Thursday, July 24, 2008

An aid bubble? - Interpreting aid trends

(unattributed source)

This graph (from a DFID presentation) shows what many people have already heard, that the volume of aid given by DFID will continue to increase, but that the amount of money being spent on administering that aid will plateau. Does this divergence mean:
  • DFID has discovered a new means of effectively giving development aid that requires less and less administrative overhead each year?
  • There is a huge amount of slack capacity within DFID that can safely be pared away for years without hindering its effectiveness?
  • This graph is prima facie evidence of an impending aid bubble that is highly likely to burst in the next few years, as one or more mal-administered or corrupted aid programs are publicly exposed, to the discredit of both the good and the bad?
  • Yes, it does mean there will be more mal-administered and corrupted aid programs in the future, but not many more people will be worried about this than have been in the past?
  • This is a good example of where there is a pressing need for an ex-ante impact assessment of a budgeting strategy ( if ever there was one)?
  • The category “Admin budget” is meaningless and in fact the real costs of administering aid have not been adequately disaggregated in this graph.
  • Or...?

You can record your opinion, by posting a Comment below, or registering your vote on this anonymous opinion poll.

My initial preference would be for the fifth option, even though it is probably unlikely that the results would have much impact on decisions that have already been made.

But on reflection option one may not be so impossible as it seems. DFID may well give more and more of its aid through third parties (multilaterals, and international programmes of different kinds). When it does this those organisations' administration costs will not appear on the DFID books as administration costs, but as aid given. And those organisations can in turn use the same device to manage the apparent levels of their own administration costs, by funding other parties, such as national NGOs.

The cumulative outcome of this re-iterated strategy may well be very perverse, adding up to a bigger proportion of aid being spent on administration than would be the case if the orginal donor had been more directly engaged and been willing to show higher admin costs in its own budget. All this is speculative though. What it does suggest however, is the possible relevance of a "whole supply chain" approach to the evaluation of the costs of different forms of aid. Unlike private sector supply chains, the total cost of delivered aid is not evident in what the beneficiary pays for the final product.

Perhaps these issues could be pursued by the new Independent Advisory Committee on Development Impact?


  1. Rick: Are you focusing on the right aid effectiveness issues? Yes, the volume of aid given by DFID will continue to increase and the recorded cost of administering UK aid is expected to decline. But there is no aid bubble. Globally, recent aid increases are largely explained by debt write offs to Iraq, Nigeria etc and total aid flows remain well below the share of national incomes achieved in 1990. As for British aid (£4.5 billion) it is still only 0.37% of the 0.7% target globally endorsed in 1970. Large administrative costs are hidden in UK aid numbers as they are in all official aid statistics. While DFID's official administration costs (about £167 million) may not be excessive they are the top of a very large iceberg called technical assistance. For the aid system as a whole, technical assistance accounts for 15 % of aid. It is not highly regarded by recipient countries and its delivery distorts local pay scales: a typical consultant earns £500 a day - more than government officials earn in a month. Under the Paris declaration donors have undertaken to cut aid transaction costs. Delivering on this promise as well as on other Paris Declaration commitments (while achieving the 0.7% of national income share) remains critical to the credility and fairness of all development assistance, including UK aid.

  2. Hi Bob. I am not saying there is an aid bubble now. Rather that if the divergent trend in the graph continues, as projected, one possible consequence will be a (DFID)aid bubble that will burst. That possibility would be independent of how big UK aid is as % of global aid flows.

    The point about large amounts of hidden administrative costs (in the form of TA)is more interesting, I think. While TA recipient views are important, equally important is how much that TA contributes to making other forms of aid affective e.g. grants. I think much of the evidence from the past would suggest the answer "not very much" In which case option 2 in the online survey may be truer than seems at first sight. And the intentions of the Paris Declaration to cut these costs might be sensible

  3. Rick
    It is from clear that more generous aid with fewer administrative strings attached would be less effective. Nor are ready made excuses to cut aid in short supply irrespective of aid volumes. For example, aid pessimists are very much in vogue in the United States despite very low shares of national incomes allocated to development assistance assistance. The politics of aid are not closely related to its economics. Thus, the hidden premise underlying all of your questions (i.e. positive aid volume trends should be a matter of deep public concern) while intuitively appealing is in fact dubious...

  4. Hi Bob
    I think you are still mis-reading my intentions. The blog raises what I think are two potentially important evaluation questions: about potential usefulness of an ex-ante evaluation of proposed expenditure patterns, and the need for a “whole of aid chain” costing of aid. I agree that there is not necessarily a positive association between scale of administration costs and aid effectiveness. That is why the survey instrument gives a number of options, including the first one that says DFID is finding more cost-effective ways of giving aid. In fact it is this first option that I find myself begrudging supporting later on down the blog, past the survey form (did you read that part?). My scepticism in this blog is not about aid volumes per se (difficult as it can be to spend existing aid funds effectively) but about the wisdom of cutting administrative costs while scaling up aid volumes. And you seem to have a tinge of scepticism yourself, when you note that the politics of aid are not very closely related to its economics. I suspect that the same also applies in the UK, but more in favour of increasing aid rather than decreasing it.

    Despite the slightly tongue-in-cheek nature of the survey form, I think I am on balance a “professional optimist” I think if you look through my past blogs the majority of them try to offer constructive ways forward.

    By the way, I should correct a mistake I made yesterday, when responding on the issue of spend on technical assistance (TA). Because costing of TA is not included in the admin cost component in the graph, reductions in TA would not (contra what I had suggested) suggest more support for option 2 on the survey.

    2009-2012. Amongst these I was pleased to see the following:

    Evaluation of the effects of a large rise in DFID’s programme budget – and concurrent decrease in administrative budget – on the delivery of the aid programme. Timing: flexible.

    You can find out more here: