Development Development AssistanceAssistance

ECON 3508 ECON 3508 December 3, 2007December 3, 2007

Official Development Assistance (ODA) Official Development Assistance (ODA) or or

"Foreign Aid“"Foreign Aid“

1. Definition: What is "Aid"1. Definition: What is "Aid" Concept and MeasurementConcept and Measurement

2. Donor Motives for Providing "ODA"2. Donor Motives for Providing "ODA"3. Ethical Justification3. Ethical Justification4. What Can "Aid" Accomplish? 4. What Can "Aid" Accomplish? 5. Possible Negative Impacts of ODA (Aid)5. Possible Negative Impacts of ODA (Aid)6. Historical Evolution, Magnitudes, and Patterns;6. Historical Evolution, Magnitudes, and Patterns;7. Canadian “Aid”7. Canadian “Aid”8. How Can Development Assistance Be Improved?8. How Can Development Assistance Be Improved?

1. Definitions: “ What is Aid or 1. Definitions: “ What is Aid or ‘ODA’ ”‘ODA’ ”

Official (Governmental), NGO, and Private Official (Governmental), NGO, and Private Grants plusGrants plus

Highly Concessional Loans (grant component) Highly Concessional Loans (grant component)

Aimed at Transferring ResourcesAimed at Transferring Resources– In Currency or In Kind;In Currency or In Kind;

“ “ Pro-Developmental” or Emergency Relief, Pro-Developmental” or Emergency Relief, not “Welfare”not “Welfare”

Non-Commercial from Donor PerspectiveNon-Commercial from Donor Perspective

2. Historical Evolution2. Historical Evolution

3. Donor Motives for Providing 3. Donor Motives for Providing ODAODA

4. Ethical Justification: 4. Ethical Justification:

Should High Income Countries Provide Aid Should High Income Countries Provide Aid to Low-Income Countries? to Low-Income Countries?

““First step towards world fiscal federalism”First step towards world fiscal federalism”

5. What can Aid Accomplish?5. What can Aid Accomplish?

Aims at “Development” not WelfareAims at “Development” not Welfare “ “ Gap-Filling Role: Gap-Filling Role: (foreign exchange, tax (foreign exchange, tax

revenues, technological, managerial, revenues, technological, managerial, entrepreneurial gaps)entrepreneurial gaps)

A “Catalytic Role”?A “Catalytic Role”? Capacity-Building RoleCapacity-Building Role Direct Basic Human Needs or MDG Filling Direct Basic Human Needs or MDG Filling

Role Role Emergency Relief & Reconstruction RoleEmergency Relief & Reconstruction Role

– Promote Re-Construction of War-torn LandsPromote Re-Construction of War-torn Lands An Investment in Shared Security as well An Investment in Shared Security as well

as Prosperity?as Prosperity?

6. Possible Negative Impacts of ODA6. Possible Negative Impacts of ODA

1.1. May permit recipients to pursue counter-May permit recipients to pursue counter-productive or foolish policiesproductive or foolish policies

2.2. May Promote a “Dependency Welfare May Promote a “Dependency Welfare Syndrome”?Syndrome”?

3.3. May deform domestic policies to May deform domestic policies to accommodate priorities of donorsaccommodate priorities of donors

4.4. May permit donor to exercise May permit donor to exercise inappropriate influence on recipientinappropriate influence on recipient

5.5. May permit recipient country to shift May permit recipient country to shift resources to other undesirable areasresources to other undesirable areas

Possible Negative Impacts of ODA, Possible Negative Impacts of ODA, continuedcontinued

6. Volatility of aid flows may be hurtful 6. Volatility of aid flows may be hurtful to recipientto recipient

7. May lead to appreciation of 7. May lead to appreciation of exchange rate with damage to exchange rate with damage to export activities (See Chart)export activities (See Chart)

8. May provide discretionary funds for 8. May provide discretionary funds for government that may promote government that may promote corruptioncorruption

9. May support dictatorial regimes that 9. May support dictatorial regimes that violate human rights in major waysviolate human rights in major ways

Development Assistance to Selected Countries of Africa

Selected CountriesSelected Countries

Net Aid from Net Aid from All Donors All Donors

as % of as % of GDP, 2003GDP, 2003

Net Aid per Net Aid per Capita, Capita, from All from All Donors Donors

20032003

Net Aid as % of Net Aid as % of Gross Gross

Domestic Domestic Investment, Investment,

20032003

BurundiBurundiCabo VerdeCabo VerdeEritreaEritreaGhanaGhanaGuinea-BissauGuinea-BissauMalawiMalawiSao TomeSao TomeSouth AfricaSouth AfricaTanzaniaTanzania

37.637.618.018.040.940.912.112.160.860.829.329.363.263.20.40.4

16.216.2

31313063067070444498984545

23923914144747

246.1246.189.289.2

182.5182.552.452.4

490.7490.7260.6260.6210.0210.0

2.22.287.987.9

Sub-Saharan AfricaSub-Saharan AfricaExcluding South Excluding South

AfricaAfricaExcl. S. Africa & Excl. S. Africa &

NigeriaNigeria

5.65.6

8.28.2

11.211.2

3434

3333

4444

29.929.9

41.941.9

60.460.4

Magnitudes and Patterns:Magnitudes and Patterns: Richer but less Richer but less generous…generous…

Donor Donor EffortsEfforts

But note:But note:

Previous numbers do not include donations to Previous numbers do not include donations to and through NGOs or Foundations (e.g. and through NGOs or Foundations (e.g. Gates Foundation, Oxfam, CARE, Red Gates Foundation, Oxfam, CARE, Red Cross……..)Cross……..)

Nor “faith-based” organizations (Caritas, Nor “faith-based” organizations (Caritas, Mennonites, Vision, Aga Khan Foundation Mennonites, Vision, Aga Khan Foundation ……)……)

Nor “private assistance” provided unofficially Nor “private assistance” provided unofficially and usually anonymously by individuals.and usually anonymously by individuals.

Aid is not always given to the poorest Aid is not always given to the poorest countriescountries

Problems of Aid “Quality”Problems of Aid “Quality” Predictability and volatilityPredictability and volatility

– During 2001-03 the gap between During 2001-03 the gap between commitments and disbursements commitments and disbursements exceeded 2% of GNI for 35 countriesexceeded 2% of GNI for 35 countries

ConditionalityConditionality

CoordinationCoordination– On average, a country in SSA dealt with more On average, a country in SSA dealt with more

than 30 donors in 2002 than 30 donors in 2002 – In 2002 Senegal hosted over 50 World Bank In 2002 Senegal hosted over 50 World Bank

missionsmissions– In 2003 Zambia hosted 120 donor missionsIn 2003 Zambia hosted 120 donor missions

•Tied aid:Tied aid:

Why “Tie” Aid?Why “Tie” Aid? Effects of “Tying”Effects of “Tying” Positive Effects of “Tying” ?Positive Effects of “Tying” ? Solutions?Solutions?

What can we realistically expect What can we realistically expect development assistance to accomplish?development assistance to accomplish?

Recall what can go wrong:Recall what can go wrong:1.1. Aid ratification of counter-productive policiesAid ratification of counter-productive policies2.2. ““Dependency Welfare Syndrome”: Recipient country Dependency Welfare Syndrome”: Recipient country

effort may be reducedeffort may be reduced3.3. Donors priorities may dominateDonors priorities may dominate4.4. Inappropriate donor influenceInappropriate donor influence5.5. May permit recipient country to shift resources to May permit recipient country to shift resources to

other undesirable areasother undesirable areas6. 6. Aid volatility may damage recipientAid volatility may damage recipient7. 7. Appreciation of exchange rate may block exports, Appreciation of exchange rate may block exports,

increase imports, & economic diversificationincrease imports, & economic diversification8. 8. Discretionary & unearned funds for government may Discretionary & unearned funds for government may

encourage & facilitate corrupt practicesencourage & facilitate corrupt practices9.9. May support dictatorships and human rights violationsMay support dictatorships and human rights violations

Conclude:Conclude:

Aid alone can not achieve sustainable Aid alone can not achieve sustainable developmentdevelopment

A useful support for domestic or national A useful support for domestic or national efforts. efforts.

Responsibility rests with developing Responsibility rests with developing countries themselves, not aid donorscountries themselves, not aid donors

Perhaps Perhaps neither “sufficient”neither “sufficient” nor nor “necessary” but useful.“necessary” but useful.

Other factors are vital: Other factors are vital: Governmental commitment to Governmental commitment to

development objectives;development objectives; Reasonably incorrupt governmentReasonably incorrupt government Equity orientation of public policy Equity orientation of public policy Sound economic policies to strengthen Sound economic policies to strengthen

and sustain an indigenous economic and sustain an indigenous economic foundationfoundation

An “enabling environment” so that An “enabling environment” so that people can improve their own situations people can improve their own situations for themselves (e.g. re the informal for themselves (e.g. re the informal sector, micro-credit ….”sector, micro-credit ….”

Question:Question: Is representative democracy a Is representative democracy a necessary precondition or element?necessary precondition or element?

How Can Development Assistance How Can Development Assistance Be Improved?Be Improved?

Increase the Quantity of Development Increase the Quantity of Development AssistanceAssistance

1.1. More grants & fewer loans More grants & fewer loans 2.2. Link Aid More Directly to NeedLink Aid More Directly to Need3.3. Further Debt Service Reductions?Further Debt Service Reductions?

But note that this is no panacea and But note that this is no panacea and also creates additional problems also creates additional problems and stressesand stresses

Can More Aid be “Absorbed” or Used Can More Aid be “Absorbed” or Used Effectively?Effectively?– Would high levels of aid institutionalize Would high levels of aid institutionalize

dependence? dependence? – Would it lead to a collapse of domestic Would it lead to a collapse of domestic

effort (e.g. taxation; F. Xch. earnings effort (e.g. taxation; F. Xch. earnings etc.)?etc.)?

– Would it promote “Dutch Disease”Would it promote “Dutch Disease”– Would it sap indigenous efforts and Would it sap indigenous efforts and

initiativesinitiatives– Could it be used effectively?Could it be used effectively?– Would donor priorities take over?Would donor priorities take over?

8. How Can Development Assistance 8. How Can Development Assistance Be Improved?Be Improved? Continued: Continued:

For the Donors:For the Donors: Improve the “Quality” of Aid Improve the “Quality” of Aid

1.1. A “A “Partnership” philosophy and approachPartnership” philosophy and approach

2.2. Orchestrate programs to avoid chaos, Orchestrate programs to avoid chaos,

Use a “consortium”Use a “consortium” approachapproach

3. Reduce administrative burdens placed on 3. Reduce administrative burdens placed on recipient governmentsrecipient governments

4. Minimize aid volatility & unpredictability4. Minimize aid volatility & unpredictability

5. Reduce the tying of aid to donor suppliers5. Reduce the tying of aid to donor suppliers

6. Increase untied budget support? Increased 6. Increase untied budget support? Increased “Program Aid not Project Aid”“Program Aid not Project Aid”

7. Emphasize capacity building7. Emphasize capacity building

How Can Development Assistance Be How Can Development Assistance Be Improved? Continued:Improved? Continued:

(b)(b) for the Recipients:for the Recipients:– Pursue wise, equitable and effective Pursue wise, equitable and effective

development strategies development strategies – Make a major domestic effortMake a major domestic effort

– ““Take Charge” & “Own” the ProgramTake Charge” & “Own” the Program

– Improve budget management and Improve budget management and accountability; combat corruption;accountability; combat corruption;

– Ensure effective management;Ensure effective management;– Avoid currency appreciation due to aid Avoid currency appreciation due to aid

inflows (“Dutch Disease”)inflows (“Dutch Disease”)

7. Some Specific Issues:7. Some Specific Issues: Allocation of Burden among DonorsAllocation of Burden among Donors

Allocation of Aid among RecipientsAllocation of Aid among Recipients

Aid, Poverty and Income DistributionAid, Poverty and Income Distribution

Executing Agencies: IFIs, Bilateral, Civil Executing Agencies: IFIs, Bilateral, Civil Society Organizations? Society Organizations?

Food Aid: Impact on Domestic Food Aid: Impact on Domestic AgricultureAgriculture

Co-ordination of Aid ProgramsCo-ordination of Aid Programs

Aid, Human Rights and "Bad" Political Aid, Human Rights and "Bad" Political RegimesRegimes

Development Assistance Development Assistance to Africato Africa

Africa receives about 50 per Africa receives about 50 per cent of total aidcent of total aid

Source: OECD/DAC Statistics (2006). DAC Members’ ODA: 1990-2004 and Source: OECD/DAC Statistics (2006). DAC Members’ ODA: 1990-2004 and simulations to 2006 and 2010, based on Monterrey and subsequentsimulations to 2006 and 2010, based on Monterrey and subsequent commitmentscommitments

0.33

0.22

0.26

0.30

0.36

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.4019

90

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

% o

f G

NI

0

20

40

60

80

100

120

140

OD

A (

2004

$ b

illio

n)

ODA as a % of GNI (left scale)

Total ODA(right scale)

Total ODA to Africa(right scale)

……with ODA increases driven with ODA increases driven by debt relief and emergency by debt relief and emergency

assistanceassistance

Total net official development assistance (ODA), non-aid official flows and private flows in Total net official development assistance (ODA), non-aid official flows and private flows in Africa, 1993-2004Africa, 1993-2004. (Source: OECD/DAC). (Source: OECD/DAC)

10

12

14

16

18

20

22

24

26

28

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

2003 US$ billion

other ODA Bilateral debt forgiveness Emergency aid

   The Canada Fund for Africa: Summary of Commitments

(Amount in millions (Amount in millions

$Cdn.)$Cdn.)

Governance, peace, and securityGovernance, peace, and security Parliamentary strengtheningParliamentary strengthening 99

Local governanceLocal governance 66

Public sector capacity buildingPublic sector capacity building 2828

NEPAD outreachNEPAD outreach 2.52.5

African Union peace and securityAfrican Union peace and security 44

West Africa peace and securityWest Africa peace and security 1515

HealthHealth AIDS vaccine developmentAIDS vaccine development 5050

Polio eradicationPolio eradication 5050

Agriculture, environment, and waterAgriculture, environment, and water Agricultural researchAgricultural research 4040

Centre of excellence in biosciencesCentre of excellence in biosciences 3030

Water resource managementWater resource management 5050

Trade and investmentTrade and investment Joint Integrated Technical Assistance ProgrammeJoint Integrated Technical Assistance Programme 77

Building African trade capacityBuilding African trade capacity 88

African Trade Policy CentreAfrican Trade Policy Centre 55

NEPAD-infrastructure Project Preparation FacilityNEPAD-infrastructure Project Preparation Facility 1010

Canada Investment Fund for AfricaCanada Investment Fund for Africa 100100

Bridging the digital divideBridging the digital divide Connectivity AfricaConnectivity Africa 1515

EnablisEnablis 1010

e-Policy Resource Network for Africae-Policy Resource Network for Africa 1010

Africa-Canada Youth ProgramAfrica-Canada Youth Program Youth and the environmentYouth and the environment 1212

Youth and HIV/AIDSYouth and HIV/AIDS 1212

War-affected youthWar-affected youth 66

Childhood development in refugee campsChildhood development in refugee camps 1.51.5

The Canada Fund for Africa: Summary of commitments, continued: