Is Aid an Effective Tool for Development

Economics Bulletin, 2012

2002

We must tie greater aid to political and legal and economic reforms. A USD5 billion annual increase…will be devoted to projects in nations that govern justly, invest in their people and encourage economic freedom." President George W. Bush, Monterrey, 22 March 2002 i President Bush's address to the United Nations Conference on Financing for Development with its startling announcement of a 50% increase in United States Official Development Assistance (ODA) has put the issue of aid conditionality at the forefront of the development debate. To understand and evaluate the impact of the announcement, it is worthwhile examining the concept of ODA and the role of conditionality in that concept. The paper will then consider to what extent, and to what effect, has democratic governance become one of the conditions for the granting of ODA. Situating ODA The starting point might be to situate ODA in comparison to other major financial flows. Using OECD figures 2 , ODA by OECD members in 2000 amounted to USD53 billion which was .22% of donor countries' combined Gross National Income (GNI). The United States contribution was USD10 billion which was .1% of GNI. Accordingly, to raise US ODA to USD15 billion would take it to .15% of GNI, still well below the OECD average and, of course, well below the .7% target set by the Brandt Commission. For the purpose of comparison Australia provided USD987 million or .27% of GNI. It is interesting to compare the USD53 billion to other flows. The flow of private capital to developing countries in 2000 was approximately USD120 billion. The figure has still not recovered from the 1997 East Asian financial crisis. In that year the flow of private capital was USD270 billion, more than five times the ODA flow. The total flow of government domestic agricultural subsidies in Europe, Japan and the United States is estimated at USD310 billion or nearly six times the ODA flow. This means that the average European cow receives USD2.50 a day in subsidies while 75% of people in sub-Saharan Africa live on less than USD2 a day. 3 And we should also note that global military expenditure is around USD700 billion. 4 ODA is therefore not nearly as significant a sum as many people imagine. 5 Its value is in part compromised by the reverse flow from developing countries to donors in the form of debt servicing. Total debt in 2000 has been estimated at USD2 trillion 6 and one of the startling facts which generated the outcry that resulted in the IMF-led debt relief strategy was that in 1996 sub-Saharan Africa paid $2.5 billion more in debt servicing than it received in new long-term loans and credits. In September 1996, the IMF and the World Bank launched a program to address this situation. The Initiative for the "Heavily Indebted Poor Countries" (HIPC Initiative) is designed to provide exceptional assistance to eligible countries following sound economic policies to help them reduce their external debt burden to sustainable levels. The total cost of providing assistance to 34 countries under the enhanced HIPC Initiative is estimated to be over $30 billion, freeing countries from over $50 billion in payments. 8 Another important qualification is that about half of all bilateral aid is tied to the procurement of goods and services from the donor country. 9 While tied aid may be an understandable political constraint it has been estimated that it raises the cost of goods and services by between 15-30% thus lessening the value of ODA. The Rationale for ODA The donor states give three principal motivations for ODA. 10

Applied Economics, 2022

According to the World Bank 2017 statistics, the inequalities between rich and poor countries have increased despite an 80% increase in the official development assistance volume. This persisted, even under the Millennium Development Goals (MDGs) regime (2000-2015), a period during which developing countries' needs were assumed to be at the centre of the international community's actions. Thus, one may question the effectiveness of aid and the real motivations of donor countries. This article aims to examine the factors that determine the bilateral official development assistance (BODA) allocation by using more recent data, and with an emphasis on whether donor countries have put into place a wish from the MDGs to largely take into account the needs of recipient countries in their ODA allocation decisions. Among other results, we show that the needs of recipient countries are taken into account by only small donors (in terms of volume) in their aid decisions. The major ODA providers do not follow the trend. Thus, rowing in line with the MDGs, putting the needs of recipient countries at the centre of BODA allocation was mainly limited to small ODA donors. Donor interest was is put forward by most of the donor countries.

I VII country level. The overall results suggest that the ODA in general, and grants in particular, have a trade distorting effect, and were felt to justify comparable investigations for the five other case study countries.

IMF Policy Discussion Papers

The views expressed in this Policy Discussion Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Policy Discussion Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper highlights the macro and microeconomic challenges associated with success of the effort to mobilize 0.7 percent of GNP for official development assistance (ODA). To promote achievement of the Millennium Development Goals, enhanced ODA must be as productive as possible. In weighing the distribution of enhanced ODA among countries, the paper emphasizes the need to limit potentially adverse "real transfer effects." It recommends a multi-pronged approach to ODA that includes, inter alia, in addition to direct bilateral transfers, enhanced use of trust funds and the financing of global public goods.