Aid only for the neediest? Official development assistance after 2015

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Today’s post is from Jon Lomøy, Director of the OECD Development Co-operation Directorate (DCD-DAC)

According to the most recent OECD aid statistics, in 2013 official development assistance (ODA) reached a record high of USD 134.8 billion, representing a rise of 6.1% compared to 2012. While this is good news, more detailed analysis shows worrying trends. The growth was largely (about 33%) in non-grant ODA – mostly loans – which tends to go to middle-income countries. On the other hand, grants, which typically flow to less developed countries, lagged behind, increasing by only 3.5% (excluding debt forgiveness). What’s more, bilateral aid to sub-Saharan Africa fell by 4% in real terms. So while ODA is on the rise in overall terms, the countries with the greatest need are being left behind.

It is important to put these figures in context when we consider the future of ODA. Traditionally seen as the mainstay of development, in recent times ODA’s volumes and growth rates have been outstripped by foreign direct investment, market-based instruments such as non-concessional loans, and remittances. In addition, many developing countries now have solid domestic resource mobilisation capabilities that are helping them to finance their own development.

Nonetheless, a recent OECD study of external financing options available to developing countries shows that ODA is still a vital resource for the least developed countries, where it represents 75% of financial flows from external sources and the equivalent of 59% of domestic tax revenues. In the upper middle income countries, on the other hand, it accounts for only 6% of external financial flows and is the equivalent of just 0.8% of domestic tax revenues.

Another study takes a look at economic growth forecasts to 2030, estimating which developing countries will no longer qualify for ODA because their average per capita income, measured as average share of Gross National Income (GNI), is too high. At present, the threshold is just over USD 12,000. The projections show that 28 of the 148 countries currently on the OECD Development Assistance Committee’s (DAC) List of ODA Recipients could move above the threshold – but that still leaves many others for whom ODA will continue to be critical.

Does this mean that post-2015, ODA should be targeted only to the least developed countries? While in many ways this is – and should be – the future of ODA, the issue is not so simple.

It is, of course, important to continue to provide support to the neediest countries to ensure that they are not left behind. The OECD Development Assistance Committee is considering building on the current United Nations target, which calls on providers of development assistance to give 0.15-0.2% of their country’s gross national income (GNI) to the least developed countries, to create an even more ambitious target.

Yet it is not only a question of where we use development co-operation, but how.

Providers of development co-operation can help upper-middle income countries overcome stubborn development challenges, for instance, by sharing knowledge and providing technical assistance. Colombia used official development assistance to the tune of just USD 15,000 (two technical missions to Colombia in 2012) to fund a capacity development programme for tax administrators. Tax revenues collected by local authorities jumped from USD 3.3million to USD 5.83million in just one year.

We also need to get smarter about using ODA to leverage private flows for development. Mechanisms like government guarantees can take some of the risk out of investment, encouraging private investors to become active in places they would not usually go. This can help to bridge large funding gaps and bring down some countries’ dependency on ODA. At the same time, it can be particularly useful in many of the least developed countries and fragile states, where large amounts of money are essential to put in place the infrastructure they need to power economic growth, create jobs and reduce poverty.

Finally, the targets that will replace the Millennium Development Goals (MDGs) in 2015 will encompass environmental, economic and social sustainability challenges for all countries that are much broader than today’s MDGs. Funding these new goals will require inputs from across the board – from public and private sources and from all communities and countries. Development co-operation will have a major role to play in helping to bridge the development–environment divide.

Making ODA fit-for-purpose in the post-2015 world is a major challenge – and a major focus of the OECD in 2014. If we make it work, all countries will benefit.

You can read more about this work programme here.

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