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Efficient, resilient, and accountable governance systems are essential to successfully manage natural resources, provide public services, foster trade, attract private investment, and manage aid relationships. Corruption and secrecy are often at odds with such goals. Illicit financial flows, for example, undermine development and governance while secrecy in extractive industries can squander a nation’s wealth and weaken the social contract.
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Secretary of State Rex Tillerson is likely to face some tough critics when he heads to Capitol Hill this week. In his first appearance(s) before Congress since his January confirmation hearing, Secretary Tillerson will have the unenviable task of defending a deeply unpopularFY2018 budget request for international affairs.
Despite promises of continued support for national security and economic priorities, the administration’s proposed budget takes an axe to foreign aid—leaving plenty of questions about how to reconcile the narrative and dollar figures. But with four hearings scheduled over two days, lawmakers may just have a chance to ask them.
Here are a few big picture issues (of many) that deserve greater scrutiny.
Prioritizing near-term foreign policy objectives over sustainable development
The budget’s rhetoric emphasizes the administration’s desire to allocate foreign aid in service of achieving US strategic and security objectives, which include building markets for US businesses and fighting violent extremism. And in key ways, rhetoric matches reality in this budget, whether in the wholesale shift in programming from the development oriented budget accounts to the strategically-oriented Economic Support Fund (newly rebranded as the “Economic Support and Development Fund”), or the full protection of support for Israel and Egypt amidst deep cuts nearly everywhere else. Using development assistance to accomplish near-term foreign policy goals isn’t new, but when aid has mixed objectives political or security needs frequently override development considerations. This can lead to tensions in program design and implementation—where the focus on achieving actual development outcomes gets blurred.
In fact, when the George W. Bush administration and Congress teamed up to establish a new aid agency focused on results—they deliberately insulated the agency from political interference. Secretary Tillerson praised the Millennium Challenge Corporation (MCC) during his January testimony. He should acknowledge that one of MCC’s key strengths lies in its ability to target assistance to promote economic growth without pressure to fulfill other objectives.
Furthermore, to the extent that private sector activity is the key to sustained growth—both at home and abroad—it makes zero sense to kill OPIC, especially since it expands opportunities for US businesses.
Targeting assistance to maximize efficiency
While not a popular subject, the issue of aid selectivity is one that deserves attention. In a joint CGD-Brookings effort to measure the quality of official development assistance (QuODA) donors earned higher marks for focus and specialization by country and sector. This is consistent with the aid effectiveness literature which suggests donors can maximize impact through targeting assistance to reflect their comparative advantage rather than risk fragmentation or programs that are spread too thin. And yet there is little in this budget to suggest that evidence of effectiveness or comparative advantage was used to guide the decision-making that produced such deep cuts. The budget request would reduce the development aid budgets of 46 countries by more than 60 percent (see map below), absent anything other than a broad, topline justification. And the request would slash spending for global health—where we have some of the best evidence of successful interventions—by more than a quarter.
An ounce of prevention is worth a pound of cure
Amidst four looming famines and the ongoing refugee crisis in Syria, the budget request proposes deep cuts to humanitarian funds, including life-saving emergency food assistance. Where Congress has increased appropriations in recent years to address these realities, under the administration’s budget the US response would come up short.
And while the situations referenced above are caused by a complex set of political factors rather than food shortages alone, the administration’s budget also ignores an age-old adage by reducing US assistance designed to mitigate other causes of hunger. USAID’s Bureau for Food Security (BFS) works to bolster agricultural production—achieving higher yields and bringing drought and flood resistant crops to regions susceptible to such conditions. And in particularly vulnerable areas, US investments include pre-programmed response tools. Under the administration’s budget, BFS would lose 70 percent of its funding compared to FY2016. And the development assistance account—the largest source of funding for agricultural development initiatives in recent years—suffers a proposed cut of nearly 45 percent as part of its merger into the Economic Support and Development Fund. These cuts are short-sighted.
In addition to being called upon to explain massive spending cuts, Tillerson is likely to face questions about the structure of the institutions tasked with delivering US foreign assistance. Check out the questions my colleagues would pose of any reorganization plan or effort. Needless to say, we’ll be watching closely to see what gets asked—and answered—in the days ahead.
Thanks to Jared Kalow for the interactive map and chart.
The UK election has shown again that electorates can throw up unexpected results, with long-standing poll leads evaporating in a matter of weeks. The British public seem uninspired by any single leader but there was little sign of descending into nationalism and populism. The only party that stood on a platform of dismantling the aid budget—UKIP—suffered a heavy defeat. Here we propose two ambitions for the government which emerges.
Election 2017 and manifesto commitments
Theresa May’s Conservative Party won the most seats in the UK’s general election but they won insufficient seats to control a majority in Westminster. For now, the Conservatives will attempt to work with the ten MPs from the Democratic Union Party (DUP), to establish a wafer-thin majority (of some 328 seats, out of 650). The House of Lords may or may not feel bound by the Salisbury Convention of not opposing manifesto commitments after their first reading. Either way, another election can’t be ruled out.
The DUP don’t reference international development in their manifesto - so it will be hard for them to exert much authority on the Conservative commitments in coalition talks. They do argue for more cooperation with the Commonwealth. The DUP are less socially liberal—and less likely to support say women's’ rights, abortion or sexual and reproductive health. The Conservative manifesto includes a long-list of admirable commitments to international leadership. Whatever government emerges, we propose two ambitions.
A positive vision for aid and development
The new government should set a positive vision of aid and why development is worthwhile. So far, Prime Minister May’s approach to development has been largely defensive—protecting the UK’s commitment to spend 0.7 percent of national income on aid, absorbing press criticism of waste and standing up for the importance of cash transfers as reaching those that need it most.
Over 630 of 650 MPs stood on a manifesto which explicitly commits to 0.7 percent of national income on aid. There is an opportunity now for the government to step away from piecemeal, parochial and defensive posture from last autumn, and to set out a positive development vision, describing what the UK will do, building on British values for a fairer, more prosperous world.
Brits believe in aid if the government can ensure it's well-spent and they surely share the Conservative manifesto’s intolerance of social division, injustice, unfairness and inequality beyond the UK too. A modern vision of effective British aid should address both.
A holistic view of development
The new government should broaden its approach to development. At home, Conservatives believe that it is better that people have opportunities for decent work rather than depending on hand-outs, which should be reserved for the most vulnerable people.
The new government should not lose the values that underpin both the Conservative and DUP manifestos—free trade, rule of law, security, the importance of work and enterprise, people living up to their responsibilities, tackling corruption, all supported by an enabling government—instead, it should apply them in its approach to international development.
A positive, broad-based vision of development
The strength of support for UK development in the manifestos of elected politicians shows that Britain will continue to take its leadership role in the world seriously.
A positive and holistic vision will enable development to take its place alongside defence and diplomacy as key planks of Britain’s outward-looking, self-confident, open and engaged contribution. The result will be a better world for all of us.
As a new WHO Director-General—Dr. Tedros Adhanom Ghebreyesus—prepares to take office, many have called for clearer priorities, governance and organizational reforms, and funding expansions. All good, but there is one additional, grossly neglected issue that requires urgent action: WHO needs better economic advice. As I explain in this blog post, that should come in the form of appointing WHO’s own chief economist.
WHO supports countries in dealing with the tough economics and choices that inevitably bedevil health systems around the world. I don’t mean how much money there is to spend or whether in general terms more spending on health is merited or not; I mean how well or poorly does WHO help countries allocate resources wisely, given their budget constraint.
WHO recommends medicines for the essential medicines list that is sometimes adopted by member countries to inform their own purchasing. WHO recommends targets for disease control that have spending implications. WHO issues clinical guidelines that are used to inform resource allocation for the clinical treatment of different diseases. WHO advocates for policies—from universal health coverage to vector control—that are widely discussed and frequently adopted by member states. The organization plays a truly influential role.
Yet too often, the rhetoric and recommendations coming from some parts of WHO show so little understanding of basic health economics that we may be doing more harm than good.
Tony Culyer is professor emeritus at the University of York and one of the founders of modern health economics alongside Kenneth Arrow, Joseph Newhouse, Uwe Reinhardt and others. He is the founding co-editor of the Journal of Health Economics, the founding Vice Chair of the UK’s National Institute for Health and Clinical Excellence (NICE), the founding chair of NICE International, and the co-editor of the mainstay reference text, the Handbook of Health Economics. I add this lengthy preamble to convey that the man knows of what he speaks.
Tony has written an open letter to Dr. Tedros, which we are publishing here with his permission, to motivate a rethink of the economic advice provided through WHO. In the letter, Tony gives a few examples of the way in which WHO has got its basic economics wrong; namely, the recommendation of a universal threshold to decide on what products and services are cost-effective in improving health (the famous 1-3x GDP per capita rule), and the notion of “fair pricing” that ignores the presence or absence of comparator products and their relative cost-effectiveness as an input into decisions to subsidize a product and negotiate its price with suppliers.
I could add further examples, but in the spirit of moving forward, what needs to happen to bring more rigor to health economics advice from WHO? In my view, WHO needs its own chief economist—to assure that targets, guidelines, lists and policies all benefit from fifty years of theory and empirical evidence that have informed the better health systems of the world in their quest for UHC. What do you think? Comments invited below.
Many developing countries are using digital technology to reform public service delivery. The convergence of financial inclusion, mobile networks and digital ID is transforming the way governments deliver public services and citizens access entitlements, including public subsidies. Are these reforms working? How are beneficiaries coping with the changes? Do they think they are better off than before?
Please join us to celebrate the launch of Charles Kenny's latest book, Results Not Receipts: Counting the Right Things in Aid and Corruption. This work illustrates a growing problem: an important and justified focus on corruption as a barrier to development has led to policy change in aid agencies that is damaging the potential for aid to deliver results. Donors have treated corruption as an issue they can measure and improve, and from which they can insulate their projects at acceptable costs by controlling processes and monitoring receipts. Results Not Receipts highlights the weak link between donors’ preferred measures of corruption and development outcomes related to our limited ability to measure the problem. It discusses the costs of the standard anti-corruption tools of fiduciary controls and centralized delivery, and it suggests a different approach to tackling the problem of corruption in development: focus on outcomes.
As indicated in the Trump administration’s skinny budget released in March, the FY18 budget request incorporates the idea of transitioning the Foreign Military Financing (FMF) program from grants to loans. The stated intention is to “reduce costs for the US taxpayer, while potentially allowing recipients to purchase more American-made weaponry with US assistance, but on a repayable basis.” As with a consumer purchasing a new automobile, a loan is sometimes advantageous for the parties involved—but not always. And a transaction involving the US government incorporates additional elements. From a financial perspective, the end result could be good, bad, or very, very ugly.
Some historical context
This is not an entirely new practice. As noted by the State Department in a March release, the Obama administration concluded a $2.7 billion loan to Iraq for the purchase of US weapons. However, providing loans to sovereign governments, rather than grants, has been the exception rather than the norm. According to US Treasury Department data, the amount of outstanding Department of Defense loans has dropped from roughly $7.5 billion 20 years ago to around $350 million currently (not counting the $2.7 billion Iraq loan). The drop is due to a combination of old loans being repaid, a pause in new loans, and the write-off of a number of uncollectible loans (more on that below).
While critics worry that loans will have a negative impact on sales, the basic concept of requiring countries to finance purchases, rather than receive grants that subsidize purchases, has some merit from a purely financial perspective. It would align the approach for supporting exports of military hardware with the practice applied by the US Export-Import Bank for nonmilitary goods. It is arguably a much more efficient use of US taxpayer resources: following US budget rules established under the 1990 Federal Credit Reform Act, appropriated funds would only need to cover the estimated long-term cost to the government of the loan, calculated on a risk adjusted net present value basis over the life of the loan (the methodology and process for calculating the subsidy cost was assessed in considerable detail by the Government Accountability Office in 2004). In the case of Iraq, only $250 million in appropriated funds was needed to finance $2.7 billion in purchases. For countries where the risk of default is low, the cost to the taxpayer from a budget standpoint could be lower for every dollar of hardware purchased, compared to grants. And if the loan is repaid in full and on time, there would be no net expenditure. In fact, as is the case with Ex-Im and the Overseas Private Investment Corporation, the program could return more to the US Treasury than was expended at the time of the purchase.
There is a frightening lack of transparency to the FMF sales program that leaves it vulnerable to corruption—a not-insignificant risk, as demonstrated by past activities in the Department of Defense procurement process. There does not seem to be a transparent, accountable process for determining the terms of the loans, much less how the grants are applied. Moreover, based on statements by OMB Director Mulvaney at the May 22 budget briefing, there does not seem to be an agreed methodology for determining which countries would continue to receive grants and which would receive loans. And finally, the fact that the US Treasury Department database on foreign credit exposure does not reflect the 2016 Iraq loan raises doubts that the lending program will be subject to the oversight and public financial management best practices that the United States encourages other governments to adopt.
The very ugly
As mentioned above, the United States has had to write off a considerable amount of debt over the years following debt treatments negotiated at the Paris Club. These debt reduction agreements cover a number of countries that have recently benefited from the FMF program, such as Liberia, Egypt, Pakistan, and Iraq. There is a considerable risk that US lending activity, if not well managed in accordance with recently endorsed G20 operational guidelines for sustainable financing, will push these countries toward the brink of another series of debt crises.
Members of the US Congress would be well advised to take a closer look at the FMF program as it transitions from grants to loans. Questions they may want to pose include:
Why should some countries that can afford loans be given grants, and others that struggle with debt sustainability be required to take loans?
Is there a transparent and accountable methodology for determining the terms of the loans?
Is the US government consulting with the IMF and World Bank on the terms of loans to developing countries?
Taking a transparent, disciplined approach to FMF loans can help mitigate the risk of needing to provide debt relief in future years, which would cost considerably more money for American taxpayers than would be saved in the early years of a lending program.
There is no more valuable time than now, in the early days of the new administration, for a bipartisan exchange among leaders of previous administrationson the formulation and execution of the international economic policies. Join CGD for a conversation with three former Treasury Under Secretaries for International Affairs who played central roles in the Bush II and Obama administrations. The panel discusses the outlook for the global economy, international structural changes and challenges that have emerged since their time in office, the critical issues that will confront the next Under Secretary for International Affairs, and the nature of the job and lessons learned. This event marks the launch of the US Development Policy Initiative’s Voices of Experience series, which will feature discussions with senior officials from past administrations of both parties who shaped international development, economic, and financial policy.
The Trump administration has had very little to say about foreign assistance, apparently preferring to let the budget knife do its talking. But if we want to discern some sort of guiding philosophy to aid coming from this White House, perhaps we should look no further than aid to Israel and Egypt, the number one and number two overall US foreign aid recipients. In a budget that imposes double-digit cuts to programs aimed at disease eradication and response to humanitarian crises, military aid to these two countries has been cut not even by a whisker.
To be fair, grant-based military support has little to do with non-military aid that supports poverty reduction, disease eradication, or responses to natural disasters. And yet, these programs all reside in the same foreign assistance budget account, which means that maintaining military aid, and at a level that already makes Israel and Egypt the largest aid recipients overall, requires even deeper cuts everywhere else.
And this is where a guiding philosophy seems to reveal itself. There is clear conviction behind funding for Israel and Egypt, which is driven by a variety of factors that probably hasn’t varied much from administration to administration. In contrast, there seems to be no conviction behind the objectives of all other non-military aid programs in this budget.
By any measure of the Trump administration’s first budget, many of the long-standing aims of foreign assistance are simply not much of a priority. This can have a perverse effect for those who are used to thinking of foreign aid in terms of long-standing goals like poverty reduction or more recent goals like addressing climate change in lower income countries. When these are your aims, you tend to develop some rigorous standards around questions of need—eg, countries with lots of poor people, high incidences of disease, and few domestic resources will tend to be prioritized for US assistance.
Consider then that the largest recipient of US assistance, and one of just a few countries to avoid cuts in this budget, also happens to be wealthier on a per capita basis than 93 percent of US counties and 42 of the 50 US states. That is not a defining vision of foreign aid that would seem to have most US taxpayers on board.
Emerging from the president’s budget proposal is an approach that sees foreign aid overwhelmingly as an instrument of geostrategic interests. Protecting military aid to Israel and Egypt amidst deep cuts elsewhere is one striking element of this approach. But it’s also reflected in the elimination of the USAID-based “development assistance” account, which has had clearly defined development-related objectives, in favor of a more strategically-oriented “economic support and development fund” based at the State Department.
This is a troubling path to be starting down, both for the opportunities lost if we abandon the priorities that have guided foreign assistance in recent years and for the risks that arise as we expose more of our aid budget to the loose objectives of “geostrategic” interests. Setting aside particular countries like Israel and Egypt, a great deal of US taxpayer money has been spent over the years in the name of these interests with too little accountability, clearly defined objectives, or scrutiny of outcomes. Let’s hope Congress is willing to step in and make a course correction with this misguided first year budget. And to be clear, the sensible path has less to do with making Israel and Egypt share the pain of the foreign aid cuts than it does with questioning the basis for the cuts to begin with.