit, FDI and other form of capital export, with some aid elements. Is it odd that the emerging partners seems often more effective in removing growth barriers in soft and hard infrastructures through bilateral acts than the many conferences by multilaterals that proclaim good governance rhetoric?
· The multilateral donor chaos. The overlap, redundancy and mission creep of the multilaterals has not even been treated in the much-cited 2011 DIFD study Multilateral Aid Review. The current wooing (better: fighting) between multilateral institutions to be mandated by the G20 in the development area provides a vivid illustration. 280 multilateral institutions are currently ODA eligible: 60 UN agencies; four EU-Institutions; five IMF facilities; seven World Bank bodies; three of the WTO; 15 regional development banks and their funds; and 118 other multilateral institutions, among which the OECD Development Centre. Add to this list ca 60 international NGOs, 14 international PPPs, und four international networks. Source: OECD (2011), DAC Statistical Reporting Directive, DCD/DAC (2010)40/REV1.
MOPAN (Multilateral Organisations Performance Assessment Framework) does merely help, to defragment the multilateral donor chaos for the benefit of poor countries administrations stressed by multilateral donor missions and their bureaucracies. The assessments are based on qualitative, hence vague, impressions, avoid to compare between competing institutions. So they may help raise x-efficiency, not the allocative efficiency for dividing funds between institutions[5]. Multilateral fragmentation is not only a problem for poor partner countries, but also for the donor ministries. They face well-paid brainpower and some mighty multilateral organisations with staff that exceeds 10,000: the agent rules the principal…
Some Thoughts Going Forward
We lack the empirical evidence to inform policy choices on the allocation between bilateral and multilateral aid delivery channels. As for multilateral aid, we need
· A serious mapping of multilateral aid with the aim to identify comparative advantages in servicing development goals, to create responsibilities for failure in reaching these goals, to streamline the multilateral landscape through agency closure and to establish a clear role assignment between institutions and development goals. The multilateral map should indicate to the G20 working groups how multilateral coordinate and where they are mandated.
· Germany should strengthen its periodic governing and monitoring of multilateral institutions through proactive (rather than just reactive and personnel policy) blue prints and instructions. This should help reduce widely felt double delegation problems, align multilateral with German policy objectives and hence raise the acceptance of multilateral aid with German policymakers.
From the perspective of poor countries[6] the multilateral role assignment will have to observe the criteria a) development engagement and poverty orientation; b) flexible adjustment to the specific institutional and policy conditions in partner countries (instead of ideological zealotry); and c) how multilaterals can credibly convey that they support for policy ownership.
[1] Klasen, Stefan (2011), „Vom Unsinn der Lieferbindung in der EZ“, KfW, Meinungsforum Entwicklungspolitik, 19. October 2011. Compare the responce by von Braun, Hans-Gert (2012), „Lieferbindung: Die Kritiker springen zu kurz!“, KfW, Meinungsforum Entwicklungspolitik, 10. February 2012.
[2] Nunnenkamp, Peter, Hannes Öhler und Rainer Thiele (2012), „In der Entwicklungszusammenarbeit fehlt die Koordination“, Ökonomenstimme, 21. März 2012.
[3] See Inge Kaul (1999), Global Public Goods; International Cooperation in the 21st Century, OUP.
[4] Rodrik, Dani (1995), „Why Is There Multilateral Lending?”, NBER Working Paper No.5160, June.
[5] Reisen, H (2008), “Ownership in the Multilateral Development Finance Non-System”, in: OECD, Financing Development 2008. DFID Multilateral Aid Review 2011 suffers from similar shortcomings.
[6] Wathne, Cecilie, & Edward Hedger (2010), “What Does an Effective Multilateral Donor Look like?”, ODI Project Briefing No.40, April.
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