The global development finance non-system

Helmut Reisen points out that the global development finance system is dysfunctional:

A prerequisite for effective ownership and efficient aid delivery, at the core of the Paris Declaration on Aid Effectiveness, is to map the rising complexity of multilateral development finance, to help identify areas for consolidation, address fragmentation and poor co-ordination at country level, and help identify comparative advantages for institutional role assignments among multilateral agencies. Such mapping identifies overlaps – leading to reduction of multilateral remit or proposals for consolidation; rivalries – leading to clarification of roles; and absences of co-ordination – leading to the design and implementation of co-ordinating structure.

I don’t think that mapping comparative advantage is the way forward. In the real world, firms do not try to analyze comparative advantage: they focus on maximising shareholder value and the ones that don’t succeed go bust or get taken over. Focusing on comparative advantage is the outcome of effective decisions, not the input. The problem in the aid industry is that there is no feedback mechanism to drive organisations towards their comparative advantage. The solution to this is to create stronger incentives – such as measuring results, greater transparency, funding outputs rather than inputs and increasing accountability – to force organisations closer to their comparative advantages. The “Gosplan” approach has been tried in development and it doesn’t work.

4 thoughts on “The global development finance non-system”

  1. In the real world, firms maximize shareholder value by exploiting their comparative advantages. That’s why investors support California wineries relative to those in Minnesota. But you raise a good point about the lack of feedback mechanisms in this instance. Probably the best way to create them is to privatise aid as much as possible. That is why (say) the Red Cross was so much more efficient with its resources in New Orleans following Katrina than was FEMA.

  2. Barry – Right: I think we are saying the same thing. The things firms do maximise shareholder value require them to exploit their comparative advantage: but there are few firms who arrive at those decisions through an explicit analysis of comparative advantage.

  3. Presumably it happens because there are lots of firms doing lots of different things, some more successfully than others, and those who don’t succeed are driven out of business. This may not take in-depth prior analysis on the part of all successful companies, you’re quite right (although many will), but similar competitive processes simply don’t exist currently in the aid industry.

  4. Right as ever. The aid industry is to all intents and purposes a “cartel of inputs”. The fact that no agency has gone out of business in the last 50 years is a very telling and worrying statistic.

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