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The rise of development effectiveness

A few months ago, DFID's Secretary of State Justine Greening announced the beginning of a new, non-aid based relationship with India focused on trade and the private sector. Around the same time, David Cameron, announced a focus for the UK's G8 presidency on changing tax, trade and transparency policies inside the UK and other G8 countries to have a positive impact on development. This new focus on "putting our own house in order", in the Prime Minister's words, will be the defining feature of this year's development campaign.

But these two big announcements were not just about a specific UK mindset. They are part of a broader shift that is taking place globally. It is the shift from "aid effectiveness" to "development effectiveness", which underpinned the establishment of the new Global Partnership for Effective Development Co-operation just over a year ago in Busan, Korea. The shift can be expressed more simply as a move away from concentrating on aid alone to address poverty reduction. It brings in a new focus on policy – for example trade and investment policy – and its effect on development.

A sceptical reader might wonder whether this shift is taking place simply because traditional donors such as the UK are under domestic pressure to cut their aid budgets. That pressure certainly exists, but in the UK the aid budget is being maintained. This year, the UK government will meet the 0.7% aid target, an ambition dating back to the 1960s. Meeting 0.7% is critical – because aid has a very necessary role, particularly in fragile and conflict-afflicted states where governments may not even be able to prioritise gathering other sources of finance for development – such as collecting taxes from citizens or business.

The fact is that the shift needs to take place because of changes in the economics of poverty. Ten years or so ago, reducing poverty was in many ways simpler than it is now. At the time, most of the world's poorest people lived in low income countries such as Kenya. They lived in rural areas, and aid was one of the largest financial flows globally. Aid was the major tool to help address the needs of the poorest people around the world.

A decade on this is no longer the case. As Andy Sumner, a development economist at Kings College London, explains in this podcast, the majority of poor people no longer live in low-income countries. They now mostly live in middle income countries. In these countries, aid represents a declining proportion of budgets and overall income. Revenues from internationally traded commodities, such as oil and copper in countries like Nigeria and Zambia, far exceed aid flows. Many developing country governments are collecting more and more personal income and consumption taxes. Kenya's tax receipts are equivalent to almost 20% of its GDP. Remittances are rising globally. Aid from the UK to Pakistan in 2011 was just over £210m, compared to the £627m sent from migrants in the UK to Pakistan.

This changed global setting, where all poor people no longer live in the poorest countries, and aid is no longer their main flow of finance, creates the need for a non-aid-based development relationship. But what should this look like? How can it take place?

Some economists, such as Acemoglu and Robinson, suggest that a non-aid-based development relationship is about ensuring good governance in low and middle-income countries. Others say it's about ensuring that governments enable the private sector enough to stimulate jobs and entrepreneurship. The latter was a major feature of Greening's speech at the London Stock Exchange on Monday, 11 March – but both approaches are important.

But the shift of poverty to middle income countries also brings with it a more direct role for governments such as London. Governments can work to make positive shifts in their domestic policy – in areas such as trade and investment. Though there is a great deal of evidence to gather on this, ultimately, these shifts are likely to be more transformational and sustainable for poverty reduction in a middle-income country such as India than aid, and can complement the good governance and private sector agendas.

That said, working towards more "development friendly" domestic policies is not an easy agenda. One of my first jobs in government was working on the economic effects that domestic British and EU farming policies had on development. The specific commodities I worked on – sugar, wheat, corn and soya – were critical to the lives of poor people all over the world. Yet years later, the battle over agricultural policy rages on in international forums such as the World Trade Organization. It is very difficult to change the status quo.

But the more that countries successfully reduce aid dependency, the more the pressure will build for synergistic policy relationships. Concentrating on aid alone will no longer be sufficient for development. And aid itself will have more impact and value for money where, for example, trade, tax and transparency policies are all pushing in the same positive direction.

The G8 and the new UK-India relationship represent the start of a new strategic agenda for effective development partnerships that reflect the more complex setting we now live in. My hope is that these first steps will be successful and extend to other policy areas as we move into the post-2015 world, including through the post-Busan Global Partnership.

This blog was first publised on the Guardian Development Professionals Network.

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