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Aid flows: the role of the DAC

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 1984
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Michael Blackwell

References to the DAC, the Development Assistance Committee of the Organization for Economic Cooperation and Development, are frequently made in discussions of development issues, but the exact nature and purposes of this Committee are often not well understood. The DAC is a forum in which representatives of the OECD’s major aid donor members meet on a regular and frequent basis to discuss ways in which the quantity and quality of their aid can be improved. The DAC has no formal authority over its members, but it has succeeded in specifying certain minimum standards of aid quality—for example, relating to the financial terms and minimum “grant element” of official development assistance (ODA)—that its members have agreed to follow. Through its Secretariat, the DAC has played a major role in collecting and standardizing statistics on aid flows and has provided expert and high quality analysis on a wide variety of development issues.

Currently the urgent financial needs of the developing countries cannot be met fully by the International Monetary Fund, the World Bank, and other multilateral financial institutions. Access by these countries to the international capital markets has been drastically reduced and in the case of many of the poorest countries is nonexistent. Under such conditions, the need for the industrial and balance of payments surplus countries to increase the volume and quality of their aid flows is particularly evident. Unfortunately, the worldwide recession that was one of the factors leading to the acute difficulties of the developing countries has led also to pressures in the donor countries to slow the growth of—and in some cases cut back on—their aid budgets. The DAC is perhaps doing more than any other international body to address these critical problems and create a consensus for improving the quantity and quality of aid.

Origins and functions

In the late 1950s, as an ever-growing number of developing countries were becoming, or were due to become, independent, the leading industrial countries became conscious of the need for increased consultations on how to coordinate and increase the effectiveness of their national aid programs. In consequence, in 1960 the Development Assistance Group was formed with Belgium, Canada, France, the Federal Republic of Germany, Italy, Japan, the Netherlands, Portugal, the United Kingdom, the United States, and the Commission of the European Communities as members. In September of the following year, the Group was transformed into one of the major committees of the newly established OECD. Since that time, despite the later departure of Portugal, membership of the Committee has grown steadily with the addition of Australia, Austria, Denmark, Finland, New Zealand, Norway, Sweden, and Switzerland. Representatives of the International Monetary Fund and of the World Bank attend Committee meetings as regular observers.

The terms of reference and objectives of the DAC remain the same as those elaborated by its forerunner, the Development Assistance Group. In the “Resolution on the Common Aid Effort,” adopted in March 1961, members stated that they were “convinced of the need to help the less developed countries to help themselves by increasing economic, financial, and technical assistance and by adapting this assistance to the requirements of the recipient countries.” The Resolution then set out a number of objectives, of which the most important was: “to secure an expansion of the aggregate volume of resources made available to the less developed countries and to improve their effectiveness”—in other words, to improve both the quantity and quality of aid resources. Other objectives involved studies of aid needs, donors’ aid performances, and burden sharing.

Participants in DAC meetings are usually members of permanent national delegations to the OECD, but they are often joined by officials from the ministries and operating agencies that deal with aid questions in the national capitals. Once each year a “high-level” meeting is held at which ministers, heads of governmental departments, or other senior officials discuss major policy questions. The Committee has a full-time chairman, usually chosen from senior academic or government circles; the present holder of this office is Rutherford M. Poats of the United States, a former Deputy Administrator of the U.S. Agency for International Development and Presidential Advisor. The Committee’s secretariat is composed of staff members from the OECD’s Development Cooperation Directorate, who, over the years, have undertaken a considerable amount of research on various development issues and who publish statistics that are a primary source of information on aid flows to developing countries.

Since 1967, the Secretariat has published comparative aid-giving performance tables, which indicate clearly which DAC members exceed and which fall short of the 0.7 percent ratio of ODA to GNP set as a target by the United Nations. The Secretariat also estimates as accurately as possible the aid performance of the OPEC countries, the East European countries, and other non-DAC countries.

The International Monetary Fund and the World Bank benefit from their presence at DAC meetings by the access it gives them to information on trends in aid flows and on national development assistance policies. The flow of information, however, goes in both directions, and the DAC benefits from the unique expertise that the Bretton Woods institutions can provide; for example, the Fund is frequently asked to comment on the overall economic outlook for the aid recipient countries and the World Bank to explain developments in the multilateral aid field. The participation of representatives from the Fund and the Bank is particularly useful for the DAC in discussions of subjects, such as the “policy dialogue” or strategies for growth in low-income countries, that are of concern to all three institutions.

Among the most important of the DAC’s regular meetings are the “Joint Aid Reviews.” Each year the DAC Secretariat undertakes a thorough individual analysis of each member country’s aid performance—covering such areas as policies, volume, terms and conditions, geographical and sectoral distribution, emergency programs, aid management and administration, technical cooperation, and environmental impact. In alternate years, each country can expect the report on its performance to be made the subject of a day-long discussion by other DAC members. At such discussions, a delegation from the country under review, often including the senior official of the national aid agency, comes to present the country’s record and take note of the questions raised and the advice offered by other DAC members. It is through such meetings, in particular, that the DAC as an institution attempts to encourage each of its members to improve its aid performance.

Although undoubtedly the DAC has had some influence on its members’ aid volume, it has had more influence on aid quality; for whereas the officials of national aid agencies present or represented at DAC Meetings have considerable responsibility for the way in which the aid cake can be cut, decisions on the size of the cake are generally taken at a governmental rather than at a ministerial level. In many DAC countries the Minister responsible for aid questions has often found it extremely difficult to convince government colleagues that increasing ODA should take precedence over other perhaps more politically popular claims on the country’s limited resources.

It is probably for this reason that, as noted in a recent article in Finance & Development (“ODA from developed countries” by Ines Garcia-Thoumi, June 1983), although the aggregate volume of ODA has increased steadily in real terms over the years—by about 5 per cent per year since 1977—the DAC has found it extremely difficult to persuade its members to increase this assistance as a proportion of GNP. In fact, in the decade after the Committee’s establishment the ODA/GNP ratio of disbursements from member countries fell from 0.53 percent in 1961 to 0.34 percent in 1970. ODA as a proportion of GNP remained close to that level throughout the 1970s, but has shown a slight upward trend over the past three years; indeed ODA disbursements in 1982 rose to 0.38 percent of GNP. Although this rise can be accounted for in part by a bunching of contributions to multilateral development agencies, it represents a significant achievement during a period of severe budgetary constraints in the donor countries. Some individual DAC members have been particularly successful in increasing their ODA/GNP ratios; indeed, ODA levels from Denmark, France, the Netherlands, Norway, and Sweden exceed the United Nations target of 0.7 percent of GNP.

Reaching a consensus to improve the quality of aid in different areas is often a lengthy process. Recently the difficulty of bringing so many disparate members together on issues that affect their budgets has been compounded by stringent economic conditions. This was evident in the recent discussions on “associated financing”. The agreement that was finally reached on this subject provides a typical example of the way in which the DAC perceives a problem in the development assistance field, analyzes and discusses it, and then proceeds to adopt relevant standards or guidelines to which the members agree to adhere. At the beginning of this decade, some DAC members were becoming concerned at the increasing incidence of associated financing—the use of ODA in association with other resources as a means of subsidizing national exports to the developing countries. The problem was discussed at the “high-level” meeting in 1981, where it was agreed that members should seek to establish guidelines to limit such financing. In the many ensuing meetings, the difference of views among members on this subject was so great that agreement on what joint action could be taken seemed impossible. Finally, however, in June 1983, agreement was reached on a set of guidelines, which, among other things, specified that associated financing should be confined to priority projects and programs meeting developmental criteria for ODA financing and should be provided with a grant element of at least 20 percent. To the extent that these guidelines are followed, it will be harder for DAC members to use aid to boost their own exports rather than to assist development.

As the result of a similar process, DAC members reached agreement in December 1982 on guidelines on aid for maintenance of capital stock. In this case members had expressed concern that as a result of the scarcity of budgetary and foreign exchange resources, exacerbated by the world recession, governments in many aid-recipient countries could not afford to maintain existing installations and public services. The guidelines agreed on the need for more aid to be channeled into maintenance and rehabilitation, particularly in the least developed countries. The guidelines also called on DAC members to ensure that in the design of any new aid projects the planned level of ongoing maintenance would not be beyond the technical and financial capacity of the recipient country, and that, where relevant, the aid donor should commit itself to pay some of the maintenance and recurrent costs of the project over an appropriate period.

Apart from its goal-setting role, the DAC can also have a beneficial impact on the aid performance of its members by providing them with the opportunity to share their expertise and experiences. During 1983, for example, the DAC held lengthy discussions on the role of women in development, aid evaluation, how to strengthen the export capacity of low-income countries, aid to agriculture, and cooperation among aid donors—in each case, at the discussions around the table and in subsequent informal contacts, delegates were able to evaluate the experience of others and reflect on the implications for their own aid programs.

Overview

Although the DAC has not been as successful as its founders hoped in boosting the volume of official development assistance, it has served a useful and beneficial purpose. In many areas DAC statistics provide a unique source of reference on financial flows from the industrial to the developing countries. In addition, the DAC has done much to help coordinate the efforts made by the world’s principal aid donors, and through effective moral suasion has spurred them on to improve the quality and, in many cases, the real value of their aid programs. While prospects for aid flows might not be as bright as many would wish, without the existence of the DAC they might well be dimmer.

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