Aid Thoughts

I recently had a long and involved argument with a group of development workers about the value of multilateral aid agencies compared with bilateral agencies. I was in the minority on that particular issue, but it raised a number of questions for me, which basically boil down to an assessment of the different incentive structures that obtain for multilateral agencies and bilateral agencies and the good and bad ways that these influence their working. Two key questions are raised: whether or not there is a net benefit of the incentives that govern multilaterals, and secondly, if these agencies are fundamentally different should they be judged on different criteria?

Both of these questions are going to come under increasing scrutiny in the future. Aid budgets are being squeezed, and even in those places where they are not there is an ever-increasing focus on value for money in aid delivery. As part of this, many aid agencies are questioning whether the money they channel through multilateral aid agencies is better spent by their own development organisations. The impacts of this are already being felt, with Britain having cut all support to the ILO due to their low assessment of its efficacy. If this trend continues, and as the international aid effectiveness agenda develops further during and in the aftermath of the Busan conference later this year, I expect a more intensive culture of accountability and measurement to evolve for donor agencies. When this happens, the question of how to assess different kinds of agency will need to be met head on.

The central difference in the incentive structures of bilateral and multilateral agencies lies in their sensitivity to domestic political climates and their responsiveness to political imperatives. Bilateral agencies ultimately all report directly to a Parliament and to local voters. Their bureaucracies also respond much more directly to political leaderships. This has a direct effect on the ways in which they work. It means that they have an inherently strong impulse for efficiency as Government finances are much more transparent and easily held to account upon than supra-national entities’ finances; they are also far more flexible because they need only satisfy the rules of a single Government and a simple political test: will this fly with my Minister (or my electorate, if you put yourself in the Minister's shoes)? This flexibility manifests both in the way in which aid is delivered (budget support typically requires less justification) and also in the sectors covered. They can, if needed, quickly change the structure of their programmes in response to need, evidence or a changing political climate. The user experience of bilateral aid is usually much less complicated than multilateral aid, and the lines of responsibility and decision-making are short enough to ensure that decisions can be swiftly made and swiftly enforced.

This, however, is also at the root of the drawbacks of the bilateral system. The proximity of bilateral agencies’ action to the political process means that they respond too closely to the biases of an electorate, and equally importantly, they are wary of challenging this electorate. Thus, most bilaterals cluster in ‘easy sell’ areas they do not need to spend valuable public time on to justify: health, education, water, food security and the like. Their need to justify their actions in the international development sphere competes with their need to justify other policies that may be more politically important, and thus makes them less likely to engage in more politically complicated international development initiatives.

Further, the shorter line between electorate, politician and development policy also makes it easier to change policy to suit political imperatives. When the UK government wants to increase spending on national security but without massively increasing their military or foreign office budget (both of which are politically sensitive), DFID provide an option for them. Spending in conflict-ridden areas is genuinely developmental in most circumstances, but the policy decision and balance of spending is influenced by factors other than development. Bigger questions of policy are more strongly influenced by the gravitational pull of political necessity and preference than strictly rational allocation procedures.

These costs and benefits are not universal to bilateral agencies. USAID and Japan, for example, are hardly paragons of flexibility, but they do serve as a relatively good characterization of the costs and benefits of bilateral aid.

Multilaterals on the other hand, have a different set of institutional incentives.

Their primary accountability is not to an electorate, but to a board of directors or member states. This has some major positives. Firstly, by answering to a range of member states, the political imperative of the organization is diluted: it can get away with less politically popular decisions because no single electorate can vote its leadership out of office. Given that the representation of member-states is primarily technocratic, the multilaterals rather face pressure to ensure that their policies are in line with accepted theory (usually economic). The direct political imperatives that prioritise politically important aid recipients (Afghanistan and Pakistan in particular) are weaker in multilateral agencies, which thus have freer reign to spend in poor countries lacking in geopolitical importance.

Even more important is the benefit conferred by representation. Developing country Governments have a stake in the many of the multilaterals, by dint of being member-states themselves. This gives those multilaterals with broad representation from developing countries (most obviously the UN) a moral authority in aid delivery that bilaterals lack, being the agents of a specific Government with specific political aims. This in turn allows them access to developing country Governments and the ability to provide close support in the form of technical assistance and advice that most other donors don’t have.

Yet there is a dark side to this kind of structure as well. Being answerable to so many member states with slightly different concerns on governance, all multilaterals have had to put in place extremely stringent and extremely cumbersome rules for the use of money, recruitment of staff, procurement of goods and taking of policy decisions they undertake. This makes multilateral donors, without exception, far more sclerotic and slow-moving than bilaterals. They provide a much less satisfying user-experience of aid. It takes longer to agree a programme or strategy. It takes far longer for the financing commitments to be made, since many times additional financing must be sourced. The financing of programmes can be uncertain, as it often depends on contributions made by member states on an annual basis. They take far longer to approve procurements, to a disburse money and to agree to the hiring of staff for projects. And they are the least able and willing to channel money through Government systems, as too often the rigid guidelines their member states have set for them deny them this flexibility. Finally, mulitlaterals, far more than bilaterals, are disincentivised to admit or report failure. For a bilateral, failure means something to learn from and the funds for international development will still come from the budget, though subject to a little more competition. For a multilateral, if they admit failure, they invite the prospect that their funding be channeled through bilateral or other multilateral agencies.

Again, this is a simplification – the IMF and the World Bank are multilateral agencies who are widely perceived as holding a very specific economic agenda, one in which developing countries cast themselves as outsiders, for example. But the general points hold – multilaterals gain from their insulation from the political process but sacrifice speed of movement for this.

So, it’s clear that there are benefits and costs arising from the different structures. Yet, value of multilateral aid depends crucially on the net effect – does the practical use of their political insulation make up for their institutional rigidity? My opinion is that there is a minority of multilateral aid agencies who can genuinely make this case. Most multilateral agencies do not take full advantage of their ability to focus on countries and sectors that do not otherwise garner enough attention to make up for the difficulty of doing business with them. Donors like the UN generally hold portfolios very similar to those of the bilateral agencies, though more specialized. Other donors, particularly the multilateral banks, focus much more on infrastructure, the private sector and the economy – this is their big selling point, but one that will become less and less important as aid agencies and recipient Governments create division of labour arrangements. Increasing recipient country ownership and direction of the development process means that the incentive structures of the donors begin to matter less. The value of the multilaterals will then depend on their ability to transcend the sluggishness of their systems or their possession of unique selling points.

Only three really have one. The UN System has an inclusive membership no other organization can match. The World Bank creates a closer link between research and practice than any other organization, and the IMF’s role in certifying macroeconomic stability is irreplaceable – almost all donors (bilateral and multilateral) take their lead from the IMF in assessing macroeconomic management, and thus the extent to which they directly support Government operations. Yet, all three need reform to make this value apparent. The UN’s membership is a huge selling point – but it’s counteracted by the immense sprawl of the organization, something it has recognized and is slowly struggling to bring coherence to. The World Bank’s approach to economics is still very much restrained by the orthodoxy of quite conservative development economics, leading to some mistrust from recipient states; and the IMF’s outlook has always been heavily informed by a free-trade doctrine that is being more deeply questioned – as they have acknowledged themselves.

The pressures on the multilateral system will be even sharper when a real system of rating and assessing donor agencies emerges. I hope this will be something that is achieved after Busan. When this system is finally devised and rolled out, I don’t believe that any of the arguments I’ve made suggest that multilaterals should be assessed any differently from bilaterals. All that matters in the end is the user-experience of aid – how easy it is to contract, use, and deliver results with, both on an individual project level and on a portfolio level. Donors (collectively) should be under the same pressure to deliver flexible aid that covers all development issues. The worst performers will only survive if they can offer something no other donor can.