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Theo worked with Owen Barder and the CGD Europe team. His work focuses on finance for development, with an emphasis on novel contracts and financing structures that enable development actors to deliver social returns by collaborating effectively with the private sector. Theo grew up in India and Ethiopia and has a Bachelor’s in economics, finance, and politics and an MSc and PhD in economics. During his PhD, he was an Overseas Development Institute (ODI) Fellow in the Pacific, where he worked as an economist for the Government of Vanuatu. Before joining CGD, he worked at the Ministry of Planning and Investment in Hanoi.
The UN reckons that more than 11 million Syrians have fled their homes, nearly 5 million of whom are now in Turkey, Lebanon, Jordan, and Iraq. More broadly, UNHCR estimates that there are about 65 million forcibly displaced people around the world, including more than 21 million refugees. That’s about the same as the population of England and Wales, or the population of Italy.
We all want to fix this problem. Affected families endure a double burden of poverty and uncertainty. Displacement can threaten regional stability. And it fuels divisive politics in countries that perceive themselves to be at risk of large inflows of refugees. So why is displacement still a tough, unchecked challenge?
One major reason is that displacement isn’t—yet—a development problem.
That sounds odd. There are tens of millions of people on the ‘displacement caseload.’ Moving people off the caseload is incredibly slow. And people stay displaced for more than 10 years on average: we need sustainable solutions, not short-term fixes. So it feels like displacement—a big, slow-moving, large-scale, long-term problem—is clearly a development issue.
But displacement falls between the cracks of how we traditionally tackle these challenges. The usual toolkit of cheap financing (like World Bank IDA lending) and technical assistance focuses on lower-income countries. That’s a bad match for a caseload that is now mainly in middle-income states. As a result, we’ve relied on annual humanitarian appeals to tackle displacement instead of the long-term development finance that is a better match for these long-term problems.
Why do we need a toolkit of longer-term instruments and programmes to deal with displacement?
Reason #1: It’s big and slow
Sixty-five million is a big number.
It helps to frame the pieces of this challenge to say that the number of asylum seekers is a population roughly the size of Puerto Rico’s. The number of refugees is a population roughly the size of Sri Lanka’s. The largest share of displacement is actually families who cannot leave their countries—the number of IDPs is roughly the population of the Ukraine.
So available figures suggest roughly 1 in 300 displaced people had a durable solution. At that rate, it would take well over 200 years to move everyone off the caseload—and only if no new people were displaced.
Reason #2: It’s long-term
These figures help get a fix on the problem, but ‘headcount’ statistics alone aren’t very helpful. It’s total time displaced, not only the number of displaced, that matters. People have often claimed that the average duration of refugee displacement is about 17 years. That turns out to be a zombie statistic, accepted mainly by dint of repetition.
The truth is more complicated. Some top-shelf new analysis by Xavier Devictor and Quy-Toan Do, two World Bank economists, applies some minimal assumptions to UNHCR’s data to back out what durations look like.
Source: Devictor, Xavier, and Quy-Toan Do. "How many years have refugees been in exile?." World Bank Policy Research Working Paper 7810 (2016). CGD Analysis. Data requested from authors.
The results suggest that the average time (the yellow line) for refugee displacement peaked in 2005, and has declined since then to about a decade. But it also corroborates the intuition that displacement is driven by large ‘episodes,’ some of which create groups that remain displaced without an end in sight. The teal line is the average time of displacement among people who have been displaced for five years or longer.
The Syrian crisis helps illustrate both trends, and the fact that shorter average lengths of displacement don’t always reflect progress. The recent large outflow of Syrian refugees (now nearly a quarter of the world’s refugee population) has pulled down the median and mean length of displacement because they have not been displaced for very long. But even in optimistic scenarios, these families are likely join the ranks of those living in protracted displacement for many years to come.
Reason #3: It’s mismatched
Another misconception is that displacement is a ‘poor-country problem.’
This chart shows the different categories of displaced people based on the income category of the countries they’re living in, using 2016 World Bank income classifications. Most of the caseload is in the world’s middle-income countries. Lebanon, for example, is an upper middle-income country. But close to 20 percent of its population—every fifth person—is a Syrian refugee.
Notes: UNHCR Population Statistics. CGD analysis. Headcounts only include ‘Asylum-seekers’, ‘Internally displaced persons’ and ‘Refugees (incl. refugee-like situations).’
Generally, when problems are long-term and concentrated in countries with cash-strapped public services, we tackle them using longer-term, subsidized lending (and policy advice for reforms that are attached to the cheap loans). World Bank lending is a primary example of this.
Displacement falls between the cracks of that model. Even though a significant portion of the caseload is long-term and requires different solutions, we are still largely using the same short-term humanitarian fundsand approaches. The chart below shows the amount of funding donors have paid the humanitarian response plan process: the level of short-term humanitarian funding has grown in perfect lockstep with the number of displaced people.
Source: UNHCR Population Statistics and UNOCHA Financial Tracking System. CGD analysis. Headcounts only include ‘Asylum-seekers’, ‘Internally displaced persons’ and ‘Refugees (incl. refugee-like situations).’
That means we’re relying on the short-term financing of appeals, rather than the long-term development finance tools that might be a better match for protracted displacement. That’s a fundamental mismatch of financing tools and purpose—like trying to buy a house using a credit card instead of a mortgage.
Bridging the divide
Recent global summits have significantly increased awareness of the mismatch between the changed nature of displacement and legacy approaches. This includes innovations that bring together the expertise, resources and leverage of development and humanitarian actors.
For example, the World Bank’s Global Concessional Financing Facility now offers loans at cheaper rates to middle-income countries to address the needs of refugees and host communities. The broader Global Response Crisis Platform addresses prevention, preparedness, and response. And the Grand Bargain launched at the World Humanitarian Summit in Istanbul in May this year promises to increase humanitarian-development collaboration, in part through more joint analysis and planning.
There’s a lot of work left to do. We need to ensure that development solutions stay laser-focused on the well-being of both displaced people and the communities in which they live. And there are difficult questions about how to protect civilians while engaging governments. For example, IDPs are often beholden to the governments that displaced them.
Tackling these challenges means accepting that they’re tough, long-term, and mismatched to our legacy financing rules. Of course, getting the diagnosis right doesn't mean that the patient will get better. But it does mean that a combination of smart, brave political leadership and better-tailored financing can deliver the sustainable solutions that displaced people need—and deserve.
Thanks to Janeen Madan and Caitlin McKee at CGD and to Madeleine Gleave and Lauren Post at IRC for great comments and edits on an earlier draft. Naturally, all remaining errors are totally their fault.
This post is part of CGD’s work looking at the UK’s role in delivering shared prosperity beyond Brexit. We’ll be looking into further ideas in the coming weeks.
Whatever you think about Brexit, it doesn’t make sense to secure Britain’s economic future by adding red tape. Theresa May’s government wants to tamp down net migration. That’s has opened space for some new self-defeating proposals. During the UK’s recent Conservative Party conference, Home Secretary Amber Rudd outlined a plan to tackle immigration by enforcing a new visa system for international students.
Clamping down on international students threatens a surprisingly important export sector. It damages Britain’s brand and limits an important instrument of soft power. And it would needlessly constrain opportunities for intellectual and professional achievement for foreign-born students, undermining a valuable and often-unrecognised contribution that the UK makes to shared, global prosperity. Migration is a contentious topic, but on this issue the numbers are clear: most voters don’t think of short-term students as immigrants.
A simple, one-line change avoids this false dilemma: redefine the way the Office of National Statistics calculates Long Term International Migration to exclude short-term and temporary non-EU students.
These students arrive in the UK to study and then leave. There are already strict rules in place requiring those who want to stay to re-apply to transition to other visa classes. And according to a year’s worth of data from exit checks, only around 1 percent of foreign students actually overstay. Whether or not you think net migration is a problem, it's bad policy to target the softest part of a badly-defined indicator—rather like “losing weight” by taking off a heavy coat before getting on the scale.
We don’t think of teaching as an export, but it is. In the jargon, education sold to foreign students is a ‘mode 2’ services export. That shows up as a credit in the UK’s balance of trade. International students contribute directly to University finances and the cities and towns in which they study. Figures collected by accountancy firm Grant Thornton for the non-partisan Times Higher Education indicate that international students paid UK universities more than £4 billion in fees in 2014-15.
They also contribute a further multiple to local economies—£3.5 billion a year in 2011-12 according to analysis by Universities UK, an education industry group. (The British Beer & Pub Association, another industry that also profits handsomely from students, has been curiously silent.) And non-EU students subsidise their peers by paying much more for the same courses, much as the pinstriped bankers who instinctively turn left when boarding the plane help pay for those of us at the back. British undergraduates at Oxford next year, for example, will pay £9,250. Their non-EU peers pay up to £23,190.
Giving international students access to the hallowed halls of British institutions is also an important instrument of the UK’s soft power. A remarkable paper published in the American Economic Review—our field’s most prestigious and competitive journal—shows that being educated in democratic countries catalyses the promotion of democracy at home. Students, in short, bring Britain home with them.
And there’s the well-established fact that studying abroad is good for the students themselves. It increases earnings by upgrading skills. It improves employment by conferring a recognised qualification. It expands their social and professional networks. And it enables them to work in a globalised world. Research shows that English-language skills can create a wage premium of up to 20 percent. Surprisingly, most of these important benefits flow to relatively poorer countries– data from the OECD show that in 2012 (the most recent year for which figures are available) more than half the foreign students in the UK were from countries that receive foreign aid.
As for the politics of this problem, most people inherently recognise that students are not migrants at all. Polling from 2014 commissioned by Universities UK found that nearly 6 in 10 respondents would not reduce the number of international students even if that made it harder to reduce immigration numbers.
Students can’t just transition to the labour market: non-EU students who want to remain in the UK to work still need to apply under other visa categories; permanent settlement still requires a successful application for Indefinite Leave to Remain (ILR). And there are already policies in place targeting institutions that might facilitate visas for people to work under the guise of studying. If the Home Office rejects just 1 in 10 or more visa applications associated a particular institution, it loses its designation as a trusted sponsor and faces a higher compliance burden, making it much harder to accept international students in the future.
Early last year, we (along with our colleague Michael Clemens) introduced a list of 13 shovel-ready improvements that would support British employers, grow the economy, provide better services to British consumes, and support development overseas. Revising the definition of migration to exclude international students was on our list then. Now it seems this one-line fix is more urgent and important than ever.
“Private sector” appears 18 times in the outcome document from last year’s UN financing for development conference in Addis Ababa—exactly the same number of times as “international cooperation.” As we approach the first anniversary of the world signing up to the SDGs, where are the ideas that bring private sector ingenuity and capital to delivering them? In the coming weeks, we’re going to tell you about six.
They are the result of a challenge that CGD laid down to UBS, a Swiss bank: can its staff use their financial expertise to address urgent problems in international development? CGD’s senior fellows worked up a list of tough development problems for an internal Grand Challenge competition. We asked them how clever financial engineering and smart product design could help us:
Crowd investment into neglected diseases?
Help investors divest from carbon to fight climate change?
Catalyse investment in infrastructure?
Make it easier to save for the future?
Transform education by using data to reward learning outcomes?
More than 1,200 UBS staff from across the world took part by forming 300 teams and coming up with 250 ideas. UBS executives and CGD senior fellows whittled those down to just six finalists, and a group of CGD senior fellows gave these six teams focused feedback on how to ramp up the development impact of their business cases for new products, services, or funds. These were all compelling and clever, and we’ll tell you about them in a series of blogs. But there could be, as they say, just one winner: a single team won out in a tough jury session held in Zürich in June.
The winning concept is nattily-named Spavest (for SPend, sAVe, invEST—we know, we know...). It’s an automatic savings app that sits on top of normal transactions to make building up a healthy pot of savings much easier for anyone using electronic payments. Each time someone enrolled in Spavest pays for something, a small percentage of the transaction is shaved off and deposited in a long-term savings account.
Rather than creating liquid assets to protect against ill-health or unexpected expenses which derail family finances, Spavest’s app helps households save for retirement or other long-run goals. That means the savings can be accrued slowly and pooled into cheap, safe investments like index funds.
That’s a smart solution to a surprising new problem. Saving is psychologically taxing, and we all struggle to save enough (this is true of people who are relatively poor in richer and poorer countries alike). That’s now creating a downside risk for otherwise dynamic emerging economies: many developing countries are, in fact, ageing quickly. Birth rates are at or below the 2.1 replacement rate that populations need to sustain themselves across emerging Asian and Latin American markets.
As a result, the number of elderly people to workers (the “old age dependency ratio”) is rising. Despite rising incomes, this shift creates a mismatch between elderly populations and the resources for their care. Even if we account for better productivity and later retirement, governments and social safety nets have not kept up.
Spavest and related interventions sit in the wedge between demand for savings and supply of cheap, scalable, sustainable, and psychologically easy ways to save. Packaging the idea as an app takes advantage of the growing number of smartphone users in frontier economies. The GSMA, a mobile operators industry group, predicts that four-fifths of smartphone connections will come from the developing world by 2020. And people in a growing list of countries are already leapfrogging some banking services on even simpler technology, making electronic payments through M-pesa and related protocols.
Let’s be clear: Spavest probably won’t start out by targeting the 'bottom of the pyramid'. For one thing, along with China and other emerging economies, the current business plan would roll out the service for lower-income people in the UK and the US. And in frontier economies, its primary users will be people comparatively well-off enough to own smartphones. Though research by Pew finds that smartphone use is quickly rising in emerging economies (and you can pick up a barebones model for less than $20 in some places), the very poorest of the poor generally don't use mobile payments or have the slack in their budgets to accrue savings.
But that’s okay. People just a rung or two up the ladder also struggle to save, continue to share unequally in the fruits of economic growth, and deserve to reap the benefits of precisely these kinds of innovations. The premise of working with the private sector to deliver development wins cannot be that every intervention tackles every market segment, or that we focus only on innovations which need continuous subsidies to be viable.
Over the coming weeks, Spavest’s originators will take their idea through more rounds of feedback and iteration with CGD’s senior fellows. After that, there’s a real chance that Spavest will be piloted in some key test markets.
In the end, there are two simple reasons that the global public sector—donor agencies, private foundations, national governments, and multilateral agencies—should want to work with private firms: finance and function. Our ambitious Sustainable Development Goals are underfunded, with an estimated gap of over $2 trillion a year between what is needed and the public funding that’s on the table. Even if the global public sector had deep enough pockets, though, there are innovations that tackle development problems that private firms are better placed to develop and deploy. Governments might pay for roads, but we’d be in trouble if bureaucrats built them.
So bringing the public and private sectors together is about “how?” much more than “how much?” CGD’s new workstream on innovative finance focuses on how to effectively balance the public sector’s patience with the private sector’s appetite for risk and capacity to fail, learn, and iterate.
The financial sector hasn’t covered itself in glory through the financial crisis and other scandals. But the artificial dividing line between the issues people who care about fighting poverty rightly obsess over and the solutions that firms like UBS can develop impacts billions of people every day.
Really delivering on the SDGs means gaining a level of comfort and a level of expertise in crossing that divide. Done right, we will unlock much more capital and much more innovation for the global poor.
Over the coming weeks, CGD’s senior fellows who coached finalists in the Grand Challenge will be posting brief blogs about the proposals, and on what else could be done. You can read about the business cases here.
UBS provides unrestricted support for CGD's independent research on innovative finance for development. UBS also supports CGD's participation in its Grand Challenges program.
In case you missed it, catastrophe bonds recently made it to the cover of the Wall Street Journal: a once-sleepy, wonky corner of the insurance market is poised for disruptive growth. “Cat” bonds are effectively a cheaper source of large-scale insurance coverage against clearly measured risks like earthquakes, storms, or even disease outbreaks.
The insurance industry’s rich jargon aside, these are simple products. Like a bond, someone lends you money and you pay them an interest rate. The twist is that if a pre-agreed disaster or other event happens, you don’t have to repay. Setting out clear conditions for “triggering” the bond based on objective data like the violence of an earthquake reduces uncertainty about the value and timing of your post-disaster income. That, in turn, facilitates planning and preparation.
Generally, though, coverage hasn’t trickled down to the poorer and most at-risk countries—precisely those which are most vulnerable when aid fails to arrive or arrives piecemeal. Parsing data on cat bonds handily provided by Artemis, an industry observer, shows that less than a twentieth of the total value of these products issued since 1996 covers risks in countries that the World Bank classifies as upper middle-income or below (places where income per capita is $12,475 or lower). They have mainly covered risks in the US and other high income countries (HICs).
Notes: Catastrophe bond issuance data from artemis.bm. CGD analysis. Totals overstate issuance due to overcounting, for example allocating the full value of a contract to both categories if both US and Caribbean risks are covered.
Information, cost, and basis risk seem to be at least three constraints on scaling catastrophe bonds up and across:
Agreeing on these contracts requires technical nous
They’re bespoke, so you need to pay for advisors and catastrophe modeling experts
The contracts are (mainly) based on triggers rather than actual losses. That creates basis risk—a storm might cause damage, for example, but not invoke the bond’s trigger.
Examining the handful of transactions that do cover developing regions bears this out. There are cat bonds covering risks in Turkey, Mexico, and a group of Caribbean countries (through CCRIF, a regional mutual insurance facility). Those issuances depended on technical and policy support from the World Bank, without which it would have been difficult—probably impossible—to navigate these complex transactions.
One way forward is to rely on centres of technical excellence like the World Bank to facilitate risk transfer deals. And it makes sense for the Bank to deliver those transactions alongside its other “risk finance” tools, like emergency credit lines. But this deal-by-deal approach is unlikely to catalyse a broad market of catastrophe bonds covering a full range of developing countries’ risks.
We might be sanguine about the gap between insurance demand in insurance supply if aid were much more effective at tackling the consequences of natural disasters—in short, if aid were ‘as good as insurance.’ But the premise of a new CGD working group focused on improving emergency response is that ex-post aid is increasingly unfit for purpose because it is overstretched, small compared to needs, prone to arriving piecemeal and late, and able to distort incentives to invest in lowering losses.
As a result, one of the exciting questions that our working group is tackling is how donors can scale up access to these kinds of insurance instruments, perhaps by streamlining access to the necessary technical assistance, bearing some share of premiums, or commodifying them so that more institutions, agencies, and governments can more readily deploy them.
If ex-post aid is a bad substitute for insurance, there’s a compelling argument for substituting insurance for aid. Cat bonds are one part of the toolkit. Scaling up this market for lower-income countries would provide better shielding against many risks that undermine development overseas. It would leave more cash in donors’ pockets to tackle the kinds of emergencies that are hard or too expensive to insure against. And it would provide the kind of protection to poorer and vulnerable places that rich countries and large firms are choosing for themselves.
When a disaster strikes, we are urged to send money, and many people do—but is there a better way to fund the relief effort? My guests this week, DFID chief economist Stefan Dercon and CGD senior analyst Theo Talbot, believe that insurance can help.
We can’t stop natural disasters from happening, and despite our best efforts, man-made conflicts and the suffering they unleash are likely to continue. When such a disaster strikes, we are urged to send money, and many people do, very generously—but is there a better way to fund the relief effort?
My guests on this week’s CGD Podcast believe that insurance can help. Stefan Dercon is the chief economist of the UK’s Department for International Development and a professor of economic policy at the University of Oxford. He recently coauthored the book “Dull Disasters? How Planning Ahead Will Make a Difference” with Daniel Clarke from the World Bank. Theo Talbot is a senior analyst with CGD Europe who is co-running a new CGD working group on catastrophe insurance for humanitarian and emergency assistance.
Under the current model, Dercon explains, governments wait until disaster strikes and then scramble for resources, which usually can’t come in quickly enough. “You may have made some kind of plan,” Dercon says, “but if only half the money comes in, how are you going to use it?” The lack of resources can also create competition between relief organizations, impeding any kind of coordinated response.
Insurance could help change that, Talbot tells me: “Preparedness [for disasters] creates government capacity. It means that we can invest money where it’s most effective. And it means that we know how much we’re going to have brought to bear… rather than having to go to the international community and hope for the best, resulting in delayed, fractured, and mismanaged funding.”
Listen to the podcast above, and learn more about disaster insurance in the new CGD report Payouts for Perils.
Cash transfers might be the next big thing in international development. Rather than spending money on technical assistance or in-kind aid, we can transfer money directly to people in need, making our assistance more effective and often much cheaper. The tenor of the discussion on cash transfers has shifted from ‘whether’ to ‘how’ in development agencies. But has public opinion kept up?
The recent World Humanitarian Summit called for increasing the share of aid given as cash. Agencies like the IRC and World Vision committed to hard targets for the shares of their aid they will deliver as cash. And a high-level panel convened by CGD and the Overseas Development Institute concluded that cash transfers are an effective, efficient, and equitable way to assist people in the majority of emergency situations.
Yet many people think that spending money this way is risky. Rather than using aid for education or to put food on the table, the reasoning goes, households might waste it on things like alcohol or cigarettes. Frontline agencies and donors depend on political endorsement from taxpayers—if public opinion shifts against cash transfers, it would imperil the fragile consensus emerging in their favour.
Our analysis of new survey data suggests that support for cash transfers is modest and fragile. Donors—who are poised to leverage a promising new way of delivering aid to do more good for less money—must continue to make the public case for cash transfers, and continue to present the remarkably strong evidence that they are not misspent.
We asked 10,000 people in 28 countries
We were fortunate to work with Dalia Research, a Berlin-based startup, to poll the European public about cash transfers. Dalia’s secret sauce is designing large-scale internet surveys that capture a cross section of European society without over-representing a single group or country. They typically rent their services to top-tier news organisations but have an interest in public policy and international development, so kindly agreed to let us add a small number of questions to a recent survey round in March.
Original survey data from 10,000 respondents across 28 European countries shows a heartening, albeit modest, level of support for cash transfers. On average, people choosing how to split up €5 in aid between cash and traditional in-kind aid would spend €1.9 of it as a cash transfer when the money is spent on ‘good’ things. But our data also show a steep decline in support if there’s a perceived risk that even some of that money will be misspent. When some of the cash might also be spent on something bad, the average choice of how much to allocate as cash drops to just €0.9.
We asked respondents to decide how much of €5 in foreign aid should be spent as a cash transfer when some of the cash would be spent on schooling and food, and, as a follow-up question, when the cash would be spent on schooling, food, and some on alcohol. Asking the ‘schooling’ question first gives us a sense of the preference for transfers when they are spent on something people consider good; that enables us to compare support for cash when, in the second question, there’s a risk of ‘some’ misspending on something bad. Asking the questions in this order every time does create a risk that respondents are primed to punish recipients, but due to the structure of the survey, we couldn’t investigate this further.
The overall effect of introducing this risk of misspending is dramatic. Looking at raw percentages in our sample of 10,000 respondents, support for cash transfers erodes precipitously, moving from the blue bars to the red ones.
The perception of misspending causes a steep discount at every level of support. The bar graph below shows the average level of support for cash when recipients spend a little on alcohol, divided up by how many euros allocated to cash when it was only spent on schooling and food. There is a hefty ‘penalty’ for misspending, regardless of the initial level of support for cash transfers. For example, people who would allocate the whole €5 as cash at first (the rightmost bar) drop their support to an average of €2.1– nearly a 60 percent decline– when the risk of ‘misspending’ appears.
One of the features of survey data is that we also get demographic information about respondents. Those characteristics could be hiding valuable correlations.
For example, our (biased) view before doing this analysis was that older people are reluctant to give aid in cash. Is that accurate?
The figure below compares the ‘effect’ of different characteristics on preferences for aid as cash, both when it is spent on schooling and when we introduce the possibility it is spent on alcohol. The results show that older people are generally less willing to give aid as cash, and are even less forgiving when money is spent on alcohol. People who report being better educated support giving more of the €5 as cash, but this largely vanishes when alcohol is mentioned. The survey also asked people whether people thought their country’s economic outlook would improve over the next year or not. Initially, people who were optimistic were not consistently more likely to favour cash, but when alcohol was mentioned, it was the optimists who were more forgiving.
Finally, men were less willing than women to give aid as cash when it would only be spent on food and schooling. But they are consistently more likely to support cash transfers when recipients might buy alcohol. This is either a quirky result or an unexpected demographic in favour of cash transfers that we should be racing to leverage. Bros for Development, anyone?
Don’t stop believing. And don’t stop making the case for cash transfers.
Considering voters’ and taxpayers’ preferences for how aid is spent is not academic navel-gazing: development professionals have coasted on the presumption of public support to their detriment before. Since 1974, the Netherlands had been a leading donor, meeting or exceeding the international target for spending 0.7% of GNI as aid. That ended in 2013, when the right-leaning Volkspartij voor Vrijheid en Democratie announced it was withdrawing support for the target, setting off a stampede for the exit as other parties followed suit. Spending is trending down, possibly reaching 0.5% by 2018.
The lesson here is that consensus around aid or types of spending is fragile. It falls to the global public sector to deploy transparency, evidence, and old-fashioned persuasion to convince electorates that cash transfers are a better way of doing business. The evidence is on their side: cash transfers are probably the most rigorously evaluated type of development intervention in history. Though some households spend some of their transfers on things like booze or cigarettes, that share is vanishingly small (indistinguishable, in many cases, from statistical noise). And the effects on outcomes ranging from female empowerment to children’s educational attainment are consistently both large and positive.
Cash transfers can save money and time, support local entrepreneurship and markets, and deliver strong development outcomes. Responses from this Europe-wide survey suggest that in order to realise these gains, donors and humanitarians must keep working hard to bring public opinion along with them. And history suggests that failing on this point risks losing the mandate to push ahead with a potentially transformative means of tackling deprivation and poverty overseas.
You can download the Stata .do file we used to clean the raw data and produce these graphs. Dalia asked us not to share the respondent-level data. If you’re interested in using it or in learning more about them, please get in touch with Niklas Anzinger at email@example.com.
Administrators in colonial-era Delhi, the story goes, had a problem. The growing capital city bordered agricultural land, bringing more people into occasionally deadly contact with a subcontinental rogues gallery that included cobras and banded kraits.
The administrators’ novel solution was to give the private sector an incentive to supply a public good: they offered a bounty for dead snakes. Supply did indeed rise to meet demand in response, but not quite in the way they had hoped: local entrepreneurs reacted to the bounty by farming snakes.
Civil servants realized they were running a costly but socially useless snake-farm subsidy program and ended the scheme. That must have seemed like a sensible response to a scheme that wasn’t working as intended. But the farmers, with their urban snake farms now unprofitable, released their stocks into the wild. The administrators’ well-intentioned plan may have made Delhi safer at first but much less safe in the long run.
Economists characterize these as “principal-agent problems”: how does the party who pays (the principle) maximize the chance the implementer (the agent) does her job well—or at all? Our CGD colleagues have helped to develop and promote the concepts of Cash on Delivery (COD) Aid and Payment by Results (PbR) that, if applied properly, help mitigate principal-agent problems by paying implementers for results rather than prescribing or supplying inputs and hoping that we choose the right ones, in the right combination, at the right time, that are appropriate for the local context.
But didn’t our figurative colonial administrators pay for outcomes? Not quite. They rewarded people based on a measure that (it turned out) could be increased or decreased without any change in snakes on the ground, creating opportunities for gaming.
Linking payments to intermediate steps or inputs, whether snakes killed or shelters counted, risks creating incentives for partners to goose metrics rather than deliver the output we really care about. The cobra effect, then, was gaming with pernicious consequences, causing harm beyond merely absorbing budgets and other scarce resources.
If we designed a similar scheme today, we might pay local administrators based on reductions in the number of snake bite deaths, providing them with an incentive to award bounties for captured animals rather than farmed ones and to experiment with more effective and cheaper approaches such as education campaigns, encouraging people to report snakes for capture by professionals,or rolling out innovative, cost-effective medical protocols to reduce mortality.
Generally, the further we go along the chain of causality, the closer we come to the outcome on which we should contract. Cobra effects are more likely to arise when a funder rewards an intermediate step (snakes captured) rather than the underlying objective (fewer snake bites).
Studying cobra effects reminds us that payment by results is no panacea: funders still need to think hard about whether the actions they pay for will actually deliver valuable outcomes. Gaming has negative connotations, but entrepreneurs in Somalia or Hanoi show us that incentives work, even in resource-poor environments.
The lesson is that the onus lies squarely on funders to minimize waste and maximize impact by contracting on the right outcomes—whether it’s food aid delivered to those in need instead of just more food aid, actual exports rather than inflated statistics, or fewer deaths rather than more snakes in the bag.
Tanzania’s Morogoro Shoe Factory: Underwritten by the World Bank in the 1970s to supply the entire domestic market and produce for export, it never produced more than 4 percent of its capacity before folding, leaving behind a trail of dodgy deals and unpaid debt.
In early 2014, USAID announced a $10 million facility to backstop loans by the Kenya Commercial Bank to local firms so that they could buy GE medical equipment, repaying half the face value of loans that default.
The Advance Market Commitment for pneumococcal vaccines: Because pharmaceutical firms cannot invest in R&D for vaccines against diseases that primarily affect poor people, donors offered vaccine makers a guaranteed price per dose if they could produce a vaccine that met effectiveness and safety criteria.
No prizes for identifying Number 3 as the odd one out. In the first two cases, the guarantees and loan subsidies were given to firms picked out by the donor. The donor support was not conditional on success. The first project turned out to be a famous boondoggle. The second uses the US aid budget to subsidize an American manufacturer by enabling a bank to make riskier loans. The AMC, by contrast, offered a reward for which any company that could compete. Firms would get paid only if they succeeded in developing and producing a new vaccines. This induced two competing pharmaceutical companies to develop and produce new vaccines. Projections through 2020 suggest that access to pneumococcal vaccines will prevent an estimated 1.5 million children’s deaths.
Of course, we have hand-picked these examples to make a point. We are enthusiastic about the growing interest in supporting private investment in developing countries, but it matters a lot how this is done. The sorry history of failed and distortionary partnerships should tell us something about how donor countries can do a better job of working with the private sector.
In a new paper, we argue that the tools that donor countries usually use to “crowd in” the private sector — guarantees and cheap loans — distort firms’ incentives by reducing their risks or increasing their rewards irrespective of how well they do. This can lead to poor choice of projects and poor management. Worst of all, it relies on donors to pick winners, instead of allowing the market to decide which firm succeeds. Anointing the successful firms in this way stifles innovation and can choke off the very market forces that would bring about a more successful economy in the long run. And at worst, it can descend into expensive government backstops for firms who do the best lobbying for support rather than the firms which are the best at innovating and serving their customers. Past experience of these kinds of partnerships suggest that these are not merely theoretical concerns.
Our paper suggests that for the same amount of public money, donors (and their development finance institutions or DFIs) would normally do much better by paying for success than by issuing guarantees or cheap loans. Donors should define what success looks like (and how it will be measured) and offer contracts that reward any successful private firm for achieving it. This approach promotes innovation, sharpens incentives to choose investments wisely, keeps the firm’s shoulder to the wheel, limits scope for crony capitalism, and protects the public purse from the excess optimism of civil servants and from lapses in the collective decision making of bureaucracies.
For a more thorough consideration of the advantages and disadvantages of these different approaches, you can read the full paper here.
Shortly, our friend and erstwhile CGD Visiting Fellow, John Simon, a former Executive Vice President of the Overseas Private Investment Corporation (OPIC) and US Ambassador, will respond in a blog post explaining why he disagrees with our analysis.
Millions of people live with the risk of rapid-onset disasters like cyclones, slow-onset disasters like drought, or the threat of conflict. We often wait for these crises to develop to collect money from donors, a delay that costs lives and dramatically raises the costs of responding. As a result, there was an $8 billion gap between what frontline agencies requested to tackle crises last year and what they received.
Nine thousand delegates gathered last week in Istanbul for the first World Humanitarian Summit. There was no shortage of great commentary in advance, all of which pointed to the pivotal role that the WHS could play in the future of humanitarian aid. And there was widespread consensus that we must do better: emergency aid is overstretched; delivery systems are often poorly matched to people's needs; refugee crises are overwhelming international organisations’ ability to respond; and lack of security for humanitarian workers signals a worrying trend of blurred battle lines that imperils both humanitarians and civilians.
How could the Summit have tackled these mounting problems? Depending on who you ask, the humanitarian system is either broke or broken.
If the system is simply broke, then the problem is that donors are simply not providing enough money. Last year, humanitarian agencies appealed for $15 billion more in funding than they received, a deficit which is set to grow larger this year. Donors currently spend about $25 billion a year on humanitarian aid—less than a quarter of all aid—and on this view, a relatively affordable increase in humanitarian aid would go a long way towards meeting the world’s obligations.
The alternative view is that the humanitarian system is broken—that is, in need of fundamental reform. The majority of humanitarian aid is spent on long-lasting crises rather than short-term emergencies, and the system does a poor job of helping people to move from dependence on humanitarian aid into safer, more productive lives. Large international agencies often fail to work with local governments and civil society partners. There are few independent needs assessments, and little rigorous evidence about what works. Agencies are mandated and organised to distribute supplies rather than give people control over their own lives and building markets by giving people cash. There is little information about what happens to the money: the humanitarian system is far behind the development system on improving aid transparency. We don’t even know how big the funding shortfall really is, since humanitarian agencies have every rational incentive to overstate needs, knowing that donors will only fund a portion of them; nor do we know how much more the humanitarian system could achieve if it were better organised. And conflicts are dangerously changing in character, threatening a greater number of civilians and increasingly targeting humanitarian staff.
In the absence of a consensus on whether the system is broken or merely broke, little progress was made on either issue at the World Humanitarian Summit. The so-called Grand Bargain was an effort to bring these two points of view together, acknowledging the need for systemic reform and for more money. But the overall result was a series of incremental, rather than transformational, improvements—and some absolute setbacks—along three dimensions of humanitarian aid: how to spend it, how to pay for it, and how to fix it.
How to spend it
Locally, transparently, and in cash. That sums up some of key commitments from humanitarian organisations and donors. One of the Grand Bargain’s few hard numerical targets is the shift to spending at least 25% of humanitarian spending through local organisations by 2020—which, if achieved, will be a dramatic increase from the small fraction that goes to them today. There is a clear and welcome call for greater transparency in how aid is spent, leveraging the International Aid Transparency Initiative, a simple electronic format for recording resource flows that many development organisations already use to help them transparently report on what, where, and when they are spending money.
There’s also been a strong endorsement of the need to give more humanitarian aid as cash transfers. We’ve worked with the Overseas Development Institute and others on collating the evidence. Not surprisingly, people are better than bureaucracies at knowing what they need and want. Markets are good at delivering those things (and can often do so much more efficiently than an international logistics system). And cash transfers are not ‘wasted’ on ‘sin goods.’
On this point, the Grand Bargain’s final language doesn’t match the impressive leadership from few forward-thinking organisations, like World Vision and the International Rescue Committee, both of whom pledged substantial targets for the share of their aid to be delivered as cash. Instead, it emphasizes 1) the need to further evaluate the evidence for providing cash transfers (when in fact this cash transfers are one of the most widely and rigorously evaluated modes of delivery in the history of humanitarian aid), 2) using cash alongside in-kind aid (often it should substitute for more expensive in-kind aid), and 3) ensuring that the delivery of cash is coordinated (thus sidestepping the need for a single organisation to deliver a single unrestricted payment to families, rather than dozens of organisations duplicating each other and requiring coordination).
How to pay for it
Reliance on single-year funding through humanitarian response plans for what are multi-year problems is a long-standing frustration in humanitarian aid, a fundamental misalignment of finance and purpose akin to trying to buy a home using a credit card rather than a mortgage. In 2015, only 13 (of 35) response plans had funding lasting more than a year, even though over half the countries that needed a response plan had had one for at least five years, and nearly a quarter of countries had had one for a decade or longer.
The Grand Bargain explicitly tackles this problem, promising to both increase “collaborative” multi-year funding from donors and reduce the number of earmarks that are applied to those funds, so that agencies get the kind of flexible financing they need to respond effectively instead of managing an endless portfolio of grants too small to make a dent in the problem, each of which carrying its own reporting requirements and administrative expenses. Although donors need to have their feet held to the fire to ensure that these promises stick, that feels like progress. (And though it is, in effect, one giant earmark, so did the announcement of a multi-billion dollar special education fund to pay for schooling for children affected by disaster or fleeing violence, a longstanding lacuna in humanitarian budgeting.)
While the big donors and agencies read prepared speeches to each other in one part of the conference, the side events next door was the venue for some of the most progressive, transformative thinking. Whether or not there’s actually a $15 billion shortfall, there’s no doubt that the system is not keeping up with needs. The result is an urgent push for innovation in how to pay for big parts of the humanitarian caseload, and agencies are increasingly turning towards insurance.
Side events convened by groups like the Insurance Development Forum highlighted an exciting future in which large organisations and vulnerable countries can insure themselves against a growing list of perils like drought and earthquakes. That would make money readily available when things go wrong, protect humanitarian funding for emergencies that can’t be insured, and ensure that vulnerable governments can plan effectively to tackle crises because they know the resources that will be brought to bear.
How to fix it
If the Summit was about finding solutions, then unfortunately it failed to address one of humanitarian aid’s core problems: the incidence of violent conflict. Research published last year found that although there were fewer armed conflicts in 2014 than in 2008, each one caused a death toll that was three times higher on average: in other words, for a complicated set of reasons we’re struggling to understand, conflicts are becoming much more lethal.
Of course, it was never realistic to think that a single summit could achieve real change in the number of protracted conflicts responsible for a large share of the humanitarian caseload. But to the extent that progress could have been made, the absence of even a core group of world leaders meant that real change was probably never in the works. In this sense, the WHS was about treating symptoms, rather than curing the disease. Chancellor Merkel led Germany’s delegation, but the UK was represented by its Secretary of State for International Development, Justine Greening, rather than Prime Minister David Cameron, and the US delegation was led by Gayle Smith, head of USAID, rather than Secretary of State John Kerry.
The absence of senior leaders also meant that real progress on refugees—one of Europe’s most bitter political discussions—was never really on offer. The outcome document from the section of the Summit dedicated to finding a way for countries to provide asylum to refugees and facilitate their integration lapsed into vague promises (“The Summit affirmed more political leadership was required for mediation, peaceful resolution and conflict prevention...”) rather than setting hard targets or measurable commitments.
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The Summit brought global attention to these important issues. Disruption and strong political leadership rather than gradual evolution are needed to create a system that can rise to modern challenges. But a meeting convened by the organisations most in need of reform and without a core group of senior political leaders was always going to struggle to be truly transformational. Political leaders need to confront the realities of paying for and integrating refugees. Donors should use their financing to demand transparency and efficiency from frontline organisations, including the local NGOs now poised to receive a greater share of it. And we must all support efforts to find peaceful solutions to violent conflicts.
Theodore Roosevelt said that good foreign policy should “speak softly and carry a big stick.” The World Humanitarian Summit—and its Grand Bargain—spoke softly. For the many problems addressed at the World Humanitarian Summit, now is the time for the main humanitarian donors to demand reform and delivery by wielding the big stick a little more conspicuously.