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Fiscal austerity and foreign aid

by Aniket Bhushan

Published: April 12, 2012

As the dust begins to settle, and the budget cuts begin to work through the bureaucratic system, it is time to update our initial post on cuts to Canada’s international assistance.

The cuts to the Canadian aid budget total over CAD$800 million, rolled out between now and 2014-15 (CAD$70 million this year, CAD$180 million in 2012-13, CAD$242 million in 2013-14 and $378 million in 2014-15).

These cuts are significant and have certainly attracted attention, but unfortunately they are not unique to Canada – a number of countries are cutting back on aid as part of their fiscal austerity measures.

In this post I emphasize why it is important to look beyond headline numbers and targets, and why the ‘efficiency’ argument surrounding proposed cuts is overdone.

The Canadian cuts were exactly in the middle of the expected range and in fact are smaller than a number of other donors. With a smaller purse, aid allocation will get more not less political and effectiveness and efficiency will take a back seat.

Canada in the DAC club

The business of foreign aid is at least as much about membership in a ‘donors club’ as it is about delivering on commitments to help the poorest and neediest. Canada is a key member of the OECD-DAC. One of the most interesting findings is just how closely Canadian headline ODA (i.e. the top line or gross number) tracks that of the DAC average. Over the last decade Canada’s ODA (overseas development assistance) to GNI (gross national income) ratio has almost exactly tracked that of the OECD-DAC average. In this regard Canada has been an average donor in the best sense of the word. Only five members – Norway, Sweden, Denmark, Luxembourg and the Netherlands – have maintained their ratios over the 0.7% target for a sustained period. The UK and Australia have committed to doing so by 2015 but that remains to be seen.

Trends in ODA are following almost exactly as predicted by past research on the impact of fiscal and financial crises on aid budgets. We know that aid budgets get affected with a lag. What we are now seeing is that lagged effect. Canada had already capped its ODA in 2010, following years of increases, and over the next few years will reduce it dramatically. What we also know from past experience is that declines in aid tend to ratchet down, i.e. they may never return to pre-crisis levels (Japan and Finland in the 1990s are two examples where ODA never recovered to pre-crisis levels).

However here too Canada is merely following a broader trend. The planned 7.5% cuts (totaling up to CAD$378million by 2014-15) pale in comparison for instance to Japan’s (a much larger donor) 10% cut, or Spain’s estimated 47% cut in real terms. Even stalwarts of the DAC club like the Netherlands have announced cuts after years of increases.

Fig.1 Aid as a share of Gross National Income 


The efficiency argument and looking beyond headline targets 

Most analysts ignore how misleading headline targets like 0.7% of GNI can be. For instance the administrative cost of providing aid, the cost of settlement of refugees in donor countries, even scholarships to students from developing countries counts as “aid”. Donors can in fact achieve ambitious ratios simply by paying staff more or factoring in higher shares for imputed costs related to refugee settlement (and they do, refugee settlement is a big source of debate in Switzerland, and imputed costs for some of the stalwart aid providers like the Nordics have been high).

It is time, especially given long-term austerity in donor countries that we start focusing on “country programmable” aid. The point is aid on the ground in recipient countries is almost unrecognizable from aid we think is given, because only a fraction even leaves donor countries.

I have tried in the past to bring this point home as clearly as possible and offer constructive suggestions. Namely, one way to stretch aid budgets in times of austerity is to focus on increasing the country programmable share. So a valid question is given the expected cuts does this still hold in Canada’s case?

Given the size of the cuts and other factors (domestic politics, institutional issues, more on this below) I am much less confident such cuts can be achieved through ‘efficiency seeking’. In other words it is hard to see how country programmable amounts or the real dollars that actually reach intended beneficiaries can be maintained while the bulk of cuts are made to non-country programmable expenditures.

Just how costly is our aid? At first sight Canada, compared to other DAC donors, does not look all that efficient. The cost of providing our aid is around $270 million. Relative to Canada’s rank as an aid provider, Canada ranks higher when it comes to its administrative cost.

On absolute costs Canada compares with Germany, Netherlands, Sweden and Norway. But the efficiency argument still appears overdone. Over the last five years Canadian administrative costs have only increased from $250 million to $270 million. Given projected cuts begin around $70 million/yr rising to over $350 million it is hard to see how efficiency seeking can play a major role. Finally administrative costs as a share of total ODA tend to remain fairly steady around 6-8%. With the exception of Germany and the UK this is again not that far off others with whom Canada can be compared in the DAC club.

Fig.2 Administrative costs of OECD-DAC donors compared (US$million)

Fig.3 Administrative costs as percentage share of total ODA – Canada and select others

Nearly a quarter of the Canadian International Development Agency’s 2000 person staff has recently been put on notice.  However these reductions alone will not be enough to reach the target. Cuts will seriously hit the country programmable share – which we can expect will have serious impact on-the-ground.  This will particularly be the case in 2013-14 and 2014-15 when the cuts are most acute. As CIDA is in the process of reviewing and updating its countries of focus, and given the scale of the budget cuts, aid allocation will become more not less political.

Domestic institutional politics 

While aid is always political, in recent years it has become particularly so in Canada. CIDA has already fairly recently undergone a series of ‘reorganization and transformation’ efforts. Yet some have called for more radical change, such as folding CIDA into Foreign Affairs, or taking an even more ambitious whole of government approach, tying in the ‘foreign’ parts of investment and trade promotion, defense and others. One commentator has likened such an approach to “folding American Airlines into GM simply because one is in trouble and both deal with transportation”.

It is doubtful therefore that major efficiency improvements would be found this way. Another suggestion that did the rounds was to channel more assistance through the Bretton Woods international financial institutions. Again not unlike what others like the Netherlands have done. But yet again it is hard to see how much efficiency could be found this way (multilateral channels already account for the bulk of the recent increases in Canadian aid as we show in our next post), although arguably the ability to leverage every dollar spent could be increased.

Looking ahead 

Cuts to Canada’s aid budget, taken along with cuts in other ‘foreign’ areas like external affairs, defense, international development research, will hurt Canada’s image abroad. The precarious state of the development agency (CIDA) in domestic bureaucratic politics only makes the outlook worse.

Announced cut backs were exactly in the middle of the expected range. Canada is following a broader austerity trend and cuts by others including Japan, Spain, Dutch and others. Taken together these cuts could have a major lasting impact on the ability of the DAC to deliver on promises to assist the poorest and neediest. As they come on the heels of years of increases there could be further fall out caused by increased aid volatility.

Efficiency seeking will not be able to play a big role in achieving the targets as ultimately the targets are too large relative to administrative and other non country-programmable costs. Country programmable shares will most likely be affected. CIDA is also in the process of reviewing and updating its countries of focus, where some expect political, trade & investment promotion and other factors will again play a role. In other words dont be surprised to see Mongolia on a list, where Canada has recently emerged as the second largest foreign investor (just like Peru and Colombia, where in the past trade deals were being negotiated as they were deemed countries of focus). With a smaller purse size, aid allocation could get more not less political, and efficiency and effectiveness could take a back seat.

Some of the cut backs will be achieved through planned “normalization” of large recipients e.g. Afghanistan (where the military mission has officially ended), as well as Haiti where large recent spikes were related to emergency response, and hence not strictly country programmable, long term economic development related aid.

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