Making Foreign Aid More Effective

As the United States forms a new government in the coming days, developing nations anticipate a change in the approach to international development. Can President-elect Obama increase the impact of foreign assistance? During the campaign, Obama said he would double the amount of U.S. foreign aid to $50 billion by 2012. Yet, the question is not how much money is given, but how well it is spent. He has a golden opportunity to exhibit leadership on the international stage by taking a more effective approach to aid.

Obama’s promise to double the amount of aid funding was music to the ears of countries on the receiving end of such assistance. However, his five-part strategy to create capable and democratic states does not address how the funds will be dispersed or how well receiving countries will use the economic assistance. The new U.S. government must exercise persistent vigilance to ensure aid funds are used properly.

The United States has made such a commitment at various forums most notably the 2005 Paris Declaration on Aid Effectiveness. The Paris Declaration brought together representatives from donor countries, developing nations and international development agencies to promote aid utilization. Signatories agreed on five principles for aid: ownership by partner countries; harmonization among donors; alignment with country systems; managing for development results; and mutual accountability.

However, even though all participants voiced support for these principles in Paris, the process of implementing the commitments in the declaration has been more difficult. Findings from the 2008 Survey on Monitoring the Paris Declaration, conducted by the Organization for Economic Cooperation and Development, are not very encouraging in this regard. Although some progress has been made, implementation is far from achieving the desired goals laid out by the Declaration. The survey recommends donors and recipient nations act together to achieve further reforms and faster action to meet the agreed targets. The Obama administration has an opportunity to imbue greater momentum to the Paris process, and use those principles to transform its strategy to promote global development and democracy.

Debates over the pros and cons of different aid modalities have dominated many high level international development forums. Foreign aid flows from developed to the developing countries through two primary routes: budget support and project aid. Oftentimes, governments of the developing nations prefer unconditional budget support. This option allows them the freedom and control to spend aid money as they prefer. Recipient governments also argue against project aid as being restrictive, and a platform for donors to exert domineering foreign policies with unreasonable conditions. These debates have delayed project implementation and made foreign funds less effective. Such disputes demonstrate the need for strong leadership in the global aid regime to coordinate foreign assistance.

Deep-seeded corruption within developing countries is another impediment to proper administration of foreign aid. Despite global anti-corruption and good governance initiatives, Transparency International’s index affirms that corruption is still highest among the developing nations. Lack of transparency and public participation has encouraged an adverse trickledown effect—making the rich richer and poor poorer. To ensure that aid money is put to better use, a fundamental change in national distribution systems must replace the dysfunctional norm. Only robust leadership can bring about a change of this magnitude.

Finally, uncoordinated donor harmonization and a lack of alignment with national policies jumble the roles of recipient governments and donors. The presence of multiple donors has increased recipient governments’ bargaining power. Recipient governments have taken advantage of this disproportionate degree of power by being lax in reform implementation, delaying negotiations, and by pressuring for unconditional budget support. As a result, aid is ineffective. Yet again, only strong global leadership can correct this imbalance.

As the largest bilateral donor, with the greatest influence in multilateral development organizations such as the World Bank, Asian Development Bank and UNDP, the United States is the best actor to take this position of global leadership.

President-elect Obama, who used the themes of “hope” and “change” to win election, is now the person to watch. This is an opportune time to bond the developing and the developed worlds together. He can accomplish this by improving the effectiveness of foreign assistance. Responsibility now lies with Obama to master the art of leadership and facilitate a global aid regime that respects the principles of better use of aid. True, this path towards global development will not be lined with roses, but it certainly opens up a great avenue for the next president and the United States to demonstrate America’s global leadership for a new century.

Atul Shrestha is a global policy student at the LBJ School of Public Affairs specializing in international development. He has worked as project coordinator on development projects for a private consulting firm in Nepal. He received M.B.A. from the Kathmandu University and has taught management courses at graduate and undergraduate schools in Nepal.