Foreign Aid Reform: Quick Facts and Talking Points

Women Foreign aid investments often lack bold, measurable outcomes and are not guided by a coherent global development strategy focused on poverty alleviation. Restrictions on how U.S. assistance can be spent and failure to invest in cost-effective, local capacity-building programs undermine U.S. leverage and impact. Inadequate tracking and evaluation limit opportunities to build on success and learn from failure. And the amount and allocation of aid dollars does not reflect a clear priority to fight poverty and achieve the Millennium Development Goals.

In 2009, Congress will be rewriting the Foreign Assistance Act of 1961 to make foreign aid more efficient and effective. But foreign aid reform must not be just a reshuffling of the cards. It must be a real reform process that fundamentally transforms foreign assistance. U.S. foreign aid should explicitly focus on helping the poorest people in the poorest countries by delivering measurable outcomes in health, education and economic opportunity in the lives of the poorest — those living on less than a dollar a day.

In 2007, then-Senator Obama pledged to double foreign aid and make the Millennium Development Goals America’s goals if he was elected president.[1] We must make sure he keeps this promise and that he partners with Congress to create a new aid structure that achieves measurable results for the poorest.

How to use this information to talk to your members of Congress: The need for foreign aid reform can be illustrated with many examples as it cuts across all the campaigns we work on. Use examples from the information below to speak to you members of Congress about foreign aid reform. Your members may have specific issues of interest around foreign aid, so use the example that is most relevant.

Basic Facts: Reforming Foreign Aid to Help the Poorest

Because poverty reduction is not the guiding principle of the U.S. foreign assistance program, aid is often not directed to the poorest countries. Many of the top recipients of U.S. foreign aid are selected for commercial, political, and security reasons unrelated to poverty. Foreign aid reform should establish country need as a clear criterion for assistance.

While the U.S. is the largest international aid donor in absolute terms, it is not the leading donor relative to the size of its economy. The U.S. gives just one sixteenth of one percent (0.16%) of its national income to development assistance, well below the international target of one seventh of one percent (0.7%), and last among major donor countries.[2] A serious commitment to achieving the Millennium Development Goals will require a scale-up in aid dollars and a clear policy agenda to achieve them.
Only about half of U.S. development assistance is primarily for the purpose of reducing poverty.[3]
Much of U.S. assistance is directed to strategic allies for political reasons, regardless of their economic and social need: just 5 percent of its foreign aid to the world’s 10 poorest countries combined.[4]
The U.S. directs just 29 percent of its development assistance to the least developed and low-income countries.[5] On average, other major donor countries give over half of their aid to the poorest countries. Since 2003, the UK has maintained a policy of directing 90 percent of its aid to low-income countries.[6]
Oxfam calculates that although “at least two of the world’s 10 poorest countries ... are now among the top 10 recipients of U.S. development aid, one of every three dollars of development aid goes to countries that are political allies in the ‘war on terror’ or the ‘war on drugs.’ In contrast, the U.S. spends just one out of every 16 dollars of development aid on the world’s 10 poorest countries (see table below). Another measure of this imbalance is that U.S. aid to sub-Saharan Africa between 1961 and 2005 was about half of what the U.S. government spent for military operations and reconstruction in Iraq and Afghanistan in 2007 alone (in constant 2005 US$).”
Multilateral aid — funding given in cooperation with other contributing countries — allows for better coordination, reduces the burden on recipient countries of managing funds from multiple donors, and leverages contributions from other donors. Unfortunately, while other donor countries give about 28 percent of their aid through multilateral channels (like the Global Fund to Fight AIDS, Tuberculosis and Malaria), the U.S. gives far less — as low as eight percent in 2005.[7]

Top U.S. Foreign Aid Recipients and Poorest Countries, 2006
Country	U.S. ODA*	GDP per capita**	Percent of total net U.S. ODA***
Top 10 Recipients of U.S. Overseas Development Assistance (ODA)
Iraq****	$4.782 billion	$1,107	20.3
Afghanistan	$1,404 billion	$309	6.0
Dem. Rep. of Congo	$838 million	$93	3.6
Nigeria	$787 million	$439	3.3
Sudan	$739 million	$512	3.1
Colombia	$720 million	$2,317	3.1
Pakistan	$478 million	$623	2.0
Jordan	$330 million	$2,193	1.4
Ethiopia	$316 million	$155	1.3
Zambia	$310 million	$366	1.3
U.S. Aid to Top 10 Recipients	$10.704 billion		45.4
U.S. Aid to strategic Allies	$7,714 billion		32.8
World’s Ten Poorest Countries
Central African Republic	$21 million	$232	0.1
Sierra Leone	$21 million	$228	0.1
Eritrea	$7 million	$165	0.0
Malawi	$64 million	$164	0.3
Niger	$31 million	$158	0.1
Ethiopia	$316 million	$155	1.3
Liberia	$88 million	$142	0.4
Guinea-Bissau	$6 million	$136	0.0
Burundi	$47 million	$106	0.2
Dem. Rep. of Congo	$838 million	$93	3.6
U.S. Aid to Poorest 10 Countries	$1.439 billion		6.1

Oxfam. Smart Development: Why U.S. Foreign Aid Demands Major Reform. http://www.oxfamamerica.org/files/smart-development-may2008.pdf

*Organization for Economic Cooperation and Development’s Development Assistance Committee (OECD/DAC).

**World Bank’s World Development Indicators (WDI), data for 2006, except for Iraq and Afghanistan. Latest available

WDI figure for Iraq is from 1999. Afghanistan figure, not reported by WDI, is the estimate for 2006 from the International Monetary Fund’s World Economic Outlook Database, October 2007.

***Based on total net U.S. ODA in 2006 of $23.5 billion from OECD/DAC.

****U.S. strategic ally.

Poverty-Focused Foreign Aid and the U.S. National Interest

Foreign aid focused on poverty alleviation is in the U.S. national security interest. There can never be stability and security when nearly one billion people live on less than $1 a day, and half of the world’s population lives on less than $2 a day.

Improving living standards is critical to long-term development. Poverty leads to malnutrition and illness, which reduce incomes and economic productivity, thus exacerbating poverty because people cannot afford proper nutrition, health care, housing, to invest in their children’s education, or own a business.
Poverty is a national security concern. Poverty and injustice breed hopelessness and instability. Our long-term security goals are undermined when we do not address the underlying factors that cause insecurity in poor countries.
The 9/11 Commission Report stresses the link between strong U.S. leadership against extreme poverty and creating security: “We should offer an example of moral leadership in the world, committed to treat people humanely, abide by the rule of law, and be generous and caring to our neighbors. America and Muslim friends can agree on respect for human dignity and opportunity. To Muslim parents, terrorists like Bin Laden have nothing to offer their children but visions of violence and death. America and its friends have a crucial advantage — we can offer these parents a vision that might give their children a better future.... That vision of the future should stress life over death: individual educational and economic opportunity.”[8]
This link is also clear for Secretary of Defense Robert Gates: “What is clear to me is that there is a need for a dramatic increase in spending on the civilian instruments of national security — diplomacy, strategic communications, foreign assistance, civic action, and economic reconstruction and development. We must focus our energies beyond the guns and steel of the military, beyond just our brave soldiers, sailors, Marines, and airmen. We must also focus our energies on the other elements of national power that will be so crucial in the coming years.”[9]

Education: Is Our Aid Getting More Kids in School?

At least 72 million primary school-aged children are currently out of school, and progress toward universal primary education is inadequately slow.

U.S. assistance for basic education has grown tremendously and is now funded at nearly $700 million per year. However, basic education programs are hindered by poor monitoring and evaluation and requirements to use U.S. materials and services rather than local and regional resources that are most cost-efficient and help build local capacity.
Progress toward MDG 2 — universal primary education — will be unacceptably slow and uneven if the U.S. continues to subvert long term development needs to short term geopolitical interests.
While U.S. foreign assistance for basic education is increasing, current investments could be more effectively spent as part of a coordinated strategy to remove barriers to education in partnership with poor countries that are committed to ensuring all children have a chance to go to school.
A 2007 Government Accountability Office (GAO) report on U.S. education assistance administered by USAID points out between 2001 and 2006, $2.3 billion was allocated for basic education in developing countries, but the actual impact on children’s learning was not measured.[10]
Former U.N. Ambassador Bill Richardson underscored the importance of education in fighting extremism in a 2008 Foreign Affairs article: “A crucial effort in fighting terrorism must be support for public education in the Muslim world, which is the best way to mitigate the role of those madrassas that foment extremism. Development alleviates the injustice and lack of opportunity that proponents of violence and terrorism exploit.”
Read a story on education to your member of Congress to bring the issue to life.
Show a DVD clip on basic education from the RESULTS Global Campaigns DVD. Joab of Kenya’s story is particularly poignant. If you need a copy of the DVD, contact your group leader or Ken Patterson.

Child Survival and Nutrition: Are We Having an Impact?

Our effort to prevent and treat basic childhood illnesses could be the flagship of our foreign assistance programs. The need is great (there are 9.2 million annual deaths of children under five), the solutions are well-documented, and the U.S. has historically played a leadership role in global child health. But currently it is difficult to say how child survival funding is having an impact.

In a 2007 review, the Government Accountability Office (GAO) found that “due to USAID’s approach to tracking and accounting for such funds, it is not possible to determine how much was actually spent on [child survival and maternal health] activities.”[11] This disturbing finding is nearly identical to that of a 1996 GAO review, which concluded that “USAID is unable to determine with any degree of precision how much funding is actually being used for child survival activities.”[12]
Even when aid is well intended, funding will not be used effectively unless clear, measurable outcomes are established. In 2004 and 2005, the U.S. allocated $675 million for maternal and child health programs. However, in a review of those programs, the U.S. Agency for International Development (USAID) was unable to track precisely where and how the funds were spent.[13]
Read a story on child survival and nutrition to your member of Congress to bring the issue to life.
Show a selection on basic education from the RESULTS Global Campaigns DVD. The piece on child survival in the Global Health section is very powerful. If you need a copy of the DVD contact your group leader, or Ken Patterson.

Tied Aid: Is Food Aid Money Spent Efficiently on Food?

Poverty-focused aid is untied. With a few exceptions, U.S. foreign aid is “tied.” This means that goods procured with foreign aid funds must be purchased from U.S. suppliers, and services — such as the training of teachers or health care workers — must be provided by U.S. firms. While this practice supports a domestic constituency in the U.S., it fails to fully invest in local capacity and is often grossly inefficient. U.S. food assistance is among the most egregious examples of tied aid.

China and the U.S. are the only two major donor countries refusing to prioritize local and regional purchases of food aid and direct cash transfers (through NGOs and the World Food Program) whenever possible, which is cheaper and increases the impact of food aid dollars.
Restrictions on the purchase of local or regional food results in higher costs and longer delivery times. U.S.-purchased food is on average 50 percent more expensive than locally purchased food and 33 percent more expensive than regionally purchased food.[14]
Current law requires the delivery of most food aid by shipping U.S. commodities on U.S. ships instead of allowing for regional or local purchase of food. In some cases, USAID paid $87.95 a ton despite a rate as low as $21.95 on foreign ships.[15] A study found that this shipping requirement may add an additional 50–75 percent to delivery costs.[16] The GAO found that these restrictions resulted in long delays in food delivery and 65 percent of food aid being spent on “non-commodity expenses,” that is, not food.[17]
The European Union has shifted policies so that approximately 97 percent of its food aid is locally or regionally procured. In contrast, only 1.4 percent of U.S. food aid was procured locally or regionally and the remaining 98.6 percent was direct commodity transfer, making the U.S. the largest provider of in-kind aid.[18]
Read a story on the impact of tied aid on the poorest to bring the issue to life.

Economic Crisis: How Is It Impacting the Poorest?

Although the poor in developing countries are the least responsible for the global financial crisis, they are potentially the hardest hit. For example, the global credit crunch is limiting the ability of microfinance institutions (MFIs) to get loans from banks, and private investors are pulling back as they see their portfolios shrink. Now more than ever, public investment in microfinance is needed to mitigate the impact of the crisis on the poorest and ensure MFIs can continue to invest in people.

Poor countries reliant on aid are increasingly vulnerable due to the compounded food, fuel, and financial crises. Although rich countries, including the U.S., pledge to increase foreign assistance for poverty alleviation and improve the predictability of that aid, many of these countries are slow to realize these commitments.
High food and fuel prices in 2008 are associated with an additional 100 million people entering poverty and 44 million additional children suffering permanent cognitive and physical injury due to malnutrition.[19]
UN Secretary-General Ban Ki-moon warns that the credit crunch has compounded the ongoing food, energy, and development crises and thus “could be the final blow that many of the poorest of the world’s poor simply cannot survive.”[20]
World Bank Managing Director Ngozi Okonjo-Iweala warns that “It’s becoming clear that many developing countries — African countries — will not be immune to the spillover effects of this global financial crisis. So, we consider that ... particularly poor people within these countries are now in a kind of danger zone. And the danger for them lies in the fact that they’re taking a hit from what I call the ‘Four Fs’ — the fuel crisis, food crisis, the fertilizer crisis and now the financial crisis.”[21]
The World Bank estimates that a one percent decline in developing country growth rates will drive an additional 20 million people into poverty.[22]
The liquidity (credit) crisis severely limits funding needed by poor countries to continue to invest in their people and economic growth, including trade.[23]
Commodity prices are still above 2004–05 levels. With rising inflation and the cost of basic staples increasing, incomes globally are diminishing as purchasing power falls.
Poor households have limited abilities to cope with the impact of the financial crisis, which comes on the heels of the food and fuel crises. Many have taken drastic measures, such as selling livestock and equipment. Children are missing school as families reduce spending. These choices, exacerbated by the financial crisis, threaten to stall economic development for generations.[24]
Many MFIs report that inflation has created hardships for their employees on modest salaries and increased basic business costs, including making it much more expensive to travel, even by motorbike, to small villages to service their clients. Many clients are cutting back on meals and substituting cheaper but less nutritious food. They are taking on extra jobs, demanding greater contributions from family members, and are experiencing increased difficulty saving. On top of that, consumer demand for their goods is falling as everyone is struggling to make ends meet.[25]
Secretary of State Condoleezza Rice has remarked, “Of course, some will ask the inevitable question in these troubled times — how can we afford it? I would ask instead — how can we not afford it?”[26] (Refer to the above security section for quotes on the importance of poverty alleviation for U.S. security).
Liberian President Ellen Johnson-Sirleaf stressed the important leadership role the U.S. must play: “Developing countries will be looking to the United States to step up during these turbulent times and emerge as the true global leader for democracy, stability and expanding economic opportunities for the poor.”[27]

USAID and Microfinance: An Opportunity for Reform Model

Targeting the poor and measuring for results: In 2004, Congress passed the Microenterprise Results and Accountability Act of 2004 (PL108-484), which requires that 50 percent of overall USAID microenterprise development assistance reach the “very poor,” as defined by either the clients’ relationship to the international poverty line (less than US$1 per day) or the national poverty line (the very poor 50 percent below the national poverty line). USAID developed country-specific poverty assessment tools (PATs) to be used by USAID microenterprise and microfinance[28] implementing organizations to measure and report on the poverty level of their clients. The PAT is a short client questionnaire with an accompanying data entry program to compile and organize the results.

Compliance or avoidance? In FY07, USAID failed to meet the target of 50 percent of overall funds benefiting the very poor. The simple average of very poor clients reached by these organizations was 21.6 percent, revealing that an estimated 19.1 percent of USAID microenterprise and microfinance funds benefited the very poor. In contrast, the Microcredit Summit Campaign reports that in 2007 its partner institutions reached 93 million very poor clients (out of 133 million clients).

As USAID has never before surveyed the groups benefiting from its microenterprise funding, these and others outcomes are not surprising. What is more important and disconcerting is USAID’s response — or lack thereof — to this data. This data should provide an important impetus for USAID to improve the quality of U.S. microfinance funding by reviewing current programs supported, revising funding guidelines and projects, and incentivizing outreach to the very poor. Unfortunately, the agency appears resistant to modifying practices.

Lessons for foreign aid reform: The poverty assessment tool, while developed for measuring the poverty level of microfinance clients, is not limited to this pool of funding, but applicable to any aid program. Therefore, USAID’s Office of Microenterprise Development has the unique ability among USAID program offices to actually evaluate if its funding is benefiting those most in need. The steps taken to monitor USAID’s microenterprise funding also serve as an example of Congress to reform foreign aid funding to ensure that it is targeted and accountable to the poorest. Additionally, the Office of Microenterprise Development’s apparent reluctance to use measurement data to improve programming of funds may be indicative of a larger challenge at USAID to accurately target and measure outcomes of foreign aid, particularly for the very poor.

Read a story on the power of microfinance to bring the issue to life.
Watch the clip of Joriman Khan on the RESULTS Global Campaigns DVD. If you need a copy of the DVD, contact your group leader or Ken Patterson.

[1] “The United Nations has embraced the Millennium Development Goals, which aim to cut extreme poverty in half by 2015. When I’m president, they will be America’s goals.” Barack Obama. Speech at DePaul University. 2 October 2007. http://www.barackobama.com/2007/10/02/remarks_of_senator_barack_obam_27.php

[2] Organization for Economic Development (OECD). Development Cooperation Directorate (OECD-DCD-DAC). 4 April 2008. http://www.oecd.org/document/8/0,3343,en_2649_34447_40381960_1_1_1_1,00.html

[3] Lerner M and Uphaus C. Development Assistance: Quantity and Quality. Bread for the World; 2006. http://www.bread.org/learn/background-papers/2006/Development-Assistance-Quantity-and-Quality.pdf

[4] Oxfam America. Smart Development: Why US foreign aid demands major reform. February 2008. http://www.oxfamamerica.org/files/smart-development-may2008.pdf

[5] OECD. The United Status Development Assistance Committee Peer Review. 2006. http://www.oecd.org/dataoecd/61/57/37885999.pdf

[6] DFID. Public Service Agreement 2003-2006. July 2002. http://www.dfid.gov.uk/pubs/files/publicserviceagreement03-06.pdf

[7] OECD. The United Status Development Assistance Committee Peer Review. 2006. http://www.oecd.org/dataoecd/61/57/37885999.pdf

[8] 9/11 Commission Report. http://www.9-11commission.gov/report/911Report_Ch12.htm

[9] Secretary Gates, address to Kansas State University, 26 November 2007. http://www.defenselink.mil/news/newsarticle.aspx?id=48226

[10] United States Government Accountability Office (GAO). Foreign Assistance: Enhanced Coordination and Better Methods to Assess the Results of U.S. International Assistance for Basic Education. March 2007. http://www.gao.gov/new.items/d07523.pdf

[11] GAO. Global Health: USAID Supported a Wide Range of Child and Maternal Health Activities, but Lacked Detailed Spending Data and a Proven Method for Sharing Best Practices. April 2007. http://www.gao.gov/new.items/d07486.pdf.

[12] GAO. Foreign Assistance: Contributions to Child Survival Are Significant, but Challenges Remain. November 1996. http://www.gao.gov/archive/1997/ns97009.pdf

[13] GAO. Global Health: USAID Supported a Wide Range of Child and Maternal Health Activities, but Lacked Detailed Spending Data and a Proven Method for Sharing Best Practices. April 2007. http://www.gao.gov/new.items/d07486.pdf

[14] OECD. The Development Effectiveness of Food Aid: Does Tying Matter? 2005.

[15] http://www.oxfamamerica.org/files/smart-development-may2008.pdf.

[16] OECD. The United States: Development Assistance Committee (DAC) Peer Review. 2006.

[17] GAO. Various Challenges Impede the Efficiency and Effectiveness of U.S. Food Aid. April 2007.

[18] World Food Program. Food Aid Flows 2006, Food Aid Monitor. INTERFAIS. 2007.

[19] World Bank. Background Paper prepared by the World Bank Group G20 Summit on Financial Markets and the World Economy. Washington, D.C. 15 November 2008. http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:21972885~pagePK:64257043~piPK:437376~theSitePK:4607,00.html.

[20] Patrick Worsnip. Reuters. “Global crisis threatens to undo all UN’s work-Ban.” 24 October 2008. http://www.alertnet.org/thenews/newsdesk/N242020.htm.

[21] Ofeibea Quist-Arcton. NPR. “Effects Of Global Financial Crisis Emerge In Senegal.” 4 November 2008. http://www.npr.org/templates/story/story.php?storyId=96503476

[22] World Bank. Background Paper prepared by the World Bank Group G20 Summit on Financial Markets and the World Economy. Washington, D.C. 15 November 2008. http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:21972885~pagePK:64257043~piPK:437376~theSitePK:4607,00.html

[23] Pascal Lamy. Business Mirror Online Space. “In economic crisis, the poor and weak suffer most.” 12 December 2008. http://businessmirror.com.ph/index.php?option=com_content&view=article&id=3236:in-economic-crisis-the-poor-and-weak-suffer-most-&catid=34:perspective&Itemid=62

[24] World Bank. Background Paper prepared by the World Bank Group G20 Summit on Financial Markets and the World Economy. Washington, D.C. 15 November 2008. http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:21972885~pagePK:64257043~piPK:437376~theSitePK:4607,00.html

[25] For more information on the impact of the financial crisis on microfinance, please read the October 2008 issue of Microcredit Summit E-News, “Addressing the global financial crisis and fluctuating food and fuel cost.”

[26] Secretary Rice at White House Summit on International Development. 21 October 2008. http://www.america.gov/st/texttrans-english/2008/October/20081021144253eaifas5.843753e-02.html

[27] President Ellen Johnson Sirleaf. White House Summit on International Development. 21 October 2008. http://www.whitehouse.gov/infocus/internationaldevelopment/trans-ids-2.html

[28] Definition of “microenterprise” and “microfinance”: The 2004 law defines a microenterprise institution as a “not-for-profit entity that provides services, including microfinance, training, or business development services to microenterprise clients in foreign countries” A microfinance institution is defined as a “not-for-profit entity or a regulated financial intermediary that directly provides, or works to expand, the availability of credit, saving, and other financial services to microfinance and microenterprise clients in foreign countries.” While the term “microenterprise” is used in reference to both the provision of microfinance and microenterprise services, organizations and funding directed to “enterprise development services” are distinguished from “financial services.”

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