Is it Time to Specialize Aid?

Aid plays a huge role in the economy of Liberia. Even after taking out UNMIL security funding, official development assistance to the West African country is projected to be USD 785m in FY14*. Compare this to the size of the national budget for the same fiscal year – USD 583m – and you can begin to see the weight that aid flows carry.

While amounts are useful to look at, what I’m specifically interested in exploring at the moment is how fragmented these aid disbursements are. The OECD, a rich- country think tank, defines this fragmentation as “aid that comes in too many small slices from too many donors, creating high transaction costs and making it difficult for partner countries to effectively manage their own development.”

The idea is that aid can be more effective if donors specialize instead of having multiple projects spread thinly across multiple sectors. From the government’s perspective, the increased reporting and coordination that is required from dealing with multiple donors is not trivial. Ministries have limited resources that can make seemingly simple tasks of sharing data, editing excel sheets, and printing documents difficult. These “little things” add up and can create big challenges.

So how fragmented is donor aid in Liberia? To answer this question I looked at all aid disbursements in Liberia for 2013, which included data provided from 18 international donors. By calculating the Herfindahl coefficient for each donor, a tool typically used to measure market concentration among firms, I was able to determine the level of fragmentation in each donor’s aid portfolio. To calculate this coefficient you take the sum of the squares of market shares (in this case how much aid is spread across multiple counterpart ministries) and it yields a value between 0 and 1, where 0 represents a completely fragmented portfolio and 1 corresponds to a completely concentrated portfolio. In our case, the lower the number, the more spread out and fragmented the portfolio is.

Donor Agency

Herfindahl Coefficient

# of Projects

# of Counterpart Ministries

European Union

0.17

18

9

USAID

0.17

41

16

Sweden

0.20

10

7

World Bank

0.31

22

14

United Nations Children Fund

0.33

7

4

United Nations Population Fund

0.37

4

4

African Development Bank

0.51

9

5

World Food Programme

0.52

3

3

DFID

0.55

4

2

Japan

0.55

6

4

United Nations Peace Building

0.60

2

2

Germany

0.67

5

4

France

0.68

4

4

Ireland

0.69

4

4

Norway

0.96

3

2

GIZ

1.00

1

1

Global Fund

1.00

3

1

World Health Organization

1.00

11

1

The above table shows that the European Union and USAID have the most fragmented aid portfolios in Liberia, both with a Herfindahl coefficient of 0.17. With 41 projects spread across 16 ministries, USAID has its hands in every major sector. As an American, this makes me question whether US taxpayer money could be spent more effectively in Liberia if it was focused on one or two areas, such as roads or energy, instead of being spread across 16. On the other end of the spectrum, you can see that while the World Health Organization has 11 projects, it has a coefficient of 1 as they are all with the Ministry of Health & Social Welfare. By specializing on health projects, the WHO helps make it easier for the Government of Liberia to manage its own development. It could make it even easier by consolidating the number of projects it implements.

It is true that each donor has its own political strategy when it comes to distributing aid. But it is important for donors to keep in mind the capabilities of aid-recipient countries in effectively managing aid inflows. Increasing the number of projects across multiple sectors increases the administrative costs and burden for both the donor and government. By contrast, specialization has led to great

advances in industry and it has the capability to do the same in the world of development assistance. This shift will require not only increased dialogue between donors and recipient countries, but also more coordination between donors as they decide in which sectors to specialize. Not an easy task, but certainly a worthy one as it can increase the effectiveness of aid and give government ministries the space to build stronger, more impactful relationships with donors.

* While aid is projected to be USD 785m in FY14, it is likely that this number will be lower. During the previous fiscal year, only 68% of projected aid was actually disbursed. This is partly a direct result of the “little things” I described above as delays in getting documents printed, shared, and signed by the respective government parties force projects to become delayed.