When Do We Have a Donor Dilemma?

Considering the wide range of scenarios for future developing-country growth and poverty reduction, prudence would suggest to approach strategic changes of multilateral concessional windows with a precautionary, rather than a deterministic, perspective to enable flexible institutional response. That perspective should not only watch the prospect of future graduation for countries today eligible for multilateral soft windows, but also the prospect of reverse graduation resulting from disasters, military conflict and governance failures^[1]. Don´t allow the shareholders of multilateral soft windows “to sleepwalk into the future” (Séverino & Moss, 2012)[2] - yes; but don´t either allow them to ignore the option value of preserving the financial and institutional strength of the soft windows by “declaring success” and letting them shrink.  After all, the configuration of poverty scenarios and strategic options is such that there may be a multilateral donor dilemma; but then there may be not...  Consider Table 1 and try to attach probabilities to the sum of outcomes that would constitute a donor dilemma (left column) and to those where a donor dilemma would not exist (right column).

 

Table 1: When Do We Have a Donor Dilemma?

		Poverty Gap/Donor Dilemma		Poverty Gap/No Donor Dilemma
	1	Closed in LICs & MICs	4	In ´stable´ LICs
	2	Only in ´fragile´ LICs	5	In MICs with little capacity for redistribution
	3	Also in MICs with good capacity for redistribution	6	Redefinition of eligibility status and of IFI mandates

 

Case 1: There will be a multilateral donor dilemma when “we beat” poverty by 2025 without changing IFI mandates. History suggests that the absence of institutional change is unlikely for a number of reasons: first, the concept of ODA-eligibility is ´elusive´ (Schlögl, 2013)[3] as it does not have hard legal force; second, there have been exceptions (such as currently the small islands, or Israel before); third, rent-seeking by affected bureaucracies; and fourth,  divergent paradigms with respect to poverty (absolute vs relative).

Case 2: This is the old, Paul Collier´s (2007) Bottom Billion. Should poverty be concentrated in a few countries labelled ´fragile´ by 2025^[4], aid volume targeted at poverty would have to shrink as the absorptive capacity in those countries is too limited relative to current aid volumes. Except for small island economies, there are 25 countries currently in that category, of which 20 in Africa (OECD, 2014, The Where of…, op.cit, Figure 2), with only 24% of the world poor living there. Moreover, one third of this country group is considered resource rich, intensifying the donor dilemma.

Case 3: It cannot be excluded that the majority of the world´s poor will live in MICs by 2025. This is the new, Andy Sumner´s (2013)^[5] Bottom Billion. They constitutes another side of the donor dilemma, mainly because of the widespread presumption that MICs can take care of themselves, given their tax and redistribution capacity, but also their other assets (FX reserves, sovereign wealth funds) and their own donor activities.

Case 4: This is the ´easy´ case for donors, as the category of ´stable´ LICs is thought to have the governance and institutions that allow for efficient aid allocation and absorption. The problem is that there are not many currently in that category, according to the OECD: 15. But it could be that aid to the fragile LICs catalyzes governance reform so that some of these countries move to ´stable´ before graduation.

Case 5: This is the ´uneasy´ case for donors as it has become increasingly difficult to explain to voters at home. Still, a large part of chronic poverty is likely to be located in MICs that have only little capacity to redistribute. These are the MICs with annual consumption per capita under $2,000; the tax burdens required to close the national poverty gaps are prohibitive in these countries, according to Ravaillon (2012). Kanbur and Sumner (2011)^[6] provide some arguments for aid to poor people in MICs rather than only to poor countries: chronic poverty calls for common humanity^[7]; concessional finance facilitates working on GPGs with strong externalities for donors; and creating a common knowledge base for policy lessons to combat poverty in poor countries. While uneasy for donors, these MICs do not necessarily constitute a donor dilemma.

Case 6: Strategic options exist for the shareholders of IFIs to attenuate the donor dilemma (if there is one) up to 2025. These options will be shortly presented and discussed: complementing/redefining the current IDA cutoff (GNI/capita); introducing subsovereign allocation; smoothening transition periods from IDA-only via blend status to IBRD-only (and correspondingly for the other MDBs); and opening the soft windows for global public goods.

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[1] For example, since IDA´s inception, 36 countries have graduated, of which 11 became ´reverse graduates´ subsequently; another 17 IDA-only countries were, at one point in time, assessed as creditworthy for IBRD financing and classified as a blend country, but subsequently reversed to IDA-only status. For detail, see IDA (2012), “Review of IDA´s Graduation Policy”, World Bank: Washington, DC, October.

[2] Jean-Michel Séverino and Todd Moss (2012), Soft Lending Without Poor Countries, Center for Global Development: Washington, DC, October.

[3] Lukas Schlögl (2013), The End of Poverty Alleviation? Effects of Shifting Global Wealth on Aid Allocation and Graduation from Foreign Aid Eligibility, Universität Wien.

[4] As defined by OECD (2014), The Where of Development Finance, OECD: Paris, January.

[5] Andy Sumner (2013), „Where Do The Poor Live?”, World Development, Vol. 40(5), pp. 865-877.

[6] Kanbur, Ravi and Andy Sumner (2011), “Poor Countries or Poor People? Development Assistance and the New Geography of Global Poverty”, CEPR Discussion Paper 8489, CEPR: London.

[7] The German philosopher Thomas Pogge (Yale) is a prominent representative of that school of thought which has challenged Rawls´ A Theory of Justice that applies only within a nation state: See Ravi Kanbur (2014), Resetting IDA’s Graduation Policy, Cornell University, mimeo, January.