The following is a response to the UK Department for International Development Permanent Secretary’s entry on the Ideas4Development blog on social projection programs to help the poor manage the food, fuel, and financial crises.
Minouche Shafik provides us with a compelling case for increasing investments in social protection programs. Owen Barder’s point about child mortality, life expectancy, and primary education indicators failing to bounce back after economic growth returns only reinforces the urgent need to focus on these vital social investments. It would seem that there is a benefit to making these kinds of investments now rather than letting the poor fall further behind and having to make even bigger investments down the road to left them back out of poverty.
The confluence of food, fuel, and credit crises and their impact on the poor merits a thoughtful reevaluation of aid program design and allocation decisions. We are less prepared to meet the needs of the poor in the face of these global”shocks.” But, just looking at aid alone, it is often volatile and pro-cyclical (Bulir and Hamann 2006; Pallage and Robe 2001). Historically, aid flows are more volatile compared to other macroeconomic variables, such as public sector revenues, consumption, and Gross Domestic Product (GDP). Aid volatility can cause disruptions in inflation, real exchange rates and fiscal policy, resulting in economic decline and social dislocations. As Homi Kharas points out in his recent study Measuring the Cost of Aid Volatility, these so-called “aid shocks” in developing countries have triggered disruptions equivalent to the magnitude of the income shocks endured by developed countries during the two World Wars, the Great Depression, and the Spanish Civil War.
Food aid has been found to be countercyclical in countries that have the greatest need. In other words, in the most urgent situations, food aid is acting like a safety net to the poor and an automatic stabilizer more broadly for the economy. Food aid can alleviate budget pressures that accompany economic weakness. The sale of food aid locally generates revenue for counterpart funds, which in turn can be channeled into schools and health care. However, in most countries, food aid tends not to be countercyclical (Gupta, Clements, and Tiongson 2003) and under current conditions, efforts to smooth consumption across the developing world have become increasingly complicated.
DFID, the Millennium Challenge Corporation, the World Food Programme, and other donors have shown leadership by ensuring greater aid predictability through longer-term commitments. New innovative approaches such as the “Purchase for Progress” initiative recognize the need to build local food production capacity and provide predictability by guaranteeing longer term purchase agreements. Combined with knowledge of local conditions and local partnerships, aid can contribute to strengthening the social fabric of communities and mitigate the risk of conflict.
But, aid can also unintentionally exacerbate social tensions, inequalities, and power struggles. Most donors are aware of “fragility” and how vulnerable certain countries are to sudden changes in aid. Some donors such as the World Bank see the need to better understand the social dynamics, local politics, and conflict realities and avoid “overly technical” approaches, especially in fragile and conflict-affected states. At the High Level Forum on Aid Effectiveness in Accra, donors made fresh commitments to longer-term financing for fragile states. The current crisis provides an opportunity to not only rethink the value of social protection schemes, but also the need to make aid more predictable – which would significantly amplify social protection in the developing world.
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