Shaking up the aid game

“China will continue to offer, as always, necessary assistance to Africa with no political strings attached,” President Xi Jinping promised on Monday. For decades, developing nations have been forced to jump through hoops in order to access cash from aid agencies. Now they are starting to push back, bolstered by support from “non-traditional” sources of development assistance, including large emerging economies such as China and India, philanthropists such as the Gates Foundation and “social impact investors” such as the Shell Foundation. Xi’s statement of intent underscores the enormous consequences of a rapid growth in aid from non-traditional donors.

In 2011, the World Bank suspended aid to Cambodia over concerns about land evictions in the country’s capital, Phnom Penh. Rather than bow to pressure, Cambodia declared its intention to phase out World Bank lending to fund new infrastructure. At first glance, this is surprising: as one of the poorest and most aid-dependent countries in South East Asia, why is Cambodia refusing support from a major funder of infrastructure?

The answer, of course, is China, which now provides more than twice as much aid to Cambodia as the World Bank, and has shown strong interest in meeting the country’s infrastructure needs. Cambodia likes Chinese aid: it is faster and less bureaucratic than that from traditional providers, it is largely unconditional and it responds more directly to the country’s priorities. Until recently Cambodia could not scrape together the aid it needed to fund transportation, leaving the sector under-funded compared to the social sectors favoured by traditional donors. Today, thanks to China, it has more than enough money for key transport infrastructure.

Cambodia is not alone in having more choice about how it finances its development needs. New research from the Overseas Development Institute suggests that support from newer actors could start to exceed traditional aid. Our estimates suggest that even by 2009, aid from non-traditional providers stood at $53.3bn—31 per cent of all aid. Given rapid growth in emerging economies and new commitments on climate finance, today’s figures are probably even higher. Non-traditional assistance has expanded ten-fold since 2000, when it stood at only $5.3bn—8 per cent of all aid.

In part these trends are being driven by rapid growth in middle-income countries, including the BRICS (Brazil, Russia, India and China). Aid from these sources has grown more than five-fold over the past decade, reaching around $11.5bn in 2009, and is likely to continue growing rapidly, in sharp contrast to the aid cutbacks being seen in many traditional donor capitals.

What all this means is that a country’s vision for its own future will be more important than ever before. No longer must countries succumb to the latest demand from donors, whether it is sensible (eg protecting land rights in Cambodia) or not. As well as Cambodia, countries such as Ethiopia are also using this new choice to play donors off against each other and maximise aid which supports their own priorities and needs. If traditional donors impose safeguards which the government perceive to be slowing down the process, they shift to newer providers—even if this means taking on loans with higher interest rates. In short, for developing countries, the new “age of choice” may offer a chance to cut the strings attached to traditional aid relationships and instead pursue their own visions for development.

The main conundrum will be for donors, who may find themselves in the unusual position of having to compete with other providers to encourage developing countries to accept their aid. This competition could help to drive up the quality of aid—a goal largely eluded by countless high-level meetings on aid effectiveness and pronouncements from G8 platforms. Competition could finally lead donors to act more quickly to provide funds, and to reduce cumbersome bureaucratic requirements which slow down aid and overload governments, as is already happening in Cambodia. Competition could also force donors to implement longstanding commitments to provide aid in support of a country’s own strategies, and to allow them to manage aid themselves, helping them to build up capacity to run their own affairs rather than remaining continually reliant on donors. But there will also be challenges: donors may find it harder to demonstrate short-term results—something that many are under considerable pressure from taxpayers to do in this era of austerity.

The aid game has changed. In this age of choice, donors will have to learn to take no for an answer.