Bilateral cooperation of SDC with Middle Income Countries (MICs): proposal for a method to evaluate priorities for aid allocation: Study on behalf of the Swiss Agency for Development Cooperation (SDC), South Cooperation

The distribution of ODA between Low Income Countries (LICs), Least Developed Countries (LDCs) and Middle Income Countries (MICs) is a controversial issue, above all because today the majority of poor people live in MICs. Despite the emphasis of many donors on providing aid above all to the poorest countries it is broadly agreed that aid to MICs is justified whenever income and non-income poverty persist at high levels. At the same time is also broadly agreed that the somehow arbitrary separation between LICs and MICs is not helpful for setting aid priorities, and that more detailed criteria than only the per capita income criterion should be used. However, the precise criteria, indicators and thresholds with which donors define aid priorities are often fuzzy and unclear. This study proposes an evaluation method, which uses four core criteria to determine aid priorities: an income criterion, a poverty and inequality criterion, a performance of poverty reduction criterion, and a criterion of domestic capacities of poverty reduction. Each criterion is represented by several measurable indicators, which are divided into three numerical ranges linked with a score of aid priorities: “high” (score 3), “medium” (2) and “low” (1). The scores are also influenced by the risk preferences of donors: risk-averse donors will assign high scores of aid priority e.g. to countries where the observed performance in poverty reduction is strong (expecting high aid effectiveness, i.e. donors aim at “harvesting low- hanging fruits”); donors willing to take high risks will set high scores in countries where the performance in poverty reduction is weak (signaling high needs for aid, i.e. donors aim at “harvesting high-hanging fruits”). The scores for all indicators are added up, resulting in an overall score for aid priority. The core criteria can be augmented to capture goals beyond the overarching goal of poverty reduction and can comprise particular self-interests of donors. The method is applied for 14 MICs and 6 LICs, the latter serving as a benchmark for high aid priorities. The results presented in the paper only illustrate the functioning of the method, i.e. the aid priority scores and the interpretations are based on valuations and preferences of the author – not on those of SDC. It is proposed that SDC makes use of the method to define aid priorities for all LICs and MICs of its bilateral South Cooperation. As the application in the paper illustrates, the effort would be relatively modest. It goes without saying that the formal evaluation method can and should be complemented by an informal (written) assessment, which takes aspects into consideration that cannot be captured with the formal procedure. The major advantage of the proposed method is its systematic approach and the full transparency. Both the staff of donor organizations and outside stakeholders can understand the rationale of setting aid priorities, which strongly influence aid allocations