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Aid and Global Governance

by Rolph van der Hoeven

Discussion of aid, both its level and effectiveness, overwhelmingly focuses on issues of national economic management. This is the approach taken, for example, in the World Bank’s major 1998 report, Assessing Aid. But aid cannot be seen in isolation from the issue of global governance: the efforts of poor countries to develop, and therefore the effectiveness of aid to them, can often be undermined by global events over which they have little control.

We need a new system of global governance, and a new role for aid. That system must be able to deal effectively with development in general, global economic shocks and natural disasters. It can also be the basis for redistribution at a global level.​

Aid is Too Limited, Too Inflexible, and Too Bureaucratic

Less Developed Countries (LDCs), especially the smaller countries exporting mainly primary products, are often buffeted by negative external shocks. This frequently takes the form of a sharp fall in the world price of a key export. But the amount of development aid is small when compared to the negative effects of external shocks. For example, the Asian financial crisis of 1998 caused a 15 per cent fall in the producer prices of primary products. Together with a fall in the demand for LDC exports, and a contraction in capital flows, this led to a fall of 3-4 per cent in their GDP in 1998. This is substantially larger than the percentage of aid to GDP provided, which for all developing countries was less than 1 per cent according to OECD data. Only countries in Africa and some in Central America and Asia have a higher percentage of aid to GDP than 3-4 per cent.

Moreover, aid shows considerable year-on-year fluctuation. Many studies have demonstrated that aid flows are often pro-cyclical instead of anti-cyclical, the result of conditionality and donor inertia. Thus aid inflows often fall when public revenues decline during negative trade shocks, thereby aggravating the resulting decline in public spending rather than helping to maintain its pre-shock level.

Finally, in countries with larger aid inflows (over 5 per cent of GDP), the process of managing the aid inflicts significant co-ordination costs on recipient governments, who must commit considerable amounts of scarce administrative resources to meeting the multiplicity of demands (often conflicting) of bilateral and multilateral donors. This gives rise to a paradox: aid is neither sufficient nor timely enough to cope with external shocks, but when it is available it adds another layer of bureaucracy to the decision making process of LDC governments.

Towards a New System of Global Governance

Better global economic governance is needed to reduce the volatility of the world economy and to protect LDCs. This will increase the effectiveness of domestic reform.

But proposals for change have been too timid. The report in 2000 of the US congressional commission led by Professor Alan Meltzer is a case in point. A world financial authority is a better way forward. This would help to co-ordinate global growth and so reduce the frequency and size of shocks. It would provide the framework for a flow of increased concessional finance to LDCs, in which flows needed to compensate for economic and natural shocks are clearly distinguished from flows to build capacity for growth, poverty reduction, and human development.

But better global governance is not just needed to minimize shocks and their effects. It is urgently needed to reduce social tensions. The current global policy framework is based on two often contradictory principles. First, the existence (or the potential) of a national welfare state (including national redistribution) and, second, an international system of increasingly free trade and free capital flows. The latter unduly circumscribes choices in the former, and is increasingly reducing the power of the nation state to engage in pro-poor redistribution.

This is leading to a crisis in political participation: people feel that they have increasingly little influence on national agendas—which seem to be overwhelmed by globalization—and virtually none over the international agenda. The protests and criticisms of international organizations reflect this. On the one hand they are criticized for doing too much and for destroying local participation and, on the other hand, for doing too little to reduce child labour and the influence of multinational enterprises on domestic policies.

Towards Global Redistribution

Better global governance is needed to effectively implement an agenda of global redistribution (thus complementing the redistributions that take place within national boundaries). For, as Nobel Laureate Jan Tinbergen emphasized in his last writings: ‘Redistribution is the core political issue of the 20th century’.

This brings us back to aid. Raising and distributing resources globally needs a better framework than the current one of voluntary pledges, be it bilateral development budgets or pledges to international development agencies. Instead, they should be collected as part of an international taxation scheme, which should include taxation of capital movements, air transport, Internet use, etc.

This new framework should also explicitly recognize the right of the individual to development, which includes labour rights and freedom from want. This acknowledgement would be a cornerstone of a rights-based system of international co-operation, which includes the right to a social minimum. At present most discussions on such rights take place in isolation, making it difficult to achieve complementarities and iron out inconsistencies. Including these agendas into a process for achieving a global framework would do much to move the issues forward.

This is also a better way to proceed than attempting to enforce the rights of the individual by putting more conditionality onto aid, or applying selectivity in the allocation of aid across countries—two arguments that are often made. Rather, under a global governance framework, national development pacts with respect to human and labour rights would be negotiated in consultation between national governments and national groups. The latter could then hold their governments both nationally, as well as internationally, accountable for the delivery of the national development pacts.

This would guide aid policy and, critically, provide the foundation for better institutions, the lack of which so often undermine aid effectiveness (a case in point being the limited success, and often outright failure, of aid to Africa in support of structural adjustment in the 1980s and 1990s). It would also, as Ademolo Oyejide and Gerry Helleiner have argued, provide for a system of equal partners in which consultation, rather than coercion, is the basis of the relationship between aid agencies and national governments.

Monitoring Inequality for Better Global Governance

Global governance cannot be built if gross inequalities, both national and international, persist. These will tear any institutional structures apart. Accordingly, national development pacts must pay close attention to inequality, which means monitoring the global and national gaps between rich and poor.

And to ensure that the reduction in poverty and inequality is rapid, bilateral donors should provide budgetary support to help the implementation of national development pacts once they are agreed upon. Such a procedure would return the spending authority, control, and accountability to the recipient country and diminish current donor practices that often undermine national decision-making processes. A monitoring system independent of donors is necessary to deal with instances when the development pact is unfulfilled, or even violated. A model for such a system is American aid to Europe under the Marshall Plan after the Second World War, which was monitored by European countries themselves.

At the same time, there needs to be a general shift from many bilateral interventions to a more global and unified system of transferring resources to LDCs. Only in this way can large amounts of resources be speedily deployed to deal with the impact of adverse global shocks, as well as natural shocks, on vulnerable and poor countries. This calls for an improved set of global and regional institutions as lenders of last resort. These will complement ongoing and longer term efforts to create better (and more consultative) institutions for macroeconomic policy making, human development, and investment in basic infrastructure.

Rolph van der Hoeven is Chief of the Macroeconomic and Development Policy Group, Employment Strategy Department, at the International Labour Organization, Geneva. The ILO Web site is www.ilo.org. Papers on issues of global governance can also be found on the WIDER Web site at www.wider.unu.edu.