Making a Noticeable Contribution to Foreign Aid?

Can Australia reduce its aid budget in the 21st century and continue to aim for best practice, asks Matthew Sinclair, an Australian delegate to the World Trade Organisation Public Forum in Geneva.

Around the globe, a considerable number of states have recently agreed that there is a need to support developing countries to better realise the benefits of global trade. But with a significantly reduced aid budget, is Australia capable of making a noticeable contribution?

Australia’s foreign aid policy is undergoing dramatic change. Not only has the budget been reduced, but also the way in which aid will be delivered has been re-designed. Australia’s new approach to aid includes an increased focus on Aid for Trade, which is aid that aims to increase the trade potential of developing nations.

This ties in closely with the opening statement on the need to liberalise trade, in a manner that is inclusive of all nations, not just for developed economies.

At first glance, it may seem like a self-interested approach to foreign aid. One that is far from altruistic. Partly, that would be a correct assessment. However, there are also unequivocal benefits from trade support for the recipient that may well exceed the benefits that Australia may see in return. When a nation is able to trade more freely and compete on the global market, it is able to access a larger pool of resources for imports and a wider market for exports. This can lead to increased jobs, higher incomes, and subsequently stronger economic growth and economic development.

But if Australian is reducing its foreign aid budget, it raises the question of how this new priority can be achieved.

Prioritisation of aid programs by return on investment for Australia has been a part of the Government’s recent approach. Australian aid will more heavily focus on the Asia-Pacific, resulting in the funding for existing programs elsewhere being redirected. From the perspective of developing countries, a smaller Australian aid budget is not desirable. But what if aid can be delivered in a manner that is more efficient and more effective?

In terms of being effective, the 80:20 rule is an important consideration. It is better to solve 80 per cent of a problem and achieve a positive overall outcome, rather than trying to boil the ocean and solve the entire problem, to the extent that resources are squandered.

With this in mind, one of the keys to effective support of trade facilitation for Least Developed Countries (LDCs) is to focus on the agricultural sector of the economy. In LDCs over 70 per cent of the population live in rural areas, and are hence highly reliant on agricultural productivity and trade. The assumption therefore is that if LDCs are able to create more productive agricultural sectors, they will achieve greater levels of economic development from the trade gains that come from this. This would therefore represent an approach that upholds the 80:20 rule. What’s more, agriculture is one of the pillars of the Australian economy and it’s an area that we have significant experience and expertise.

The Australian Centre for International Agricultural Research (ACIAR) is an illustration of our potential to achieve best practice in sharing our knowledge of the agricultural sector. ACIAR engages in numerous research and development projects abroad, such as its work in Cambodia. ACIAR is working with the Royal Cambodian Government to assist with various aspects of the country’s agricultural sector with the goal of building productivity, competitiveness, and resilience.

The Australian private sector is also an important factor that should be leveraged. Australia’s farming community plays host to an incredible wealth of knowledge of how to be successful despite the droughts and flooding rains. Another recent Australian Government policy, the Economic Diplomacy platform, aims to support the further success of Australian businesses operating abroad. As such, there is a secondary policy framework that could be used in conjunction with the Aid for Trade platform, by leveraging the knowledge of the Australian private sector in aspects of international development projects.

There are many potential avenues for alternative funding models of foreign aid that need to be explored in more detail. One such model is the use of seed funding for small projects. Seed funding is easy to implement, can be delivered in a way that is financially sustainable, and is an area of funding that Australia has already had some success.

Seed funding could be implemented through a co-investment model, whereby the Australian government matches a contribution made by a partner in the Australian private sector. This allows for financial risk to be shared, while freeing more of the Government’s funding for other projects. The Australian private sector partner would also add value by engaging in the co-delivery of the project being funded, in collaboration with the funding recipient in the developing nation.

There is the scope for the creation of an Australian International Development Seed Fund, which could be implemented under the existing Direct Aid Program framework. The seed fund would provide a secure pool of funds that can be used when there is a clearly defined financial return on investment for both Australian partners, in addition to a social return on investment for the funding recipient.

The purpose of this piece has not been to evaluate the merit of recent policy changes. Instead, the purpose of the above is to understand – given the current policy – whether or not Australia can continue to achieve positive outcomes in foreign aid delivery despite a reduced budget and a new operating model.

With a reduced foreign aid budget Australia needs to be smart about spending priorities. The importance of the agricultural sector for economic development lends itself as a logical area to prioritise. With the additional consideration of new policies such as Aid for Trade and Economic Diplomacy, Australia should look towards the private sector as a co-investment partner- more specifically through the use of seed funds. If implemented with proper consideration, such an approach would not only be good for developing countries, but also good for Australia.  

About the author: Matthew Sinclair is a student at The University of Melbourne’s Faculty of Business and Economics and is a current Global Voices delegate to the WTO Public Forum in Geneva.