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Multilateral aid: IFIs up - UN agencies down

The findings of a new DAC/OECD report

The Organisation for Economic Cooperation and Development (OECD) has just released the 2010 DAC Report on Multilateral Aid. The report highlights that although the percentage of Official Development Assistance (ODA) given through multilateral institutions remains stable overall, the share of funds disbursed by the UN has decreased. The report also notes that in the wake of the global crisis, lending to poor countries has dramatically increased as grant aid is falling. By Bodo Ellmers

 

According to the report (see reference) multilateral aid grew from $23bn in 1989 to §35bn in 2008. While multilateral aid as a share of total ODA remained relatively stable, ranging from 27% to 33%, the share of ODA given by regional institutions (in particular the European Commission) and vertical funds (such as the Global Fund to combat AIDS, Tuberculosis and Malaria) increased. As these have increased, the share of ODA given by the United Nations decreased from 15% to 10% over the past two decades.

* Donors pick their multilateral institution

Much of multilateral institution funds come from donor countries' development budgets, and primarily from member countries of the OECD’s Development Assistance Committee (DAC). DAC donors have widely ranging preferences for particular multilateral organisations. Luxembourg, for example, provides 13% of its non-EU multilateral aid portfolio to the World Bank’s International Development Association, while Germany provides 53%. The range of contributions to UN Funds and Programmes can be as low as 5% (France) or as high as 45% (Norway). Obviously, smaller EU countries tend to have a preference for the UN which has a one-state one-vote voting procedure, while the larger ones prefer the World Bank where the voting procedure favours the economically more powerful countries.

* Vested interests could mean that aid allocation is not needs-based

The share of multilateral aid given to Low Income Countries (LICs) is greater than that of bilateral aid (55% compared to 33%). The report diplomatically states that this is because the mandates of multilateral organisations apply rules-based allocation mechanisms. More explicitly, bilateral aid allocation is strongly influenced by the geopolitical and commercial interests of the respective bilateral donor that provide it. Multilateral aid agencies and development finance institutions are theoretically free from such vested interests. However, the OECD report indicates that even multilateral aid allocation is not always allocated on a needs-basis. This may be caused by the imbalanced voting rights, in particular in the International Financial Institutions’ (IFIs’) governance bodies where in particular the G7 countries have a strong weight. This may lead to IFIs responding to unilateral interests of some of their more influential member states, rather than on allocating funds according to clear needs and effectiveness assessments.

* The global crisis – a money maker for the IFIs, while poor countries slide further into debt

Many rich countries responded to their own fiscal challenges caused by the crisis by cutting aid budgets, or halting ODA increases promised in international agreements. Instead, the biggest economies gathered under the G20 mandated Multilateral Development Banks (MDBs) to scale up lending, as this would have a smaller impact in rich country’s budgets than increasing grant aid. Hence, most of the funding to help poor countries coping with the effects of the crisis came in the form of loans. As a result, many poor countries have been driven into more severe debt dependency, while MDBs have profited from the global financial crisis, as they massively scaled up their lending in an attempt to support developing countries.

The World Bank Group is a good example of this trend, as lending from their International Bank for Reconstruction and Development (IBRD) almost tripled, and International Development Association (IDA) disbursements hit a record level of $14bn in fiscal year 2009, an increase of 25% compared to the year before. IFIs, many of which were deemed nearly irrelevant before the crisis broke out, also used the window of opportunities offered by the crisis to successfully advocate for replenishments and capital increases in order to strengthen their position in the international aid architecture.

* Earmarking funds undermines aid effectiveness

The trend amongst international organisations towards non-core funding is worrying. In particular the UN system suffers from donors earmarking funds they provide for special purposes, sectors or countries. The report stresses that earmarking reduces predictability and increases the transaction costs of aid. Both parties, international organisations and their Member States, spend much time on negotiating individual funding agreements, and the international organisations have to comply with cumbersome donor-specific monitoring and reporting requirements.

The UN and its agencies are particularly affected by donor earmarking. More than three quarters of the UN Development Programme’s (UNDP’s) income is earmarked. Other multilateral institutions are better off. Until recently, the EU has not accepted any non-core funding from its member states. The World Bank does host a large and growing number of special purpose Trust Funds, but still they amount only to one quarter of World Bank disbursements. Earmarking also undermines recipient country ownership of aid, the core principle of the current aid effectiveness regime as fixed in the Paris Declaration on Aid Effectiveness. Through earmarking, donors predetermine the allocation of aid and thus disempowered the recipient to use aid inflows for self-defined development and poverty eradication priorities.

The share of non-core funding is particularly high for humanitarian aid agencies such as the World Food Program. The demand for humanitarian aid is unpredictable by nature; however, the ongoing flood disaster in Pakistan is a good example of how earmarked funds limit aid agencies’ ability to reallocate funds when needed to take immediate actions in order to save lives: even if funds were available elsewhere in the UN system, they could not be used to fund other pressing issues.

Very few donors have so far taken actions to address these problems. A positive example highlighted in the OECD’s report is Belgium that has recently adopted a new policy that shifts most of its contributions to international organisations towards core funding over the coming years.

* Climate Finance: Not yet additional

At the UN Climate Conference in 2009 in Copenhagen, rich countries promised developing countries scaled up, predictable and adequate funding to the tune of USD 30 billion for the period of 2010-2012 for climate change adaptation and mitigation. Actual disbursements, however, fall short. The OECD reports that thus far cumulative disbursements by existing global funds for climate change both inside and outside the UN Framework Convention for Climate Change (UNFCCC) amount to only $2.9bn since their inception – only $246m per year. According to World Bank information cited in the report, $9-10bn per year is currently dedicated to climate change, most of which ($8-9bn) is for mitigation, just $1bn for adaptation.

It is obvious, however, that this amount includes large shares of double-accounted development aid. Civil society organisations have repeatedly argued that climate finance needs to be additional to development spending, but the additional money made available for climate funding is still meagre.

The OECD report also criticises the setting up of new parallel funds for climate finance and stresses that it is important to learn from the experiences made with global health funds in the past decade, which were not always positive from an aid effectiveness perspective. They also stress that climate change mitigation and adaptation needs to be an inclusive country-owned process rather than a donor-driven process. “The ideal climate fund model will provide flexible external resources to support intrinsically integrated interventions anchored in a country‘s climate or national development strategy”, stresses the OECD.

Reference:
* DAC/OECD: 2010 DAC Report on Multilateral Aid, 143 pp, OECD: Paris 2010. Bezug: über www.oecd.org

Bodo Ellmers works with the European Network on Debt and Development (Eurodad) in Brussels.

Posted: 11 Sep 2010

Recommended citation: Bodo Ellmers (2010) 'Multiolateral aid: IFIs up - UN agencies sidelined', World Economy & Development In Brief, Issue 5/Sep-Oct, Luxembourg (www.wdev.eu)


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