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Views from the Center


This article was originally published by The Guardian.

International development has reached a crucial moment in its evolution. Given the great progress in much of the world in the past decade or so, the paradigm of north-south development assistance is now outdated. All countries are engaged in contributing to global development, supporting sustainability and poverty reduction locally, nationally, regionally and globally.

At the same time, the challenges faced by the world, in particular the poorer countries, are evolving and, to some extent, multiplying. The post-2015 discussions are firming up an agenda in which ending absolute poverty remains central but other concerns are also recognised, namely the planet’s environmental limits and the need to invest in greener growth.

In this context, the future of development aid is the subject of heated debate. Is it still needed? Who should give it? How should it evolve?

In our view, the era of international aid is not ending; it is still in its infancy. This is evidenced by the plethora of new aid agencies, both public and private, to emerge in recent years to complement, or challenge, traditional sources of funds.

But people in many aid-giving countries are not so sure (to say the least). They question the simplistic “aid works” narrative; assertions that aid is responsible for impressive improvements in human development in the past couple of decades are hard to substantiate.

More fundamentally, perhaps, they find sending large amounts of money abroad hard to justify when times are hard at home. The thinking that underpins much development cooperation has to change if we are to make the case for aid in a new era. We need a new narrative on aid.

We propose reimagining aid as foreign investment. There are four main reasons why.

First, the language of investment better reflects the reality of modern aid. The charity paradigm has long been considered patronising by most poor countries, and is increasingly considered old-fashioned even in many “donor” agencies. The reality that strategic and economic interests have always been at play in aid-giving is recognised by most DAC, or developed country, donors somewhat cautiously, but is explicitly promoted by the “emerging” contributors of development cooperation in the global south.

These “emerging donors” eschew the term aid because of its simplistic connotations, preferring the language of “mutual benefit”. They want to imply “horizontal” relationships between equals, fundamentally similar to business transactions. Investment, not charity.

The origins of official development assistance (ODA) as reconstruction begun in the aftermath of the second world war would align with this understanding of aid as foreign investment for mutual benefit.

Second, the differentiation between private investment and public aid depends on a stark separation of these two realms that has been common, at least in rhetoric, in the more advanced economies but is much more fluid in many of the emerging economies, including the Brics. Separating foreign spending into public aid and private investment is complicated by the active role played by the state in economic and business affairs.

Third, reframing aid as a form of foreign investment could be beneficial if it helps make resource transfer more accountable, shifting from charitable donations to contracts with accountability, transparency, recognition of possible failure and evaluation as key elements of a longer-term relationship.

And fourth, crucially, the copious literature on foreign private investment in developing countries (particularly foreign direct investment or FDI) is instructive for many aspects of the debate on the effectiveness of aid. Both aid and foreign investment can support growth and development, but when and where is a matter of context and specific decisions. This literature should inform aid debates, rather than being siloed off as a separate research topic.

The foreign investment literature is contested, but there does appear to be one area of consensus that isn’t evident in the aid literature: FDI works for the host country under certain conditions. The three factors that seem to make FDI more or less supportive of development objectives (as opposed simply to profit realisation by the investor) are:

  • Country context (the “prior” conditions);
  • Type of FDI (the nature of the investment and decisions made by investors);
  • Policies governing FDI (decisions made by host governments to actively manage FDI).

These factors could equally well apply to international aid and could encourage a more profound understanding of “aid effectiveness”, especially as the Paris aid effectiveness consensus appears to be struggling to survive.

The investment analogy has its limits, naturally. Most private investment is made for profit, while interventions in the field of international cooperation seek primarily to further internationally agreed development objectives. Therefore, using the language of foreign investment should not be seen as denying the element of solidarity inherent in development cooperation.

Instead, it could add a further layer to our conceptualisation of aid, and encourage us to move beyond the “recipient of charity” mentality, towards mutuality and working together for agreed outcomes.

For all these reasons, it is time the aid community started to talk about aid as investment not just charity. It could start by renaming aid “international public investment”.

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CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.