Skip to content

Forum for the Future of Aid

Southern Voices for Change in the International Aid System Project

The Forum on the Future of Aid is an online community dedicated to research and opinions about how the international aid system currently works and where it should go next

organised by ODI

Crisis as an opportunity to balance aid with development finance alternatives

By Aniket Bhushan and Bill Morton, North-South Institute


Since August 2007, when the global economy fell deeper into crisis, the external environment for development financing has turned increasingly negative. Commodity prices have collapsed, low income country exports have been hit especially hard, private flows including direct investment have reversed sharply and remittances have contracted for the first time in decades. These combined effects have led to very significant financing gaps in developing countries, and as a result, to severe social impacts including increased unemployment and poverty. On the other hand, ODA appears to have been rising, and reached its highest ever level of $119.8 billion in 2008. However, if debt relief is excluded, bilateral aid to Sub-Saharan Africa rose by only 0.4%, and donors remain well short of commitments made at the 2005 Gleneagles G8 Summit.

In this context, the London G20 outcomes are important for developing countries. On paper, the commitments are significant: $1.1 trillion to fuel a global recovery, including several measures targeted at developing countries. We argue, however, that while the G20 commitments must be adhered to, they represent a short-term response. They should not distract from the long-term challenge facing developing countries: that of developing comprehensive strategies for aid exit. The current crisis makes this more difficult, but it also provides an opportunity to re-focus on aid exit objectives and to consider innovative ways of balancing aid with alternative sources.

The case for focusing on alternatives to aid is compelling. Firstly, domestic, rather than external resources comprise the bulk of financing mobilized to fund development and external savings are an imperfect substitute for domestic savings. Second, ODA in particular tends to be pro-cyclical, which presents significant macroeconomic challenges, is far more volatile than domestic mobilization and is accompanied by onerous conditionalities that limit policy space. There is evidence that ODA in Sub Saharan Africa (the largest recipient region) has resulted in very limited net fiscal expansion and most resources either flow right back out in the form of capital flight or are accumulated as reserves. Mobilizing ODA has political economy and governance implications – countries that mobilize a large majority of their budgetary needs externally may have little incentive to focus on domestic efforts such as widening the tax base. Finally, there is considerable scepticism and frustration surrounding the developmental impact of long-term reliance on aid. Instead of ad hoc targets, donors and recipient countries need to think strategically about aid exit. There are a number of aspects of such a strategy; here we concentrate on three, described below.

Getting revenue management right and re-thinking exemptions

Examples of aid-exit are relatively rare. Countries that have made progress in this regard have utilized a combination of prudent resource management (including aid) and rethinking their exemptions regimes. Botswana is the most often cited example of the former. The presence of natural resources alone does not explain Botswana’s aid-exit: the integration of aid and resource revenue into a unified budgeting process was at the core of its success. Zambia offers similar lessons: the exemptions in place to promote FDI in the copper sector were scaled back when it was clear the government was not benefiting from the commodity upswing that preceded this crisis. The fact that scaling back exemptions did not drive out investors indicates that these are not the main incentives for investors. A 2007 study on Ghana shows that rethinking exemptions may be worthwhile regardless of the revenue impact: a growing list of discretionary waivers created numerous loopholes for tax evasion and promoted corruption, making the tax system more complex and more expensive to administer.

Integrating fragmented domestic financial markets

Many low-income countries are characterized by highly fragmented financial markets. Within these systems, it is often assumed that since incomes are very low, savings mobilization is of negligible importance. This is not the case, because in the absence of safety nets the precautionary saving motive is high. Often the need is to adapt to given conditions.

Renewed efforts could have significant payoffs in mobilizing savings and integrating fragmented markets. For instance, extending formal financial services in rural areas can have a significant poverty impact. India experimented (1977-90) with such a policy during a period of bank nationalization and consolidation, and this resulted in significant poverty reduction through an increase in non-agricultural activities. In addition, leveraging technology especially mobile telephony can play a major role. In South Africa and Botswana one third of people who do not have a bank account have access to a mobile phone; access to relatively simple money transfer services such as M-PESA (Kenya) and WIZZIT (South Africa) has significantly increased access by lowering costs. The main advantage of leveraging mobile technology however is adapting to remoteness and low population density through ‘branchless banking’ in areas where opening a brick-mortar branch is too expensive.

Mobilizing diasporas as an investment base beyond remittances

The price of remitting funds is higher for South-South transfers and higher for smaller amounts, which penalizes the poorest. Whatever the scale of the transfer it is desirable to lower the cost of remittances. The World Bank estimates doing so could yield an additional $1 to $3bn for Sub Saharan Africa. In fact overseas diasporas have often voluntarily worked to lower remittance costs. A good example is Mutualité d’Épargne et de Crédit (MUTEC), an initiative of the Burundian diaspora in Europe which helped reduce the cost of money transfer to zero. Another mechanism which countries with a critical mass of diasporas are employing is Diaspora Bonds. Israel and India have substantial experience issuing Diaspora Bonds; Lebanon, Sri Lanka and most recently Ethiopia (2009) have also experimented with such bonds that are made especially attractive to diasporas. The World Bank estimates the potential Diaspora Bond market for the Sub Saharan region to be $5 to $10bn, or 15 to 25% of ODA to the region.


Each of the areas we emphasize can be part of an overall aid exit strategy; the examples demonstrate that concrete steps are possible and assumptions need to be challenged. However, each of the areas is also affected by the current crisis, which makes the G20 response critical. Thus, while the G20 Communiqué’s emphasis on trade and trade finance is welcome from the perspective of effective revenue management, donors should ensure that trade and investment policies do not undermine developing countries’ ability to benefit from commodity upswings.

The IMF was the biggest beneficiary of the London G20. Additional resources without reforms to the conditionality framework - which helps perpetuate the situation of fragmented markets we describe above via unrealistic inflation targets and high interest rates - will not make the IMF any more attractive to developing countries. Southern CSOs would do well to track progress on the new IMF Flexible Credit Line as well as reforms to conditionality broadly, and to mobilize around the proposal to expand Special Drawing Rights.

Finally the threat of protectionism puts remittances and foreign workers on the frontlines of the crisis. So far the G20 has failed to take into account the real cost of social and human dislocation and has yet to provide adequately for the lack of safety nets.

Un Nuevo marco regional

By Alberto Croce, Fundación SES

A menudo escuchamos y hablamos acerca de que América Latina está viviendo una etapa nueva que permite esperar un proceso de integración auspicioso, esperado y soñado por muchos desde hace muchas décadas. Por otra parte, también es necesario advertir que esto está surcado por múltiples contradicciones. ¿Qué hay detrás de este proceso? ¿Cuánto se asemeja al sueño de integración de la “Patria Grande”? ¿Dónde es posible advertir mayores avances? ¿Cómo identificar mejor las contradicciones y cómo enfrentarlas? Son preguntas tan difíciles como necesarias de intentar responder.
El presente artículo hace una revisión los temas más acuciantes que atraviesan la región en materia de integración, como ser la producción de materias primas básicas, superávits y estrategias financieras regionales, la carga de la deuda, las nuevas tendencias políticas, el tema migratorio, los movimientos sociales, etc.

Para leer el artículo completo, haga click aquí

Good intentions aren’t enough (disponible también en Español)

By Javier Gomez Aguilar and Juan Luis Espada Vedia

Just over six years since this Monterrey Consensus (MC), only weak and limited results have been achieved, given that the Millennium Development Goals are far from being reached by 2010 and that the financial fragility and vulnerability of our countries has again been brought to light in the last few years. This is made even more notorious due to the economic disturbances generated by the bigger world economies. Within this framework, it is important to note that the MC actions are not based on principals or axes which differ from the current development model. Neither does the mobility of resources that the MC promotes prioritize the financial strengthening of our States for their autonomous management. Rather they aim to generate conditions so as these States are receptors of transnational capital and that the “goodness” of international trade only deepens economic and social concentration and differentiation.
This article explores the economic model in Latin America and the mechanism for the mobilization of internal resource and international financial resources. It also presents critics and recommendations around issues related with International Aid, Debt, International trade and the Reform of the international financial system.

To read the full paper, click here

Para leer el documento en Español haga click aquí

The Urgent Need for Financial Reform to Mobilise Savings in Sub-Saharan Africa

By Sedat Aybar and Costas Lapavitsas

A highly unsatisfactory mobilisation of savings by the liberalised financial systems of Sub-Saharan Africa has severely constrained investment and growth in the region. To a large degree, Sub-Saharan savings are directed towards non-financial assets and the informal financial sector because:
• one can demonstrate status and wealth this way
• the financial environment is typically risky
• there are few formal options
• minimum deposit and balance requirements as well as the time and administrative effort needed to access the formal sector are too high
The paper highlights the need of improvements in access, adequacy and reliability of financial assets as well as more effective public mechanisms to mobilise savings.

To read the full paper, click here

Assessing Resource Mobilization and Management Strategies for MDGs in SADC

Author: Charles Mutasa, SARPN, June 2007

In this paper the author stresses the fact that while the accomplishment of the Millennium Development Goals (MDGs) goals is extremely dependent on financing sources, the capacity to absorb donor funds and implement projects in South African Development Community (SADC) is very limited.
Lack of absorptive capacity has lead to reduced financial support and the use of other channels for assisting regional cooperation. This contributes to SADC’s lack of harmonization and represents a setback to attaining the MDGs and sustainable development in general and tends to weaken aid effectiveness.
The paper explores alternative and additional resources from both domestic and external sources and discusses the challenges to resource mobilization.

To read the full paper, click here

Innovative sources of financing for development: The Currency Transaction Tax

Author: Rodney Schmidt, North-South Institute

The Currency Transaction Tax (CTT) is one of the new mechanisms being considered by many governments, international institutions, and others to raise large amounts of independent, global, and stable monies. The revenues are to be used to finance international development and other projects addressing global issues, such as public health. This article argues that of the possible new sources of finance for development, the CTT is the most immediately practical and effective. It is safe and easy to implement, and can immediately raise at least US$ 33 billion of global, independent, and stable revenue each year. The CTT therefore appears to be the most immediate and effective new source of financing sought by the Monterrey Conference on Financing for Development in 2002, and, since then, by the UN and the “Leading Group on Solidarity Levies to Fund Development”.

Click here to read the full statement

Log In or Join

Resource Categories

Size of tags indicates the number of resources
Absorption Accountability Africa Aid Architecture Aid Architecture Aid effectiveness Aid linkages Aid modalities Aid organisations All regions Asia Pacific Bilateral Donors Budget Support By Region Capacity Development Conditionality Corruption CSOs Debt Relief Domestic Resource Mobilisation Donor Coordination Mechanisms Economic Growth Education Effects of aid Emergencies Environment Europe Food Aid Gender Good Humanitarian Donorship Governance Harmonisation & Alignment Health Hot Topics Humanitarian Aid Quality Institutions Latest trends Latin America and Caribbean Macro impacts/Dutch Disease MDGs Middle East Multilateral and International (governmental) Organisations National Policy Frameworks/PRSs Natural Disasters NGOs Ownership Productive Sectors Public Expenditure Management/Budget Sector Programme based approaches Technical Assistance Trade Vertical Programmes/Global Initiatives Workshops

Recent Forum Posts

  • The Paris Declaration is Gender Blind
  • The urgent need for transparency and accountability
  • Your Support is needed in Egypt
  • Independent People's Tribunal on the World Bank Group
  • South and the future of the world

Suggest a Resource

If you would like to suggest a resource for the Forum on the Future of Aid, please email