Monetization of Food Aid: Reconsidering U.S. Policy and Practice

(July 5, 2009) “Monetization” is one of the more misunderstood and increasingly controversial forms of US food assistance abroad. It has rarely been reviewed by an independent entity. In June 2009, the DC-based non-profit, the Partnership to Cut Hunger and Poverty in Africa, published an important, 56-page report, “Monetization of Food Aid: Reconsidering U.S. Policy and Practice” by Emmy Simmons, who also serves on the board of the Partnership.

This report is written in a more accessible style than many technical publications by aid agencies, and therefore may be a useful introduction to the subject for the public or policy makers. The report mixes history, basic background data with useful tables, and original insights and findings. As well, as a readable, contextual, not-too-long, case study about key decisions about a major aid program, it can be an excellent teaching too.

The report primarily considers evidence of monetization through Title II of USAID and gives only passing references to the experiences with US Department of Agriculture (USDA) provided food aid, under the assistance category “Food for Progress.” Given that many hundreds of millions of dollars of monetization has been conducted through this USDA program, it would have been interesting for the report to consider or compare USAID and USDA experiences. The author, Simmons, focuses on USAID because she finds the data richer, yet the vast amount of reporting by NGOs on their USDA monetization still merits examination.

Backdrop

Monetization in the arena of food aid refers to sale of U.S. (or other donor) food aid overseas in a developing country in order to generate cash that is then plowed into local assistance. During the last twenty years, monetization has largely been the province of U.S. private voluntary organizations (from here on referred to by the larger set of agencies, “NGOs,” which are non-governmental non-profits) who have generated several billion dollars worth of “local currency proceeds” that has allowed them to implement dozens of types of field programs, from road building to nutrition education, from child survival to microcredit.

Originally allowed in small portions (“partial monetization”) as a way to allow NGOs to generate some local cash to pay the expenses of transporting and distributing food aid, where the food was delivered directly to beneficiaries, by the 1990s, many food aid programs involved the sale of all food aid programmed to an NGO in a country. By the early 1990s, NGOs had honed best-practice guidelines for the effective use of monetization, including how to conduct market analyses to avoid harming the local food economy.

Many Distinct Stakeholders and Objectives

Simmons is up front about the complexities, both overseas, and in the US driving monetization’s different uses and support: “Different perspectives on food aid monetization derive from divergent political and organizational interests in the United States as well as the developmental assistance and food needs of the developing world.”

CARE led the charge in the 1980s advocating for monetization and starting in 2006 began a public process of back-peddling, arguing that it has come to believe that monetization, all along, was inefficient.

As part of its overall support for food aid, Congress continues to appear to support monetization, while USAID continues, as from the beginning, to be mostly reluctant.

In recent years the monetization of food aid has come under increasing scrutiny and criticism, thus the analysis by Simmons is very welcome, as Simmons has long been one of the keenest analysts within USAID and now, retired from USAID.

Also in recent years, the U.S.-led practice of monetization had come under severe criticism, i.e. as dumping, by other Governments and was expected to prohibited under new World Trade Organization rules negotiated in the Doha rounds of trade talks, which failed to come to any conclusions. Where many policymakers fully expected monetization to be phased out, as a part of multi-lateral trade agreements, it continues and may increase in the next few years as Congress seems poised to continue to increase food aid overall.

Case examples of Ethiopia and Rwanda

Within the global analysis, two cases are provided to generate some lessons. A long-standing, multi-NGO monetization in chronically-food-stressed Ethiopia learned how to adjust the quantity of vegetable oil monetized, causing some difficulty among NGOs, in response to evidence that the levels provided were potentially harming national producers of vegetable oil. The case of Rwanda during the last decade provides a different lesson. There, monetized vegetable oil stimulated a market of traders, creating a vibrant sub-economy that met the needs of local consumers, otherwise not met from local production. But at the same time, this market may have created a dependency on the commodities imported; analysis found that a phase-out of monetization would shock the marketing chain and potentially harm Rwandans both as consumers and as millers, traders and other employees of the supply chain.

The Debate

Most USAID or NGO evaluations of a given program or project that uses monetization focus on the use of the monetization resources, what was accomplished, and how well the program ran. As Simmons points out, these evaluations rarely look at or acknowledge the poor benefit to cost rations of using commodities to generate the cash in the first place. Thus, Simmons focuses on this key over-arching question.

Simmons captures the NGO experience that “monetization proceeds fund development activities critical to long-term food security” in many ways. Monetization per se also can help create and strengthen local markets, such as through the introduction of auctions and diversity of traders. Indeed, Simmons suggests that “timely sales of food aid can stabilize local market prices” (i.e. keep low for the benefit of consumers, if other pressures might make food too expensive to afford. This is accomplished through the food aid’s sheer volume effect, coming into the country’s market.)

Findings

Looking at a range of US food aid (“Title II”) efforts from 1997 through 2005, this report finds that the monetized food commodities “can and did make up a significant share of reported imports” in the 22 main countries were it went. She finds cases in countries where US donated and monetized wheat comprised 10% or more of imports. And, if the US provision of that food aid is unreliable, it can destabilize markets.

On the important question of efficiency, Simmons discusses the evidence that most monetization programs do not generate the same amount of cash that it cost U.S. taxpayers to purchase and ship the food overseas.

The report also has a section which reviews the specific experiences with key commodities, such as wheat and vegetable oil.

Recommendations

The report recommends better inter-agency coordination, better field monitoring and better cost-efficiency, none of which are particularly controversial or radical.

Simmons concludes that PVOs (cooperating sponsors, in their relationship to the U.S. Government, which is the donor of the food aid in question) need more predictable and regular food aid for their development programs.

But her main emphasis is that the local market effects and efficiency dimensions of food aid monetization should be more aggressively and comprehensively monitored, and not be summarily passed over by NGOs which prefer to focus more on the uses of the local currencies proceeds in their field projects.

Simmons recommends that analysis of overall food disruptions needs to be taken up a notch, accounting for the effects of multiple aid programs coming into the same country and inter-year effects of unreliability and dependency: “Uncoordinated shipments and monetization of food aid from various U.S. programs… can exacerbate both commercial displacement and local market effects Repeated and routine monetization of food aid commodities over time can lead to market dependency.”

Drawing from the Ethiopia and Rwanda cases, but obviously applicable in almost every country, Simmons argues for independent (i.e. unbiased, professional) analysis of the food markets that might be disrupted or displaced by food aid imports. Good independent analyses led to monetized food aid to be appropriately scaled back in Ethiopia, but kept steady in Rwanda.

In looking at the monetization of specific commodities in countries, Simmons urges the U.S. Government to harmonize food aid decision-making with other aid efforts, so that “simultaneous local/regional purchases by other donors do not interact negatively with monetization to disrupt markets and confuse market signals.”

It concludes with reflections on the bifurcation, in Congress, between policies and appropriations related to food aid (the jurisdiction of agriculture committees) and the rest of the international aid programs (the development Assistance, in international affairs). But it does not go so far as to recommend consolidating all food aid programs under one federal agency (for instance, USDA).

Simmons ends the report with the view that monetization on balance imposes unnecessary costs and risks and should be replaced by Congress with direct dollar appropriations to NGOs.

Steven Hansch is a member of the board of the World Hunger Education Service, serves on several other non-profit boards, teaches about humanitarian aid at several universities, and has worked overseas conducting nutrition and public health programs, primarily in emergencies.