Ring-fencing budgets is a bad idea. It's inflexible and means you are stuck to commitments even if there is a change in external conditions. It's a politically expedient way of showing commitment, but often does not get to the root of problems. The International Policy Network (IPN) has today released a report that investigates the seemingly universal acceptance of binding 0.7 per cent of national income to spend on international aid. The paper, The Ghost of 0.7 per cent, gives a background to where the figure came from in the first place. Rather than being an arbitrary number that sounds acceptable, the target is actually forty years old. According to the IPN, it comes from a 'financing gap theory', which is now out of date and does not reflect the process of long-term economic development. Yet politicians still persist in binding aid spending to it.
Using the same theory that calculated the original target, the IPN have tracked how capital ‘need’ in low-income countries is actually below current flows:
Now, this is not to say that we should reduce our resource flows to track the 'capital need' line. Indeed, the IPN’s paper isn’t a call to reduce aid spending. This graph shows that using this old measurement to bind to a 0.7 per cent guarantee is incorrect – if we updated the target using the same methodology it should have reverted to less than 0.05 per cent of national income.
Another failing of the 0.7 per cent target is that it focuses on our resources as opposed to the needs of other economies. For too long governments have focused on inputs rather than what is achieved, mistaking more money for more commitment; an ill not exclusively suffered by DfID. Identifying where money and investment is needed most – and making sure it is spent correctly all the way to the front line – is far more important than setting targets based on flawed methodology from forty years ago.
Our paper Lost Along the Way showed that around 13 percent of DfID’s budget was lost to administrative and other non-frontline costs. Reducing these kinds of costs and prioritising spending to achieve better outcomes is far more important than pleasing Bono and congratulating ourselves on binding spending pledges.