Dirk Willem te Velde
While UK aid channelled to the private sector should be more transparent, such investment can nonetheless have a big impact on the lives of the world’s poor
 |
| The central business district in the Ugandan capital, Kampala. The CDC’s significant investment in renewable energy in the country has led to a more reliable electricity supply. Photograph: Thomas Cockrem/Alamy |
There has been no shortage of criticism levelled at the UK government over its recent proposal to increase the limit on aid funding it can channel through its private sector arm, the CDC.
The Department for International Development (DfID) has been under fire over issues ranging from lack of transparency to a failure to demonstrate development impact. The latter point was highlighted by a National Audit Office (NAO) report published on Monday.
These are valid and important concerns that should be dealt with, as any increase in money to development finance institutions should be subject to the same level of scrutiny and accountability as the rest of the aid budget. Yet it is also worth providing a balanced account on the amount of money the UK gives to the CDC, as well as the positive impact these institutions can have on development.
Governments increasingly channel aid funds through such bodies, which can use the money to address market failures and invest in private sector firms and funds in developing countries. In 1990, there were hardly any investments of this kind, but by 2015 they had grown to $65bn (£52bn), equivalent to roughly half of global aid ($132bn).
This is an ongoing trend, and it is possible we will see annual investments by development finance institutions surpass annual aid within the next decade. It is no wonder that the global community has assigned specific roles to these organisations to address the sustainable development goals through the Paris climate change agreements and the UN Financing for Development conference in 2015.
The move out of obscurity will bring new challenges for institutions like the CDC, including working more visibly with local communities, governments and NGOs in addition to dealing with the companies in which they invest.
It is important to recognise that most jobs are created by the private sector, and that working with the private sector is vital for inclusive growth. The CDC’s annual report suggests it contributed to the creation of more than 1m jobs in 2015: directly, in the companies in which it invested, and indirectly, in linked companies.
While the techniques used to arrive at such an estimate are well-established, we can make improvements, as they do little to account for jobs created in the long term through making the economy run more efficiently. Overall, however, the CDC’s impact measures are among the best to be found among development finance organisations, aid agencies, businesses or NGOs – though they can and should be further improved.
Monday’s report rightly emphasises the need to examine attribution more closely. Whether investment would have taken place at all – or in a different way – without CDC involvement is a question that goes to the heart of impact analysis in development economics.
However, this is not a challenge the CDC can tackle on its own, and development agencies need to commission more and better evaluations.
Meanwhile, individual investments can and do improve the lives of many ordinary citizens. In 2001, Mo Ibrahim, the founder and chairman of pioneering mobile phone firm Celtel (previously MSI Cellular), spoke about the benefits of such funds. “The CDC was our first investor,”, he said, “and their presence has helped MSI attract both other developmental finance and private sector money from the likes of Citigroup and AIG.”
The positive impact of mobile phone technology on African farmers and households is indisputable. Elsewhere, the CDC’s significant investment in renewable energy in Uganda has extended the reach and improved the reliability of the network, which has helped many firms and households.
Investments by development finance institutions are now so significant that macroeconomic impacts have become visible, well beyond the individual project level. Statistical evidence soon to be published by the Overseas Development Institute suggests that a £10bn increase in exposure of such organisations in Africa would raise average incomes and labour productivity by a quarter of a per cent. The economist Finn Tarp and his colleagues have convincingly argued that aid overall has a long-term positive impact on the recipient country’s GDP. Interestingly, our evidence finds that the GDP increase from development finance institution investments is in the same range, or actually higher, than all aid together.
Of course, there are areas for improvements in the conduct of organisations such as the CDC, ensuring maximum transparency and due diligence. It also needs to be acknowledged, as the NAO did this week, that positive changes have been made.
Much better targeting is still needed to ensure that projects offering the most to the world’s poorest people – through increased job opportunities and the stimulation of economic growth – receive investment. However, even those that appear to have few direct effects on poverty can still have considerable indirect impact on jobs and development overall. The influence of development finance bodies is likely to grow. It would be better to work with them to get the best returns on transformation and poverty reduction.
No comments:
Post a Comment