Supporting the IDA Is Thrifty and Smart

Homi Kharas and Nancy Birdsall

Editor’s Note: This commentary was initially published by the GlobalPost on October 9, 2010.

As world financial leaders gather here for the annual meetings of the IMF and World Bank, they will discuss what to do about replenishing the coffers of the International Development Association (IDA) — the World Bank’s window for making grants and concessional credits to the poorest countries in the world.

The talks are likely to be tough-going for aid and IDA champions. Advanced countries are struggling with their own debt and fiscal problems and ongoing fears of a second dip into recession. Although aid is a tiny fraction of most rich countries’ budgets, it is subject to even worse political pressures than other discretionary spending.

Tough choices will be made. Donors are already squeezing their pledges to other multilateral funds — recent commitments to the concessional fund at the African Development Bank barely kept pace in real terms with the past, and the new replenishment of the Global Environmental Facility was less than half the original proposal.

What about the IDA? Short-changing the IDA would make no sense, according to independent evidence just published by the Center for Global Development. Our new research assessing the quality of aid from donor countries and aid agencies shows that the IDA, as well as a handful of other multilateral funds, spent aid money “smarter” than most bilateral funds, extracting far more value for money in building a more stable, safer and more prosperous global system.

We applaud countries like the United Kingdom that have promised to protect their aid budgets. But the tough reality is that at a time of huge fiscal deficits in advanced countries, it is unrealistic to expect the rich world to be much more generous.

The answer is to be smarter about aid, to increase its impact in terms of development and poverty reduction for each dollar spent.

Our assessment of the quality of official development assistance (QuODA) looks at how donor countries and aid agencies score on 30 indicators spanning four dimensions of aid quality: maximizing efficiency, fostering institutions, reducing the burden on recipient countries and transparency and learning. These dimensions were chosen based on academic research, the principles of aid effectiveness to which official donors have publicly and repeatedly committed, and the concerns expressed by aid recipient countries themselves.

The maximizing efficiency index gives points to those who give money to the poorest countries, to well-governed countries, and in ways — such as not tying their aid to their own suppliers and contractors — that ensure the most efficiency in terms of development projects and programs on the ground.

The fostering institutions index rewards those who link their aid with recipient country development plans and who support the implementation of the countries’ own priorities. It penalizes agencies that set up parallel systems instead of providing aid whenever possible through local institutions.

The reducing burden index recognizes that the current aid system has significant waste and overlap. Many of the 152 agencies we track give aid in small packets. The median size of projects has been falling steadily and is now just $70,000, too tiny to generate scale economies. With more than 80,000 small, new projects annually, each with its own reporting and monitoring requirements, negotiating and reporting has become an enormous burden on recipients. In our index, we reward donors who minimize this administrative burden.

The transparency and learning index reflects the importance of providing timely, comparable information on who is doing what where. Without such information, there can be no coordination among donors and no learning from experience. Development assistance has yet to take advantage of the potential offered by modern information technology, such as geo-coding and real-time client feedback.

Multilateral agencies, on average, do better than bilateral agencies on three of the four indices, the exception being transparency. IDA is the only large agency that appears in the top 10 across all four indices. It does especially well in fostering institutions and in transparency and learning. Indeed, the IDA implemented a far-reaching transparency program last July and has just made all its development statistics and most internal material freely available on the web.

The conclusion from QuODA is straightforward. In these difficult fiscal times, donors should put a premium on value for their development funds. They can best do this by channeling more resources through multilateral agencies. The leader among those agencies is IDA. Concluding a generous IDA replenishment, through a reorientation of development budgets if necessary, would be a smart and thrifty move.