What is the case for aid?

8/8/2019 What is the case for aid?

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The Case for Aid in Fiscally Constrained Times

Andy Sumner and Michael Tribe 1

DSA Conference 2010

DRAFT

Abstract

Aid (Official Development Assistance ODA) is under pressure as fiscal constraintsmount in OECD countries. The arguments in favour of commitments by (mainly)

higher income countries to contribute financially through aid programmes todeveloping countries have been articulated by several writers over the years, buthave consistently been challenged. However, in these difficult economic times it isstill not that easy to find a coherent set of reasons in one place justifying ODA.

There are a several important questions: What is the case for aid? What are thedifferent ways of approaching the case for aid? Does the case for aid differ in fiscallyconstrained times? Does the case for aid differ by types of aid? Is the case in favourof aid affected by the nature of different types of aid, by its effectiveness, by theobjectives of donors, and by the criteria relating to its allocation between countries,purposes and sectors?

This note reviews the literature and aims to summarise cogently the main argumentsin favour of continuing substantial international aid programmes. These argumentshave a significant economic content, but also extend to moral and ethical issues andto political pressures. The discussion revolves largely around the reasons why higherincome countries should contribute ODA to developing countries, rather than to thereasons why developing countries should accept international aid from the donorcommunity.

1Respectively IDS and University of Bradford and University of Strathclyde. Correspondence to:

[email protected]@[email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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1. INTRODUCTION

We approach international aid (official development assistance ODA as definedby the OECDs Development Assistance Committee in Box 1) from a direction whichis essentially within the economics discipline, but with a multi-disciplinary mindset. A

distinction is often made between narrow and broad economics. The former isfocused principally on a positivist approach as opposed to a normative approach,while the latter is focused more broadly in an approach which may be described aspolitical economy or as heterodox economics.

We should make it clear that this paper attempts to go back to first principles inconsidering the arguments for ODA, and is at this point still in a preliminary form.We have not attempted to base the paper on a comprehensive review of the aidliterature for two reasons. First, in attempting to work on the basis of first principles ifwe had simply focused on critically summarising the literature our approach wouldhave been insufficiently radical. Second, the aid literature is vast and has several

distinctly different foci, so that for example the literature assessing developmentsin aid architecture would only be marginally relevant to discussion of the case forgiving ODA.

An example of a paper which took a notably different starting point to ours is that byAlesina and Dollar (2000). The following quotation states some of their main findingsvery clearly:

We find considerable evidence that the pattern of aid giving is dictatedby political and strategic considerations. An inefficient, economicallyclosed, mismanaged non-democratic former colony politically friendlyto its former colonizer, receives more foreign aid than another countrywith a similar level of poverty, a superior policy stance, but without apast as a colony. We also find significant differences between donors.Certain donors (notably the Nordic countries) respond more to thecorrect incentives, namely income levels, good institutions of thereceiving countries, and openness. Other countries (notably France)give to former colonies tied by political alliances, without much regardto other factors, including poverty levels or choice of politico-economicregimes. The United States [sic] pattern of aid giving is vastlyinfluenced by that countrys interest in the Middle East. (Alesina andDollar, 2000: 33-34).

This represents what might be considered as a revealed preference approach toanalysis i.e. which factors have actually accounted for ODA allocations. Thiscontrasts with the concerns of this paper which relate to a) which factors are widelyaccepted as justifying ODA allocations in principleand b) which are widely acceptedas the official criteriafor the allocation of ODA.

Collier and Dollar (1999) take a similar approach to that of Alesina and Dollar insearching for systematic factors accounting for aid allocations, and particularlyrelating these to poverty reduction objectives and to adequate policies. Again, thisdoes not lend itself to the first principles approach which is being attempted in thecurrent paper.


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Analysis of international aid within a more narrow positive economics approachdoes not allow for moral, ethical or value judgements, while the political economy orheterodox approach recognises that moral, ethical and value judgements arepossibly as much at the centre of concern as pure economic issues and oftencannot realistically be avoided. Positive economic analysis does not have much

regard for multidisciplinarity or for the broader approach, and we would argue thatthis narrowness limits its relevance to many of the important issues relating toanalysis of international aid and ODA, and particularly to systematic discussion ofthe case in favour of international aid. If narrow economists draw back fromdiscussion of the case for aid then broader economists might relish the opportunityto enter this intellectual exploration?

Box 1. The Definition of Official Development Assistance (ODA)

Official development assistance (ODA). Grants and concessional loans for development and welfare

purposes from the government sector of a donor country to a developing country or multilateralagency active in development. A loan is considered sufficiently concessional to be included in ODA if

it has a grant element1

of at least 25%, calculated at a 10% discount rate. ODA includes the costs tothe donor of project and programme aid, technical co-operation, forgiveness of debts not alreadyreported as ODA, food and emergency aid, and associated administrative expenses.*Other official flows (OOF). Consists of: i) grants or loans from the government sector not specificallydirected to development or welfare purposes (e.g. those given for commercial reasons) and ii) loansfrom the government sector which are for development and welfare, but which are not sufficientlyconcessional to qualify as ODA.Private flows at market terms. Flows for commercial reasons from the private sector of a donorcountry. Includes foreign direct investment, bank loans, and the purchase of developing countrybonds or securities by companies or individuals in donor countries.Private grants. Funds from non government organisations for development or welfare purposes.

1The grant element is measured as the difference between the face value of a loan and the present

value, calculated at a discount rate of 10%, of the service payments to be made by the borrowerduring the lifetime of the loan, expressed as a percentage of the face value.

Source: OECD-DAC. 2008.

We should make clear that this paper is focused on ODA, with the emphasis onofficial and so is relevant for bilateral and multilateral aid to developing countries,but not for aid contributed by NGOs. We have also excluded consideration of major

new initiatives such as the Global Alliance for Vaccines and Immunisation (GAVI)and the Gates Foundation which are not directly related to ODA. In addition it isworth noting that private remittances from developed market economies todeveloping countries now exceed ODA in global terms (Commission on Growth andDevelopment, 2008: 154).

ODA has a long history. The Development Decade of the 1960s (Encyclopedia of theNations, 2010) was a period of comparative optimism, and the Pearson Commission(Commission on International Development, 1969) and the Brandt Commission(Independent Commission on International Development, 1980) continued a similarintellectual tradition. The IFIs (International Financial Institutions) Structural

Adjustment Programmes in the 1970s, 1980s (and into the 1990s) changed the


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development agenda. However, the World Banks Comprehensive DevelopmentFramework combined with a shift to a poverty reduction and policy-related emphasisand the introduction of international debt write-offs in more recent years has againchanged the perspectives of international development and of the aid industry(Wolfensohn and Fischer, 2000).

Controversy has never been far away. There have been well-known authors arguingthe case for and against aid throughout this period, including Bauer (1972) andEasterly (2007). One of the most supportive cases in favour of foreign aid has beenarticulated recently by Sachs (2005), and Radelet (2003 and 2006) has producedsignificant contributions to the literature which are searchingly critical but withpositive conclusions. In this paper we aim to discuss the case for aid systematicallyand cogently without adoption of some of the more polemical slants which haveappeared in the literature.

There are many major single-authored, jointly-authored and edited books which have

focused on ODA, international aid, or plain foreign aid. A few of these have run tosecond or even third editions. In our review of the literature it has been apparent thatthere has been comparatively little attention to first principles in the sense of whyODA is given or accepted at all. We include is this literature recent contributionssuch as those by Riddell (2008), Cassen (1994), Lancaster (2000 and 2007),Lancaster and Van Dusen (2005) and Tarp and Hjertholm (2000), rather thanextending back to the 1960s and 1970s. In this context Riddells recent book is anotable exception.

There are, in addition, development texts which include substantial chapters andsections which review many significant issues relating to ODA. From the moreeconomic direction these include Todaro and Smith (10 th edition, 2008: Chapter 14)and Thirlwall (8th edition, 2006, Chapter 15). From a more multidisciplinaryDevelopment Studies direction basic texts which cover international aid quitesubstantially include Desai and Potter (2008: Chapter 10), Clark (2006: Chapter 29)and Chari and Corbridge (2008: Part 6)

2. THE CASE FOR ODA

We take the view that the case for aid can be placed within two distinct areas: firstly

the ethical or moral case, and secondly the self-interest case. The developmentalcase for aid bridges these two lines of argument (see Figure 1).2 A recentcontribution to the literature by Nixson takes a broad overview of many of the issuesraised in this paper (Nixson, 2007-2008).

Issues surrounding the effectiveness of aid is a second-order issue. If the objectivesestablished by the moral/ethical case, or by the self-interest case, are not effectivelyachieved then the arguments in favour of aid would be significantly weakened. Thiswill be explored in more detail in the third section of the paper.

2Most of this paper is concerned with exploration of the case to be made within developed countries

for aid to be given to developing countries. There is an obverse exploration of the case for developingcountries to accept (or not to accept) such aid which is not much touched upon.


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Figure 1 Summary of the Main Arguments in Favour of ODA

A) Ethical Moral Argumentsi) Compassion / Humanitarian

response to international poverty: international social justice

ii) Compensation recompense for the sins of the past colonialism, imperialism, slavery etc deterioration of international terms of trade (e.g. Stabex) climate change and environmental impacts

iii) Responses to disasters

B) Self-interesti) Mutuality income growth in LDCs creates markets for developed countries exports

and vice versa an interdependent worldii) Support for MNCs/FDI (e.g. infrastructure, education etc supply of essential materials

and agricultural products)iii) International security

2.a) The ethical case for aid

ODA, ethics and international social justice

The first argument in favour of richer countries giving aid to poorer countries is theethical, moral or humanitarian one which is similar to the argument for income beingtransferred from richer to poorer people within any one country. In other words themore privileged in global society give some of their income to those who are lessprivileged. In the context of discussion about the rationale for ODA we should be

clear that this is not related to private charitable income transfers, but isinternationally comparable with the adoption of progressive taxation and expenditureprogrammes by national governments. Some forms of conditionality and meanstesting may, or may not, be applied to such transfers. At the international level onefactor which needs to be recognised is that most richer countries have elements ofpoverty within their societies, and poorer countries have elements of privilege withintheirs. Thus, it is logical that international aid programmes which have povertyreduction objectives (such as the adoption of the MDGs) would not aim to enrich themore privileged groups within developing countries.

Box 2 Public Opinion and the Ethical Case for Aid

In a 1983 national opinion poll, people in Britain were asked if they believed rich countries shouldgive help to poorer countries: 71 per cent were in favour and 13 per cent against. Of those in favour78 per cent gave an ethical explanation for their positive attitude to aid, citing specifically morals,humanitarian reasons, conscience, duty, Christian duty, and the needs of the poor as the underlyingreason for their support. It is, moreover, not only the general public which has made reference toethical considerations when arguing the case for aid. In 1969 the Pearson Report answered thequestion Why Aid? as follows: The simplest answer to the question is a moral one; that it is only rightfor those who have to share with those who have not. Eleven years later, the Brandt Commissiongave as its motives for addressing the problems of Third World poverty human solidarity andcommitment to international social justice. (Riddell, 1986: 24)


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The quotation from Riddells 1986 article on the ethical case for aid which has beenreproduced in Box 2 makes it clear that in the mid-1980s public opinion gave ethics amajor role in the justification for aid. Riddells more recent major overview of aidcontains two chapters focussing on the moral case for aid (Riddell, 2008: Chapters 8

and 9) but other literature relating to international aid gives little attention to thisdimension of the case. Perhaps surprisingly contemporary surveys of public opinionsuggest that, although the numbers are somewhat lower than in the mid-1980s,there is still a strong public view that there is a moral/ethical argument in favour ofaid. A recent publication from the IDS, Sussex shows that, depending upon thenature of the question asked, between 50 percent and over 6 in 10 of a samplesupported the moral/ethical stance on aid (Henson and Lindstrom, 2010). This publicview transcends aid-weariness, international security threats and ideological shifts indeveloped market economies which might have changed public opinion somewhatmore.

Perhaps the most radical approach to the reform of ODA would be to embody ethicalprinciples into domestic and international fiscal policy. Discussion around whatcomes after the MDGs when the year 2015 is reached has in part focussed on theissue of whether aid transfers should be automatic rather than discretionary (i.e. atthe discretion of the donor countries see for example the discussion at the 2009Policy Forum in Brussels Tribe and Lafon, 2010). To what extent should at leastsome aid be provided as transfer payments through a form of internationallyprogressive taxation and grants? Although such a transfer payment system wouldresolve the issue of the source of funding, it would beg the question of thedestination of the transfer payments which countries would receive the aid andhow much would each receive? It would be possible to construct a composite indexbased on measures of poverty as a criterion for the destination of such aid if thefunding sources were to deposit the income transfers into a global fund but thiswould have to be associated with multilateral aid systems rather than bilateralsystems. Aid allocation between receiving countries, sectors and programmes wouldremain an issue.

ODA as Compensation

The second part of the moral/ethical case for aid relates to the issue ofcompensation from richer countries to poorer countries. One aspect of this case is

based on past sins or transgressions of the former colonial powers including theissue of the slave trade. To the extent that imperialism/colonialism exploited orimmiserated former colonies (which are now independent developing countries) it ispossible to argue that transfers should be made from the former colonial powers tothe countries which suffered from the exploitation. While such the logic and ethicalbasis for such an argument is appealing from many points of view it is clear thatmany contemporary higher income countries would argue that they were neverdirectly involved in the slave trade, and many developing countries might notthemselves have suffered directly from the slave trade.

The negative economic impact of the slave trade on developing countries which

were sources of slaves would have been based on the impact of the removal of an


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able-bodied swathe of the population reducing the productivity of the affectedeconomies on a cumulative basis. The economic impact of the slave trade can becompared with that of the extraction of mineral wealth (i.e. plundering rather thancommercial transactions recognising the property rights of the indigenouspopulation) in its immiserating effects.

It would be extremely difficult to place a value on the level of transfers which mightbe associated with this exploitation element of the case for aid, and many peoplewithin the richer countries would reject these arguments for compensation either onthe grounds that exploitation simply reflects the working out of legitimate marketforces, or that their particular country was not involved in the slave trade or in pastimperial/colonial exploitation. Equally, all developing countries were not involved inthese forms of colonial exploitation, and of those which were some were moreseriously affected than others. Fair and equitable compensation would be difficult toachieve even if the basic principle were to be accepted.

Another aspect of the compensation element of the argument relates tocontemporary, rather than past, exploitation either through movements of theinternational terms of trade against developing countries (and in favour of the richercountries), or through the process of richer countries seeking merchandise importsfrom countries which have significant reserves of cheap labour (perhaps aninternational variation of the Lewis model). This aspect of compensation has beenrecognised in two particular instances which recognise distinctly different logicalarguments:

i) In the World Banks 1994 review of the impact of Struc tural AdjustmentProgrammes on six sub-Saharan African countries the point was made that duringthe adjustment period ODA had been at a level which offset income lost throughdeterioration of the international terms of trade, implying that ODA had not made anynet contribution to these economies (Husain, 1994: 7). Although this type ofcompensatory link is uncommon in official discussions of aid policy the fact that itappeared in such an influential source is of great interest. These remarks relate tosecular deterioration in the net barter terms of trade and its impact on theinternational purchasing power of developing country exports, essentially based onthe well-established arguments of the Prebisch-Singer thesis and its derivatives.

ii) The EUs STABEX programme was devised in order to cushion the economic

impact of fluctuations in export earnings due to changing world market conditions(Aiello, 1999). The STABEX scheme was never intended to relate to thedeterioration of international terms of trade, but was explicitly focussed on theuncertainties created by fluctuating export revenues focussed on instability ratherthan on secular and sustained changes in international trading relationships.

Poverty Reduction through Economic Growth and Public Service Provision

A more dynamic framework consistent with the positive relationship betweeneconomic growth and poverty reduction in developing countries would emphasisethe role of ODA in contributing to sustained economic growth and to poverty

reduction. This contrasts with an approach which would emphasise a static form of


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income redistribution from high income countries to poorer countries. The linkbetween the growth of national income in developing countries and poverty reductionis provided by the poverty elasticity of growth.3 ODA which supports agricultural,industrial, infrastructural or trade development as part of the economic growth anddevelopment programmes of recipient countries is directly related to objectives of

long-term sustainable poverty reduction through the link between economic growthand reduced poverty.

The implication of this is that for aid to have a poverty-reducing role it does not haveto be committed to explicitly poverty-related project, programmes or policies. Equally,a broader definition of poverty which extends beyond income poverty means thatpublic health, water and sanitation and other social infrastructure developmentprogrammes usually have clear poverty-reducing impacts being evident inimprovements to Human Development Index or Human Poverty Index compositeindicators. These programmes often involve a public goods dimension in the sensethat benefits to the individual arise through community-based services.

Thus ODA-supported programmes can have a significant poverty-reducing rolethrough contributions to both the stimulation of economic growth and public serviceprovision (particularly water and sanitation, public health and education).

Climate Change and the Environment

Another form of compensation which is linked to ODA is that which recognises thenegative economic role which the demonstrable global environmental impact of highdeveloped country consumption levels (and global warming emission levels) ishaving on developing countries, and on their agricultural production in particular.This impact is an example of the transmission international external diseconomiesbut the forms of compensation which have been suggested, for example indocuments produced at the time of the 2009 international conference in Copenhagen(UNFCCC, 2008), have not usually been conceptualised as being part of ODA.However, in the new, wider, view of ODA which is reflected in Table 1 below thistype of financial flow needs to be included in consideration of the arguments forODA.

Conflict and Stress

One of the most challenging issues within international development has been therole of conflict and civil strife in dislocating economies and societies over longperiods of time. This has been problematic in sub-Saharan Africa and South EastAsia in particular, but extends to other regions as well. The response of the ODAsector to this problem has involved two prongs. First, the issue of contributionstowards attempting to control and resolve conflict, including international armedforces (which properly belongs to the security dimension of argument for ODA).Second is the contribution which can be made by ODA to recovery and rebuilding

3The poverty elasticity of growth links economic growth to poverty reduction (Heltberg, 2002;

McKinley, 2009), and is a more sophisticated approach to the growth/poverty relationship than that

provided by the Dollar and Kraay arguments in their Growth is Good for the Poor (Dollar and Kraay,2002 and 2004).


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fragmented economies and societies. It is the second of these which properlybelongs within the ethical/moral argument for ODA part of the application of theprinciples of international social justice (Fukuda-Parr, 2010).

Responses to Disasters

The final element of the moral/ethical case for aid relates to international responsesto disasters. This argument has an illustrious record and has become considerablymore sophisticated over the years now involving significant collaboration betweenbilateral aid agencies, international institutions and international NGOs.Governmental institutions contribute not only funds but also a coordinating andemergency response role.

2.b) The Self-Interest Case

Mutuality of Interest

It was as long ago as the Brandt Commission (Independent Commission on Growthand Development Issues, 1980) that the issue of mutuality of interest wasarticulated within an international public policy context. Essentially this aspect of thecase for ODA relies on the fact that the stimulation of stronger economic growth indeveloping countries creates demand for exports of goods and services fromdeveloped market economies which provide the ODA. More crudely this argumentcould be seen as supporting tied aid, which would give the mutuality a moreinstitutional dimension. However, the tying of ODA is not an essential part of theargument for the mutuality of interest.

A further argument which has been articulated in a political context relating tomutuality concerns the connection between international investment (particularlyforeign direct investment) and ODA. For example, there is narrow complementaritybetween the performance of foreign private investment and public investmentsupported by ODA in economic infrastructure (such as transportation, water andwaste management, energy and telecommunications) and in social infrastructure(such as education). There is a broader complementarity between the profitability offoreign private investment and ODA to the extent to which aid programmes improvegovernance and policy management (for example through the elements of the

CPIA) (Alexander, 2010; Burnside and Dollar, 2000; African Development BankGroup, 2009; World Bank, 2007; World Bank, 2009). Another broadercomplementarity can exist between the performance of foreign private investmentand ODA supporting social development programmes which enhance labourproductivity, although this may be less tangible and longer term in its impact.

International Security

The security dimension of the argument for ODA has been given much emphasisrecently (Mitchell, 2010). In the case of the United Kingdom this has recentlyparticularly been associated with policy concerning internationally collaborative

operations in Afghanistan which relate to direct military activity, to Afghan socio-


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economic development, and to the connection between domestic and internationalsecurity and its link to the Al Qaeda network. In the case of Afghanistan theinternational security dimension extends to the production and export of narcoticdrugs, and the ODA connection to this may be seen as including developmentprogrammes which can provide sustainable livelihoods in the absence of narcotic

drug production. The Iraqi situation has also related to allocations of internationalODA, as is clear from the US data in Table 1.

There are other aspects of the contemporary security case for ODA for whichSomalian developments have been relevant. Somalia is an example of a failed statewhich has experienced difficulty in maintaining a sustainable government andadministration. Meanwhile, immediate neighbours of Somalia have sufferedconsiderable disruption, and there have also been significant internationalramifications including piracy at sea, terrorist operations in East Africa, andinternational criminal activity.

In this context there is an issue over which parts of governments expendituresshould be regarded as part of their defence policy (and be allocated from thedefence component of national budgets) and which parts should be regarded as partof their international development policy (and be allocated from the ODA part ofnational budgets allowing for the broader definition of ODA outlined below).

There are other elements of the security dimension which relate to the provision oftraining of personnel, and equipment for, military and police forces in fragile andeven not-so-fragile states which need to be viewed within the context of ODA. Thiscan involve the strengthening of domestic police services (and judicial systems) inpursuit of greater stability of markets for goods and services and of personal securitywithin the ambit of some elements of the CPIA measure (refer to the citationsrelating to the CPIA above).

In the past the security dimension of ODA has been regarded as being related tomajor international military concerns, and the Cold War in particular. Aid to Pakistanand to Turkey, for example, have been viewed in this connection in the past.However, the Cold War is no more. Of course, recent arguments for the allocation ofODA to Pakistan would be more related to disaster relief (earthquake and floods)and to the security threat posed by Al Qaeda.

A final element of the security element of ODA might be represented by the meansof financing international peace-keeping operations, many of them undertaken by theUnited Nations, but there have been comparable operations undertaken by otherinternational bodies. The same issues relating to whether such funding should beregarded as part of defence expenditure or of ODA expenditure would occur.

2. c) The nature of ODA

Table 1 below is directly relevant to recent discussion about the nature of ODA in theUnited Kingdom. The definition of ODA from the OECDs DAC which has been

reproduced earlier in this paper does not limit ODA to aid flows emanating from only


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the principal aid institution in any one country. Thus, countries which have ODAprogrammes may have substantial flows from institutions other than the principal aidinstitution (DFID in the UK). Table 1 shows that USAID contributed only US$4.5billion to ODA in 2004 as compared with over US$6 billion from the Department ofState, and about another US$4 billion from other US government institutions. This

does not allow for the near US$18.5 billion indicated for the Iraq reconstruction andit is questionable whether this should be included in US ODA. At the time of writingcomparable recent data for the United Kingdom was not readily available.

Table 1 The Diversity of US Official Development AssistanceUS Foreign Aid Programs,2004(millions of dollars)

Department of StateRefugeeInternational Organizations and programsESF* (policy)NIS (distribution)

SEED (distribution)HIV/AIDS (distribution)Andean Counter-drug

Department of the TreasuryContributions to international financial institutions (IFIs)Technical Assistance and adviceDebt relief

Department of AgriculturePL-480 II (budget)

US Agency for International Development

DA, child survival, disaster

Millennium Challenge Cooperation

Peace Corps

InterAmerican Foundation

African Development Foundation

White HouseEmergency Fund for Complex Crises

Iraq reconstructiona

Other departments and agenciesb

7563203,263584

442488727

1,3831994

1,185

4,511

994

308

16

19

100

18,439

500-1,000

a. Iraq reconstruction funding is considered a one-time exceptional financing program.b. This is an estimate since data are not available for the technical assistance and otherprograms funded abroad by non-foreign affairs agencies. In 1994 OMB estimated about this amountfor these expenditures. Thus the amount reflected here could be construed as conservative.

Source: Lancaster and Van Dusen, 2005:14.


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2. d) ODA and fiscal constraints in OECD countries associated with the post-global crisis context

Two of the main issues implied by the title of this paper are those of whether the

fiscal constraints, and public expenditure cut-backs, which are currently beingexperienced across developed market economies, affect the factors justifyingallocations of ODA and the overall volumes of ODA.

We have stated that the arguments justifying ODA commitments to developingcountries set out in this paper have been based on first principles. In this sense theyare affected by short-term economic considerations affecting developed marketeconomies. Indeed, the mutuality of interests between ODA donors and recipientswould tend to suggest that continued ODA commitment might be part of the recoveryprocess. Arguments for ODA based on moral/ethical principles are certainly notaffected by short-term considerations based on the ramifications of the 2008-2009

credit crunch, and the same applies to arguments based on security considerationsand on long-term environmental considerations. There is still a long-termcommitment by the developed market economies to allocate 0.7 per cent of theirGDPs to foreign aid, and this is not affected by short-term factors.4

The issue of whether, at times when public expenditure is being cut in manydeveloped market economies, the aid budget should take its share of the cuts is adifferent order of question. Where individual donors have not reached the 0.7 percent target, a logical approach would suggest that efforts should be continued toreach that target implying that in several countries ODA allocations shouldcontinue to increase in real terms and as a proportion of GDP. In those developedmarket economies where the impact of the 2008-2009 credit crunch has been toreduce GDP then, perhaps perversely, the ratio of ODA to GDP might haveincreased (even with a constant level of ODA allocations in real terms) and the targetof 0.7 per cent could be closer to being achieved.

Perhaps the main difference of opinion between those who are supportive of themoral imperative for ODA allocations and those who are more sceptical wouldgovern attitudes over whether ODA should be cut in line with overall publicexpenditure cuts or whether ODA should be maintained at a steady level or beincreased.

One question is whether the cases for ODA which we have outlined i.e. the ethicaland the self-interest cases are significantly different during periods of fiscalconstraint in the aid donor (see Table 2). One could argue that the ethical case forODA is largely independent of the fiscal context in the donor country this case is along-term one. However, one could also say the compassion-ethical argument mightbe stronger, depending on the socio-economic situation in the potential recipient.What might be important is the relative impacts of the global crisis in recipient anddonor country.

4

For a critique of the 0.7% target see Clemens and Moss (2005).


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The self interest case for ODA may also be stronger in fiscally constrained times if itstimulates the global economy more than the same spend at home (but whether thiscan be accurately assessed is another matter).

Further, the self-interest arguments related to security might also be stronger. Again,

the impacts of the global crisis in recipient relative to the donor country mightshape the argument. If a fragile state was particularly badly impacted by the crisis(lost remittances, falls in exports, etc) the resultant pressure on the country mightform the basis of a self interest-security argument in favour of ODA which seeks toprevent further pressure on the country.

Table 2. The global case for ODA

Case for ODA Is this case for ODA stronger, weakeror neutral in fiscally constrained timesin ODA donor?

Ethical arguments

Compassion global socio-economicjustice

Stronger depending on economicsituation in recipient?

Compensation Same these are long-run arguments

Disaster relief Same given acuteness of need forexample Pakistan 2010

Self-interest arguments

Mutuality Stronger depending on the relativemultiplier effects on the global economy?

MNC inputs Stronger?

Security Stronger depending on the relativecrisis impacts on recipient and givercountry?

3. IMPLICATIONS OF THE CASE FOR ODA FOR CONTEMPORARY ANDEMERGING DEBATES

This section seeks to discuss how the case for ODA that has been outlined can berelated to contemporary and emerging debates on the practice of ODA and inparticular what ODA seeks to achieve i.e. aid effectiveness. This particularlyrelates to the ethical case for ODA and in particular the compassion/humanitarianand poverty reduction objectives of ODA but also can be related to the self-interest

case for ODA outlined and notably international security and/or political objectives of


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ODA (which in themselves raise ethical questions).

The case for ODA is in some ways independent of aid effectiveness but the casewould be weaker if aid does not really have a positive effect on the variables relativeto ethical and self-interest arguments.

We discuss here the case for ODA to contemporary debates on what ODA isseeking to achieve (aid effectiveness debates) and to the shifting nature of globalpoverty (linked to the ethical case for ODA) and in doing so seek to raise thequestion, is the case for ODA affected by the nature of the objectives of differenttypes of ODA.

3a. Contemporary debates on ODA

ODA and aid more broadly and aid effectiveness are going through somewhat of aferment (see detailed discussion in Evans 2010a). This ferment has several

dimensions as follows:

The goals, players and instruments of aid are all mushrooming (Severino andRay (2009; 2010);

The transparency and accountability revolution (see for details Barder 2009;2010).

The questioning of whether aid effectiveness debates have missed the point byfocusing on quantity or quality of aid rather than aid as a catalyst for economicor political change (Fischer 2010).

Key drivers of the rethink have been the changing landscape and nature of aid notably the new non-DAC donors (accounting for perhaps 15 per cent of globalODA) and other actors such as the foundations, the new modalities (innovativefinance mechanisms) and the likely dwarfing of traditional ODA by climate financing,as well as new institutions such as cash-on-delivery and output-based aid (seeBirdsall and Savedoff 2010).

In short, there is considerable ferment on what ODA hopes to achieve (as well aswhat actually counts as aid). Add to the mix some pressing timelines such as thatfor the Paris Declaration in December 2010, the high-level Seoul meeting in 2011and the post-MDG debates emerging following the September 2010 MDG summit,

and we have some fundamental questions that can relate the earlier discussions thecase for aid with the contemporary practice of ODA.

3b. The case for ODA and differing objectives of ODA

Historically aid objectives have included reducing international inequality; filling forexand savings gaps and more recently poverty reduction or intermediate variablesthought to be supportive of poverty reduction i.e. social sector spending, growth,infrastructure and good governance.

In particular, the social sectors have benefited from ODA increases over the last

decade (see Table 3). At a global level, bilateral ODA has gone up in absolute terms


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since 2000 from $46bn to $74bn and from 0.14% of donors GNI to 0.20 but actuallyfallen slightly as a percentage of recipients GNI. There has been a structural shifttowards social allocations and away from economic and productive sectors. Inabsolute terms, social sector, bilateral ODA spending has doubled 2000-2008 fromabout US$20bn/year to over US$40bn/year. In contrast production-sector ODA has

stagnated.

Table 3. ODA Disbursements to developing countries, 2000 and 2008.

2000 2008Net ODA from DAC countries, excl. debt relief (constant 2007 US$m)

Bilateral 46,454 74,120Multilateral 25,429 33,190

Net bilateral ODA (% of OECD-DAC donors GNI)Bilateral 0.14 0.20

Multilateral 0.07 0.09ODA from OECD-DAC donors to developing countries (% Recipients GNI) 0.7 0.6Sectoral Allocation of Bilateral ODA to from OECD-DAC donors todeveloping countries (by sector, % total)

Social Infrastructure and Services 50.2 57.9of which: Basic social services 15.8 14.2

Economic Infrastructure and Services 26.0 24.1Production Sectors 11.0 9.6

Multisector/Cross-Cutting 12.8 8.4Source: McKinley (2010) calculated from IDS-DAC online.

The move from productive sectors to social sectors, which one can partly attribute tothe MDGs, can be seen as a good thing (focus on achieving health and educationgoals which are important); but it can also be seen as a distortion as it gives the (atleast partly) impression that countries can have long-term sustainable progress ineducation and health without a well-functioning, inclusive and growing economy (Seediscussion in Bourguignon et al., 2008). Also, short run increases in social indicatorscould be achieved without any reduction in aid dependency or long-run structuralpolitical or economic change.

In short, the current situation is one where the objectives of ODA are open tocontestation and potentially large trade-offs between short run and long runobjectives. Further different donors and different projects have different objectivesthat may well not be complementary at all.

As noted above there is some consensus that the objective of ODA is to reducepoverty and this of course links to the earlier discussion of the ethical case for aid.The reduction of what exactly what in poverty reduction i.e. what types of povertyor deprivations are reduced differs by ODA donor and project.

The goal of development for the last 20 years has largely been growth-led povertyreduction as Barder (2009:2) argues but this objective needs revisiting because the

emphasis on the one goal poverty reduction defined as a permanentreduction in the global poverty headcount through economic growth has contributed both to poor program selection and poor programdesign and implementation, and it has thereby undermined the

effectiveness of aid [Further, a new agenda should,] not target a


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single measure of poverty reduction but explicitly manage a portfolio ofobjectives that (a) promote long-term and permanent changes indeveloping countries by investing resources and sharing knowledge;(b) tackle the causes of poverty by changing the policies of richcountries and investing in global public goods; (c) transfer income and

consumption from the worlds rich to the worlds poor to enable them tolive better lives while development is taking place, as a matter of globalsocial justice; and (d) target more assistance on those in chronic anddeep poverty. (Barder 2009: 2)

This discussion of ODA objectives can be related to the case for ODA thus if thecase for ODA is one an ethical one humanitarian/poverty reduction then the ethicalcase for ODA could be strengthened in the short run by quick, MDG-type results(more children in primary school) at the same time as the ethical case for ODA couldbe weakened in the long run if there was no structural political and economic changeleading to a reduction in aid dependency. This resonates with other calls for a new

approach to development objectives:

The objective, through economic development and statebuilding, istransformation of developing countries into middle class societies in whichcitizens hold their governments accountable for provision of physical securityand basic social services A good indicator of progress in transformation is agrowing middle class that has the economic heft and consequent politicalvoice to hold government accountable for the domestic social contract. (Birdsall 2009: 2)

This means the ethical basis for aid may actually raises deeper fundamentalquestions about that arise from governance objectives of some ODA those thatfund or seek to catalyse political change and the role of donors in domestic politicsand governance structures. Aid may seek to catalyse change by funding theprogressive forces and coalitions of pro-poor change. This means question marksover what are the ethics of intervening in other countries for the common good. Inshort the ethical case for ODA outlined earlier raises deeper ethical questions in thepractice and trade-offs arising from ODA objectives.

3c. The case for aid and the new geography of poverty

Alison Evans (2010a) has discussed the new geography of global poverty thatmany of the worlds poor live in middle income countries like India and Indonesia thatmay neither need or what ODA.

If the case for ODA is one of poverty reduction, where the poor live and whatresources their own governments have at their disposal are useful questions to pose.

Of the worlds US$1.25 poor 960m or 72% live, not in poor countries but in middleincome countries and most of them in stable, non-fragile MICs (see table 4 anddiscussion in Sumner, 2010). Only about a quarter of the worlds poor about370mn people or so live in the remaining 39 low-income countries (LICs), which

are largely in sub-Saharan Africa. These findings are similar across nutrition


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indicators and the UNDPs new multi-dimensional poverty index. Education children out of primary school - is an exception; 60% of the children out of primaryschool are in LICs and just 40% in MICS. This is a dramatic change from just twodecades ago when 93% of poor people lived in low-income countries.

What is new about this? The poor havent moved nor are these newly poor people.What has largely happened is the countries in which many of the worlds poor live inhave got richer in average per capita terms transitioning from LIC to MIC statusunder World Bank classifications whilst at the same time the number of poorpeople hasnt drastically fallen.

Table 4. Estimates of the change in global distribution of worlds $1.25/day poor (percentage)198890 and 20078

% of worlds poor Millions1988-90 2007-8 1988-90 2007-8

Middle-income countries (MIC) 7 72 120.88 956.57

MIC minus China and India 7 22 120.88 293.18MIC FCAS 1 11 18.25 143.51

MIC NON-FCAS 6 61 102.64 813.06Low-income countries (LIC) 93 28 1,547.13 370.76LIC minus China and India 31 28 408.68 370.76

LIC FCAS 13 12 210.08 156.38LIC NON-FCAS 80 16 1,337.05 214.38

Fragile and conflict-affected states (FCAS = 43) 14 23 228.33 299.90Sub-Sahara Africa 13 27 223.99 355.07Least Development Countries (50)* 14 25 241.06 334.98China and India 68 50 1,138.45 663.39

Total 100 100 1,668.02 1,328.69Source: Sumner (2010:14).

One read of this is that the case for ODA in some countries with substantial domesticresources is weakening or that global poverty may be increasingly turning from aninternational to a national distribution problem, potentially making governance anddomestic taxation and redistribution policies more importance than OfficialDevelopment Assistance (ODA). This is not to say the global distribution of wealthand assets is no longer important. Merely less so that was once the case.

The emerging powers the G20 minus G8 countries are home to most of the

worlds poor (the BRICS to more than half) and by the end of 2011, the Economistnotes, $7 trillion in foreign exchange reserves (half of which is accounted for byChina).

Further, many MICs are now donors themselves. Estimates of Indias aid programmeare $550m/year in 2008 and estimates of Chinas aid programme are in the region ofat least $1-2bn/year (Brazils aid programme is estimates at $1bn/year).5 This would

5For data estimates see:

Indias aid programme:http://blogs.cgdev.org/globaldevelopment/2010/10/india-emerges-as-an-aid-donor.php

Chinas aid programme:http://www.fas.org/sgp/crs/row/R40361.pdforhttp://www.cgdev.org/files/13953_file_Chinese_aid.pdf
http://blogs.cgdev.org/globaldevelopment/2010/10/india-emerges-as-an-aid-donor.phphttp://blogs.cgdev.org/globaldevelopment/2010/10/india-emerges-as-an-aid-donor.phphttp://blogs.cgdev.org/globaldevelopment/2010/10/india-emerges-as-an-aid-donor.phphttp://blogs.cgdev.org/globaldevelopment/2010/10/india-emerges-as-an-aid-donor.phphttp://www.fas.org/sgp/crs/row/R40361.pdfhttp://www.fas.org/sgp/crs/row/R40361.pdfhttp://www.fas.org/sgp/crs/row/R40361.pdfhttp://www.cgdev.org/files/13953_file_Chinese_aid.pdfhttp://www.cgdev.org/files/13953_file_Chinese_aid.pdfhttp://www.cgdev.org/files/13953_file_Chinese_aid.pdfhttp://www.fas.org/sgp/crs/row/R40361.pdfhttp://blogs.cgdev.org/globaldevelopment/2010/10/india-emerges-as-an-aid-donor.phphttp://blogs.cgdev.org/globaldevelopment/2010/10/india-emerges-as-an-aid-donor.php


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mean the new donors are set to overtake some DAC donors including Australia,Belgium, or Denmark. At the same time net annual ODA into India is $2.1bn and toChina $1.5bn (see Table 5).

Table 5. Selected large MICs and poor people, net ODA, aid dependency and forex reserves

Country Number of poorpeople (under

$1.25/day,millions, 2007)

Net ODA ($bn,2008)

Aid dependencyratio (2008, >9%

GNI = high)

Forex reserves(average

20082010,$bn)

China 207,559 1.5 0.0 1953.3India 455,830 2.1 0.2 279.0Indonesia 47,002 1.2 0.3 71.8Nigeria 88,592 1.3 0.7 53.0South Africa 11,528 1.1 0.4 42.0Sources: World Bank World Development Indicators; Global Development Finance (GDF);International Monetary Fund (IMF); Economist Intelligence Unit (EIU)

This raises questions over the ethical case for ODA flows to countries withsubstantial domestic resources and might lead to a wider discussion of aidinstruments and relationships beyond ODA.

Further, on the case for aid even if some middle income countries (MICs) cansupport their own poor people, others cannot (or more often the poor may lack voicein governance structures due to inequalities). Some MICs such as Pakistan are only just past the threshold and withdrawing aid suddenly might mean they slip back toLICs. Even when domestic resources appear more substantial political will may beambivalent. So in MICs the donor strategy should include a broader range of aidinstruments beyond resources - for example, focusing on issues such as trade,

migration, tax havens, innovative finance and climate change, Northern consumptionpatterns (i.e. the footprint of red meat) and security cooperation (the do no harmnarrative).

This is very different from the current donor approach to MICs because the currentapproach is still largely framed by money rather than a broader range of aidinstruments which may well include funding progressive forces such as CSOs.

Theres a further ethical debate for ODA and the international community in all ofthis. Is the international community committed to reduce poverty in some countriesnot all or in all countries? If the poor live in stable MICs, do those countries need aidflows or are domestic resources available? Whose responsibility are the poor inMICs donors or governments or both?

There are further questions that relate to the case for ODA: If most stable MICs dontneed aid judging by their aid dependency ratios (see Table 6) should aid flows beredirected to LICs, FCAS LICs and/or to global public goods? What should thedonor-recipient partnership/strategy and aid instruments for MICs be?

Brazils aid programme:http://www.odi.org.uk/resources/details.asp?id=5120&title=brazil-election-emerging-donor-aid
http://www.odi.org.uk/resources/details.asp?id=5120&title=brazil-election-emerging-donor-aidhttp://www.odi.org.uk/resources/details.asp?id=5120&title=brazil-election-emerging-donor-aidhttp://www.odi.org.uk/resources/details.asp?id=5120&title=brazil-election-emerging-donor-aidhttp://www.odi.org.uk/resources/details.asp?id=5120&title=brazil-election-emerging-donor-aidhttp://www.odi.org.uk/resources/details.asp?id=5120&title=brazil-election-emerging-donor-aidhttp://www.odi.org.uk/resources/details.asp?id=5120&title=brazil-election-emerging-donor-aid


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Table 6. Data on resources: Forex reserves, ODA and structural indicators in the 27 new MICsversus other groups (averages for countries with 2 data points)

Total reserves inmonths of imports

Net ODA received (%of GNI)

Net ODA received (%of gross capital

formation)

1988-90 2007-8 1988-90 2007-8 1988-90 2007-827 new MICS (2000-9) 1.3 5.0 7.0 5.8 40.4 28.4

MIC 2.9 5.3 7.2 4.5 33.6 15.7MIC FCAS 1.8 4.2 13.6 9.4 73.7 53.9

MIC NON-FCAS 3.1 5.5 6.1 3.3 26.5 8.3LIC 2.3 4.3 16.4 15.4 88.3 62.6

LIC FCAS 2.2 4.5 17.0 19.3 108.5 77.4LIC NON-FCAS 2.3 4.1 15.9 10.7 68.9 44.4

FCAS 2.1 4.4 15.7 15.5 95.9 68.9Sub-Sahara Africa 2.3 4.3 15.3 13.0 93.9 54.4LDCs 2.3 4.1 19.1 15.7 - 66.0

Source: Sumner (2010:21).

This would all suggest the global case for ODA as previously outlined, may not differnot only in fiscally constrained times in the giver but also by the type of country (seetable 7) and in particular the recipients (i) available domestic resources (proxies -LIC and MIC status) and their state capacities to deliver for their population afunctioning state (proxies - FCAS or non-FCAS status).

The ethical argument for ODA might be weaker if there were substantial domesticresources available (for example in stable MICs). However, the ethical argument iscomplicated because there is no guarantee the people who needed the resources

would be able to access them. Further, the self-interest case for ODA might bestronger in fragile and conflict-affected states depending on the crisis impact, speedof economic recovery and fiscal space available (estimated to be very limited in LICsby Oxfam, 2010).


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Table 7. Is the case for ODA stronger, weaker or neutral in fiscally constrained time and doesthis differ by type of recipient country?

Case for ODA Is this case for ODA stronger, weaker or neutral in fiscally constrainedtimes in ODA giver?

Global ODA LIC stable(e.g.Tanzania,Ghana)

LIC, FCAS(e.g. DRC,

MIC stable MIC FCAS(e.g.Nigeria,Pakistan)

Ethical arguments

Compassion Stronger ifimpactsworse inrecipient?

Stronger ifimpactsworse inrecipient?


Weaker ifsubstantialdomesticresources?

Weaker ifsubstantialdomesticresources?Mightdepend on

statecapacities todeliver.

Compensation Same aslong-runarguments

Same aslong-runarguments




Disaster relief Same dueto acutenessof need

Same dueto acutenessof need

Same dueto acutenessof need

Weaker ifsubstantialdomesticresources?

Weaker ifsubstantialdomesticresources?Might

depend onstatecapacities todeliver.

Self-interestarguments

Mutuality Stronger? Stronger? Stronger? Stronger? Stronger?

MNC inputs Stronger? Stronger? Stronger? Stronger? Stronger?

Security Stronger ifimpactsworse inrecipient?


Muchstronger ifimpactsworse inrecipient?


Muchstronger ifimpactsworse inrecipient?


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4. CONCLUSIONS

In this paper we have sought to present in one place a coherent set of argumentswhich can form the basis of a case for ODA at firstly, a global level of analysis andsecondly, how this argument might differ between different recipient countries.

The main points we make are as follows:

First, the ethical and self-interest case for ODA at a global level is based on 6components as follows: a) Ethical/Moral Arguments: i) Compassion, ii)Compensation, and iii) Responses to disasters and urgent needs; and b) self-interest: i) Mutuality of interest; ii) Support for MNCs and iii) Security.

Second, the compassion or international social justice case for aid is a very strongone, and underlies continuing public support for ODA programmes in developedmarket economies. There are issues over the extent to which the global social

justice argument should be transformed into forms of taxation and internationaltransfer payments which are automatic rather than discretionary and this hasbeen raised within the current debate over the future of the MDGs.

Third, the ethical case for ODA outlined is somewhat independent of fiscal context the case relates to the long-term. However, the self interest case for aid may bestronger in fiscally constrained times if ODA stimulates the global economy in thecontext of mutuality.

Fourth, the case for ODA is inter-related with ODA objectives (including aideffectiveness) and the new geography of poverty. Th is suggests that the globalarguments for ODA may not apply to all countries or to aid beyond ODA.

Fifth, the ethical case for ODA may be stronger in countries with more serious crisisimpacts and the self interest security case could be much stronger in fragile andconflict-affected states.

In sum, at the global, or general, level of argument the case for ODA is clear but atthe level of individual country ODA allocations the application of the principle may beconsiderably more difficult.

We have noted that ethical arguments which relate to such long term issues as theimpact of the slave trade of centuries ago can provide a general context within whichpart of the case for ODA can be articulated. However, because not all developingcountries were subject to the slave trade, because the economic impact would bedifficult to estimate with any accuracy, and because impacts on economicperformance by factors other than the slave trade will have been significant over theintervening centuries and decades, this principle can hardly be seriously consideredas one for the determination of individual ODA allocations in the 21 st century. Theremay, of course, be arguments concerning compensation for contemporary forms ofslavery, but these may be equally imponderable. A similar problem applies to theapplication of the principle of compensation for deterioration of the international

terms of trade affecting developing countries.


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We should also note that our frame of reference has related to countries which inthe context of ODA means governments. In some circumstances this createsdifficulties: i) a government may have resources and capability but for whateverreason governance structures are unresponsive to the needs of the poor, ii) there

are cases of failed states where in particular countries no effective government is inplace for periods of time.

Our frame of reference has also related to ODA as defined by the OECD DAC.However, ODA is far more complex than this definition encompasses. . For example,historically the UK has not included government-funded scholarships for developingcountry students but other European donors have done so. Other questions remainin terms of aid instruments beyond conventionally defined ODA? There is a do noharm narrative arguing that the North can help the South such as withcompensation relating to climate change negotiations, trade policy, migration policy,tax havens and innovative finance which are often not included within definitions of

ODA. These aid instruments are potentially larger financially than current ODA flowsto some countries.

Finally, we have alluded to the conclusions of Alesina and Dollar (2000) whichcontrast global arguments and principles supporting the case for ODA and the thereality of international politics, and history. Aid effectiveness and the policyenvironment is another important dimension of their argument. The US relationshipwith the Middle East (Egypt and Israel in particular) plays a significant role in USODA allocations; and the recent experience in Iraq and Afghanistan has had a majorimpact on the allocation of ODA internationally.


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What is the case for aid?

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