ISBN92-64-01961-843 2004 31 1 PThe DAC Journal2004, Volume 5, No. 1 2004, Volume 5, No. 1Development Co-operation, 2003 ReportThe DAC Journal 2004, Volume 5, No. 1-:HSTCQE=UV^[VY:Development is the business of the people and governments of the countries concerned.Their own policies and institutions will remain the key to sustainable improvements inpeoples lives. The development community can merely help the process, and in particularfacilitate faster progress. The two key ways the development community can do so are bypromoting positive changes in the conditions that poor countries face in the world thecoherence agenda and by delivering more, and more effective, development assistancewhere it can be put to good use. The DAC can and should play a role in both a roleof advocacy and support to the first and one of leadership in the second. The DAC Chairsoverview in Chapter 1 of this report is built around these issues. The report goes on toanalyse, in Chapter 2, the evolution of aid flows to developing countries, including recenttrends in the volume and allocation of DAC members aid and attempts to isolate the factorsthat determine the size of their efforts, and to assess the impact of policy ideas in shapingtheir development co-operation programmes. Chapter 3 shows the progress that still needsto be made to meet the Millennium Development Goals, while Chapter 4 gives informationon the aid strategies, programmes and policies of DAC members and non-DAC OECDmembers in terms of aid volume and programme objectives. It shows that aid increasedby 7.2% in 2002, the highest real level achieved in a decade. And prospects are good forimproved aid volume and effectiveness.ISSN 1563-31522004 SUBSCRIPTION(4 ISSUES) www. oecd. orgAll OECD books and periodicals are now available on linewww.sourceoecd.orgThe DAC JournalDevelopmentCo-operation2003 REPORTDevelopment Co-operation2003 REPORT OECD, 2004. Software: 1987-1996, Acrobat is a trademark of ADOBE.All rights reserved. OECD grants you the right to use one copy of this Program for your personal use only. Unauthorised reproduction,lending, hiring, transmission or distribution of any data or software is prohibited. You must treat the Program and associated materialsand any elements thereof like any other copyrighted material.All requests should be made to:Head of Publications Service,OECD Publications Service,2, rue Andr-Pascal, 75775 Paris Cedex 16, France.ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENTEfforts and Policiesof the Membersof theDevelopment Assistance CommitteeDevelopment Co-operation2003ReportReport by Richard ManningChair of the Development Assistance CommitteeORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENTPursuant to Article 1 of the Convention signed in Paris on 14th December 1960, and which came intoforceon30thSeptember1961,theOrganisationforEconomicCo-operationandDevelopment(OECD)shall promote policies designed: To achieve the highest sustainable economic growth and employment and a rising standard ofliving in member countries, while maintaining financial stability, and thus to contribute to thedevelopment of the world economy. To contribute to sound economic expansion in member as well as non-member countries in theprocess of economic development. To contribute to the expansion of world trade on a multilateral, non-discriminatory basis inaccordance with international obligations.TheoriginalmembercountriesoftheOECDareAustria,Belgium,Canada,Denmark,France,Germany,Greece,Iceland,Ireland,Italy,Luxembourg,theNetherlands,Norway,Portugal,Spain,Sweden,Switzerland,Turkey,theUnitedKingdomandtheUnitedStates.Thefollowingcountriesbecamememberssubsequentlythroughaccessionatthedatesindicatedhereafter:Japan(28th April 1964), Finland (28th January 1969), Australia (7th June 1971), New Zealand (29th May 1973),Mexico(18th May 1994),theCzechRepublic(21stDecember1995),Hungary(7thMay1996),Poland(22nd November 1996), Korea (12th December 1996) and the Slovak Republic (14th December 2000). TheCommission of the European Communities takes part in the work of the OECD (Article 13 of the OECDConvention).In order toachieve its aims theOECD has set upanumberofspecialised committees. One of these istheDevelopment Assistance Committee, whose members have agreed to secure an expansion of aggregate volume ofresourcesmadeavailabletodevelopingcountriesandtoimprovetheireffectiveness.Tothisend,membersperiodically review together both the amount and the nature of their contributions to aid programmes, bilateral andmultilateral, and consult each other on all other relevant aspects of their development assistance policies.The members of the Development Assistance Committee are Australia, Austria, Belgium, Canada, Denmark,Finland,France,Germany,Greece,Ireland,Italy,Japan,Luxembourg,theNetherlands,NewZealand,Norway,Portugal, Spain, Sweden, Switzerland, the United Kingdom, the United States and the Commission of the EuropeanCommunities.Publi en franais sous le titre :Coopration pour le dveloppementRapport 2003 OECD 2004Permission to reproduce a portion of this work for non-commercial purposes or classroom use should be obtained through the Centre franais dexploitationdu droit de copie (CFC), 20, rue des Grands-Augustins, 75006 Paris, France, tel. (33-1) 44 07 47 70, fax (33-1) 46 34 67 19, for every country except the UnitedStates.In the United States permission should be obtained through the Copyright Clearance Center, Customer Service, (508)750-8400, 222 Rosewood Drive,Danvers, MA 01923 USA, or CCC Online: www.copyright.com. All other applications for permission to reproduce or translate all or part of this book should bemade to OECD Publications, 2, rue Andr-Pascal, 75775 Paris Cedex 16, France.PREFACE BY THE SECRETARY-GENERAL2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 20043Preface by the Secretary-GeneralThe 2003DevelopmentCo-operationReportisthefirsttoappearundertheresponsibilityofRichard Manning, the new Chair of the Development Assistance Committee (DAC). It was a greatpleasure to welcome our new chair to this important post, he being singularly well qualified to leadthe DAC during this important period.OECD contributes to development in many ways. Certainly by giving a home to the DAC wherebilateraldonors,i.e. theprovidersofclosetoUSD 60 billioninofficialdevelopmentassistancein 2002, co-ordinate their strategies on how to help developing countries achieve economic growthand poverty reduction. Indeed, the development process in many of these countries will continue todepend on ODA support for the foreseeable future.At the same time, we know that growth and development will only be sustainable if based ontrade and investment. Here, OECD and its member countries have an enormous amount of expertiseand experience to share. And there is growing readiness among various other Committees of OECDto take the specific problems of developing countries into account when discussing technical issues.The OECD Initiative on Investment for Development is a recent example of this changing mindset.Beyondtradeandinvestmentissues,agreatdealofworkwithintheOECDshouldcontributetoDevelopment. Think of Information and Communication Technology, biotechnology, agriculture, theenvironment and so on. The DAC is especially well placed to identify these resources of the OECD andto marshal them in support of Development. The DAC can count upon the support of management ofthe OECD to facilitate this critical and continuing challenge.Itisgratifyingtosee that,moreandmore,theworkoftheDACandotherimportantOECDcommittees is indeed focusing on the potential synergies between various drivers of economic growthin the interests of developing countries.Donald J. JohnstonSecretary-GeneralFOREWORD2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 20045ForewordForoverfortyyears,theOECDsDevelopmentCo-operationReporthascharted,undertheguidanceofsuccessiveChairsoftheDevelopmentAssistanceCommittee,theprogressofthedevelopmententerprise,andparticularlyoftheroleofoneofitspillars,theprovisionofofficialdevelopmentfinance.Itiswrittenfromadonorperspectivebutinformedbyinsightsfrommanyquarters.As the report recognises, the efforts of partner countries themselves will continue to be the maindriver of progress, along with the wider international environment within which they have to work.Central to the thinking of the Development Assistance Committee and the OECD more widely is thatofficialaidisonlyone andformanycountriesnotthemostimportant elementinexternalfinancing. But the Committee takes seriously the need to account for the nearly USD 60 billion a yearnowgoingintoofficialdevelopmentassistance,andtoimproveitseffectivenessandimpact,particularly in view of the distance that must be travelled if developing countries are to get close tothe goals set by the worlds leaders at the Millennium Summit. This report is designed to provide asmuch transparency as possible about the emerging shape of this international effort. It also providesawayofbringingtowiderattentiontheoverallworkoftheDevelopmentAssistanceCommittee,which remains the central body for collective discussion of many policy issues within the bilateraldonor community, increasingly in partnership with the multilateral donor community.As a new Chair of the Committee, I should like first to recognise the contribution of my manypredecessors, and most recently Jean-Claude Faure, to the evolution of thinking in the donor familywhichisreflected,howeverimperfectly,inthereport.Secondly,Ishouldliketoexpressmygreatappreciation to Michael Roeskau and the many members of the Secretariat who have contributed thematerial of this report, and not least to Kerry Burns, for her work in pulling it together and ensuringdelivery to a very tight timetable.Richard ManningDAC ChairACKNOWLEDGEMENTS2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 20046AcknowledgementsAcknowledgementsMainauthorsandcontributorstothisyear'sreportwere:YasminAhmad,SafiyeAkalin,StephanieBaile,HilaryBalbuena,JuliaBenn,EricBensel,VirginiaBraunstein,KerryBurns,RichardCarey,SeanConlin,SaraDahlsten,Jean-LouisGrolleau,BrianHammond,JamesHradsky,PaulIsenman,MichaelLaird,FransLammersen, Hans Lundgren, Richard Manning, Hunter McGill, Carola Miras, SimonMizrahi, Diana Morales, Aime Nichols, Marjolaine Nicod, John Noonan, MadeleineParis,RudolphePetras,SandraPhilippe,MichaelRoeskau,SimonScott,ElisabethThiolron, Ann Zimmerman.TABLE OF CONTENTS2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 20047Table of ContentsPreface by the Secretary-General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3Foreword. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61. Overview by the DAC Chair. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12Making policies more coherent for development . . . . . . . . . . . . . . . . . . . . . . . . . . .13Making development assistance more effective . . . . . . . . . . . . . . . . . . . . . . . . . . . .15Delivering more aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21Fostering constructive dialogue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25Growth or poverty reduction?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25Public or private?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25Social sectors or production and infrastructure?. . . . . . . . . . . . . . . . . . . . . . . . . .25Projects or programmes? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .272. Trends in Aid Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30The overall flow picture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31DAC and non-DAC donors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32Aid by region and income group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33Multilateral share of ODA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34Aid by sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37Trends in forms of aid delivery. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41Aid is back . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43Annex: Falling Aid to Agriculture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .483. Progress Towards the Millennium Development Goals. . . . . . . . . . . . . . . . . . . .51Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52Progress towards the Goals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52Goal 1 Eradicate extreme poverty and hunger. . . . . . . . . . . . . . . . . . . . . . . . . . . 52Goal 2 Achieve universal primary education. . . . . . . . . . . . . . . . . . . . . . . . . . . .55Goal 3 Promote gender equality and empower women . . . . . . . . . . . . . . . . . . .55Goal 4 Reduce child mortality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56TABLE OF CONTENTS2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 20048Goal 5 Improve maternal health . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56Goal 6 Combat HIV/AIDS, malaria and other diseases . . . . . . . . . . . . . . . . . . . .56Goal 7 Ensure environmental sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . .58Goal 8 Develop a global partnership for development . . . . . . . . . . . . . . . . . . . .58Improving aid effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63Alignment and harmonisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64Public financial management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68Strengthening procurement capacities in developing countries. . . . . . . . . . . . .68Managing for development results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .704. Policies and Efforts of Bilateral Donors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71Trends in DAC members aid volume and programming. . . . . . . . . . . . . . . . . . . . .72Notes on DAC members. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73Australia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .76Austria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .78Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79Denmark. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80European Community . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .82Finland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .83France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85Germany. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .86Greece. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .87Ireland. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .88Italy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .90Japan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .91Luxembourg. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .93Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95New Zealand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .96Norway . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .97Portugal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98Spain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .99Sweden. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103Notes on non-DAC members . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105Czech Republic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105Hungary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105Iceland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .105Korea. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106Mexico. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107Poland. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107Slovakia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107Turkey. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .108TABLE OF CONTENTS2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 20049The DAC at Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .109The Development Assistance Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .110Key Activities of the DAC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .113DAC Subsidiary Bodies Mandates and Work Programmes . . . . . . . . . . . . . . . . . . .116The Development Co-operation Directorate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .124Statistical Annex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .129Technical Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .233Glossary of Key Terms and Concepts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234Notes on Definitions and Measurement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .239DAC List of Aid Recipients For 2002 Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .241List of Acronyms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .242List of Boxes1.1. Progressive increase in bilateral aid to good performers . . . . . . . . . . . . . . . . . . .181.2. Aid effectiveness and selectivity: Integrating multiple objectivesinto aid allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .201.3. No trend towards greater concentration of bilateral aid among DAC members 233.1. Millennium Development Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 533.2. PARIS21 From modelling to measuring results . . . . . . . . . . . . . . . . . . . . . . . . . . 553.3. A gender perspective on the MDGs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .573.4. The Millennium Development Compact A plan of action aimed at countries most in need of support. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .603.5. Progress with the 2001 DAC Recommendation on Untying ODA to the Least Developed Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .643.6. Rome Declaration on Harmonisation 25 February 2003. . . . . . . . . . . . . . . . . . .654.1. DAC Peer Review of Denmark, 22 May 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .814.2. DAC Peer Review of Finland, 17 June 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .844.3. DAC Peer Review of Ireland, 17 November 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . .894.4. DAC Peer Review of Japan, 12 December 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . .924.5. DAC Peer Review of Luxembourg, 18 March 2003. . . . . . . . . . . . . . . . . . . . . . . . . .944.6. Joint Assessment in Tanzania of the aid programmes of Denmark, Finland, Ireland and Japan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .104List of Tables1.1. Anticipated ODA 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22A.1. Aid to agriculture by donor and share in total aid; commitments, 1980-2001. .453.1. Overview of progress towards the Millennium Development Goals . . . . . . . . . . 543.2. DAC members ODA prospects for 2006: Latest projections . . . . . . . . . . . . . . . . .624.1. DAC members net official development assistance in 2002 . . . . . . . . . . . . . . . .73List of Charts2.1. DAC members total net ODA at 2001 prices as a share of GNI, 1980-2002. . . . . . . 302.2. DAC members resource flows to developing countries, 1980-2002. . . . . . . . . .312.3. Donor breakdown of DAC members ODA in real terms, 1980-2002 . . . . . . . . . .332.4. Share in net DAC bilateral ODA by recipient region, 1970-71 to 2000-01. . . . . .352.5. DAC members ODA shares to multilateral agencies, 1992 and 2002 . . . . . . . . .362.6. Share of multilateral ODA to the EC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36TABLE OF CONTENTS2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 2004102.7. Share of multilateral ODA to the UN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .362.8. Share of multilateral ODA to IDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .372.9. Share of multilateral ODA to RDBs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .372.10. Gross concessional disbursements by multilateral agencies in 1992 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .372.11. Share of social sectors in DAC members bilateral ODA, 1980-2001 . . . . . . . . . .382.12. Share of production sectors in DAC members bilateral ODA, 1980-2001 . . . . . . . . 392.13. Share of infrastructure sectors in DAC members bilateral ODA, 1980-2001 . . . . . .402.14. Share of non-sector aid in DAC members bilateral ODA, 1980-2001. . . . . . . . .402.15. Structure of gross ODA, 1980-2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .412.16. DAC members average annual net flows of project and programme aid and technical co-operation, 1980-2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42A.1. DAC countries bilateral aid to agriculture by region, 1980-2001 . . . . . . . . . . . . .46A.2. DAC countries bilateral aid to agriculture by sub-sector, 1980-2001. . . . . . . . .47A.3. DAC countries aid for agricultural research, 1980-2001 . . . . . . . . . . . . . . . . . . . .474.1. Net official development assistance in 2002 Amounts and as a percentage of GNI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74ISBN 92-64-01961-82003 DEVELOPMENT CO-OPERATION REPORTEfforts and Policies of the Members of the Development Assistance Committee Volume 5, No. 1 OECD 20042003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 200411 Chapter 1 Overview by the DAC ChairThis overview by the DAC Chair looks at two broad areas where the policies of DACmemberscouldsignificantlyimprovetheprospectsofprogresstowardstheMillennium Development Goals, recognising that the prime responsibility lies withdevelopingcountriesthemselves.Thesearethecoherence,fromadevelopmentstandpoint, of DAC members overall policies, and the volume and effectiveness ofdevelopment co-operation. In each case, the overview looks in particular at wherecollective action could add value to the efforts of individual members. It concludesbyaddressinganumberofpolicyissueswhichhaveproveddivisivewithinthedevelopment community, and suggests areas of common ground that might enablethe policy debate to be more fruitful and constructive.1. OVERVIEW BY THE DAC CHAIR2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 200412IntroductionIt is 2004. We are well over half way through the 25 year period (1990-2015), over whichtheDevelopment Assistance Committee (DAC)in 1996and theUN Millennium Assemblyin 2000urgedtheachievementofkeygoalsforsustainabledevelopmentandpovertyreduction.Atworldlevel,wemayexpecttoreachonlytheincomepovertytarget(essentially because of the performance of large Asian countries, which still contain mostof the worlds poorest people); the health-related targets look especially challenging; and,at regional level, sub-Saharan Africa stands out as having the most intractable problems.Thisisnottodenytheprogress,muchofitathistoricallyhighlevels,thatcontinuesinmany poor countries. Indeed, we in the development community need to do a better job ofgettingovertothepublictherealprogressthatisbeingmade.Butwhatshouldthedevelopment community now do to maximise the prospects of progress and to help spreaditmorewidely?AndhowcancollectivediscussionandagreementamongdonorsintheDAC encourage it?Developmentisthebusinessofthepeopleandgovernmentsofthecountriesconcerned.Theirownpoliciesandinstitutionswillremainthekeytosustainableimprovements in peoples lives. The development community can merely help the process,and in particular facilitate faster progress than would otherwise take place. The two keywaysthedevelopmentcommunitycandosoarebypromotingpositivechangesintheconditionsthatpoorcountriesfaceintheworld thecoherenceagenda andbydeliveringmore, and more effective, development assistance where it can be put to good use. The DAC canandshouldplayaroleinboth aroleofadvocacyandsupporttothefirstandoneofleadershipinthesecond.Italsohas,tomymind,aroletoplayinclarifyingideasandlanguage in relation to the development agenda. This overview is built around these issues,and, as is customary, sets out personal views of the Chair of the DAC.IamwritingthisoverviewinmyfirstfewmonthsasChairoftheDAC.Mydistinguished predecessors in this position have left behind them a valuable tradition bothof hands-on engagement with key topics and of a more reflective overview of the progressbothofdevelopmentandoftheinternationaldevelopmentcommunityinaddressingit.Bothareimportant.RealissuesneedtobetackledbothintheDACastraditionallyconstituted and in the wider development community, as represented for example in theDevelopment Committee. But we also need to look at the wider context if we are to identifythose issues where collective discussion and agreement really add value, as opposed to themany examples where diversity and independent practice and experiment should be givenfree rein. This overview highlights some of these broader issues on which I think a morecollaborativeapproachwithinthedevelopmentcommunitycouldandshouldbeencouraged, and where the DAC, the wider development community and in some cases theOECD more broadly, should make a serious contribution.1. OVERVIEW BY THE DAC CHAIR2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 200413Making policies more coherent for developmentCoherentpoliciesfordevelopmentrequiremanypolicycommunitiesincountrieswhichleadinsettinginternationalagendastotakethedevelopmentdimensionintoaccount. Such policies cannot be mandated by the development community. But we haveboth a need and a responsibility to ensure that the development dimension is indeed fullyunderstood and taken into account, since if it is not, much of our spending will be merelyoffsettingthecostsimposedonourpartnersbyotherpoliciesofourowngovernments.This is undesirable in principle, and certainly should not happen by inattention.Governments have of course incentives other than the possible waste of aid funds totake the development dimension into account: Increasingly, policies have to be agreeable to major developing and transition countriesif they are to be effective. Some (e.g. control of money laundering) indeed need to involveallpartiesdowntomicrostates.ThefailuretoreachagreementatCancnlastSeptemberonhowtotakeforwardtheDohaDevelopmentRounddemonstratestheimportance of a real dialogue between countries of all kinds if progress is to be made inmultilateral approaches. The development community has a particular responsibility toconcern itself with the needs of poor and uninfluential developing countries, which maybe marginalised in such discussions. Civil society groups are increasingly alert to the potential effects of OECD policies ondevelopingcountriesinawholerangeofareas.Theirvoiceis,rightly,beinggivengreaterweight.TheJubilee 2000movementdemonstratedthepoweroffocused,evidence-basedlobbying.Parliamentariansarealsogettingincreasinglyinvolvedindevelopment issues, and their important role still tends to be underestimated by somein the development community. Manypolicieshaveaclearneedforsupportfromaidagenciesiftheyaretowork(e.g. technical assistance for trade capacity building, funding for environmental issues ofconcern to the international community as a whole, rebuilding states after conflict). Developmentagenciesandresearchinstitutions includingtheOECDDevelopmentCentre arewellplacedtohelpprovidethepolicy-orientedresearchandresearchsyntheses that decision makers in other communities need in order to understand betterthe consequences for developing countries of particular policy choices.Suchconsiderationsshouldmakethedialoguethatisnecessarybetweenthedevelopment community and other communities within and beyond OECD member countrygovernments much more of a two-way street than has usually been the case in the past. Inparticular, close joint working between trade, agriculture and development communities isneeded if the Doha Development Round is to be brought to a satisfactory conclusion.The production by the Centre for Global Development of an index (the CommitmenttoDevelopmentIndex)totrackarangeofOECDgovernmentpoliciesthatbearondevelopment, including policies on migration, the environment and trade, as well as aid,hashelpedtohighlightthepolicychallengesthatourgovernmentsface.Onecanargueover the methodology of the index or over the fairness of its judgements. But it is useful inreminding us how far short we remain, as a global community, of providing as positive anenabling environment for poor countries as we could if the development dimension wasgiven greater weight in decision making. Indeed, research suggests that the costs of certainpolicies of OECD countries which have adverse effects on developing countries exceed by a1. OVERVIEW BY THE DAC CHAIR2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 200414largemarginthetotaldevelopmentco-operationeffort.Barriersappliedbydevelopingcountries against each other are also significant. To paraphrase Schumacher, we all needeconomic policies as if development mattered. Nor is the coherence agenda just abouteconomicpolicies:theimportanceofdevelopmentneedstobefactoredintopoliciesofevery kind, from the environment to foreign affairs, defence and anti-terrorism.There is a severe limit to what the DAC, or the development community at large, canachieve alone in these areas. It is therefore particularly welcome that the OECD itself nowhas a cross-cutting project to assess the coherence, from a development perspective, of thepoliciesbeingdiscussedinitsvariouscommittees.1Thisprojecthassofarbeenitselfdependent on voluntary contributions from a few member countries. It is highly desirablethat such work should in future be fully integrated into OECDs own programme of work.Within this overall framework, where would collective action within the developmentcommunity most add value? Here are a few personal suggestions: A more concerted attempt to tackle examples of incoherence within development policy,notablyinthetranslationofbroadly-acceptedideasintoactualpractice.Idiscussthisfurther below under Making development assistance more effective. Doingeverythingwecantoensurethatthepotentiallynegativeimpactofotherpolicyobjectives (however legitimate) on long-term sustainable development, and on developmentprogrammes as such, is considered seriously as part of the policy-making process. Muchhistory shows that when the pursuit of such objectives leads to negative or unsustainabledevelopmentoutcomes,theprogrammesinquestionareintheenddiscredited.TheUNMillennium Assembly set the seal on real and sustainable improvement of poor peopleslives as the core objective for development aid. Many DAC members have produced nationalstatementsofpolicythatreflectthis.Weneedtobroadentheunderstandingthatthisobjective is strongly in the long-term self-interest of donor nations and that attempts to useaid as a quick fix for other policy objectives are likely to fail. StatementsofcommitmentbymoreOECDcountrieswhichplacedevelopmentco-operationwithinabroadercontextthatgivesweighttobetterpolicycoherencefordevelopment. Such statements need to be followed through by establishing capacity foridentificationofcoherenceissuesandmechanismswithingovernmenttoco-ordinateresponses and consider trade-offs. (There are interesting and positive examples withinthe DAC membership of how to do this.) Amoreco-ordinatedapproachtocommissioninghigh-qualityanalysisonissuesofcoherence, especially those of particular importance to smaller or poorer developing andtransition countries, whose voice may often go unheard. A vast amount of research ofthis kind is currently commissioned by bilateral and multilateral donors, much of it ofexcellentquality.ButshouldthedevelopmentcommunitynotworkwithNGOsandresearchinstitutes(particularlyintheSouth)todeviseamoreconcertedprogrammeoverthemediumterminatimelyway?Thismightalsohelpidentifyareaswherepolicy makers are as yet under-served, such as perhaps migration. A better understanding of the political economy context within OECD countries and howwecanengendergreatersupportforreformsneededtoimprovethetradingenvironmentfordevelopingcountries.Asusualforreformswhichmaybenefitconsumers at large but which may affect the interests of producer groups more directly,strong but also creative leadership is likely to be required.1. OVERVIEW BY THE DAC CHAIR2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 200415 Moreencouragementtothericherdevelopingcountriestoopentheirownmarketsfurther to goods and services from other developing countries. Moreencouragementtopoorerdevelopingcountries(andcampaigningNGOs)tobasetheir own negotiating objectives on sound evidence. Moreemphasisondevelopmenteducation.PoliticalandeconomicreformsinOECDcountries depend heavily on the degree of understanding of these issues by the generalpublic.MuchcanbelearnedfromeachotherasafewOECDcountrieshaveinvestedconsiderable resources into development education. Despite some signs of greater publicrecognition of the risks of a highly unequal world, public opinion polls inside the OECDcountries often indicate the misconception that developing countries and developmentpolicyarefar-awaymatters,orshownegativeblanketjudgementsofthesituationprevailingindevelopingcountriesasawhole.Thisunderminespeoplesinterestandreduces their willingness to consider positive approaches.Making development assistance more effectiveThecentralpreoccupationfortheDACforover40 yearshasbeenthesizeandeffectivenessoftheexpenditureofmembercountrygovernmentsinternationalaidprogrammes.Thetwoissuesareofcourseverycloselyrelated.Letsstartwitheffectiveness, since it is fundamental to the case for significant aid volume.Many attempts have been made over the years to assess the effectiveness of aid, andto tackle obvious weaknesses. There is a wide measure of agreement that aid is most likelyto deliver sustainable development if it is provided in support of country-owned strategiesincountrieswithasoundmacroframeworkandcompetentinstitutions,butthattheproblemofweakerandlesscompetentstatesshouldnotbeignored.TheDACsseminalreportof 1996,Shapingthe21st Century,tooktheseeffortsintoanewandchallengingdirection, by selecting specific desired outcomes as benchmarks, which in turn formed thebasisfortheMillenniumDevelopmentGoals(MDGs).Asaresult,twoquestionshavebecomecentraltothecasefordevelopmentassistance:howistheworldprogressingtowardsthedesiredoutcomessetoutintheMDGs,andhowfararedevelopmentassistance programmes contributing to progress?There are plenty of difficulties about even the first of these questions, not least in theavailability of credible and up-to-date measurement of the key parameters. It is clear thata sustained effort to promote both stronger statistical capacity and better use of statisticsisneededthroughinitiativessuchasPARIS212andtheWorldBank-ledTrustFundforStatistical Capacity Building. Nevertheless, as noted above, certain directions seem alreadyreasonably clear, and a more coherent international reporting system is coming into being.The evidence highlights the difficulty of translating income growth at aggregate level intomeasurablybetteroutcomesforverypoorpeople,theparticularproblemsofcertainregionsandsub-regions(notably,butbynomeansexclusively,sub-SaharanAfrica),andthe heavy impact of the HIV/AIDS pandemic. It is clear that a step-change is required to getclose to the income targets in sub-Saharan Africa, to universal primary education in AfricaandmuchofAsia,andtothehealthtargetsineveryregion.Environmentalandgendertargets, less well specified than some others, also look challenging everywhere. There is noroom for complacency. The development community will need to look collectively at thechallenges ahead as we approach the major UN events planned for 2005.1. OVERVIEW BY THE DAC CHAIR2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 200416Thesecondquestionisaparticularchallengetothedevelopmentcommunity,bothbilateral and multilateral, not least since much of the progress in meeting the MDGs hastaken place in Eastern and Southern Asia, where aid, even if large in absolute terms, hasusually been modest in relation to the size of the economy (though this is not to minimisethevalueofthetransferbothofresourcesandofideasandgoodpracticewhichhavehelped shape these nations approaches to their development). What are the links betweentheactivities or transfers that aid programmes finance, and the outcomes set out in theMDGs?Isitenoughtoassesstheresultsofspecificactivitiesandhopethatthebroaderoutcomes will follow? Is there a missing middle that can be teased out through appraisaland through ex post evaluation which would enable donors, singly or collectively, to makemoreconfidentstatementsabouttherealimpactoftheirexpenditure?Doassistanceprogrammeshavecriticalmassinthedevelopmentprocessforwhich,afterall,thecountries themselves, and not the donors, are ultimately responsible?Theevolutionofaidprogrammesinmanycountriesintosupportfornationalorsectoralprogrammessetoutinpovertyreductionstrategiesandsimilarapproachessharpens these questions. They become increasingly hard to tackle just at the level of onedonor, or even for bilateral or multilateral agencies operating in isolation from one another.Amulti-stageprocessmaybeneeded:first(incountriesorsectorswheretotalaidissufficiently large in the overall scheme of things for the question to be relevant and wherethere is enough local capacity to participate effectively), what has been the overall impactof aid programmes in aggregate on the progress of the recipient country or sector, takingthe MDGs as core elements for measuring this progress? Second, have the donors and therecipient (government and other actors) worked together effectively? Both these issues arebest looked at collectively across all the main development actors.The first would require a much more integrated and collaborative evaluation processthan currently exists (though a number of joint evaluations facilitated by the DAC NetworkonDevelopmentEvaluation,suchasthejointlysponsoredevaluationofaidtobasiceducation, are useful pointers for the future). This process should in principle be led by therecipientsratherthanbythedonors,andwillrequiregreatersupporttotheireffortstobuild capacity to monitor and evaluate results. Without credible, independent assessmentsofthiskind,thedonorcommunityisdangerouslyshortofreliablefeedbackontheeffectivenessofitsoveralleffortstosupportprogresstowardstheMDGs,andofgoodaccountingtoParliaments,publicopinionandthosewhotakedecisionsonthescaleoffutureefforts.ThesecondlevelhasbeenaddressedinahighlyconstructivewayinTanzaniabytheIndependentMonitoringGroup,amodelwhichcouldhaveapplicationmorewidely.Inaddition,theDACisrightly,withawiderangeofmultilateralpartners,giving high priority to monitoring the progress, or lack of it, towards harmonisation, andalignment around partner countries own systems, as called for at the High Level Forum onHarmonisation held in Rome in February 2003. This includes sponsoring Joint Country Learning Assessments on Harmonisation andAlignment in selected countries. In addition, there are efforts underway to assess PRSP andPRGF processes, notably by the World Bank and IMF, which will provide useful insight intohoweffectivelytheseprocessesareworking.Againstsuchabackground,assessmentscould then, as a third level, be made of how far individual donors have contributed to theseresults, for better or worse. And finally, as a fourth level, assessments can be made of theeffectivenessofeachdonoragencyasaninstitution(itsinstitutionaleffectiveness,asopposedtoitsdevelopmenteffectiveness).Thethirdandfourthlevelscanbenefitfrom1. OVERVIEW BY THE DAC CHAIR2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 200417peer review and exchange of methods and standards, but do not require the same sort ofadvance planning of collective action, and fit more naturally into the prevailing culture ofindividual review.In the absence of sufficient soundly-based, collectively-conducted evaluations of theimpact of overall aid on a country or sector basis, there are still some useful indicators ofaid effectiveness worth highlighting: Astudycarriedoutforthisreport(presentedinmoredetailinBox 1.1)showsaprogressivetrendovertheperiod 19962001foraidtobeconcentratedonrecipientcountrieswithsoundpolicies.Theproportionofaid excludinghumanitarianaid goingtocountriesinthetoptwoquintiles(asmeasuredbytheWorldBanksCountryPolicyandInstitutionalAssessment)rosefrom63%to68%overtheperiod.Theproportion going to countries in the lowest two quintiles fell from 21% to 16%. (Of course,there are valid reasons for the development community not simply to walk away fromtheweakerperformers:Box 1.2reviewsrecentworkoncriteriaforaidallocationthatemphasises this point.) Povertyreductionstrategies thoughstillfarfromperfect aresettingaclearerframework for aid support, and co-operation among donors at national and sectoral levelin support of locally-owned strategies appears to have increased. Theproportionofuntiedaid whichisassociatedwithmorecompetitivepricingandhence higher value for money has increased from 60% to 80% (including multilateralaid but excluding technical co-operation) over the past 20 years, though the proportionhas stagnated or fallen since the mid-1990s.In addition, the proportion of grants in total ODA has increased, with the overall grantshareofbilateralODAupfrom76%in 1980/81to86%in 2000/01.Iamnotarguingthatgrantsaremoreeffectivethanloans,butthehighershareofgrantsminimisestheconsequences of bilateral ODA for indebtedness of developing countries.Less encouragingly, perhaps: There is little visible trend to any greater concentration of aid on low-income and leastdeveloped countries, which continue to account for about 65% of total ODA allocable bycountry, much as 10 years ago. Emergencyassistancehasbecomeasignificantlylargerportionoftotalaidovertheperiodsince 1989,demonstratingthecontinuinghighcostofconflictsandnaturaldisasters, and limiting the amount of aid available for longer-term development (thoughthere has also been some additionality in the case of major, high-profile crises). There is a rise in those parts of ODA that do not represent actual cross-border transfersofrealresources.FirstyearrefugeecostsincurredindonorcountriesaccountedforUSD 1 billion of ODA in 2002, and net debt relief (much of which does not generate newflows of cash) a further USD 6 billion. Technical co-operation expenditure has also risen.Ofcourse,muchtechnicalco-operationhasbeenoutstandinglyeffectiveandthetransfer of ideas and skills has been central to development. It is also welcome that thereappearstobeanincreaseintheuseoflocalorSouthernskills.Butwelackareallypersuasive assessment of the overall value of this highly diverse block of expenditure.1. OVERVIEW BY THE DAC CHAIR2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 200418Box 1.1. Progressive increase in bilateral aid to good performersThisboxreportsonastudybytheSecretariattoassesstrendsinperformance-basedallocationofbilateralaidbyDACmembers.Inordertodeterminewhetherthereisatendency among DAC members to reallocate according to country performance, ODA flowsof DAC member countries were measured, using DAC data, against country performance. Asanestimationofcountryperformance,theCountryPolicyandInstitutionalAssessment(CPIA) set of indicators, produced by the World Bank, was used. The CPIA was chosen as oneofseveralpossiblesetsofindicators.AdvantageswiththeCPIAincludethefactthatitassessesawiderangeoffactorscomprisingthequalityofacountryspresentpolicyandinstitutional framework; quality meaning how conducive that framework is to fosteringpovertyreduction,sustainablegrowthandtheeffectiveuseofdevelopmentassistance.Twenty items are assessed, each with a 5% weight in the overall rating. According to theseitems, countries are ranked and put in quintiles of approximately 15 countries dependingon the number of countries assessed in the exercise. Allocation of DAC members bilateral ODA 1996-2001 according to CPIA rankingSource: OECD.50% %1995 96 97 98 99 2000 01 024030201001995 96 97 98 99 2000 01 021995 96 97 98 99 2000 01 0210% %1995 96 97 98 99 2000 01 02864201995 96 97 98 99 2000 01 02%1817171616151514121086420Quintile 1 Quintile 235302520151050Quintile 3Quintile 4 Quintile 51. OVERVIEW BY THE DAC CHAIR2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 200419In addition, aid programmes continue to be marked by a very large number of smallinterventionsandarelativelymodestnumberoflargeones.ActivitiesreportedtotheCreditor Reporting System show the following patterns for the period 1999-2001:There is to my knowledge no a priori reason to suppose that the size of interventions iscorrelatedwitheffectiveness indeed,wecanallquoteexamplesofcostlyfailuresandoutstandingly productive small activities but the sheer number of such interventions (onaverage, 35 225 a year in the period with an average cost of USD 1.5 million) is significantfor the pressures on both aid agencies and more importantly on recipient governments.The pattern of aid activities, characterised by their large number and by the numerouschannelsthroughwhichtheyareprovided,haslongbeencriticisedfornotonlyitseffectiveness (what is it achieving?) but also its efficiency (can it make sense to have somany missions, so many donor offices, so much pressure on recipient staff?). It is howeveronlyrecentlythatthedevelopmentcommunityhasgivenaiddeliveryissuesseriouscollective consideration. Significant steps along the road have been: ThestrongassertioninDACsShapingthe21st Centuryin 1996thatpartnership(asopposed to donor-led approaches) must become a reality. The support for country ownership in the Comprehensive Development Framework setout in 1999 by the Word Bank President James Wolfensohn. The establishment of poverty reduction strategies and the like as a central pillar of morecountry-owned frameworks within which donors can operate. Thedevelopmentofmorecommonapproachesbetweendonorssuchassector-wideapproaches, basket funding and budget support.Box 1.1. Progressive increase in bilateral aid to good performers (cont.)ThechartsaboveshowthepercentagesharesofDACmemberstotalannualbilateralODAfrom1996to 2001tothecountriescomprisingtheCPIAquintiles.Togiveaclearerpicture of the long-term trend, humanitarian assistance and debt relief were omitted fromthe calculation. They show a modest but noticeable shift in aid over the period towardsbetterpolicyperformers(Quintiles 1and 2inthe 2002CPIAranking),withpoorperformers (Quintiles 4 and 5) suffering reduced aid. The trend, however, is dominated byafewlargerrecipients,suchasHonduras,Tanzania,UgandaandVietNam.Forsomeothergoodperformers(countriesthatarewithinthefirstquintile)ODAfromDACmembers has gone down in recent years. These countries include, among others, Bhutan,CapeVerde,Mauritania,SamoaandSt. Lucia.Nevertheless,overallthefiguressuggestthat there is a modestly greater inclination on the part of donors collectively to link theiraid to performance than was the case in the mid-1990s.Over USD 100 m USD 10-100 m USD 1 m to USD 9.99 m Under USD 1 m% by value 25 42 24 9% by number 0.2 2 12 851. OVERVIEW BY THE DAC CHAIR2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 200420 Theincreasing,and welcome, assertionby recipient countriesthat theywould set theparameterswithinwhichdonorsshouldwork(e.g. VietNamsDecreeNo 17,Ugandaspressuretomaximisebudgetsupport,andin 2003,Tanzaniasmoratoriumondonormissions and Indias decision to limit sharply the number of individual donors).Box 1.2. Aid effectiveness and selectivity: Integrating multiple objectives into aid allocationsTheDevelopmentAssistanceCommittee(DAC)andtheOECDDevelopmentCentresponsoredaseminarinMarch 2003 withleadingacademicanalystsanddonorpolicyofficialsonimprovingtheeffectivenessofaidallocations.Thisseminarextendedthescopeofanalysisbeyondtheaid-policy-growth-povertylinkagestoincludethreenewelements:abroaderrangeofpoverty-relevantobjectives;practicalexperienceintheapplication of quantitative analysis to allocations; and analytical approaches to allocationof aid between bilateral and multilateral channels and between country programmes andglobal public goods.Conclusionsoftheseminar*reaffirmedthewideconsensusonthemaincross-countryallocation criteria for effectiveness in reducing poverty: the number of poor people and thedepthofpoverty;andthedevelopmentperformance,broadlyconceivedtoincludegovernanceandthefunctioningofinstitutions,ofpartnercountries.Thisconsensusisbasedoneconometricanalysis,countrycasestudies,andthefieldexperienceofaidpractitioners.(Vigorousdebatecontinuesintheacademicliteratureontheinteractionofperformanceandaidinaffectingaggregategrowth;however,thestrongeffectofperformance on returns to aid at the micro/project level is clearly established.)Theseminaralsohighlightedothervariablesthatraisetheimpactofaidongrowth,particularly helping vulnerable countries adjust to shocks and post-conflict reconstruction.The seminar emphasised, however, that development objectives other than growth need tobe taken account of in allocations. These include provision of humanitarian aid, preventingandrespondingtoviolentconflict,anddealingwithdifficultpartnershipsituations,where government commitment, and usually capacity, to reduce poverty is weak. In thesedifficultcases,itisimportanttotakeaccountofthecostofneglect thatoflettingcountriesdriftintodeepdifficultiesorbecomefailedstates,withnegativeimpactsonneighbouring countries and beyond. In such countries aid is needed to address governanceand capacity issues and, where feasible, for social programmes to tackle urgent needs andhelp meet the Millennium Development Goals (MDGs).Theseminaralsofoundevidencethatglobalpublicgoodsareseverelyunder-funded,althoughfundingforsuchprogrammesthathavesubstantialbenefitsfortheworldatlarge should to the maximum extent feasible be from non-aid sources. In addition, thereis some evidence of under-funding of multilateral programmes.There is room for further sharing of analysis and of practical donor experience on howto take account in practice of this broader set of development criteria in allocations, so asto improve the overall effectiveness of aid. But perhaps the most striking finding from theseminar relates to aid volume. It is that aid tends to have a positive impact on growth evenifpolicyperformanceisonlymoderate,thoughtheimpactdeclinesasperformanceworsens. If in addition, we look at the broader set of development objectives noted above,then the need for aid increases substantially.* The summary conclusions of the seminar and key background documents are available at www.oecd.org/dac/wpeff/Mar2003ExpertsSeminar1. OVERVIEW BY THE DAC CHAIR2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 200421These developments have encouraged two related but distinct initiatives among manydonors, bilateral and multilateral: To align their programmes with locally-owned priorities, programmes and systems. To harmonise their requirements and procedures for disbursing and managing aid.Thelogicofthesetwointerlinkedapproachesistostrengthenlocalsystemsforplanning,deliveryandaccountingforbothdomestically-raisedandaid-financedexpenditure.BothwerehighlightedintheprinciplesagreedattheHighLevelForumonHarmonisationheldinRomeinFebruary 2003.AcentraltaskoftheDAC,workingveryclosely with the multilateral donors, is now to encourage members to put these principlesinto practice. Donors have little excuse not to do so. In parallel, work is needed to improvethe analysis of how to act more effectively in the context of poor performance and conflictand post-conflict situations.Against this background, it is encouraging that the DAC has created, with support fromthe Multilateral Development Banks and the UNDP, the Working Party on Aid Effectiveness andDonor Practices (WP-EFF)3 which provides a new international forum for collective discussionof aid effectiveness among both bilaterals and multilaterals, and one that also brings to bearthe knowledgeandexperienceofrepresentativedevelopingcountries.Aid effectivenessisabove all something to be sought through collective as well as individual action.Delivering more aidAt Monterrey in March 2002, donors committed themselves to what would be the largestmulti-year percentage increase in aid in real terms in the history of the DAC. Assuming theydeliver,wemayexpectofficialdevelopmentassistancetorisefromthelevelofaroundUSD 55 billion of the past few years to around USD 75 billion (at2002 prices and exchangerates) by 2006. As a proportion of donor GNI, this would be an increase to about 0.29% fromthe low of 0.22% of 2001, still well below the comparable levels of the early 1990s.Many analyses of the cost of faster progress towards the MDGs, including not least thecosts of the HIV/AIDS pandemic, suggest a need for yet further increases. Several proposalsfor innovative ways of raising additional finance are indeed currently being debated. It isnot clear whether a critical mass of support can be garnered for such proposals in the nearfuture. But in any case, the first essential is that donors do indeed deliver the increased aidthat they have promised, and do so in ways that are best calculated to have a strong impacton the MDGs.Among DAC members, the bulk of the absolute increases over the period 2002-2006 areexpected from five key donors, on the basis of public statements at Monterrey and since, asshown in Table 1.1.Asoflate 2003,thepositionforthesekeydonorsisasfollows.IntheUnited States,Congressional appropriations for FY 2004 for foreign assistance (not identical, however, toODA)areupbyatleastUSD 2.4 billion,comparedtothepreviousfiscalyear,notconsideringsubstantialshort-termassistancetoIraqandAfghanistan.IntheUnitedKingdom,newpublicexpendituredecisionsarenotanticipatedbeforemid-2004.TheFrench government has announced its intention to reach 0.5% of GNI in 2007 and 0.7% ofGNIby 2012,andfor 2004hasprojectedODAatalevelof0.43%ofGNI.Italyremainscommitted to reach 0.33% of GNI by 2006, as agreed at the EU Barcelona Summit in 2002; itsODA recovered from 0.15% of GNI in 2001 to 0.20% in 2002, but the budget approved for 2004makes no further progress towards this goal.1. OVERVIEW BY THE DAC CHAIR2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 200422TheGermanChancelloralsoconfirmedthe0.33%targetinhisinauguralpolicystatementin 2002.Inordertomakesomeprogresstowardsthis,theapproveddevelopment assistance budget for 2004 rises, by 0.4% for the half covered by the FederalMinistry for Economic Co-operation and Development, compared to a 1.1% decline in theoverall federal budget.Forthosedonorsnotsingledoutabove,thenetincreasesindicatedinTable 3.2stillappear a reasonable estimate of what might be forthcoming by 2006. The DAC will continueto track and publish progress towards delivering the commitments made at Monterrey ona regular basis.Questions have been raised about whether the sum total of choices made by the bilateralandmultilateraldonorswillbeconsistentwiththetwinobjectivesofrewardinggoodperformance on the one hand and sustaining support for reform and for maintaining basichuman needs in poor performers on the other. Will some good performers be left unrewardedfor arbitrary reasons (as has been argued, for example, in the case of the Fast Track Initiative onEducation)? Will the large numbers of poor people in weakly-performing countries be furthermarginalised? Or will rising aid transfers, perhaps particularly to good performers, reach levelsthatwouldout-runabsorptivecapacity,createunhealthydependenceandweakentheproductive sector, for example by unduly raising the real exchange rate?TheDACshouldkeeptheseissuesunderscrutiny(aswellasotherquestionsnotdirectlyconsideredhere,suchasthebilateral/multilateralbalance,andtheroleofthevarious multilateral actors in an era of IDA grants and new global funds). At present, theproblems do not look insuperable: Althoughseveralbilateraldonorsareproposingtoconcentrateahigherproportionoftheir aid on fewer countries (e.g. Canada, Finland, the Netherlands or, in respect of theMillennium Challenge Account, the United States), most recipient countries have a largeanddiversifiedgroupofdonors.(TheWorldDevelopmentReport 2004givestheaveragenumberofbilateraldonorsperrecipientas 14andbilateralandmultilateraltogetheras 26.) Greater concentration should reduce transaction costs for recipients as well as fordonors.Arguably,mostdonorspresentlyspreadtheireffortstoothinlyforrealeffectiveness. And the share of the top 15 aid recipients has fallen as a proportion of DACbilateral aid from 55% to 48% over the past 20 years (see Box 1.3). Box 1.1showsaprogressiveincreaseinaidtogoodperformersbutstillasignificanteffort being made in aid poor to performers.Table 1.1. Anticipated ODA 2006USD billion (at 2002 prices and exchange rates)Source: OECD.Net ODA 2002 Anticipated ODA 2006 IncrementUnited States 13.3 19.5 6.2United Kingdom 4.9 6.9 2.0France 5.5 7.4 1.9Italy 2.3 4.2 1.9Germany 5.3 7.1 1.8Sub-total 31.4 45.1 13.8All other DAC members26.9 31.7 4.8TOTAL 58.3 76.8 18.61. OVERVIEW BY THE DAC CHAIR2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 200423Box 1.3. No trend towards greater concentration of bilateral aid among DAC membersThisboxreportsonastudybytheSecretariattoassesswhetherthereisanytrendtowardsgreaterconcentrationofbilateralaidbyDACmembers.TheshareofDACmembersbilateralODAtotheirlargestrecipientswasusedtoestimatethelevelandtrend of concentration. Many donors have stated an intention to concentrate their aid onalimitednumberofcountries,inordertoprovidefocus,reducecostsandfacilitateco-ordination. But DAC data show no concentration trend among DAC members. Rather,as the chart below shows, the share of the top 15 aid recipients has fallen over the past20 years from 55% to 48%, and the trend towards deconcentration is even more marked atthe level of individual DAC members (since the top recipients at aggregate level may makeup for some declines from their main donors by increases from new or minor donors).Share of bilateral ODA to the 15 main recipients degree of concentrationSource: OECD.Among the likely explanations are: A secular decline in special relationships that led to very high shares of donors ODAgoingtooneortwomainrecipients,e.g.AustraliatoPapuaNewGuinea;BelgiumtoDem. Rep. Congo;andtoalesserextent,FinlandtoTanzania,CanadatoBangladesh,and the USA to Egypt, Pakistan, the Philippines and Turkey. Many of these relationshipsremain important, but there has been a broadening of the donor base of the recipientsconcerned, and a relative decline in the share of each donors programme accounted forby them. The fact that it is relatively easy to start a new country programme, but more difficultpolitically to pull out once an aid relationship has been established. Increases in forms of aid that are not subject to aid allocation planning, e.g. emergencyand refugee aid, debt relief. Technical factors to do with the DAC List of Aid Recipients* also play a role. A couple ofmajor recipients (especially Israel) have left the ODA part of the List, whereas countriesthathavejoinedit(successorstatesoftheformerYugoslavia,centralAsianandTranscaucasian republics of the former Soviet Union, Eritrea, East Timor) are minor tomedium recipients. Both trends tend to reduce the share of total ODA accounted for bythe largest recipients.* See Technical Notes at the end of this volume.70%1980-81 1990-91 2000-0160504030201001. OVERVIEW BY THE DAC CHAIR2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 200424 IMF and other research argues that the Dutch disease consequences of increased aidare in general within acceptable limits, provided that transfers of aid are maintained ata reasonably consistent level in relation to the local economy. TheWorldBankhasarguedinitspapertotheDevelopmentCommitteemeetinginDubaiinSeptember 2003thatlargeAsiancountriescouldabsorbdoublepresentaidlevelsandsmallerAfricanonesatleasta60%increase,inbothcasesassumingcontinued policy improvements. Projected increases are well within these limits.Infouryearstimeweshallbeinapositiontoanalysewhetherplannedincreasesto 2006 were delivered and how, if at all, the pattern of aid shifted. I hope we will be able tosay in the Development Co-operation Report for 2007/8 that in 2006: DonorsdeliveredatleastUSD 75 billion(at2002 pricesandexchangerates)innetdisbursements. Theproportionofthisgoingtoleastdevelopedandotherlow-incomecountriesrosesignificantly from the proportion in 2002. Ahighersharethanin 2002wenttocountrieswithrelativelygoodperformanceandlargenumbersofpoor withinthecontextofimprovedapproachestoallocationsbydonors that take account of the broader set of objectives outlined in Box 1.2. Well-consideredinterventionswerebeingmadeinthosepoor-performingcountrieswhere effective transfers were possible, on the basis of careful and joint planning aboutwhatcouldbedoneeffectivelytopromotebettergovernanceandinstitutionaldevelopment and to help progress towards the MDGs. Emergency and humanitarian relief was on a downtrend at least as a proportion of total aid. A higher proportion of aid was untied. Aidenabledpoorrecipientcountriestoexpandprovisionofpublicservices,andthusoverallspendinglevels,butatthesametimethesecountrieslaidthefoundationsforgreater self-sufficiency by achieving levels of domestic resource mobilisation on averageseveral percentage points higher than at present. Muchmoreaidwasclearlyalignedtolocalpriorities,programmesandsystems,andshown in recipient budgets. Indicators of harmonisation showed a quantum leap from the 2002/03 baseline. Thebulkoftheincreasedflows(whetherbilateralormultilateral,andwhetherasprojects,programmesorbudgetsupport)involvedagenuinetransferofresourcesinterms of the balance of payments of recipient countries, and that technical co-operationexpenditurewasdemonstrablymoreefficient(includingthroughmoreuseoflocalorother Southern skills) and more effective. This support for developing countries own efforts was beginning to be translated intomore progress towards the harder-to-reach MDGs, not least in sub-Saharan Africa.Surveying progress in such areas is a core service which the DAC can provide for itsmembersasabasisforcollectivediscussionamongdonorsbutalsoamongallthoseinterested in development co-operation.1. OVERVIEW BY THE DAC CHAIR2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 200425Fostering constructive dialogueThedevelopmentcommunityiswellknownfortheenergywithwhichitdebatescompetingideas.Giventhediversityofthedevelopingworldandthecomplexityofthedevelopment process, this is not perhaps surprising. The circumstances and prejudices ofdonor countries and agencies vary, and the case for positive engagement with developingandtransitioncountriesneedstobemadeineachdonorcountryinawaythatmakessense to the domestic audience. An energetic flow of ideas is valuable, particularly if it isnot just within the somewhat incestuous world of aid agencies.But too often, it seems to me, avoidable misperceptions exist, sometimes about concepts,but often more due to language, which polarise positions and inhibit rational discussion. Hereare a few examples. In each case there is scope for different but valid approaches that havepotential consequences for policy; but in each case there is also more common ground thanmuch of the language in which the issues are addressed might suggest.Growth or poverty reduction?Thisisprobablythemostvenerabledebateamongdevelopmenttheoreticians.Itiseasytosetoutthecaricatures:ontheonehand,growthmerchantsseeingpovertynarrowly in terms of income, with nave views on the trickle down of growth to the poor;ontheother,welfaristswhobelievewithequalorgreaternaivetythatgrowthisirrelevantandthatonlydistributionmatters.Itishardertofindpeoplewhoreallyholdeitheroftheextremepositions.Inpractice,fewdenythatatleastinpoorcountries,economicgrowth oftenwellabovecurrentlevels isessentialifpovertyistobesustainablyreduced, andfewdeny that the distribution ofthebenefits ofthatgrowth isalsoimportant.Thereisalsobroadagreementthattheunderstandingthatpovertyismultidimensional, and the reflection of this in the MDGs, means that more than incomegrowth, important though that is, will be needed. Of course policy choices will and shouldbe the subject of debate and controversy, particularly where there may be real trade-offsbetween levels and quality of growth: this is what politics is about. But within the donorcommunityatleastletthesebeaboutrealpolicydifferencesthatdonotdisguisethewidely-sharedviewthatbothgrowthanditsqualitymatter,andthatalldimensionsofpoverty need high-priority attention.Public or private?Almostasmuchinkhasprobablybeenspiltontherespectivemeritsofpublicandprivate-sectorapproachestodevelopment.Again,thereisanentirelyproperplaceforenergetic debate on the merits of the size and role of the public and private sectors, and therole of markets as opposed to other means of allocating scarce resources. Probably most ofus have seen the problems of the extremes of either a state-dominated economy or of toosweeping and hasty privatisation. Effective states need efficient markets; efficient marketsneedeffectivestates.Buttoooftenweuselanguagethattypecastsourinterlocutoraseither blindly statist or blindly capitalist.Social sectors or production and infrastructure?These debates are paralleled by debates over the areas for donor support. Donors haveinaggregatebeenspendingmoreonhealthandlessonagriculture,industryandmanytypesofinfrastructureoverthepastdecadeorso,thoughfewreachthe20%forbasiceducation, basic health and water (itself of course an element of infrastructure) proposed1. OVERVIEW BY THE DAC CHAIR2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 200426by the UN Social Summit in 1995. Clearly, developing countries need to invest in support ofall these areas, while paying attention to the scope for private investment wherever this isviable. The MDGs have helped to focus on some areas of critical under-investment such asbasiceducation(longanareamarginalisedbydonorsoftenmoreinterestedinhighereducation).PerhapsbecausesomeoftheclearestoftheMDGsrelatetohealthandeducationoutcomes,therehasbeensometendencytodownplayotherpartsoftheeconomy, for example infrastructure. And it is true that as long as aid levels remain wellbelow what is needed to achieve the MDGs, there is an inevitable competition whetherfromapartnercountryoradonorpointofview amongneedsforscalingupprogrammesinthesocialsectorsorelsewhere.ButmostMDGsare appropriately outcomes that no narrow sectoral focus can deliver. For example, lower maternal mortalityrequiresnotonlybetterobstetriccarebutalsoeducation,transportandwomensempowerment. There is a growing recognition that this too is not an either/or situation fordonors stilllessforrecipientcountriesthemselves andthat,withinaframeworkcapable of delivering sustainable, broad-based growth, a wide variety of activities shouldbe incorporated into PRSPs and the like, and justify donor support. Indeed, the better localpolicies and systems are, the less it matters what donors finance, so long as the method offinance does not distort local priorities.Projects or programmes?It is somewhat surprising that the lively debate over the rights and wrongs of budget-type support coincides with a secular decline, only modestly reversed in the past few years(see Chart 2.14), in the proportion of DAC assistance delivered in programmatic form. Butthisisanotherdebateunhealthilyfullofstereotypingandcaricaturewithinthedonorcommunity.ThistendstodisguisewhatIsuggestarewidely-sharedviewsacrossthecommunity, such as: Alldonorsshouldworktogetherwithinbroadly-ownednational(e.g. PRSPs),regionaland sectoral strategies. Indesigningmedium-termbudgetaryframeworksandannualbudgets,developingcountries need to strike a balance between current and capital expenditure. In many, nofeasible level of domestic resource mobilisation will enable them to approach the MDGsortomaintaintheircapitalstockefficientlyunlesstheyreceiveoutsidesupportforrecurrent expenditure over an extended period (whether delivered through commodityaid, balance of payments support, basket funding or direct budget support). Such support should be provided in an efficient, non-distortionary and predictable way,linkedtoreformsthatwillovertimeencouragedomesticresourcemobilisation.Itshouldhelpbuild,notmarginalise,localsystemsforaccountability.Transfers(ofwhateverkind)togovernmentsshouldthereforebeintegratedintolocalbudgetprocesses wherever possible. Therewillalwaysbeaneedforpubliccapitalinvestmentwhichbringstogetherresources for a tightly-defined output in other words for projects. While some may beappropriately financed from current budget surpluses or local borrowing, the larger ormorecomplexsuchprojectswilloftenbenefitfromtheexperiencethatdirectdonorsupport can provide. Such investments themselves should be properly included in local capital budgets andbesubjecttotherelevantlocalsystems(enhancedwherenecessary),asforrecurrent1. OVERVIEW BY THE DAC CHAIR2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 200427expenditure. Their recurrent costs must also be properly planned and integrated into asustainable recurrent budget.Donors vary in their willingness and ability to provide different types of support andto accept different types of accountability and levels of risk. This is entirely legitimate, butthereisroomforfurtherworkonthevarietyofperceptionsandonwaysoflesseningperceived as well as real risks. Closer engagement with the audit community is important.Soisbuildinglocalcapacitytoachieveaccountability,andavoidingtheimpositionofmultiple donor-centred requirements.Of course, I do not expect instant harmony to emerge on any of these issues on all ofwhich, as I have said, there are some real policy divides that need addressing. But I do hopethat the debates that need to take place will not obscure what my predecessor, in his firstmessage as Chair, rightly described as Common Ground. My sense is that this commonground has in fact increased. Let us try to enlarge it further, even as we recognise the valueof diversity.Notes1. See Box in DAC at Work section on Policy Coherence in the OECD.2. PARIS21: Partnership inStatistics for Developmentin the21st Century.ThePARIS21 Consortiumwas established in 1999 to boost statistical capabilities, especially in poor countries. Its foundingorganisersare:theOECD,UnitedNations,WorldBank,IMFandthe EC.PARIS21 ishostedat theDevelopment Co-operation Directorate (DCD) of the OECD. See also Box 3.2.3. See Chapter 3 for details of the work programme of the WP-EFF.ISBN 92-64-01961-82003 DEVELOPMENT CO-OPERATION REPORTEfforts and Policies of the Members of the Development Assistance Committee Volume 5, No. 1 OECD 20042003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 200429Chapter 2 Trends in Aid FlowsThis chapter analyses the evolution of aid flows to developing countries, and morespecificallyrecenttrendsinthevolumeandallocationofDACmembersaid.Itattempts to isolate the factors that determine the size of their efforts, and to assessthe impact of policy ideas in shaping their development co-operation programmes.The past two years have been a turning point for aid volume, which increased by7.2%in 2002.Inalongerperspective,technicalco-operationandaidtothesocialsectorshavegrown,whereasaidlendingandcapitalprojectfinancinghavedeclined.Prospectsaregoodforimprovedaidvolumeandeffectiveness,despitegathering fiscal pressure in member countries.2. TRENDS IN AID FLOWS2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 200430IntroductionThe last two years have been a turning point in the evolution of aid flows to developingcountries. After maintaining a steady level through the 1980s, aid fell sharply after the endof the Cold War and of superpower rivalry in the Third World. By 1997, and in three of thesubsequentfouryears,itwasatanall-timelowof0.22%ofdonorscombinednationalincome.Butin 2001-2thetrendreversed(seeChart 2.1).By 2002,therewasa7.2%realincrease, and if current plans are met, similar annual increases are likely up to 2006.Twoeventsareresponsiblefortheturnaround.Thefirstwasthewaveofterroristattacks on the United States on 11 September 2001. These outrages led to a fundamentalreassessmentofallaspectsofUS policytowardsdevelopingcountries,includingitssecurity, diplomatic and development co-operation dimensions. One outcome has been abroad consensus in the Administration and Congress that significant and effective foreignaid is both morally justified and an important contribution to US national security.ThesecondmajoreventthathasaffectedthinkingonaidwastheInternationalConferenceonFinancingfor Developmentin Monterrey,Mexicoin March 2002. Planningforthishadtakenseveralyears,anditsstatushadbeenthesubjectofconsiderablediscussion and negotiation. Many doubted whether it would have much impact. But in factit led to significant new initiatives by most DAC members to improve both the quantity andquality of their aid.ThischapteranalysesrecenttrendsinthevolumeandallocationofDACmembersaid, using the latest data available at the time of writing. It attempts to isolate the factorsthat determine the size of their efforts, and assess the impact of policy ideas in shapingChart 2.1. DAC members total net ODA at 2001 prices as a share of GNI, 1980-2002Source: OECD.80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 020.400.350.300.2500.200.150.100.05706050403020100ODA as a % of GNITotal ODA% of GNI ODA (USD billion)2. TRENDS IN AID FLOWS2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 200431their development co-operation programmes. Chapter 3 looks at future volume prospectsand the outlook for meeting the Millennium Development Goals (MDGs), while individualmembers programmes are discussed in more detail in Chapter 4.The overall flow pictureOfficialdevelopmentassistance(ODA)consistsofdonorsgrantsandsoft(i.e. low-interest)loanstodevelopingcountries.Withthepossibleexceptionofworkersremittances,1itistheleastvolatilecomponentofcapitalflowstodevelopingcountries,since it expresses government programmes for development that are largely independentof the individual decisions of economic actors.Chart 2.2 shows the evolutionof ODA over the past 20 years,inthe contextof otherresourceflowsfordevelopment.ThecategoriesarethoseusedinDACstatistics.Theyincludegrantsandloanswithamaturityofmorethanoneyear,excludinginterestpayments, military credits, and transfer payments to individuals.Thesharpfallinprivateflowsfromtheearly 1980sreflectsthecollapseininternational bank lending following Mexicos announcement in 1982 that it was unable tomeetitsdebtserviceobligations.The 1990ssawarevivalinprivateinvestmentindevelopingcountries.Althoughtotalprivateflowshavenotregainedtheirlevelsoftheearly 1980s as a share of DAC members GNI, the composition of these flows suggests theymaybeofmoredurablebenefit.Directinvestment,thoughnotmaintainingthepeaksreached in the late 1990s, is becoming a much more significant element of private flows,reflecting longer-term confidence in developing countries growth prospects. By contrast,banklending,whichaddstodebtburdens,hasbeenmuchlowerthan20 yearsago,andthere is some evidence that the financial viability of the investments it funds is being morecarefully scrutinised.Chart 2.2. DAC members resource flows to developing countries, 1980-2002Note: Net OOF flows were negative in 2000-2002, and other private flows were negative in 1987, 1990, 2001 and 2002.Source: OECD.1980 1985 1990 1995 20000.80.60.40.201.21.02002ODA OOF Net grants by NGOs Direct investment Other privateShare of DAC GNI (%)2. TRENDS IN AID FLOWS2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 200432Many factors contributed to the 1990s trend of rising private flows and falling ODA. Asalreadymentioned,theendofsuperpowerrivalryreducedthepoliticalincentivestoaidgivingfromtheearly 90s.Aidwasthusparticularlyvulnerabletocutsatatimewhenrecession had reduced government revenue and most countries were introducing stringentfiscalconsolidationprogrammes.TherewasalsoreducedneedforaidinsomerapidlyadvancingeconomiesinAsiaandLatinAmerica,whileflowstostrife-torncountriesincentral and west Africa fell sharply as it became impossible to deliver effective aid there.Private flows rose through the 90s as interest rates fell, increasing the profitability ofinvestment. Excessive lending led to debt sustainability problems in east Asia, Russia, andother emerging economies from1998, but the effects have been less severe than in 1982,since several of the major destination countries for private investment including Chinaand India were little affected.DAC and non-DAC donorsTwentyyearsago,non-DACdonorsweregivingalmosthalfasmuchaidasDACcountries combined. While political attention focused on aid from the Soviet bloc, this wasactually rather modest, being heavily concentrated in a few client states dotted throughoutthedevelopingworld.Sovietblocaidrarelyexceededone-tenthofDACODA.MoreimportantwastheeffortoftheArabcountriesastheyrecycledthepetrodollarsgainedfromtheoilpricespikesof 1974and 1979.Muchofthiswasdonethroughthebankingsystem, but Arab aid also rose sharply to about a third of DAC ODA in the late 70s and early80s. It was concentrated in Muslim countries, but was also instrumental in setting up theInternational Fund for Agricultural Development, the only significant United Nations fundfor providing ODA loans.Theearly 90ssawthecollapseoftheSovietblocanditsaidefforts,andasharpcurtailmentofArabaidasoilpricescontinuedtofallfromtheirearlierpeaks.Bythelate 90s, DAC countries were providing roughly 95% of all known ODA flows.These figures may be somewhat misleading in suggesting a sharp contraction in thediversityofaiddonors.Twofactorsmitigatethistrend. Oneisthe riseinthenumberofDAC members, from18 in the early 80s to 23 today. The other is the increase in a numberof smaller aid programmes by individual, mostly middle-income countries. These includeone founder member of the OECD Turkey; most of the new OECD members the CzechRepublic,Hungary,Korea,Mexico,Poland,theSlovakRepublic;andseveralnon-OECDmembers, including China, Chinese Taipei, India and Israel.2 Iceland, a high-income OECDmember, also has a small development co-operation programme.3 In addition, several non-OECDcountriesinCentralandEasternEurope,includingRussia,arenowstartingtodevelop or revive their development co-operation efforts.The balance of aid effort within the DAC has also shifted substantially. The 1980s saw asteadydeclineintheshareoftheUnitedStates,fromabout30%oftheDACtotalatthebeginning of the decade to around 20% at the end a level that still applies today. The fallwas matched by rising aid from EU countries and Japan. At the beginning of the 1980s, Japanwas only the fourth largest DAC donor, behind France and Germany as well as the UnitedStates. As a share of its national income, Japans aid did not rise much over the subsequentdecade, but during the 1990s, Japans efforts to raise the level of its ODA budget, along withits solid growth record and the rising value of the yen against the dollar, propelled it ahead ofthe United States as the worlds largest aid donor, a position it held until 2000.2. TRENDS IN AID FLOWS2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 200433Relative to national income, the most consistent and impressive aid performance hascomefromDenmark, theNetherlands,Norwayand Sweden.By 1980,allthesecountriessurpassed the UN target for ODA of 0.7% of national income, and they never slipped belowit thereafter. In recent years, Luxembourg has joined this group, Ireland has committed todo so by 2007, and Belgium and France aim to join them by 2010 and 2012 respectively.Donorseconomicperformanceisakeydeterminantofthevolumeofaidtheycanachieve.Thelate 80ssawshort-livedeconomicboomsinFinlandandItalythatallowedthosecountriestolifttheiraideffortsubstantially.By 1991,FinlandevenreachedtheUN ODA target. But both countries faced economic crises in the early 90s which severelycurtailedtheiraidefforts.Asthe 1996editionofthisReportpointedout,aidisalargelydiscretionaryexpenditurethatisparticularlysensitivetothedonorsfiscalposition.4Surplusesorsmalldeficitsoftenpresageariseinaid,whereashighfiscaldeficitshavealmost always been followed by sharp contractions in aid budgets.AidfromotherDACmembershasgenerallystagnatedinrecentyearsinrealterms,and declined as a share of growing national income. By the latter measure, Australia andCanada showed two of the largest falls. Both had an ODA/GNI ratio of over 0.5% in at leastone year in the early 80s, but in recent years their ratios have been around half that figure.Aid from Belgium and Germany has shrunk by about one-third over the same period. TherehasbeenlesschangeinaidfromAustria,NewZealandandSwitzerland;aidfromtheUnited Kingdom, after falling significantly, has now recovered (Chart 2.3).Aid by region and income groupWhile total ODA fell substantially up to 2001, the picture varies by recipient region. Afterthe 1970s, Asia saw a major drop in ODA as its need for aid declined, whereas Africas shareincreasedrapidly.AidtoLatinAmericaretaineditsrelativelyminorshare.Then,intheChart 2.3. Donor breakdown of DAC members ODA in real terms, 1980-2002Source: OECD.1980 1985 1990 1995 2000301510502520Constant 2001 USD bnOther Japan United States EU152. TRENDS IN AID FLOWS2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 200434late 1990s, a series of financial crises in middle-income countries partly reversed the trends,with disbursements to Asia and Latin America rising again at Africas expense.SeveralfactorscontributedtothefallinaidtoAfrica.Themostimportantanddistressing was the increasing difficulty in delivering aid in many strife-torn countries inthe Horn of Africa, the Congo basin and parts of West Africa. Human rights concerns led topolicydecisionstoreduceaidtoothercountries mostrecentlyZimbabwe.Onasomewhatmorepositivenote,thedevaluationoftheCFAandComorianfrancsin 1994enabled a substantial reduction in French assistance to meet deficits in the countries usingthose currencies.5The aggregates conceal large differences in donor and recipient relationships. On thedonorside,theAfricanfocusisstrongestamongEuropeandonors.In 2000-01,Africancountries accounted for eight of the top ten recipients of gross ODA from Belgium, Franceand Ireland, and for seven of the United Kingdoms top ten.Asian and Pacific countries accounted for all of Australia and New Zealands top tenrecipientsin 2000-01,andfornineofJapanstopten.Spainwastheonlydonorwithamajority (six out of ten) of its top recipients in Latin America. Other donors programmesshow a fairly even mix of regions. Chapter 1 discusses in more detail the factors guidingcountry allocations of ODA.The 1990salsosawthefirstaidprogrammestoformerSovietblocstatesineasternandcentralEurope.Thesehavedifferedmarkedlyfromtraditionaldevelopmentassistance, and are not counted within ODA.6 They have concentrated on debt relief andtechnical help to smooth the transition to a market economy. The main donors have beenthe United States, France and Germany, with Austria, Canada and Denmark also makingsubstantial contributions. Details are given in the last three tables of the Statistical Annexto this volume.There has been little change through the 1990s in the shares of ODA accounted for bythevariousincome groupingsofcountries. Roughly30%ofaidgoes toeachof thethreemain groups: the least developed countries (total population: 660 million), the other low-incomecountries(includingChinaandIndia;totalpopulation3 billion),andthelower-middleincomecountries(650 million).7Flowstoupper-middleincomeandhigh-incomecountries combined have not exceeded 10% of net ODA for the last 20 years.Multilateral share of ODAChart 2.4comparesdonorssharesofmultilateralassistancein 1992and 2002(thedates are chosen so as to be able to compare all DAC members except Greece, which joinedthe DAC in 1999). Most countries have made shifts and for some, notably Italy and Ireland,the changes have been substantial.Ingeneral,however,shiftsinthemultilateralsharesofaidaremainlyanindirectresult of decisions affecting donors bilateral programmes. Multilateral aid itself varies onlyslowlybecausedonorscontributionstoeachmultilateralagencyreplenishmentaretypicallylinkedtotheirrespectivenationalincome.Butdecisionstoboostorcurtailtheoverall level of aid are quickly reflected in a donors bilateral programme, and this affectsthebalancebetweentheirbilateralandmultilateralaid.ThusIrelandandLuxemburg,which increased their total aid substantially over the period, saw large reductions in themultilateralshare.Bycontrast,sharpcutsinaidbyFranceandItalyhaveboostedtheirmultilateral shares.2. TRENDS IN AID FLOWS2003 DEVELOPMENT CO-OPERATION REPORT ISBN 92-64-01961-8 OECD 200435Special factors explain some other substantial shifts. For example, Portugals bilateralODAwasunusuallyhighin 1992duetosubstantialforgivenessofprivatedebt.Thisreduced the multilateral share of its total ODA that year. By contrast, 1992 was also the yearin which Switzerland joined the World Bank, so its multilateral share was unusually high,reflecting the value of its initial capita