5 Restructuring of Norway’s international development activities

Effective investments and coordinated international efforts require clear and unambiguous goals. Given the increasing complexity of the problems and challenges, as described in Chapter 2, the fragmentation of policy instruments and the actors involved, described in Chapter 3, and the effectiveness principles presented in Chapter 4, it is necessary to organise and adjust the objectives and associated investments of Norwegian development policy.

Against this backdrop, we propose a new financing framework that is based on a clearer differentiation between different objectives and a more detailed system for assessing effectiveness. This will result in fewer conflicting objectives, more clear-cut terms of reference and funding mechanisms, and a more strategic approach to addressing global challenges. The rationale for our restructuring follows from our overall argument of ensuring effective use of resources and clearer goals for distinct categories of development.

In this chapter, we will

• Operationalize the investment principles presented in the previous chapter and make specific recommendations for the categorisation of Norway’s international efforts. The guiding principle for this re-categorization is that increased effectiveness requires an adaptation of policy instruments to address complex problems.

We propose a framework consisting of two main categories with distinct primary objectives and areas of impact:122

1. Investments in development
1. Investments in poverty reduction and development
2. Immediate crisis relief/response and stabilisation
2. Investments in global public goods for development

The core dimension of our classification is what is increasingly seen as a continuum in development funding, with national and geographically specific efforts aimed at poverty reduction and development at one end, and efforts to tackle global challenges that has a clear developmental consequence, at the other end. A clearer distinction will ensure that investments target different types of initiatives and different groups of countries. The axis between short-term crisis relief and long-term development investment is another important dimension, as is income levels and fragility/vulnerability in different groups of countries. Both humanitarian efforts and long-term investments in sustainable development fall into category 1, as we increasingly need to consider them together – what is often known as a comprehensive approach or ‘nexus’ (see box 3.5). There are often underlying vulnerabilities, such as conflict or climate issues, which drive humanitarian crises and needs. The traditional structure of development cooperation, based on the idea that development is primarily a linear and sequential process from crisis to reconstruction and development, is misleading in many of these contexts.

Tabell 5.1 A new framework for Norwegian development policy

5.1 Category 1a: Investments in poverty reduction and development (re-focused ODA)

Aid funds in this category should be used where they can make the biggest difference to poverty reduction. A number of the world’s least developed countries are experiencing reduced direct foreign investment, increased inflation, an increased debt burden and increased capital costs for investment. ODA therefore has the greatest significance in these countries, as well as in some lower-middle-income countries. In practice, however, this rationale has been difficult to follow because new goals – usually related to global challenges – have been added to the international development agenda.

As can be seen from Table 5.1, category 1a and its associated funding target represents a significantly stricter application of ODA rules than is currently the case: It represents an attempt to re-focus aid.123 Investments and efforts in this category will be geographically concentrated in the LDCs, fragile contexts and certain lower-middle-income countries. Our point of departure for this refocusing is that ODA rules, as described in Chapter 3, allow for a number of interventions and measures that are not necessarily the most effective in reducing poverty in developing countries. Category 1a should therefore only include measures that are assumed to be among the most effective contributions to poverty reduction.

Climate adaptation measures in low-income countries and in the LDCs are included in this category since costs associated with climate-related disasters and reversal of development caused by climate change have a direct, negative impact on poverty reduction. For many of the most climate vulnerable low-income countries, climate adaptation and economic growth largely go hand in hand, as key sectors such as agriculture need to be restructured to adapt to climate change. Investments in renewable energy in this category should be primarily aimed at increasing access to energy that contributes to development and reduces poverty, while emissions reduction is a secondary consideration (see category 2). This follows from the principle of emphasising effectiveness and clear and unambiguous objectives. Indirectly, it is also an important contribution to sustainability, as a development pathway based on significant carbon emissions can have negative consequences for long-term development. Nonetheless, the objective is to give priority to poverty reduction, thus ensuring clear goals, while also indicating which group of countries this category of aid will focus on (low-income countries, least developed countries, fragile states and certain middle-income countries).

A stricter application of ODA rules will mean that a number of aid-funded measures and initiatives that are today approved as ODA will fall outside the scope of category 1a. This applies to efforts to deal with global challenges where poverty reduction is not the primary objective, such as the financing of emission cuts (category 2). Specifically, climate and environmental initiatives have become a substantial part of Norwegian aid to middle-income countries such as Brazil, Colombia, Gabon, Indonesia, China and Peru, but also large low-income countries such as DR Congo, Ethiopia, India and Pakistan.124 In these contexts, poverty reduction clearly seem to be a secondary objective. Nor is poverty reduction the primary objective of using ODA funds to cover refugee expenditure in Norway. As a result, this is not placed in this category.

A more clear-cut development category for poverty reduction will prioritise countries with less access to resources and a pressing need for grant aid and concessional loans with grant elements. More urgent humanitarian efforts that are considered short-term and temporary will fall under category 1b, while more long-term work on strengthening national systems for crisis management and long-term, complex humanitarian situations, focused on resilience, will be included as a natural part of category 1a, cf. the OECD’s recommendations on the HDP nexus approach in humanitarian situations.

5.2 Category 1b: Crisis relief and stabilisation

We have chosen not to separate categories 1a and 1b as proportions of GNI, as the poorest countries are also to a much greater extent characterised by more frequent crises, either in the form of conflict or natural disasters, and because a larger proportion of global poverty challenges will be found in these countries. This is an important reason why more and more development actors are attempting to bridge the gap between humanitarian aid, long-term development cooperation and peacebuilding efforts (known as the “triple nexus”). At the same time, it is important to recognize that these are two distinct categories. Category 1b is more directly driven by crises than 1a, and the response is also based on humanitarian principles. More crises and increasing levels of conflict have contributed to the growing funding gap between humanitarian needs and actual mobilised financing. We also see that several types of crises interact and reinforce one another. As a result, an increasing proportion of international and Norwegian aid is therefore directed to short-term humanitarian efforts. If this trend continues, emergency relief budgets will make up a considerable proportion of the overall aid budgets. While new policy initiatives for prevention and resilience strengthening have been placed on the agenda, a substantial change remains to be seen. Only between 1 and 2 % of ODA in fragile contexts goes to crisis prevention, peacebuilding, and disaster risk reduction.125 As long as the goal of a more comprehensive approach based on the synergies between long-term and short-term efforts is not achieved, most of this aid will not constitute ‘investments’ (category 1a). A continued increase in category 1b therefore requires an innovative approach to prevention and the development of international crisis response rather than the current, more reactive funding system.

This is why we emphasise prevention, reconstruction and a long-term perspective in the transition to category 1a, and why the total amount allocated to category 1 must be increased in the event of major crises. This means that in the event of major crises, resources over and above 0.7 % should be mobilised, as we have recently seen with the Nansen Support Programme for Ukraine. This ensures that extraordinary needs do not lead to cuts and unpredictability in category 1a.

5.3 Category 2: Cooperation on global public goods for development

An increasing number of poor countries’ obstacles to development require investments and measures that largely take place outside the borders of the poorest countries. Category 2 therefore aims to prevent and address global and transnational challenges that affect developing countries particularly severely, but which require collective action on a global scale and greater efforts in higher-middle-income countries. This is also based on the 2030 Agenda, with its emphasis on (global) preconditions for development and poverty reduction. This category includes climate and environmental efforts, preservation of ecosystems, global health security, research cooperation, stabilisation efforts, as well as development and monitoring of international rules and standards. The spill-over effect of these challenges, and the extent to which they undermine preconditions for development, vary. Far from all of them have a global impact, yet their common cross-border nature entails a potential negative spillover effect on other countries and regions.

Climate change is the clearest example of a global challenge that hits developing countries the most. Around 3.5 billion people live in areas that are highly vulnerable to climate change. Without investment in emissions reductions and adaptation, the risk of climate catastrophes will soon increase in all regions of the world, and especially in poor countries, thereby contributing to a further increase in global inequality. For example, climate change is expected to cost Vietnam between 12 and 14 % of its GDP by 2050.126 The floods in Pakistan caused damage worth at least USD 14.9 billion and led to a direct economic loss of USD 15.2 billion.127 Without significant efforts to halt this development, achieving the poverty reduction target under category 1a may become particularly demanding and funding needs under category 1b will increase.

Category 2 investments will not necessarily be as effective as category 1 investments in fulfilling immediate development needs in low-income and fragile states. The gains from investing in global public goods are usually long term. In addition, the gains are indivisible and cut across national borders and income categories. As a rule, low-income countries are not in a position to prioritise efforts that require a long time-horizon and where access to expensive technology is needed. It will therefore be important that high-income and higher-middle-income countries help to ensure innovation, technology and knowledge sharing.

5.3.1 Criteria for category 2

In order to meet the demand for addressing the global challenges identified in category 2, Norway should increase its overall investments. Category 2 will also be the category where public funds can be expected to mobilize more private investment.

It is of fundamental importance that all category 2 investments must be based on the principles of sustainability and effectiveness. Even when the measures in themselves do not have poverty reduction as their primary objective, they must be designed in such a way that they pave the way for poverty reduction as effectively as possible, as well as prevent the reversal of development gains in future. Thus, even without a direct and immediate poverty-reducing effect, effective contributions to these basic preconditions for development will fall under category 2. An important condition for investments made under category 2 is that they deal with issues that will become far more difficult and expensive to deal with later. In line with our discussion of global public goods, effective preventive measures against climate change, pandemics and conflict will be far more cost-effective today than a reactive effort once the crises have occurred.

A stable climate is a global public good that all countries will benefit from, but the consequences of not achieving it will hit poor countries the hardest. In line with the emphasis on unambiguous goals, category 2 includes measures that most effectively provide development-relevant global public goods. However, given the principle of aid effectiveness stating that developing countries must have ownership of investments, it is important to ensure that clear links to partner countries are established. It is particularly noteworthy that several of the aid effectiveness principles agreed upon by the international community are not well established in the field of climate funding, parts of which are somewhat chaotic involving many small grants and a large number of investors (fragmentation). In order for a measure with emission reduction as its primary objective to be financed under category 2, therefore, a link to low- and middle-income countries is required. The link can be ensured by implementing the initiative in an ODA eligible country and/or in cooperation with one or more ODA country’s governments and/or research institutions, businesses or organisations – either directly or through South-South cooperation or multilateral institutions.

Effective climate adaptation measures that are not considered to have a direct link to poverty reduction – such as the construction of dikes or other mitigation measures against the consequences of climate change in low- and middle-income countries – will also fall under this category. If the same action takes place in a high-income country, without any form of cooperation with or special relevance to a developing country, it may not be included as part of Norway’s international efforts under category 2. The same applies to the development of technology and research where the relevance for poor countries is uncertain.

5.3.2 Category 2 in light of current aid and the ODA rules

Current ODA rules and their implementation do not ensure that ODA-approved measures are adequately limited to interventions and activities that provide effective poverty reduction in developing countries. The donor countries that come together in the DAC have not been able to safeguard a strict application of the ODA rules. Instead, we see that the DAC members have diluted ODA over time, a development Norway has also contributed to over the past decades.

Our point of departure is to maximize effectiveness and impact for development. The flexibility we open up for in category 2 is based on effectiveness, and the geographical filter and requirements for cooperation with developing countries are aimed at avoiding a slippery slope where the one per cent of GNI set aside for aid is used to fund measures that are most relevant to high-income countries (see section 5.5.3 on global public goods with low relevance to development). Recall that this category is premised on considerations of fundamental preconditions for development. This means that activities and interventions must be designed with a primary focus on the social and environmental returns on the investment for developing countries. This may result in the activity or intervention falling wholly or partly outside the scope of the ODA rules. The considerations of effectiveness and poverty orientation apply to all investments in category 2, regardless of whether they fall within or outside the scope of the current ODA regulations. However, it is crucial to ensure that the somewhat broader framework for development financing and reporting (see chapter 6 on reporting) does not result in the dilution of aid, thereby contributing to undermining its effectiveness and impact. In our view, the prestige connected to a high level of ODA has contributed to diluting ODA. Our model entails a more stringent practice, and a clearer formulation of the goals to which this type of funding can be used. We believe this will help reduce the inherent tendency that the more that can be reported as ODA (increased quantity), the less effective overall aid will be (reduced quality). Norway should therefore work internationally to achieve a stricter application of ODA rules.

Although the ODA regulations will not be binding for category 2, the expert group believes that investments within the category that falls within 1 % of GNI should and will, as a rule, be reportable as ODA. The existing flexibility within the ODA rules to pursue ambitions for development-related global public goods is already sufficient to this end. In sum, it will be essential to ensure that Norway’s overall contribution to sustainable development is not reduced. That would break with the main message of our report.

We should also stress that more effective international efforts are not an argument for less funding. It is important that Norway continues to be seen as a generous ODA donor and that we strive to safeguard ODA’s effectiveness and integrity in order to generate credibility in relation to our commitments. It is also important to Norway’s ability to influence international processes. We believe that the investment framework and the new categorisation proposed above will ensure that future Norwegian international efforts become more effective, and will only in exceptional cases include measures that fall outside the ODA rules within the one per cent target.128 If the Government follows up the recommendations in this report, Norway will still report one per cent, or very close to one per cent, of GNI as ODA annually.

Below are three reasons why category 2 (within 1 % of GNI) may, in exceptional circumstances and to a limited extent, contain measures and activities that cannot be reported as ODA:

1. Individual measures that will be effective given the criteria discussed above, but which fall outside the scope of the ODA rules, may be considered if they prove to be more effective than measures that fall within the ODA framework.
2. The point above will provide the political leadership and government administration with more flexibility to ensure the most effective investments possible in global public goods for development.
3. This flexibility makes it possible for Norway to be strict in its interpretation of the definition of ODA and at the same time work to tighten ODA rules within the DAC, thus helping to ensure the integrity of ODA as a measure of donor countries’ contributions to developing countries.

Given the pressing challenges described above, the expert group finds it imperative that funding under category 2 is increased over time (this will be discussed in more detail in section 5.4), above and beyond 0.3 % of GNI, which will lead to a total aid budget that exceeds one per cent. Increased contributions, beyond 1 % of GNI, will make it easier to consider new measures on the periphery or outside of ODA rules. In line with the proposal to think of aid as investments in sustainable development, it would be natural to consider new initiatives capable of creating partnerships between public and private stakeholders. In Chapter 7, for example, we describe how guarantee schemes and private investments can contribute.

New forms of cooperation can also be envisaged with the aim of creating and scaling up modern technologies of particular relevance to developing countries. This could, for example, be initiatives that draw on Norwegian and foreign/international research environments and are linked to the business sector and other actors in developing countries, for example in the form of programmes along the line of the Research Council’s ‘Centres for Research-based Innovation’ that specifically target challenges in developing countries. Another potential area of investments is in so-called Blue Forest initiatives, where knowledge environments in Norway and other high-income countries form partnerships with stakeholders in developing countries to reduce climate emissions while contributing to climate adaptation in low-lying rural areas. Within the area of global health, global health security initiatives can be envisaged that require investments in health technology and research, and that are particularly beneficial to developing countries while also contributing to global public goods.

If category 2 funding is not increased, there will in practice be very limited scope for new and increased efforts for global public goods for development. In Chapter 3, we described why contributions targeting the climate crisis will make up a significantly larger proportion of Norwegian aid in the future. Unless part of the climate funding is additional and allocated above the one per cent target, Norway’s existing climate financing commitments and promises – such as the increase from NOK 7 billion in 2020 to NOK 14 billion by 2026 – will make the scope for investment in other global public goods for development – such as efforts in peacebuilding, disarmament or international rules and guidelines for trade – very limited.

We stress that the overall purpose is to ensure maximum impact and effectiveness of those investments. The Government’s International Climate and Forest Initiative (NICFI) is an example of a category 2 initiative. One of its key principles is performance-based financing, i.e., that funding is disbursed based on verified reductions in greenhouse gas emissions (development-relevant global public goods). To be approved as ODA, the initiative contains and gives high priority to development-motivated components. NICFI is not primarily poverty-reducing (category 1a), however, it shows how category 2 financing can incorporate effective ODA-approved measures for development-relevant global public goods. In principle, however, our proposal opens up for the possibility that NICFI could be designed and implemented with a looser link to ODA rules, if ODA rules limit the effectiveness of reducing emissions, which is the primary objective.

Other concrete examples of interventions that may be able to achieve greater effectiveness through greater flexibility in relation to the ODA rules include Norfund and the Climate Investment Fund’s energy investments outside low-income countries. The same applies to investments in global health security and preparedness and global efforts to conserve biodiversity of particular relevance and value to developing countries. In the expert group’s assessment, there are some measures and activities that are currently financed outside the aid budget that could belong in category 2 if a more detailed assessment concludes that they are effective measures. This includes funding for disarmament efforts and UN peacekeeping operations.129

5.3.3 Investments in global public goods with low relevance to development

Many important contributions to the SDGs will fall outside both categories 1 and 2. This includes measures to support global public goods that are not designed to reduce poverty reduction, which do not have the greatest possible benefit for poor countries, or that do not involve close cooperation with developing countries.

The production of global public goods often involves complex value chains that require input factors such as technology, diplomacy, finance, research and international regulatory development. They can also have different consequences for various industries, populations and countries. Investments in research and innovation in Norway can potentially make an important contribution to reducing greenhouse gas emissions. The same applies to energy efficiency in France or the USA. Every country’s contribution to the SDGs requires a comprehensive, cross-sectoral approach. In a broader perspective, it will therefore be important to ensure policy coherence for sustainable development.

Support for the provision of global public goods that benefit high-income countries as much as others should not, however, be financed from aid budgets. It is important to set a limit for what type of contributions can be included in category 2, and to avoid a slippery slope where references to “global” benefits is used as an argument for it to be funded by aid budgets. A case in point is funding for carbon capture and storage in high-income countries, basic research, international cooperation on sustainable ocean management, global cybersecurity and regional biodiversity initiatives in Europe. These are investments that constitutes important contributions to global public goods, but they have much less clear development consequences, and should therefore not be covered over aid budgets.

Refugee costs in donor countries should in our view be covered outside the aid budget. The OECD Development Committee’s rationale for including refugee costs in ODA is ‘to reflect the financial effort of hosting refugees and the sharing of responsibility with developing countries who host the vast majority of the world’s refugees.’130 However, such expenditure has little direct relevance for developing countries, does not make an effective contribution to poverty reduction and growth, and entails only a very limited degree of cooperation with developing countries. Furthermore, this funding is intended to meet Norway’s obligation to persons who fulfil the conditions of the Refugee Convention.131

5.4 Increase in funding over time

How much money, measured as a percentage of GNI, to allocate to the different categories of aid is a political choice. Our task is to specify overarching objectives for the different categories. We nonetheless note that there is a growing consensus in the UN, OECD and among independent expert groups that (i) the need for investment in the green transition is substantial and will only increase, and (ii) that the longer one waits to scale up investment in climate and environmental measures, the more expensive it will be to achieve the same effect, both in terms of climate stabilisation and poverty reduction. According to the latest synthesis report from the IPCC, both financing gaps and opportunities are largest in developing countries, and accelerated financial support from high-income countries is crucial.132 Furthermore, it has been emphasised in several climate agreements that climate funding should come in addition to already established ODA funding.133 For example, Norway has pledged to double climate funding to developing countries, but it is unclear whether it will be genuinely “additional” as that depends on the total aid volume.

During the Conference of States Parties to the UN Climate Change Conference (COP27) in Egypt, the parties endorsed ‘new funding arrangements’, including a dedicated fund for “loss and damage”. A number of countries are experiencing a liquidity crisis, and more than half of the debt of climate vulnerable countries is the result of extreme weather events and natural disasters.134If a large proportion of a country’s crisis and disaster management funds is financed by loans, it will have less national resources available for necessary long-term economic growth and adaptation. It is against this background that the expert group proposes an increase in funding of category 2, particularly in relation to climate finance.

Tabell 5.2 Schematic presentation of proposed developments in the two categories over time

We propose increasing concessional financing/funding for categories 1 and 2 to a total of 1.4 % of GNI in 2032 (see Table 5.2), and more under category 1b in the event of crises. At the same time, private capital will be important contribution to sustainable development, both because of the need for more investments in low- and middle-income countries, and because of the development benefits it can bring about in the form of sustainable value chains and jobs. As we discuss in Chapter 7, we also propose setting a target to increase the mobilisation of private capital to the equivalent of 0.7 % of GNI over time.

5.5 Conclusion

In the expert group’s assessment, Norwegian aid and international development cooperation have become increasingly complex, with a growing number of objectives to be financed from the same pool of finite resources. We have therefore outlined a new framework in which the objectives of development policy are made clearer. This is primarily about creating a clearer distinction between distinct development policy goals that are too often assumed to go together. The framework will facilitate a more clear-cut focus on specific objectives and related assessments of what measures are most effective to reach stated objectives. We have also suggested an increase in funding to match the growing challenge of simultaneously reducing poverty and spurring development and addressing climate change and environmental degradation. In sum, such a framework will be robust in the face of the challenges that will have to be addressed now and in the future, and will contribute to increasing the effect of aid.