Five Ways for Donor Countries to Review Their Development Policies

Note: This blog is a summary of a policy brief published by IDOS, available to read in full here.

The environment in which development policy operates has changed rapidly. The world is becoming more multipolar, and countries from the "Global South” are taking a more prominent role in global cooperation. The global economy is in upheaval, and interconnected and ongoing crises are becoming the norm. Crisis response, climate change and conflict are consuming an increasing share of development budgets. Crises also exacerbate inequality in our partner countries, which in turn contributes to undermine democratic structures. At the same time, national development policies and budgets are being questioned, most vociferously by populist forces.

For development actors and agencies, there is a natural instinct to protect development budgets by focusing on the core mandate, rather than being drawn into dealing with new demands. But ignoring the new reality in which we are operating could be counterproductive. Instead, actors should conduct a continuous review of development policy, based on the following:

1. It is commonly argued that development policymakers should maintain an “independent” viewpoint within governments, representing the interests and positions of developing countries. Undoubtedly, a deep understanding of the situation, challenges and needs of partner countries is key to an effective development agency. But this aspiration is unrealistic. It would also be more in the spirit of true partnership for donor governments to make clear the real interests and positions of their own countries. Of course, this should be done in a constructive and far-sighted way that promotes global prosperity. This approach is even more relevant in times of proliferating crises that require strong collective action, such as the prevention of pandemics, the spillover effects of conflict and financial distress, and, in particular, the management of the climate and biodiversity crises. Development policy should therefore be explicitly be integrated into broader policy approaches, and systematically contribute to overcoming global challenges.
   
   Such an approach would have important implications and challenges. It would imply disclosing national interests to partners in developing countries. While partners may have different views in some cases, this is what a “partnership of equals" should be: a good, well-functioning partnership involves recognising that there are interests on both sides. A situation where one side has significant interests and the other side is ”just trying to help” is hardly a partnership. A major challenge is to reconcile development and climate goals. Development activities very often have co-benefits for the climate, so the two agendas are closely linked. However, there are also trade-offs, which is one reason why ODA and climate finance should be accounted for separately. This requires measuring the global externalities of local development activities. With the ongoing reforms in the MDBs, such an approach is now feasible.
    

2. A renewed and concerted effort is needed to protect vulnerable people and countries from the uncertainties associated with recurrent crises. As these crises become the new normal, we need to invest systematically in building resilience. This means first and foremost to establish pre-structured crisis instruments that can be scaled up in the event of an emergency. Adaptable social security systems are key in this context and have already proved useful in a number of countries. These systems provide benefits (health advice, food or money) to vulnerable groups (such as mothers or people living in arid regions) in return for particular actions (such as visiting a health centre or participating in a reforestation campaign). This system of benefits can be scaled up in an acute crisis situation such as a drought, thus partially obviating the need for conventional emergency aid, which is much more cost-effective in the longer term. Systematic efforts should therefore be made to promote this approach. This would also help prevent the rise of populism and the dismantling of democratic institutions. Priority should be given to countries in the process of democratization.

3. Development policy must become more partnership-based, more effective and more political. In the past, development policies have contributed to undermining partner governments, via projects which are poorly aligned with the partner governments’ policies. In future, development cooperation activities should be integrated into partner structures and policies whenever possible. There should be a joined-up approach to this, with other donor agencies, e.g. in the form of country platforms such as the already established Just Energy Transition Partnerships, supported by the G20. Most importantly, policy reforms must be addressed comprehensively. The green energy transformation, for instance, is being held up by insufficient policy frameworks for green private investments. The solution is to focus then, on policy-based approaches, such as sectoral budget support or results-based financing for green fiscal reforms.
   
   This requires national development agencies to gain better understanding of the sectoral context of individual projects, including macroeconomic and regulatory constraints, the policies of partner governments, and the efforts of other donors. On this basis, sector policy dialogue in particular has a key role to play. More generally, the traditional formats of development cooperation should be reviewed and adapted to a new, modern understanding of partnership.
    
4. Development policy must fundamentally change the way it mobilises private investment, focusing less on subsidising individual investments and more on transforming markets. The catchy slogan “from billions to trillions” has been used for some time to call for more private sector investment. These calls have grown louder as public coffers have emptied. But the results so far have been disappointing. This is problematic because large-scale private investment is needed to decarbonise the energy and transport sectors, agriculture and industry. Close cooperation between private and public actors is essential. Encouraging private investment (e.g. through guarantees, risk sharing and concessional finance) needs to be integrated into an overall strategy for sectoral transformation. This approach mirrors what is currently being tried in the EU and the US: regulatory measures (e.g. emission standards) are being used to complement public investment (e.g. in electric vehicle charging infrastructure) and subsidies, for example to decarbonise the transport sector. It is problematic to focus too much on subsidies while neglecting other areas. This may be one of the reasons why efforts to mobilise private investment have so far been so unsuccessful. Moreover, an approach that focuses on sweetening private investment by providing subsidies and covering risks would not be financially feasible. The IMF has calculated in its Fiscal Monitor 2023 that this would increase the debt ratio of an average middle-income country by around 50 percent.
    
5. Finally, development partners need to team up to find solutions to the acute debt and financial crisis. Comprehensive debt relief for countries in or at risk of debt distress would be desirable. However, as this would put severe pressure on debtor countries' budgets, such an initiative is likely to gain sufficient support only in the event of a full-blown debt crisis. If this is the case, any comprehensive debt regime should be designed in such a way that it also promotes the green transition, e.g. debt relief could be linked to a transformation programme of partner countries aimed at decarbonisation and climate adaptation. Like the Poverty Reduction Strategy Papers under the Heavily Indebted Poor Countries (HIPC) initiative, debt relief could be based on “Just Transition Strategy Papers”, prepared by debtor governments. If the debt situation does not worsen, less ambitious approaches should be implemented, in particular a reform of the G20's Common Framework for Debt Treatment. In addition, debt relief should be accompanied by other measures to improve financing conditions, such as a review of national legislation to strengthen the obligations of private creditors in the event of sovereign default, and further reform of the MDB system along the lines of the G20 recommendations, including closer cooperation between the MDBs and the IMF on climate change.

Currently, development policy is between niche and mainstream; between charity and self-interest. We need an open discussion on where we go now…