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Yes, it is time to revisit the concept of Official Development Assistance

May 4, 2013
by Guest author
Aid recipients?

Aid recipients?

Following this article in The Guardian criticising the way OECD measures aid, today’s post is from Jon Lomoy, Director of the OECD Development Co-operation Directorate (DCD-DAC)

ODA – official development assistance – is an important concept and an important measure. It is, to date, the only systematic means we have of assessing the efforts the ‘traditional’ donors make to support development. But the world is changing, and development finance is changing. 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 the ODA concept.

Some say that it includes too much – that it counts much more than the money that actually flows into developing country budgets (donor administrative costs, refugee costs, etc.) This is why the OECD has introduced the concept of ‘country programmable aid’, which enables us to identify just how much is directly usable by countries to fund their priorities and programmes.

On the other hand, some feel that ODA cash-flow-based measurement includes too little. Countries make efforts that are not counted as ODA – guarantees, callable capital etc. – that could mobilise significant investment for development by mitigating risk. This is of particular concern today when an increasing number of developing countries need loans, guarantees and equity – rather than grant funding – to boost infrastructure and finance economic growth.

Finally, the ODA concept does not capture the complex and continually evolving interaction between public efforts and the use of market mechanisms.

All this gives rise to tensions between ODA as a measure of development effort by donors, and flows available to developing countries to reduce poverty and promote growth. This is why the Ministers of our DAC member development agencies – when they met in London in December 2012 – gave the OECD-DAC the mandate to take a fresh look at the broader financing concept, as well the concept and role of ODA per se.

This includes, of course, the issue of loans, which is the subject of much debate at the moment – both within the DAC and in the public arena. Loans have always been an important part of development financing – both concessional loans, such as the ones provided by the World Bank’s International Development Association (IDA), and non-concessional loans provided by many bi-lateral and multi-lateral donors, for instance the World Bank’s International Bank for Reconstruction and Development (IBRD).

Today, there is a growing demand for loans from the developing countries. The good news is that countries are growing – and this means they need and can afford to borrow money to fuel their continuing economic growth. This is one reason why this debate has risen to the top of the agenda.

Recently it has also become evident that our members follow different approaches in determining what makes a loan concessional. Some members follow the approach of the multilateral development banks – where only loans that have been subsidized are reported as concessional. Others emphasize the recipients’ perspective, arguing that loans given on more beneficial terms than developing countries could otherwise attain on the market could be considered concessional. 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 they reflect the current markets terms. It is also important to keep in mind the importance of the public guarantees for institutions providing loans, which address the high-risk factor of some development investments.

As the discussions continue, it is important that these differences – and the data behind them – continue to be publicly known and available for scrutiny. This will stimulate – as we already can see – a welcome and healthy debate. It is fundamental that we continue and deepen these discussions if we’re going to get in place an effective strategy for how to finance the new set of international development goals that will take over from the Millennium Development Goals after 2015.

But with the increasing complexity of development financing, the broadening of the development agenda and the growing diversity among developing countries, that debate needs to be about aid and other sources of financing for development. It is not – and cannot be – a question of either/or. That said, we need to be able to discuss other sources of financing without that discussion being used as – or perceived as – an excuse for donors to walk away from their aid commitments.

There is full agreement among DAC members that as we move towards 2015, we need to settle this debate, prioritizing innovative means to measure and promote development finance. At OECD, we will continue to work with our members and with 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.

In this way, we will also ensure that the OECD DAC continues to be a key source of reliable and transparent data on development financing.

Useful links

OECD Aid Statistics

OECD Insights: From Aid to Development

3 Responses leave one →
  1. May 5, 2013

    The discount rate at which loans’ net present value are calculated in order to arrive at the embedded grant element: it was never conceived to relate to market rates. It reflects instead the shadow cost of providing ODA to DAC budgets.

  2. Duncan Green permalink
    May 6, 2013

    This ignores the political context. Aid budgets everywhere are under huge pressure from austerity. Opening up a discussion on definitions at such a moment is only going to lead to dilution. More on http://www.oxfamblogs.org/fp2p/?p=14486

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