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30 Years of economics for development

Foreign Aid: Down but Not Out

Peter Burnell

The UN Doha Follow-up International Conference on Financing for Development, held late in 2008, reminds us of how far foreign aid has come but also how far there is to go since the Monterrey International Conference on Financing for Development in 2002. It is worth reminding ourselves about the background to Monterrey and the consensus on the difference that conference was supposed to make. Official development assistance (ODA) peaked in the early 1990s and subsequent trends appeared to confirm predictions of inexorable decline. All major donors reduced ODA relative to gross national income (GNI); by 2000 the DAC states were providing a smaller share (0.22 per cent) than at any time since the late 1940s, moving further away from the 0.7 per cent target the UN General Assembly adopted in 1970. Over the decade, annual ODA flows in real terms declined by around 10 per cent, and by 40 per cent to Sub-Saharan Africa, which has the highest concentration of least developed countries.

A widespread perception emerged that there was growing ‘aid fatigue’ among the public, articulated by both the political left and the more influential right, fuelled by doubts about aid’s effectiveness even with respect to ethically-rooted development objectives. Consequently, aid’s future was judged ‘precarious’ as recently as 2000.

Reasons for the Decline in ODA

The reasons behind the trends are well known. Pre-eminent was the collapse of the Soviet Union. This dramatically reduced US support both for bilateral and multilateral ODA, driven from 1945 to 1990 – when the United States was top donor – by national security and geopolitical strategic concerns. In Japan, the largest ODA provider for most of the 1990s, recession caused popular and government support to sag as the decade wore on. Germany’s willingness to continue its historically large ODA was undermined by the financial, economic, and political costs of reunification. The European Union (EU), while vying to become one of the world’s leading donors by volume (together with member states’ bilateral aid, the EU accounts for just over half of all ODA), became more preoccupied with its own internal agenda: enlargement to the east (a major drain on EU finances), deeper political integration, and preparation for the single currency. Aid budgets were a soft target, as member states sought to restrain public spending so as to satisfy the convergence criteria for monetary union. In the UK, where the incoming Labour government in May 1997 endorsed the Conservative Party’s animus against overt increases in direct taxation, pressure to allocate more resources to domestic social policy was trailed as a political priority. The newly rich countries of East Asia showed no inclination to share the burdens of international assistance, let alone fill the gap left by large former donors like Saudi Arabia and the Soviet Union. Then came the Asian financial crisis (1997), generating requests for massive external financial support from the International Monetary Fund (IMF).

Furthermore, in many countries the increasingly onerous foreign debt overhang appeared to confirm these doubts, suggesting that new aid, particularly loans, would only compound the problem. An ideology of international political economy that privileges private capital flows and trade over aid became increasingly influential, shifting responsibility for development to the developing and transition economies themselves. In the late 1990s, dramatically increased foreign corporate investment and commercial bank lending to a few developing countries in East Asia (primarily China) and Latin America made ODA look increasingly insignificant. Certain favourable developments made aid look less essential anyway. For example, peace became the norm in Central America. It was expected that post-apartheid South Africa would provide an engine of growth for all southern Africa. A more stable Middle East involving peace between Israel and the Palestinians looked a real possibility after the 1991 Gulf War.

A New spirit

Subsequent developments suggest that trends finally turned the corner. Thus prior to the 2002 Monterrey Conference on Financing for Development the Bush administration unexpectedly revealed proposals to increase its bilateral aid. The promised increase involved an extra US$10 billion over 2004–06, of which US$5 billion would appear in 2006 (subsequently a new government agency – the Millennium Challenge Corporation – was announced as being responsible for distributing the funds). This ‘Millennium Challenge Account’ followed an EU pledge to increase ODA by up to US$7 billion annually by 2006. EU member states agreed to raise their minimum contribution to the EU’s current average (0.33 per cent of GNI), entailing an extra €22 billion and raising the average to 0.39 per cent. The combined US and EU pledges would raise the DAC ODA/GNI ratio from 0.22 per cent to 0.24 per cent (assuming annual real income growth averages 2.5 per cent) – still a long way from the 0.33 per cent of 1990–92. President Bush, in his State of the Union address in 2003, again surprised his detractors, by increasing by US$10 billion to US$15 a 5-year emergency plan for AIDS relief in Africa and the Caribbean. This put pressure on European leaders to consider a matching commitment.

Observers interpreted the millennium challenge as a signal that the US was becoming more open to persuasion that aid might be developmentally efficacious in certain circumstances. In the words of Jeffrey Sachs the ‘US is waking up from a 20-year sleep in the development field. We can forgive them for not immediately knowing everything that has been happening during their slumbers’ (Financial Times, 25 March 2002).

Some years on, there does now seem to be more enthusiasm to move the debate forward. One example has been the endeavour to unlock ‘added value’ in our understanding of complex development and aid issues by combining interest in ODA effectiveness with the analytical framework offered by public goods theory. The demand for international/global public goods of all descriptions – which according to one estimate accounts for only 9 per cent of aid (a further 30 per cent is allocated to national public goods) – looks bound to increase, so fuelling demands for much more aid. Indeed, major issues where aid is invited to contribute range ever more widely, from meeting refugee and humanitarian crises (in the 1990s a significant growth area for aid) to combating illicit drug production and trafficking, checking the spread of communicable diseases and addressing environmental threats generally and global warming specifically, all features of the new security agenda. Target-setting remains in fashion too: the UN ‘World Summit on Sustainable Development’ (September 2002) agreed to halve the number of people without access to sanitation facilities and safe water to one billion by 2015. This will require substantial amounts of aid, as will several of the UN Millennium Development Goals that look unlikely to be achieved in many countries: halving before going on to eradicate extreme poverty is but one example.

Economists, too, regained the courage to reassert some good news about aid, contrasting with previous years’ emphasis on doubts and reservations. Notwithstanding the continuing high profile of some vocal critics, the positive association between aid inflows and economic growth has been restated, noting that even aid not directed into investment can usefully benefit welfare and development. The case for stepping up assistance to help developing countries address climate mitigation as well as adaptation, in the run-up to international agreement on a successor to the Kyoto Protocol, looks stronger than ever. But now comes the international financial crisis and the prospect of global economic recession, serving to remind us that while ODA remains part of a much bigger financial picture its role in insulating and supporting developing countries – the most vulnerable social groups in particular - continues to be critical.

Concluding Remarks

Despite the ill omens of the early 1990s, reports of aid’s death were greatly exaggerated. But although the prospects for aid subsequently began to brighten, it must be kept in mind that promises of more aid often do not materialize. The aspiration of 0.7 per cent of GNP for ODA to developing countries by 2015 and 0.15 to 0.20 of GNP for ODA to the least developed countries remains intact for now. But very recent trends do give some cause for concern, among them the volume of new aid disbursements, the rising debt stock of developing countries as a group, and what the Doha Declaration calls a growing need for more systematic and universal ways to follow the quantity, quality and effectiveness of aid flows. This last criteria stands as a warning that long running intellectual battles over aid’s worth in practice could so easily flare up again.

Furthermore, aid’s inevitable political drivers mean we cannot be certain that ODA will be more substantially reallocated to countries with policy environments that favour pro-poor development. Economists advise us that in countries with weak institutions an increase in poorly-targeted aid can actually harm prospects for sustainable development – and frustrate effective democratic governance. Nevertheless, that may well not be sufficient to prevent some aid going to such countries. Conversely, political neglect and internal political malaise like that in Zimbabwe will mean that the societies which most need help (in Africa especially) may not get the amounts and kinds of assistance they need. That aid has always been inter alia a political instrument harnessed to the pursuit of national interests by rich powerful states is hardly news; but the emergence of China on the world stage and the re-emergence of Russian political ambitions are giving it a subtle new twist. The significance for a revitalised aid industry and its future prospects in the light of Doha’s call to renew or maintain and increase the aid momentum should not now be underestimated either.

The world must await the proposed 2009 UN meeting to examine the impact of the global financial crisis on development, to see how far the developed world’s commitment to foreign aid really does stand up to the test that deepening economic recession and the need to restructure at home will surely bring. But one thing is for certain: the current financial crisis and the serious weaknesses in the international financial system that it has revealed make a compelling case for international agreement on bold steps to reform and strengthen the international financial architecture. This could represent both a challenge and an opportunity for the evolving aid regime.

WIDER Angle newsletter, January 2009

ISSN 1238-9544



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