Development Co-operation Directorate (DCD-DAC)

Real or phantom aid? by Richard Carey, Deputy Director of DAC Secretariat (DACNews June-August 2005)

 

Real or phantom aid?  Richard Carey, Deputy Director of DAC Secretariat enters the debate about ODA, debt relief, technical cooperation and looks at what is ‘real aid’?

A significant debate is emerging in the media and amongst NGOs and development professionals about how much ODA is ‘real aid’ – defined as aid that improves the lives of poor people.

The quality and effectiveness of aid is without doubt a real and topical issue of high priority. But is it valid and useful to attempt to measure aid quality by adjusting the ODA figures?

ActionAid International, a major NGO, has just released a report under the title ‘Real Aid: An Agenda for Making Aid Work’  that discounts the official ODA figure for each DAC member for what the report calls ‘phantom aid’ – aid that is overpriced, mislabelled as aid or does nothing to help poor people.

The result of this arithmetic? So-called ‘real aid’ is calculated at just 39 per cent of total ODA.

The 61 per cent  of ‘phantom aid’  is made up of the authors’ deductions of:

  • 20 per cent for overpriced and ineffective technical co-operation
  • 14 per cent for debt relief
  • 13 percent for excessive transactions costs
  • 7 per cent as not poverty focussed
  • 4 per cent for tied aid
  • 2 per cent for hosting of refugees
  • 1 per cent for excessive administrative costs. 

DAC members are ranked in terms of ‘real aid’  as a proportion of ODA, from Portugal at the top to Greece at the bottom. (http://www.actionaid.org.uk/wps/content/documents/real_aid.pdf ).

But in terms of its own methodology for adjusting the cost-based ODA numbers for quality factors, the ‘Real Aid Report’ gets the sums wrong.

I accepted an invitation from ActionAid to chair the opening session of a ‘Real Aid Seminar’ in London last week, bringing together a group of development co-operation researchers and actors to discuss the methodology and findings of the report.

The seminar identified some fundamental problems of methodology and a number of specific errors in the definition and measurement of ‘real aid’. A detailed critique can be found on the DFID Website.

As the DFID analysis shows, the report double and even triple-counts some of its adjustments. And it misunderstands the way the DAC statistics handle the cancellation of ODA loans, making an adjustment that is already made in the DAC statistics. Its assumptions about the quality of technical assistance and transactions costs are necessarily arbitrary.

The results are sensational and may stimulate public debate, but also public confusion and doubt.

However the issues raised by the report are certainly real and the ‘Real Aid Report’ is not alone in questioning the quality of aid.

Outgoing World Bank President Jim Wolfensohn has pointed to the amount of ODA accounted for by relief of export credit debt, expensive expatriate-provided technical co-operation, tied aid and excessive transactions costs such as multiple uncoordinated missions and studies.  And there is the long-standing issue of tied aid. The DAC itself estimates the extra costs of good and services tied to donor country sourcing, could be at around USD 5-7 billion (2002).

The DAC has special responsibilities here as the originator and guardian of the ODA concept and the compiler of ODA statistics.  ‘Is it ODA?’  is the title of a user-friendly guide available on the DAC Website, which sets out the definition and the coverage of ODA – what’s in and what’s out. ( http://www.oecd.org/dataoecd/21/21/34086975.pdf).

The DAC definition of ODA serves as the world’s gold standard for measuring aid flows. To qualify as ODA:

  • Financial flows to developing countries have to be provided from official sources, on concessional terms (a grant element of at least 25 per cent)
  • They have to promote the economic development and welfare of developing countries as the main objective
  • They have to exclude military aid  and peacekeeping expenditures, with a few closely defined exceptions.

What is measured by the ODA figures is the cost to donor governments (read taxpayers) of providing such assistance. The ODA figures in themselves are neutral regarding the quality of aid - they do not attempt to measure the benefits (or their absence) of ODA to developing countries. But the effectiveness of aid is a fundamental concern of the DAC and the focus of most of its work – from peer reviews to promoting best practices across the range of aid processes and programmes.

It is important that donors be ready to contribute to frank discussion of the real issues.

Let’s look at some of these issues.

Debt relief creates ‘fiscal space’ for higher development expenditures when it reduces the amount of debt repayments actually being made. It is then equivalent to an inflow of budget support. This is what has been happening under the HIPC (Highly Indebted Poor Countries) scheme for cancellation of multilateral debt. It is clearly ODA under the DAC definition, whether the funding for this debt relief is additional or not – a complicated issue in itself.

Where debt repayments are not being made, then debt relief does not create any new fiscal space. This is the case of export credit debt in insolvent countries. In such cases the creditor countries, having settled the credit claims as an internal insurance transaction, become the legal holders of the claim against the debtor country. Their collective decision in the Paris Club to cancel all or part of the debt is a decision not to pursue these claims, not a transfer of financial resources.

It is arguable therefore whether or not counting the face value of unrecoverable export credit claims should qualify as ODA.  Past debates in the DAC on this issue have not produced agreement on suggestions to change the ODA reporting rules, for example by applying  a steep discount to calculate the amount  to be recorded as ODA.

What is clear however is that the huge effort over the last decade to cancel Paris Club debt has removed a major international problem weighing on the management and development prospects of debtor countries, with repeated reschedulings taking up the scarce time of their senior financial officials whose focus has to be on stability and growth.

For donors, the debt reporting rules have created often significant amounts of ODA that have not required the allocation of real resources and the real aid programmes needed to deliver them.  But with the progress in settling debt problems, and the DAC’s lump sum debt reporting rule, it is foreseeable that debt forgiveness will eventually decline dramatically in the ODA statistics. At that point, to sustain the kind of medium term ODA commitments announced since Monterrey, donors with a large debt cancellation component in ODA will suddenly need to create large new budget lines for ODA and manage their programming through bilateral or multilateral channels.

In other words, the ‘debt relief bubble’ in ODA in recent years will sooner or later disappear. Not however, before an imminent and spectacular bubble in the form of the debt relief agreed by the Paris Club for Iraq comes on stream next year, with an estimated $30 billion of Iraqi debt relief counting as ODA, spread over several years. This will require a major effort to explain clearly the resulting exceptional increases in ODA to the public and to keep the focus on the underlying trend increase in ODA. 

Technical co-operation has long been a debated area in terms of impact on developing country capacities, particularly the overuse of donor-based researchers, consultants and experts.  The Netherlands just a few years ago moved to cut this kind of technical assistance from its aid programme entirely, in effect disestablishing a significant Dutch development co-operation industry. 

Technical co-operation is  a broad aid category encompassing activities which transfer knowledge and skills, ranging from advice to performance of specific functions, whether provided through expatriate experts or institutions or through local experts and institutions supported by donor financing. DAC statistics on technical co-operation are sadly deficient in unpacking the different types of technical assistance and the way in which it is being provided. In response to questions being raised in the debate on aid effectiveness, the DAC will devote a special chapter in its 2005 annual Development Co-operation Report to  technical co-operation, exploiting what data are available .

There are many examples of the strong impact of technical co-operation (see this link on DFID website).

One little recognised case is the Indian IT industry, founded on the Indian Institutes of Technology supported by donors in the 1960s, which produced a generation of graduates who have helped fuel the IT boom in the United States in particular and to make India itself a world force in IT. This has had a profound impact on the process of globalisation and development.

But concerns about the effectiveness of technical assistance are longstanding. The DAC Guidelines on New Orientations for Technical Co-operation, adopted in 1991, incorporated a radical critique of technical co-operation – that without local ownership and strategic management, technical co-operation from donors is too fragmented to create sustainable systemic capacities in developing countries and may indeed prevent the emergence of sustainable local capacities.  The guidelines sought to promote technical co-operation designed and coordinated within developing countries’ capacity-building strategies and reform programmes.

Carrying the critique further, it can be argued that donors have appropriated local administrative capacities to manage the delivery of aid projects and programmes on a piece-meal competitive basis. Practices such as salary top-ups and per diems and special project implementation units have undermined the emergence of strong,  well-structured and properly paid civil services. Accountability mechanisms have been donor-oriented, discouraging local accountability through parliaments and other domestic institutions.

Here the concerns, if not the arithmetic, of the 'Real Aid Report' are shared by the donor community.  

Making aid work better. The DAC is hosting an international coalition of donors and developing countries to promote the most wide-ranging and integrated aid reform programme ever attempted to raise the quality and effectiveness of aid. The Paris Declaration, agreed at the beginning of March by DAC members and some 60 partner countries, lays out a detailed set of joint commitments, with monitorable time-bound targets now being defined, which imply major changes in behaviour for both donors and their developing country partners.

Under the Paris Declaration, mutual accountability mechanisms are to be established at the local level to track implementation. This will mean in effect, that for the first time,  there will be systematic discussion of aid effectiveness issues between donors and their partners in specific country contexts.

Such a process should stimulate aid dependent developing countries to evaluate and manage their aid in a proactive way. Indeed, some twenty such countries are being helped to do just this by Development Finance International, an effort financed by a coalition of donors to foster development management capacities in HIPCs (Highly Indebted Poor Countries) (http://www.hipc-cbp.org/ )

The 'Real Aid Report' has not focussed on the Paris Declaration initiative. It rather looks to the creation of annual review processes under a new International Aid Agreement and  a UN Commisioner for Aid as a framework for mutual accountability.

But in fact  the Paris Declaration is a new international agreement on aid effectiveness.

This should be recognised, not only by the NGO community but at upcoming United Nations events.

At the same time, the public announcements already made by DAC members for significant increases in aid are estimated by  the DAC Secretariat to add up to an extra $36 billion or more by 2010 over the 2004 figure of $79 billion.

The prospects for aid, and for effective aid, are being transformed. 

 

Related Documents

 

DACNews from the OECD Development Assistance Committee

High Level Forum on Joint Progress toward Enhanced Aid Effectiveness (Harmonisation, Alignment, and Results)

Deputy Director of the Development Co-operation Directorate

 

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