The most important economic concept shaping development is one you’ve never heard of
Oligopsony. It is a type of inefficient, imperfect market where instead of few sellers (as in the more commonly known oligopoly), you have few buyers. In an oligopsony, the buyers wield disproportionate influence on the market and any one buyer can effectively shift the behavior and dynamics across the system. This leads to significant volatility compared to a competitive market where changes of individual actors can be rectified at the margins. In development, there are relatively few donors who set the agendas and budget allocations across issues and geographies. In some places, you can even find donors who essentially have monopsonistic power where they are the only funder of a particular issue in a given geography. With a single change in focus or policy, they can essentially wipe out an entire “market”. They can also construct a new one overnight which can prompt a rapid reordering of resources and energies to align with the orientation of the new market. This inevitably leads to tremendous unpredictability and undermines the resilience of a particular market because it privileges short-term thinking. This is precisely what is happening now with COVID-19, where resources are rushing away from efforts that are not health-related.
In theory, an oligopsony in development could be an efficient system of ensuring that the various efforts and energies being deployed respond in a “harmonized”, coordinated and agile way to the needs of the populations it aims to serve. While this would seem appealing in the midst of our current global crisis, the kind of wholesale changes development aims to achieve take years of concerted effort. The accumulation of incremental marginal transformations that characterize development cannot take place in a context of convulsive shifts in funding flows. This is yet another dimension of the role of power in undermining real development impact.
This exercise of power in development is not merely dysfunctional in terms of volatile funding agendas. The whole enterprise essentially operates according to a de facto principal-agent dynamic where donors are theoretically charged as “agents” of the people they are meant to serve as “principals” (in development usually referred to as “beneficiaries”). But development donors (agents) were never contracted by the beneficiaries (principals) to act on their behalf. This means donors are essentially self-appointed agents of the world’s poor when formulating policy and enacting programs that are (presumably) intended to enhance these principals’ well-being.
A classic principal-agent problem arises when agents, empowered to make decisions on behalf of, or that impact, principals, are motivated to act in their own best interest rather than those of the principals. In development, while the donor-agents may not necessarily be motivated solely by their own interests, they are arguably, more often than not, making decisions according to interests that are not those of the principals they purportedly serve. In this case, there is a third-party constituency that enters the dynamic. It can be the citizens of a bilateral donor country, the voting members of a multilateral institution, the boards of foundations or any other group that determines policy and funding outside the context in which it will ultimately take place. What is particularly worrisome is the constituency’s “preferences” informing the behavior of the donor-agents are almost completely exogenous to the context in which those agents operate. One famous example of this is the Mexico City policy/global gag rule, which prohibits organizations receiving USAID funds from providing abortion services, even if the funding is directed at other unrelated programming. This policy has ping-ponged back and forth with Democratic presidents rescinding it and Republican presidents reinstating it. When a new party is elected into office in the US, it constitutes a major exogenous shock to the development space — USAID is a member of a donor oligopsony and it is enacting policy determined not by the realities and needs faced by the principals they serve, but by the completely independent political reality of an American constituency.
What we find in development are therefore a limited number of parties who command considerable influence over the activities in a space intended to serve certain people but ultimately determined by other unrelated realities. This means that the world’s poor — the “principals” around which the entire development enterprise is organized — have no real agents after all.
