2017 development aid figures: A half empty mixed bag

Added 19 Apr 2018

Last week the Development Assistance Committee (DAC) of the Organisation for Economic Co-operation and Development (OECD) released their preliminary figures on the amount of Official Development Assistance (ODA), or development aid, raised in 2017. The week before I wrote a blog outlining Eurodad’s expectations for these figures – and the results are a mixed bag.

While certain negative trends seem to be on the mend, overall the amount of aid raised every year has stagnated in volume and although there was positive economic growth across donor countries ODA dropped to 0.31% of Gross National Income (GNI). The continued inclusion of costs not directly linked to development and poverty eradication inflate the figures and undermines the credibility of the reporting exercise of a scarce resource that is of paramount importance to the poorest people in the world. On this note the headline figure of $146 billion in ODA in current terms ($144 billion in real terms) is not a monolith and it is important to look into the details.

The numbers

Bilateral aid (aid that is not channelled through multilateral agencies) to the world’s poorest countries, or Least Developed Countries (LDCs), increased by 4% in real terms (making up 18% of total ODA ) due largely to the efforts of Sweden and Japan. However, in-donor costs, money that stays in donor countries, still make up at least 10% of ODA.

The graph above shows the composition of aid over time. For 2017 it shows that in real terms there was a decline in ODA primarily due to a reduction in inflated aid expenditures such as debt relief (0.34%) and in donor refugee costs (10%). The decrease in refugee costs is linked to a 50% decrease in new asylum applications in 2017 (650,000 in 2017 compared to 1.21 million in 2016). This in turn is linked to stricter immigration policies and to the externalisation of European borders to developing countries.

Despite their decline, these costs still make up a significant portion of total ODA for 2017. The lion’s share (51%) of aid went to programmes and projects as well as technical assistance (which can be problematic). This was followed by contributions to multilateral agencies (30%) and then spending on humanitarian aid, which increased by 6% to $15 billion.

Whats new?

Overall very little has changed from previous years. Despite the efforts of a few DAC members, we are still not making any progress towards achieving the 0.7% GNI target. The major dips and dives are due to the unpredictability of costs that should not be included in ODA reporting, such as debt relief and in-donor refugee costs. That is not to diminish the importance of these expenditures, rich countries have a responsibility to receive and support refugees fleeing conflict and crises, but the inclusion of these flows in ODA distort the picture it is trying to represent.

If the top two flows on the chart above were removed this would do much to enhance the predictability and credibility of ODA, but there are other significant problems associated with the other flows. In 2016 nearly $17 billion worth of aid was tied to firms based in donor countries. The figures for amounts tied in 2017 should emerge in the near future, but unless there has been a significant reduction this means that a huge amount of ODA will go towards servicing the commercial and economic interests of donor countries. This figure only covers formal tying practices. If informal tying were included – that’s where aid is channelled to companies in donor countries through less overt methods – it would be significantly larger.

More loans

In 2017 there was a 13% increase in ODA loans primarily from France and Japan, which is potentially worrying. Historically Japan has favoured loans over grants (see graph below, more than 60% of their development aid was issued in loan form in 2017) on the basis that “ODA loans, which require repayment, promote efficient use of the borrowed funds and appropriate supervision of the project they finance, thereby underpinning developing countries’ ownership in the development process”.

The logic behind this is questionable. To promote ownership, partner countries should be able to decide what financial resources best support their development needs. That being said, loans from Japan tend to be highly concessional so comparatively cheap for partner countries. They will do well under the forthcoming changes to ODA reporting where loans will be accounted for on the basis of their “grant element”, or the level of subsidy given to these loans rather than on a cash flow basis.

The same cannot be said for France, which would likely see a decrease in ODA if their loans continue to be only lightly concessional. Eurodad would prefer to see increases in grant-based financing as grants are more conducive to sectors that are crucial to achieving poverty eradication and the welfare of citizens in partner countries such as health and education. However, we recognise that loans are important as long as they are highly concessional and do not adversely impact partner country debt sustainability. As the European Parliament has recently noted, the number of poor countries facing debt crises has doubled since 2013.

Is it worth it?

Given the problems with ODA reporting the question arises: is it still worth maintaining this pot of money along with its 0.7% target? The answer is a resounding yes. The issue with ODA lies primarily in the fact that the methods to assess its quantity are not directly linked to the methods and principles that assess its quality. In particular this applies to the principle of ownership of development priorities by developing countries and the principle of transparency and accountability to each other.

We need more and better ODA and the challenge with the current reporting system is that the rules can be easy for donors to juggle. This was witnessed by the need to reform how loans are accounted for where some donors were getting “away with murder” by issuing loans well above market rates and reporting them as development aid. The OECD DAC secretariat did a good job in sounding the alarm on this problem and the resulting changes, while far from perfect, reduce the incentive for donors to behave badly. However, there was significant pushback from the member states on the secretariat’s activist approach and new incentives are being created that further challenge the credibility of the reporting process.

The inclusion of instruments directly targeting the private sector (Private Sector Instruments) and pressure from donors to include costs related to military actions are highly problematic. The former is likely to be used as a subsidy for firms from donor countries increasing tied aid, and the implications of the latter are too terrible to contemplate. The OECD DAC is the arbiter of what can and cannot be accounted as ODA – a figure that should be as demonstrable as it is symbolic – and they must be empowered to ensure the integrity of what is a crucial and unique form of public finance.