How the G20 Can Fix International Aid


Expected to be high on the agenda of the G20 meeting in Seoul this week is the international aid that rich countries spend on efforts to lift conflict-affected states out of violence, economic collapse, human and material ruin. While many of the problems that these states suffer are homegrown, they are often exacerbated by an ineffective international aid industry that delivers chronically poor results. Yet there's a promising new approach to transforming the international aid system now in play -- and the world's greatest recipients of international aid are already calling for it.

The counterpoint to the G20 is the g7+ group, established in 2008, which consists of Afghanistan, Burundi, the Central African Republic, Chad, Cote D'Ivoire, the Democratic Republic of the Congo, Haiti, Liberia, Nepal, the Solomon Islands, Sierra Leone, Southern Sudan, and Timor-Leste. The g7+, an independent forum of fragile and conflict-affected states, seeks to communicate the concerns of the bottom billion to the top billion. No topic is more important to them than reforming international aid systems, be it in disaster relief, peace operations, or development assistance.

According to the World Bank, net official development assistance and aid globally is approximately $130 billion USD/annum. But are we getting good value for our money? The Associated Press reported in 2009 that after ten years of comprehensive aid, Timor-Leste had slipped on all major indicators. Why is this? A significant amount of aid money, in Timor-Leste and other aid recipient nations, is in the form of expensive technical assistance (i.e. western advisers) or goes toward goods and services purchased outside of the assisted country. As a result, a great deal of aid money does not ultimately go to the country for which it's been designated. Instead, the aid agenda should focus on the generation and equitable distribution of wealth within the targeted country. Successful countries have successful economies, end of story.

Leaders of the international community burn through much of its resources trying to recreate states in their own images. American legal experts, for example, often seek to build American-style legal systems in countries that have never had them. But this can take years and eat up scarce aid money, often to disappointing results.

This fascination with democracy and governance programming often comes at the expense of the "missing middle," the underdeveloped working and middle classes. They want order, good infrastructure, basic governments services, and above all economic prosperity and jobs. Though they are often overlooked by the aid community's emphasis on top-level reforms and assistance for the poorest of the poor, the assisted country's fate will ultimately rest with them. Emerging economies such as Brazil, India, or Indonesia, for example, have risen on the waves of growing and vibrant middle classes, driven by small and medium business.

One of the ways that the international community can best help the missing middle is by directing its massive aid budgets into local business. Business is efficient; its winners survive and create jobs. It is also sustainable; what is more self-sustaining than a profitable, popular enterprise?

Since 2006, there has been a rising groundswell in support of the idea that procuring goods and services locally will create wealth and jobs and build private sector capacity. The United Nations pioneered research in these ideas in 2005-2006, and in 2008 the United Nations Integrated Mission in Timor-Leste endorsed the approach, though they failed to follow through. In 2009, the United Nations Assistance Mission in Afghanistan pushed the international community to buy locally. The United Nations Procurement Division recently signed an agreement with the International Chamber of Commerce to get more local-businesses access to aid money. More recently, NATO, the United States government, and General David Petreaus have all publicly embraced an "Afghan-first" approach in Afghan aid policy. Canada, the U.S., Australia, Norway, and others are now funding local procurement projects in Afghanistan, Timor-Leste, and Haiti.

In April of this year, the g7+ held the Dili International Dialogue, seeking consensus on policy towards international donors. The recipient states say they are exasperated, as most aid money still follows the old model. The g7+ plan to take their message to the fourth High Level Forum on Aid Effectiveness in Seoul in November 2011, and no doubt to the entire G20. They plan to call for the use of local systems, an end to policy conditionality, country-driven capacity development, mutual accountability, and reduced transaction costs.

The G20 is already awakening, if slowly, on the missing middle. It recently launched the first G20 Small and Medium Enterprise Finance Challenge. It has asked for financing models to best harnass the economic power of the missing middle. The G20 Finance Challenge has already pinpointed one of the most pressing challenges to economic growth in g7+ states: the lack of access to credit.

The micro-finance sector is an over-extended market, and has so far struggled to assist micro-enterprises that are robust enough to make much of a difference. On the other end of the spectrum, large borrowers are undesirable because they are often foreign and mostly draw their credit through commercial banks. These borrowers are also often part of the problem, being closely allied with exclusive power elites. In between lies the missing middle, business enterprises whose requirements are too large for micro-finance but who lack the resources to secure commercial credit. So what to do? Aid groups could help by establishing a short-term line of credit service just for small and medium local businesses. The service would require loan recipients to bid on, win, and fulfill a contract - for example, perhaps a USAID contract to build a school. This would level the playing field between smaller local businesses and larger foreign ones, ensure that more local businesses can access credit, and enable international aid groups to create local jobs. The international community would, in effect, be able to spend the development dollar twice. You get a school, but you also get a profitable local business, increased local business capacity, and jobs.

Timor-Leste President José Ramos-Horta is fond of saying that "aid funds are spent on Timor-Leste, but not in Timor-Leste". If there is an independent South Sudan in the near future, and there may well be, will we hear the South Sudanese President repeat this same line in 2020? It may be too late to have a major impact on Timor-Leste, but perhaps it is not too late for South Sudan, or any number of emerging aid crises, to benefit from a reformed international aid system. Certainly the missing middle in Juba would welcome it.

Image: Protesters in Seoul, dressed as the world leaders convening nearby for the G20 summit, call for a great focus on alleviating poverty worldwide. By Chung Sung-Jun/Getty Images.