Development Agencies and the “New Normal”

Development agencies are facing a period of profound change. Upheaval from the global pandemic and urgent calls to tackle the climate crisis are happening against a backdrop of sustained demand for traditional development programming and squeezed development budgets.

In this blog, we map key trends and changes in the development landscape and highlight the implications of these changes for the future of ODA. These findings were presented at the Development Leaders Conference 2021, held earlier this month. All development agencies will need to ask themselves how to better address challenges that extend beyond national boundaries and how to respond to the increasing incidence of poverty and inequality at the national level. Both approaches are linked and can co-exist. But they require a re-think of roles, practices and capacities.

Global challenges and the development landscape

We live in a world characterised by rapid change with a significant probability of major shocks. Changes in the environment and the global economy are increasing the frequency and magnitude of both unanticipated and foreseeable shocks. These shocks can, and often do, intrude dramatically to alter the course of history. Take COVID-19, which has stalled what was a hyper-globalizing world economy, increased global poverty and deepened inequality.

Since the early 1990s until recently, the world had been witnessing an economic convergence, whereby poor countries were beginning to catch up with rich ones. COVID-19 has reversed this trend. The IMF predicts that while advanced economies are forecasted to return to their pre-crisis growth path by 2023, sub-Saharan Africa is not expected to regain the lost ground any time soon, knocking it off the economic convergence process (see Figure 1).

The pandemic has also exposed the structural vulnerabilities of local food systems, hitting already fragile contexts and vulnerable groups hard. Figure 2 shows how food import costs relative to income have surged to record levels in developing countries (in red) compared to developed countries (in blue).

Combined with the broader impact of COVID-19, the historically unprecedented increase in global poverty as a result, and the measly supply of COVID vaccines to some of the poorest countries, these problems risk derailing the longer-term process in which more countries steadily climb the economic development ladder and pull citizens out of poverty.

Dilemmas and challenges facing development agencies

In this landscape, development agencies are finding it harder to be resilient, prepared and responsive. They are now operating in a “new normal”’ and face hard choices. At the country level, huge national poverty challenges require resources, a strong presence, understanding, engagement and responsiveness to local needs and political realities. But at the global level, pandemics, conflict, displacement and climate change are huge challenges that affect us all, and require international moderation, management and finance.

Should country-based poverty reduction give way to global public goods (GPG) provision? With the increase, interconnectedness and complexity of transnational development challenges, Official Development Assistance (ODA) is coming under intense pressure to accommodate global public goods spending, and the gap between GPG spending and spending on country development challenges is narrowing. Most GPG spending is in the form of climate mitigation in middle-income countries (MICs) (see Figure 3).

Should bilateral interventions give way to multilateral engagement? Multilateral organisations have played a key role in financing the immediate response to COVID-19 and will have a key role in addressing global challenges. However, while a rising share of ODA is being allocated through the multilateral system, the increase is mainly due to the rise in earmarking rather than core funding for the system itself.

Should the focus be on fewer low-income countries (LICs) and more on middle-income countries (MICs)? And if on MICs, how do you help them both contribute to the production of GPGs but also cope with the negative externalities that derive from their under-provision. The World Bank predicts declines in poverty in high income countries and MICs while LICs are expected to see further increases in poverty. And yet MICs continue to receive a larger share of ODA at the expense of LICs (see Figure 4).

Should development agencies deploy less in the form of concessional aid and more in the form loans and catalytic aid? As recipient countries become richer, it makes sense that scarce concessional resources should focus on the poorest places, while loans and equity should be used in more well-off places. ODA provided by development agencies in the form of loans and equity is increasing. However, limited amounts of development agency ODA (relative to their overall budgets) are being allocated to mobilising the private sector through raising returns or mitigating risk.

The role and purpose of ODA in the “new normal”

Amidst the changing landscape, development agencies are facing important questions about how, where and on what limited development resources should be spent. These questions are fundamental to the work of development agencies, affecting both the main purposes of providing ODA (the objectives or goals of development spending) as well as the role of ODA (its use as a source of development finance) relative to other flows.

In a survey conducted earlier this year, we asked a sample of development agency staff and partner country officials about how the roles and purposes of ODA were changing for their agencies. Preliminary findings are presented below; a full analysis of the survey results will be published in early 2022.

When asked how the purposes of ODA have changed over the last decade, respondents reported that tackling global challenges and supporting the development of the private sector have become increasingly important purposes of ODA for their organizations (Figure 5). Our partner country survey revealed similar results. At the same time, respondents answered that the use of ODA to promote “democracy and human rights” and to “alleviate poverty and human suffering” saw the largest decrease in importance as a purpose of ODA for their agencies, over the last decade. This stands in contrast to the partner country survey which currently shows that poverty reduction has increased in importance, from their perspective.

If the purposes of ODA are shifting to increasingly focus on the provision of GPGs and to promote private sector development, then does this change expectations around the role of ODA as a source of development finance? We put this question to survey participants, and asked them to identify how the role of ODA might be changing alongside shifting purposes and the “new normal” in the development landscape. Our results show that 85 percent of respondents suggested that the catalytic role of ODA was becoming increasingly important, while almost 40 percent said that the traditional role of ODA was in decline (Figure 6). Yet results from the corresponding partner survey suggest that these trends in the changing role of ODA run counter to current partner country priorities—only a minority of partners prioritised ODA's catalytic role as opposed to others.

Taken together, these preliminary (and limited) findings, already paint a picture of shifting expectations of ODA and the agencies that provide development finance. To understand how these changes are expected to impact the work of development agencies, we asked participants to identify how their agencies would need to adapt over the next five years in response to the shifting purposes of ODA, and to select all options that apply (Figure 7). The responses show a mixed but telling picture: development agencies will need to adapt on several fronts. They will need to engage in more diversified partnerships, utilize new funding instruments, build new thematic expertise alongside traditional development specializations, and work more across government to support policy coherence for development. These changes are ongoing, but will need to be deepened in the years ahead.

Adapting to a new “new normal”?

It is clear that for development agencies, adapting to the demands ahead will be no small task. Agencies will be asked to reconcile the tension between the traditional model of country-focused development alongside calls to use ODA to support global public goods. They will need to work effectively in a more diversified development landscape, including within their own governments, and will need to develop new skills, capacities, and ways of working at a time when ODA resources are dwindling and calls to use ODA to support domestic interests remain strong. At the same time, agency-level changes will need to be combined with efforts to ensure that global norms and standards of doing development keep pace with emerging challenges and remain agile enough to provide direction amidst increasing uncertainty.

Over the next year, our work on “Rethinking and Renewing Development Cooperation” will continue to explore and provide evidence to inform solutions to the challenges ahead. Our goal is to build a body of evidence that provides practical support to help agencies remain “fit for purpose” and resilience in an era of change. For more information, please contact the authors.

The authors would like to thank Beata Cichocka and Samuel Pleeck for their invaluable research support.