TIA talks to the chief economist of the UK's Department for International Development about the benefits of investing in high risk development for the world's most fragile states.

As the likes of Spain, Ireland and Italy cut back foreign aid, the UK overseas assistance budget is set to increase in real terms to £10.5bn ($16.45bn) in 2014-15 from £7.5 bn ($11.75bn) in 2010-11 - or roughly £137 ($215) per citizen - moving Britain towards the UN aid target for rich countries of 0.7 percent of Gross National Income.

As well as an increase in volume, the UK Department for International Development is also evolving its strategy. In February, Justine Greening, the UK's new Secretary of State for development, announced the department would seek to promote more British investment in Africa.

Since the arrival of the Conservative-led coalition government, it is also pressing ahead with a focus on 'fragile states,' mandating that 30 percent of overall spending be focused on post-conflict or conflict-affected countries, including Sierra Leone, Liberia, South Sudan and Somalia.

Working in higher-risk places, donors are more exposed to failures, which can feed into the domestic political debate about the value of foreign aid. The DFID increase has been heavily criticised in some quarters, coming at a time of deep austerity at home in Britain.

Stefan Dercon, chief economist at DFID, defends the move, arguing that donors must take on difficult challenges if they are going to make a difference. "If we don't take any risks in development, not least in fragile states, then we are not going to do anything. We're only going to do bits of humanitarian aid and not do anything transformational," he says.

Public scrutiny could backfire if it leads donors to stay in their safety zones and fail to reach the most needy. "One of the problems we have in development is that the perception has been created that every single pound spent has to be a success, and we are not being judged on the return to our portfolio across whole spheres of possible activities," Mr Dercon argues.

"In a business, you should be trying to take some risks, but you do it in such a way that certain things which have very high returns can help to outweigh things that potentially have high returns but, in the end, the circumstances went against you. We should be doing development like that. That's very hard in an environment where ex poste, everything has to look rosy."

Directing 30 percent of DFID's budget towards fragile states sends a strong signal that the department is not afraid to take those risks. "In a world where you want to provide some incentive to deal with risky environments, where the pay off for getting things right is really high, a very sensible things is to say is: 'Let's tie our hands and systematically do at least some of our spending in risky environments, and pre-announce that.' Marginal returns for a project in such a fragile state are potentially very high, and could also be very negative. But we tie our hands to have at least some in our portfolio."

While internationally respected, DFID faces similar operational challenges - and domestic debates - as other aid agencies. A recent parliamentary report made several recommendations to improve the agency, which are now under discussion. Among its observations was a criticism of the amount of aid funnelled through multilateral agencies. Mr Dercon calls for a case-by-case approach to establish the right modality for aid disbursement.

"There is a proliferation of financial instruments. Each of them have set up costs, transaction costs, and so on. The question 'Is it too much or too little?' has to be compared to the alternative channels. You're not going to go through an NGO to build infrastructure," he says.

"You want to weigh carefully the costs and benefits of using that channel. It would be wrong to just assume that alternative routes must be better because they are spending more directly."