How to make aid more effective

The clock has struck 12 on the goals that the United Nations agreed in 2000 to further international development. From the time of the UN summit of that year, which took place between September 6 and 8, the world was given 15 years to meet the eight Millennium Development Goals. These included eradicating extreme poverty, combating HIV/AIDS and reducing child mortality.

In his report on progress Ban Ki-Moon, the UN secretary-general, said that the goals had helped over one billion people out of extreme poverty but great challenges remained. He wrote:

In 2011 nearly 60% of the world’s one billion extremely poor people lived in just five countries. Too many women continue to die during pregnancy or from childbirth-related complications. Progress tends to bypass women and those who are lowest on the economic ladder or are disadvantaged because of their age, disability or ethnicity. Disparities between rural and urban areas remain pronounced.

This set the scene for the summit in New York later this month where the UN will adopt 17 new Sustainable Development Goals for 2030, a broader slate that includes ending all poverty, ensuring quality education and protecting the environment.

Once the eyes of the world media move elsewhere, a new wave of donor funding will hopefully be in the offing. Most donors would agree they have a moral responsibility to disburse the aid as efficiently as possible, to improve the lot of the intended beneficiaries to the greatest possible extent.

Yet we think agencies need a different approach when it comes to giving aid to countries that at least have some budget to spend on development goals, which applies to all but the failed states (the World Health Organization publishes figures here that show what proportion of different countries’ health spending derives internally). Traditionally they make investments based on cost effectiveness and proceed down the list until the budget is exhausted. But this is inappropriate for the countries we have in mind. It takes the pressure off the domestic government to contribute its own resources to achieve the intended benefit.

Introducing country C …

Consider the following example. The government of low-income country C has the opportunity to invest in a variety of HIV prevention activities, as shown in the table below. The table ranks the total cost and number of infections averted from each activity, starting with the cheapest (we roughly base our figures on this research).

Cost of HIV prevention activities in country C

First imagine that country C is spending only its own resources to combat HIV infection. We assume the government makes its investment decisions following the standard cost-effectiveness advice, based on the opportunity cost of spending on other sectors. In this case, it considers that spending more than US$300 to avert a single HIV infection is not good value for money as it can achieve equivalent or more benefit by investing the money in some other sector. On this logic, country C would implement the first two activities on the list only – educating sex workers and safe blood transfusion. It would spend $89,575 and will prevent 3,068 infections.

But now suppose there is a donor D which can supply $1m to country C to prevent HIV infections. If it allocated funding to activities in cost-effectiveness order until the money was exhausted, it would mean implementing the first three activities completely and then 35% of the fourth (condom marketing). Since country C remains of the view that spending anything over $300 per infection averted is bad value for money, its government will now spend no money on HIV prevention. Under this scenario, $1m will be spent by donor D and 4,779 infections will be averted.

Two rules

Clearly this $1m is being spent well in the sense that many HIV infections are being averted. But in our example, donor D is taking the place of spending by country C, which is now free to spend resources on other, possibly undesirable, activities. We propose two rules to ensure that donor D gets more value for money.

First, D should fund only interventions which have a cost-effectiveness worse than $300 per infection averted. Country C would then spend $89,575 (on the top two activities) and prevent 3,068 infections, freeing up donor D to fund the peer education of young people and 44% (rather than 35%) of the condom marketing, preventing 1,878 infections. Using this rule, a total of $1,089,575 would be spent by both C and D to prevent 4,946 infections.

But then we add a second rule: D should only partly fund interventions by subsidising the costs down to $300 per infection averted. In other words, D brings down the costs to the level at which it is cost-effective for country C to invest. Here’s what happens:

Costs of HIV prevention with donor subsidies

In this example D will ignore the two best-value activities (educating sex workers and safe blood transfusion). It will spend $995,000 to subsidise educating young people, condom marketing and educating high-risk men. Country C will spend £1,228,500 on these three activities, plus $89,575 on educating sex workers and safe blood transfusion. The total amount of investment is now $2,313,075 and the total number of infections averted is 7,163. We have now more than doubled the amount of investment into HIV prevention and come close to doubling the number of infections averted, compared to the standard cost-effectiveness model.

This approach raises a number of issues. There are clearly practical questions in assessing the cost-effectiveness of different interventions in country C, which may depend on the scale of investment required to meet a particular policy target (work published here by the University of York provides a model for assessing cost-effectiveness).

It also raises policy questions for donor D and the extent to which it wishes – explicitly or implicitly – to influence the investment made by country C in its own domestic policy priorities. But these questions aside, this is hopefully food for thought for donors. As they plan how to spend their money to help achieve the UN Sustainable Development Goals, it can perhaps go further than they imagine.

This article is published in collaboration with The Conversation. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Alec Morton is Professor of Management Science at Strathclyde University. Ashwin Arulselvan is a Lecturer in Management Science at Strathclyde University. 

Image: Indigenous Miskitos carry food aid distributed by the World Food Program in the village of Siksayari in Nicaragua, about 625 miles (1005.8 km) north of Managua, December 4,2005. REUTERS/Antonio Aragon