Donor Assistance

The vast majority of development aid comes from developed country governments, directly or through multilateral organizations such as the World Bank, the GFATM, or the UN institutions. Over the last 20 years, annual official development assistance (ODA) has been between US$50bn and US$60bn and reached over $100bn in 2005. www.igh.org

The United States is the world's largest contributor of ODA in absolute terms ($15.7 billion, 2003), but the smallest among developed countries as a percentage of its GDP (0.14% in 2003). The UN target for development aid is 0.7% of GDP; currently only five countries (with Norway in the lead with 0.92%) achieve this.

Donor Assistance and the Private Sector

Current innovations in donor assistance focus on delivery of aid via the private sector, including output based assistance, microcredit programs and the use of third party agencies (e.g. social franchise organizations) to manage development activities in recipient countries. A number of these innovations are detailed on our page on Mechanisms of Service Delivery.

There is growing donor recognition of the role economic growth plays as a means for eradicating poverty, and the role of the private sector as the engine of growth.

By focusing on private sector development, donors aim to build up financial and capital markets as well as to improve the investment climate and business opportunities and, in this way, to heighten economic activity and employment in developing countries. Most development organizations now have subdivisions or projects devoted to private sector development (e.g. Investment Climate Facility for Africa at the IFC; PSP-One at USAID; or HRC at DFID). Depending upon both the situation and the donor goals, private-sector-focused development aid may be targeted towards tax and customs policy, business registration, competition policy, infrastructure, labor market reform, access to financing, or direct service provision.

Cooperation with, and utilization of, the private sector offers donors both reach and efficiency, and holds promise in some areas for sustainable results from time-limited investments. The reasons for donors to work with the private sector, directly or indirectly via NGOs or government, vary by setting.

Reasons for Donor Engagement of the Private Sector:

Strengths

  • Less corruption
  • Avoid crowding out and other adverse effects on local markets
  • Direct link to beneficiaries
  • More effective than broad economic trade changes or national health system support

Weaknesses

  • Disregard of local traditions and culture
  • Corruption can misdirect investments
  • Local government oversight capacity of private sector may be insufficient