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ODA from developed countries: The ups and downs of aid flows

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
June 1983
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Ines Garcia-Thoumi

Independence came to much of the developing world less than 40 years ago. Since then, economic development has been its primary goal. Regardless of development strategy, developing countries require more capital than can be generated domestically, and most have relied heavily on official development assistance (ODA)—funds from official bilateral and multilateral sources that are either grants or loans primarily for development purposes, the latter with a grant element of at least 25 per cent. The countries belonging to the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD) mounted a common aid effort early in the 1960s and contributed all the ODA at that time. While new donors have recently emerged, DAC countries still account for over two thirds of official assistance flows. The members of DAC are Australia, Austria, Belgium, Canada, Denmark, Finland, France, the Federal Republic of Germany, Italy, Japan, the Netherlands, New Zealand, Norway, Sweden, Switzerland, the United Kingdom, the United States, and the Commission of the European Communities.

The volume of ODA from all sources combined grew by nearly 5.8 per cent annually in real terms over the past decade, a sharp increase from the 3.1 per cent average annual real growth between 1960 and 1970. Between 1960 and 1981, official development assistance more than doubled in real terms. Of the US$36 billion of ODA provided in 1981, 70 per cent came from the DAC countries and 20 per cent from the Organization of Petroleum Exporting Countries (OPEC) (Table 1). The aggregate figures conceal, however, the considerable changes that occurred not only in the amount and concessionality of the ODA flows from the DAC member countries, in particular, but also in their preferences between bilateral and multilateral assistance and the country distribution of recipients.

Table 1.Disbursements of ODA, 1960-81
1960197019801981
In billions of 1981 U.S. dollars
DAC countries15.817.926.425.6
OPEC1.08.97.9
Others2.52.12.1
15.821.437.435.6
In per cent
DAC countries100.083.670.671.9
OPEC4.723.822.2
Others11.75.65.9
100.0100.0100.0100.0
1960-701970-801980-81
Average annual
percentage change
in total3.15.8-4.7
Source: Organization for Economic Cooperation and Development, Development Co-operation- Efforts and Policies of the Members of the Development Assistance Committee, 1982 Review—Indicates zero.

Amount and terms

The volume of net ODA disbursements from the DAC countries rose between the early 1960s and 1970, but so did incomes in the industrial countries. Thus, their ODA as a share of gross national product (GNP), according to data provided by DAC, actually declined in real terms—from about 0.51 per cent in 1960 to 0.34 per cent by 1970. Currently, slightly more than one third of a penny of every GNP dollar is destined for official aid. In real terms, concessional assistance from DAC increased at an average annual rate of about 5 per cent between 1975 and 1980 and at about 4 per cent during the decade as a whole. Given the economic and financial circumstances prevailing in the industrial countries during the period, this could be considered a fair achievement. However, measured against productive capacity or the United Nations target of an ODA/GNP ratio of 0.7 per cent, the collective aid performance of the industrial countries has not improved since 1978.

The aggregate ODA/GNP ratios mask widely different performances by individual countries during the last decade. The Netherlands, Norway, Denmark, and Sweden set ambitious targets and achieved them, surpassing the 0.7 per cent of GNP target in the mid-1970s. Other countries have considerably increased the priority for aid. Among these, France reached the 0.7 target for ODA in 1981, Germany raised its ODA/GNP ratio from 0.32 per cent of GNP in 1970 to 0.47 per cent in 1981 and Japan continued to improve its ODA/GNP ratio to levels close to 0.3 per cent of GNP. It is also noteworthy that some countries with low ODA/GNP ratios, such as Austria, Finland, and Italy, are currently making determined efforts to improve them. On the other hand, the United States, albeit the largest DAC donor in absolute terms, continued to show a steady decline in the ODA/GNP ratio, amounting to a meager 0.2 per cent of GNP in 1981 (Table 2). A somewhat different picture emerges from an analysis of the per cent distribution of aid among donors. Whereas the Nordic countries and the Netherlands perform well in terms of per cent of GNP, their combined assistance in 1981 amounted to 13 per cent of total DAC aid. By contrast, Japan and the United States, with ODA/GNP ratios below the DAC average, contributed 35 per cent of total DAC aid in 1981.

Table 2.ODA from selected countries
Total 1981
In millions of 1981 U.S. dollarsNet disbursements as per cent of GNP
1970197519801981
Canada
Net disbursements1,1890.410.540.430.43
Net commitments1,489
France1
Net disbursements4,1770.660.620.640.73
Net commitments5,150
Germany
Net disbursements3.1810.320.400.440.47
Net commitments4,647
Italy
Net disbursements6660.160.110.170.19
Net commitments1,640
Japan
Net disbursements3,1710.230.230.320.28
Net commitments4,524
Netherlands
Net disbursements1.5100.610.751.031.08
Net commitments1,542
Sweden
Net disbursements9160.380.820.790.83
Net commitments933
United Kingdom
Net disbursements2,1950.390.390.350.44
Net commitments1,954
United States
Net disbursements5,7830.320.270.270.20
Net commitments7.201
Other
Net disbursements2,8470.230.470.450.47
Net commitments3,263
DAC Total
Net disbursements25,6350.340.360.380.35
Net commitments32,343
Source: Organization for Economic Cooperation and Development, Development Co-operation: Efforts and Policies of the Members of the Development Assistance Committee, 1982 Review.

As has already been noted, official development assistance has two characteristics: it is financing intended to promote economic development; and it is concessional—in that it contains a grant element of at least 25 per cent. In the last decade, the average grant element of ODA from DAC countries has ranged from over 40 per cent in loans from Austria and Italy to over 80 per cent in loans from Belgium, Canada, and Denmark. For the DAC countries as a group, the grant element of ODA loans in 1980-81 was about 60 per cent. Since, in the same year, grants accounted for 75 per cent of their total ODA commitments, the grant element of all ODA commitments amounted to almost 90 per cent.

In recent years, with world interest rates having risen considerably, the conventional 10 per cent discount rate assumed for DAC concessionality calculations may have been underestimated. Therefore, the true grant element probably exceeded the 60 per cent average for DAC loans. For individual donors, the exact grant element will depend on the terms of their loans and the opportunity cost of capital to them.

Multilateral and bilateral ODA

Development assistance is provided through multilateral institutions—principally the United Nations (UN), the European Community (EC), the International Development Association (IDA), and the regional development banks—or bilateral programs. The distribution of ODA between these two vehicles is the result of a variety of factors, in particular the donors’ perceptions of aid effectiveness and their own economic and political situations. In current circumstances, where there is a sense of disillusionment with the effectiveness of large-scale assistance and where virtually all donors face economic difficulties, aid agencies are emphasizing the immediate export and employment benefits of bilateral aid programs.

There seems to have been a turning point around 1977/1978, when a trend toward increased bilateral aid reemerged. Bilateral assistance increased from $4.1 billion in 1960 to $18.3 billion in 1981 but it fell as a percentage of GNP until 1977/78 (see chart). In the ensuing years of renewed “bilateralism,” a number of major themes recur: the maintenance and expansion of trade relations, investment opportunities, and access to natural resources; the protection and enhancement of cultural ties; the strengthening of national political influence; and the achievement of a more stable international order through the development of viable economies in the developing nations. It is the mixture and emphasis among these several themes that distinguishes the various bilateral programs. Up to 197778, national aid agencies pointed more toward the larger long-term political and economic benefits to be gained from building stronger economic partners. To achieve this goal, they provided increased support to multilateral agencies, particularly in the 1970s.

Aid effort as a percentage of GNP of the DAC countries, 1960-81

Source-Development Assistance Committee data.

Multilateral aid increased sharply, from $582 million in 1960 to $7.4 billion in 1981, and from 13 per cent of total ODA in 1960 to 29 per cent of total ODA in 1981 (although its share of total ODA has declined since 1978). In the last decade, while aggregate ODA from the DAC generally stagnated as a proportion of GNP, the ratio of multilateral contributions approximately doubled, from 0.06 per cent of GNP in 1970 to 0.10 per cent of GNP in 1981. In fact, contributions to multilateral programs have been a major factor accounting for the growth of ODA achieved by DAC countries in the last decade. The rising share of multilateral aid in total assistance reflects in part the increased contributions to IDA and the expansion of several existing regional development banks during the early 1970s.

The rise in allocations to the multilateral development banks in the early 1970s may be explained by a perception that these institutions can be particularly effective in promoting long-run development. Aid effectiveness depends heavily on the policies adopted by recipient countries, and multilateral institutions have an important role to play in giving advice on policy issues, both because of their capacity for macro-economic and sectoral analysis and their broad international experience with development problems. Through multilateral agencies, bilateral donors can identify projects which support long-term development strategies evolved in this way. At times, these strategies benefit sectors and countries that may not be so favored by individual bilateral programs. Thus, in the last decade, this process has resulted in an increased number of “aid consortia” or “aid coordination groups,” where multilateral and bilateral donors attempt to work hand in hand with recipients.

The revival of bilateralism inevitably introduces new constraints on the flexible and effective use of aid for development promotion. While the donors’ search for the more immediate benefits of aid is a legitimate objective, it is important to reconcile these concerns with the donors’ maintenance of support to multilateral institutions that have earned a reputation for undertaking sound infrastructure and agricultural projects in low-income countries. To the extent that governments recognize these efforts as being complementary to, rather than in competition with, their own goals, it is likely that the already existing coordination schemes will be further improved.

Donors and recipients

The latest available DAC data on the annual average geographic concentration of total ODA by donor for 1979 and 1980 indicate that France channeled more than 40 per cent of its ODA to its Overseas Departments and Territories. The United Kingdom has continued to direct a similar proportion to its former territories in South Asia (India, Pakistan, and Bangladesh received almost half) and in Africa (almost 10 per cent went to Tanzania, Zambia, and Kenya). Germany provided about 10 per cent of its concessional assistance to Turkey and more than 25 per cent to countries in Africa. The United States continued to concentrate its aid on Israel (which received about 19 per cent), Egypt (which received 14 per cent), and a number of other countries of key strategic interest. The Nordic countries channeled more than 15 per cent of their combined ODA to Tanzania and Vietnam. And more than 45 per cent of Japan’s recent ODA has gone to Asia, particularly East Asia (25 per cent).

In recent years, DAC has given considerable attention to the “geographic distribution” of ODA or the distribution of aid according to income. ODA from the DAC countries has been generally allocated according to such criteria as strategic foreign policy interests, historic ties, and human rights records, rather than per capita income. In fact, most of these aid links are with better-off developing countries (with 1980 per capita income of more than $600), which received about 40 per cent of total DAC aid in 1981. By contrast, the countries with per capita incomes of less than $410 in 1980 received only a third of total aid from DAC donors in 1981. Further, 60 per cent of the ODA from DAC in 1981 to the higher income countries was concentrated on ten countries; in descending order of importance these were Israel, Reunion, Turkey, Martinique, Philippines, Republic of Korea, Thailand, Papua New Guinea, Morocco, and Brazil. For all income groups combined, the main five recipients in 1981 were, in order: Egypt, India, Israel, Bangladesh, and Reunion. As regards the regional distribution of ODA from DAC countries, more than 60 per cent of the total went to Africa and Asia in 1975-81 (Table 3).

Table 3.Geographic distribution of ODA by DAC countries, 1975-81(In per cent)
1975197619771978197919801981Annual average 1975-81
Africa3033373735383836
Latin America1213121111111212
Asia3730252726242627
Middle East7911109768
Europe12224543
Unspecified11313131315151414
100100100100100100100100
Source: Organization for Economic Cooperation and Development. Geographical Distribution of Financial Flows to Developing Countries, 1978-1981.

ODA channeled by the multilateral agencies partly helps offset a bias of DAC aid toward the middle-income countries. Whereas only one third of total DAC aid went to the low-income countries in 1981, about half of ODA from multilateral agencies went to the same group of countries. In 1981, 90 per cent of IDA’S lending went to the poorer countries, and within that group, particularly to countries designated as the least developed.

Sectoral emphasis

Development assistance is currently broadly classified as project or nonproject aid. The sectoral spectrum of project aid covers identifiable investment activities, such as development of public utilities, agriculture, education, health, and industry and mining, as well as measures aimed at reaching certain development objectives with fixed resources and in a given time frame. The latter aid flows often include technical cooperation and program assistance. Project aid is preferred by the multilateral institutions, which have used it mainly to finance infrastructure and agricultural projects, as well as to provide balance of payments support for the low-income countries. The World Bank’s structural adjustment lending is also included in this classification. It provides support for a specified program of policy actions by governments and is, in principle, conditional on such actions.

By contrast, bilateral donors use their resources to support nonproject assistance. This is already a relatively large component of the aid programs of DAC countries (about 33 per cent) and is even higher when sector aid is included (45 per cent). Although the 45 per cent share in total bilateral aid remained about the same in 1981, there has been a declining trend in real terms in the volume of nonproject assistance from 1979/1980 to 1981. In 1981, one half of nonproject aid was allocated to financing with some emergency content, of which 40 per cent went to food aid and 60 per cent to general purpose contributions, such as balance of payments stabilization loans and budget support. In the same year, emergency financing (including emergency food aid, disaster relief, and debt relief) amounted to 11 per cent of non-project aid.

Prospects

There is widespread belief that the economic, budgetary, and political environment for aid programs has become increasingly difficult, giving rise to a generalized feeling of “aid fatigue,” that is, a feeling that current efforts are already sufficient and that efforts to redress domestic problems should take priority. Most governments and much public opinion are more concerned about the cost of aid in total budget expenditures rather than the ratio of aid to GNP. Aid represents a very small share of most donor governments’ budget expenditures—about 1 per cent on average in 1981, ranging from 0.4 per cent in Austria to over 2.5 per cent in Germany, Netherlands, Norway, Sweden, and Switzerland. Nevertheless, the slowdown in economic activity in the late 1970s, accompanied by more rapid inflation, has resulted in general pressure in donor countries to reduce public expenditures in an effort to contain inflation and rising public indebtedness, while rising unemployment, and energy and defense needs have imposed new claims on budgetary resources. Thus, governments have been able to reduce foreign aid commitments without the risk of incurring much opposition at home.

The prospects for maintaining the 4 per cent growth rate of aid achieved in the 1970s are not promising. While official statements have been made by a number of donors in support of an enlarged aid effort (Austria, Canada, Finland, and Italy have announced their intention to reach the UN target by the end of the decade), it will be hard to translate them into action, particularly now that the global economy is in a recession. Aid legislation continues to face difficulties in the U.S. Congress; there may be little or no growth in aid from the United Kingdom and Germany. These nations’ willingness to support the international system, in recognition that their economic future cannot be separated from that of developing countries, will continue to be tested in a period of economic and budgetary difficulties. All the official rationales expressed in international forums such as replenishment negotiations of concessional funds treat aid as a form of enlightened self-interest, benefiting donors as well as recipient developing countries. The positive response of donors to the needs of an interdependent world in the context, for example, of the Seventh IDA Replenishment negotiations will be a key factor in the continuation of the common aid effort of the industrial countries during the 1980s.

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