Development aid and finance: A defining moment

Development aid fell by 4% in real terms in 2012, following a 2% fall in 2011. Though this decline must be reversed, it is not the only issue to address. Also being questioned is how that aid is measured in the first place. As Jon Lomoy explains, while it is high time to revisit the concept of official development assistance, the outcome of the discussion will influence the effectiveness of development policy over the next decade or more.

The Millennium Development Goals come to term in 2015, and debate is gathering on policies and approaches for the post-MDG era. One key question is how to define and measure development aid. It is a fraught yet vital debate.

At issue is Official Development Assistance, or ODA, which is the conventional metric of bilateral development aid, and the one that usually makes the headlines. Make no mistake: ODA is an important instrument, and is the only systematic means we have for assessing the efforts the “traditional” donor countries make to support development. Those donors, which comprise the OECD Development Assistance Committee (DAC), account for some 90% of bilateral official aid to developing countries. But the world is changing, and development finance is changing, too. In this light, do we need to look at the ODA concept again? I think we agree that the answer is yes.

There are several criticisms of ODA.

Some say that it includes too much–that it goes beyond actual financial flows into developing country budgets by adding in such items as administrative costs in the donor country end, refugee costs and so on. How much is directly usable by countries to fund their priorities and programmes has to be made clearer, which is why the OECD introduced the concept of “country programmable aid”.

In contrast, some say that ODA cash-flow-based measurement includes too little. Donors make efforts that are not counted as ODA–such as guarantees, callable capital, etc.–yet these help mitigate against investment risk. Such efforts are particularly needed today when an increasing number of developing countries turn to loans, guarantees and equity–rather than grants–to finance their economic growth.

Finally, the ODA concept does not fully capture the complex and continually evolving interaction between the public and private sectors.

All this gives rise to tensions between ODA as a measure of development effort by donors, and the actual flows of funds available to developing countries to reduce poverty and promote growth. This is why ministers gave the OECD-DAC a mandate to take a fresh look at the broader financing concept, as well the concept and role of ODA itself.

Consider loans, for instance, which are the subject of much public and policy debate at the moment. One reason for this extra attention is the growing demand for loans by developing countries themselves. This is good news, since it means those economies are expanding. Loans have always been an important part of development financing. They include (mostly subsidised) concessional loans, such as the ones provided by the World Bank’s International Development Association (IDA), and non-concessional loans provided by many bilateral and multilateral donors, for instance the World Bank’s International Bank for Reconstruction and Development (IBRD).

Part of the problem is that donors follow different approaches in determining what makes a loan concessional. Some countries follow the approach of the multilateral development banks–where only loans that have been subsidised are reported as concessional. Others emphasise the recipients’ perspective, arguing that loans should be considered as concessional if they are given on more beneficial terms than developing countries could otherwise attain on the market.

As former OECD-DAC Chair Richard Manning pointed out in his 9 April letter to the Financial Times, there is a need to revisit these calculations to ensure that loans are indeed concessional in relation to current market terms, and to discuss whether, for instance, interest rate repayments should be deducted from ODA totals. But at the same time, the importance of the public guarantees for institutions providing loans, which address the high-risk factor of some development investments, must be borne in mind.

As the discussions continue, it is important that these differences–and the data behind them–continue to be publicly known and available for scrutiny, not least for the sake of building an effective strategy for how to finance the goals that will take over from the Millennium Development Goals after 2015.

And with the increasing complexity of development financing, the broadening of the development agenda to incorporate the likes of capacity, governance and so on, and the growing diversity among developing countries themselves, that debate needs to be about both aid and other sources of financing for development. It cannot be a question of either/or. In other words, discussions about other sources of financing should not be taken as an excuse for donors to walk away from their very important aid commitments.

As we move towards 2015, all OECD-DAC donors agree that we need to settle this debate, while prioritising innovative means to measure and promote development finance. That means working together, alongside other key stakeholders–including developing countries, as well as the United Nations, the World Bank, the International Monetary Fund (IMF) and other international financial institutions–to ensure that we have a robust measurement system for development finance in place by 2015.

If we are to navigate the post-MDG world with clarity, the OECD-DAC must continue to be a key source of reliable and transparent data on development financing.

References

Manning, Richard (2013), “OECD is ignoring its definition of overseas aid”, Financial Times, 9 April.

Provost, Claire and Mark Tran (2013), “Value of aid overstated by billions of dollars as donors reap interest on loans”, The Guardian, 30 April.

Visit www.oecd.org/dac/ and www.oecd.org/development/

©OECD Observer No 296 Q1 2013




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