Tuesday, 2 October 2012

On the Voluntary Funding of Multilateral Aid

My first mission as a self-employed economist will lead me to Geneva tomorrow, where I will participate in a research kick-off meeting for the Swiss National Fund for International Studies (SNIS) on the growing trend toward non-core funding of multilateral aid institutions. I will meet researchers and practitioners from a wide range of disciplines (political science, economics, law, philosophy and anthropology), with different sectoral specializations, and with experience of a number of different international organizations. The research team is coordinated by Professors Simon Hug (Graduate Institute Geneva), Katharina Michaelowa (Zurich U) and Axel Dreher (Heidelberg U).

Non-core multilateral aid has seen a strong rise relative to assessed core funding of international organizations. The voluntary contributions by bilateral donors to the budgets of multilateral aid institutions to specific activities make use of separate funding channels and governance structures outside the executive boards, despite being managed by the multilaterals.

To orient yourself in the alphabet soup of UN acronyms it may be valuable to look at the List of UN Acronyms which the DAG Hammarskjöld Library at Uppsala University has put together (I promise it´s not only fun but may help identify totally unknown potential employers to the younger readers of this blog, and consultancy sources for the older ones…). The UN (ECOSOC) has recently produced a report that summarizes for the UN the damage done over the recent decades. For the most important UN organizations, the graph shown below documents for the year 2010 that the share of non-core contributions to development related operational activities exceeds the share of core contribution, often by a wide margin. The UNDP, for example, a UN entity widely appreciated above all on the ground in poor countries, has to fund 81% of its operational expenses on the shaky basis of voluntary contributions.

It is easy to see why voluntary budget contributions have been popular among donors. They allow earmarking contributions for specific development objectives which in turn allows for more influence over the allocation of multilateral aid, more visibility for individual contributions and higher financial flexibility since voluntary contributions are not subject to long-term international contracts.

In a principal-agent framework, the higher share of non-core budgets in multilateral organizations has gone along the move from collective principals to multiple principals, from member country groupings with largely homogenous preferences to groupings with heterogeneous policy goals. Applied to the UN system, the US called the shots after WWII based on its Western European and Latin American allies in what was then a much smaller country grouping. To the extent that the UN enlarged and raised its member base, the US, the UK and other leading countries lost the majority. This explains the start and rise of voluntary multilateral aid funding. Multiple principals have multiple interests that they see better implemented in earmarked rather than general policy programs.

Non-core multilateral aid may pose severe risks for aid effectiveness. It may replace the core contributions to multilateral organizations, complicate the budgeting of these organizations, inflate administrative costs and governance structures due to additional reporting, relinquish the expert knowledge of experienced MAI staff through newly created sub-structures, and attract the attention of their management to shopping for funds, away from their genuine task to lead by content design and by strategic decisions. Moreover, donors may create funds to which little additional resources are channeled, causing sunk costs and organizational duplication with existing multilateral organizations. From the perspective of staff in multilateral organizations, the trend toward higher voluntary funding translates into job insecurity as overall budgets are being destabilized. From the perspective of recipients, non-core multilateral aid undermines developing country ownership and tends to make aid flows less predictable – with adverse effects on development effectiveness. It seems from the outset of our research that non-core budget contributions should be seen not as a blessing, but as a curse.