I gave evidence to the House of Commons Committee on Public Accounts last week, about a recent audit of DFID’s approach to allocating multilateral aid. This gave me the opportunity to challenge what I think is a common misconception: that aid given through multilateral agencies is less efficient or more expensive than aid given through the bilateral aid programme. During the hearing, the chair of the Committee said:
if you are trying to work through the plethora of EU and UN-type agencies, you waste one heck of a lot of a money on the way in bureaucracy, and less gets to the front line
The Committee was a bit taken aback when I put forward the opposite case. I said:
when you look at value for money, there are theoretical reasons for thinking that multilaterals would be more effective and, in practice, such data as we have tend to support that idea.
The Committee gave me a good opportunity to explain this, though I am not sure I persuaded them. Here is why I think the big multilateral aid organisations through which the vast majority of multilateral aid is spent – such as the World Bank, European Union, regional development banks, and larger global funds such as GAVI – are generally more efficient than bilateral aid.
Why would multilateralism be more cost-effective?
1. Relative immunity from capture – bilateral donors are prone to being captured by commercial interests (eg the beltway bandits), lobbying by vocal NGOs, or short-term political pressures from legislators on a hobby-horse. Multilateral donors have more diverse stakeholders, so they are are less susceptible to capture by individual campaigns.
2. Untied aid – a particular example of capture is that bilateral donors generally tie their aid to their own suppliers, either explicitly or implicitly. This greatly reduces the value for money of aid.
3. Returns to scale – larger organisations can spread overhead over more projects. This is especially important for overseas offices, the duplication of which is very expensive. Bulk procurement can bring down prices (for example, of medicines).
4. Specialisation – It makes no sense to have lots of bilateral donors each trying to build up expertise in each subject.
5. Diversity and breadth of membership – multilateral organisations include a broader range of members, including some countries which have themselves recently successfully industrialised their economy – and so can draw on and synthesize a wider range of experiences. This diversity gives developing country partners access to a greater range of ideas.
6. Improved aid allocation by ineffective donors – If a relatively effective donor (say, the UK or Ireland) increases their contribution to the multilateral system, that creates pressure on other, less effective bilateral donors (say, Italy or South Korea) to do the same in order to maintain their relative ‘fair’ burden. So if DFID shifts money from its (relatively effective) bilateral programme to a multilateral programme (also effective, but perhaps not markedly more so than DFID) this can other push other countries to spend less through their woefully ineffective and wasteful bilateral programmes and greatly increase overall aid effectiveness.
7. Reduced spillover effects – When we think about the effectiveness of bilateral aid, we often forget about the cumulative effects on developing countries and governments of coping with hundreds of different donors. Knack (2006) refers to a forestry project in Vietnam jointly funded by 5 donors: it took 18 months and the involvement of 150 government workers to buy five project vehicles, because of the different procurement requirements of the different donors. That is why Simon Maxwell often says “don’t harmonise, multilateralize”.
We might all individually prefer to drive from our home to the office, but the roads would be impossibly congested if we all did that, so we are all better off if we pool our resources into an effective public transport system. It is similar for aid: we are all better off if we invest in a collective mechanism and resist the temptation to cause congestion by running our own individual aid projects.
The distinct roles of multilateral aid
Not only is multilateral aid likely to be more cost-effective than bilateral aid, there is much that it can do that bilateral aid cannot. It can:
1. Set and help spread norms and standards – for which individual donors lack legitimacy and credibility
2. Invest in global public goods – in a way that bilateral donors are usually unwilling to do.
3. Act in politically sensitive situations – for which sovereign countries lack neutrality and credibility.
Conversely, making more use of multilateral aid would free free up staff in foreign ministries and development agencies to focus on non-aid policies, such as trade, corruption, illicit financial flows, migration, environment, all of which have huge impacts on developing countries but which get crowded out by the priority given to managing aid budgets.
And in practice?
That’s all very well in theory, but what about the real world?
Shamefully we have very little data with which to compare the cost effectiveness of bilateral and multilateral aid.
But in the CGD Quality of Aid index, a multilateral agency tops three of the four dimensions; a multilateral agency (the World Bank) tops the index as as a whole; and all the multilateral agencies (apart from the UN agencies) come in the top half.
Almost all the aid establishment has a reason to claim that bilateral aid is better. Politicians prefer bilateral aid because it increases the prestige and reputation of the donor country. NGOs and consulting firms reckon they have a better chance of getting a slice of aid spent through their flag-carrier aid agency. The aid bureaucrats in many governments prefer to control spending themselves than to provide core funding to multilateral agencies. The one group of people who might think otherwise – the multilaterals themselves – are constrained from saying so by their shareholders. But the fact that almost everyone has an incentive to say that bilateral aid is better doesn’t make it true.