Donor accountability reconsidered: Aid allocation in the age of global public goods

Decades of scholarly literature have held donor governments accountable by assessing whether the allocation of foreign aid followed recipient needs (and merits), or rather the direct commercial or geopolitical interests of the donors themselves. In terms of the development impact, the former could be shown to be clearly more effective than the latter. However, the increasingly recognized relevance of global public goods for development – as exemplified by the adoption of the Sustainable Development Goals in September 2015 – considerably challenge the traditional classifications as measures of accountability. In this paper, we will show theoretically why this is the case: When development assistance addresses global public goods, the characteristics of the recipient, i.e. the country in which the funds are invested, can no more be considered as a relevant proxy for the needs orientation of the donor. Even if there are some local side-benefits, the primary effect is of global nature, and as a consequence, other countries may benefit much more than the recipient itself. The problem lies in the very nature of public goods, namely their non-excludability. We use data of the Organisation for Economic Cooperation and Development’s (OECD) Development Assistance Committee (DAC) to show the empirical implications of this problem at the example of aid for climate change mitigation (a global public good): At first glance, aid for mitigation appears much more donor-interest driven than aid for adaptation (a private or local public good) or than general aid where the consideration of recipient need seems to play a greater role. The picture changes when including appropriate control variables for mitigation efficiency. As the latter is positively correlated with economic development, donors allocating their aid in line with mitigation efficiency may be wrongly accused of allocating aid in their own interest. While the control for efficiency-related variables solves the attribution problem for individual public goods, it is difficult to conceive of appropriate controls at the aggregate level. This represents a major challenge for the aid allocation literature and implies that holding donors accountable for their overall aid portfolio will become difficult in the future.