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Economic aid reconsidered A fresh look at development aid: Major findings of a Development Committee task force

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 1986
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Shahid Javed Burki and Robert L. Ayres

There has been considerable rethinking of development strategies in recent years, prompted in part by the great divergence in the performance of developing countries over the last 30 years. Developing countries today are characterized by considerably more diversity than they showed in the mid-1950s, which suggests that universal prescriptions are less valid now than they were when the discipline of development economics was in its infancy. The debate over approaches to development includes a number of new and some perennial issues, such as the respective roles of the public and private sectors, encouragement of greater export orientation in developing economies, new approaches to poverty alleviation, and the harmonization of economic stabilization and growth policies. It is only natural that the intellectual ferment about alternative development strategies should also include debate about the role of official development assistance (ODA) (also known as concessional flows or, more commonly, as aid). This is because aid has played a central role in the development of many nations—including middle-income countries, such as Colombia and the Republic of Korea, that have “graduated” from concessional assistance, and low-income countries, such as those of sub-Saharan Africa that still depend heavily upon it for sizable proportions of their investment resources.

The aid debate of the early 1980s has had several prominent themes. One is the effectiveness of aid. A number of donor governments as well as academic and journalistic observers have been taking a harder look at how effectively aid has contributed to development. A second theme is the support for aid in donor countries. There is a perception in some quarters that such support has declined among both the general public and political leaders. This situation is often summed up in the phrase “aid fatigue.” A third issue is the volume of aid: how much is required to meet the developmental needs of recipients? What are those needs? These themes are seen to be interrelated in a number of complex and important ways. For example, a demonstration of aid’s effectiveness might serve to increase public support for it and thereby contribute to increases in its volume.

The early 1980s have also witnessed the increasing politicization of aid and the in creased mixing of aid with the foreign policy and commercial objectives of donors. The bilateral aid programs of a number of donors have become increasingly concentrated on countries of geopolitical interest. One unfortunate consequence of this tendency is that poor countries lacking a central place in donors’ larger foreign policy concerns receive a disproportionately small amount of aid. (See Tables 1 and 2.)

Table 1Changes in distribution of ODA, 1975–83(In millions of US dollars)
197519801983
Country groupAmountPercentAmountPercentAmountPercent
Low-income6,627.741.79,773.738.39,865.841.5
Africa2,097.013.24,626.117.44,326.018.2
India1,708.610.71,127.18.01,720.07.2
China0.00.066.10.2663.22.8
Other2,822.117.73,954.414.93,156.613.3
Middle-income9,226.858.015,544.458.613,715.057.7
High-income49.30.3203.50.8169.70.7
Total15,903.8100.025,521.6100.023,750.5100.0
Source: The data on aid flows are from: OECD, Geographical Distribution of Financial Flows to Developing Countries (Paris, various issues). The country classifications are derived from the World Bank, World Development Report 1985 (New York, Oxford University Press, 1985).Note: Low-income countries are those with 1983 GNP per capita of $400 or less.Middle-income countries are those with 1983 GNP per capita between $400 and $6,850, excluding three industrial market economies (Italy, Ireland, and Spain) and one oil exporter (Oman). These exceptions are included in the high-income group.
Source: The data on aid flows are from: OECD, Geographical Distribution of Financial Flows to Developing Countries (Paris, various issues). The country classifications are derived from the World Bank, World Development Report 1985 (New York, Oxford University Press, 1985).Note: Low-income countries are those with 1983 GNP per capita of $400 or less.Middle-income countries are those with 1983 GNP per capita between $400 and $6,850, excluding three industrial market economies (Italy, Ireland, and Spain) and one oil exporter (Oman). These exceptions are included in the high-income group.
Table 2Ranking of 25 major recipients of aid, 1973–83
By total cumulative

ODA receipts

(In millions of US dollars)
By average annual ODA

receipts per capita

(In US dollars)
1. Egypt17,750.91. Jordan209.87
2. India16,789.62. Israel185.53
3. Syrian Arab Republic10,193.93. Oman118.06
4. Bangladesh10,185.14. Syrian Arab Republic97.55
5. Pakistan8,364.15. Mauritania95.71
6. Israel8,163.46. Papua New Guinea92.28
7. Indonesia8,086.87. Lebanon56.17
8. Jordan7,156.78. Somalia54.27
9. Sudan4,972.59. Yemen, People’s Dem. Rep.45.38
10. Tanzania4,817.410. Jamaica41.86
11. Morocco4,026.411. Congo, People’s Rep.41.63
12. Turkey3,978.712. Lesotho40.98
13. Viet Nam3,386.813. Egypt36.43
14. Zaire3,199.614. Senegal36.24
15. Papua New Guinea3,246.715. Yemen Arab Republic35.37
16. Kenya2,993.816. Nicaragua33.22
17. Sri Lanka2,965.017. Tunisia31.45
18. Yemen Arab Republic2,918.418. Liberia30.49
19. Philippines2,884.619. Central African Republic27.64
20. Thailand2,822.820. Zambia27.36
21. Somalia2,686.421. Costa Rica27.19
22. Senegal2,392.122. Niger26.13
23. Tunisia2,318.023. Togo24.94
24. Burma2,218.924. Mali22.86
25. Korea, Rep. of2,051.125. Burkina Faso22.76
Source: OECD, Geographical Distribution of Financial Flows to Developing Countries (Paris, various issues).
Source: OECD, Geographical Distribution of Financial Flows to Developing Countries (Paris, various issues).

Moreover, aid volume, after growing at an annual average rate of about 6 percent in real terms during the 1970s, began to stagnate after 1980, and even declined in real terms from 1981 to 1983. At the same time, most developing countries were confronting an external environment that had become grim and inhospitable to development as a consequence of the most severe global recession since the 1930s compounded by increases in oil prices, interest rates, and debt-servicing difficulties. Growth rates slowed in most countries (and even turned negative in some).

These various circumstances persuaded some governments to begin to seek a new political consensus on the relationship between developed and developing countries, including the role of aid. This in turn resulted in the creation of several task forces of the Development Committee (the Joint Ministerial Committee of the Boards of Governors of the Bank and the Fund on the Transfer of Real Resources to Developing Countries): one studied issues of private direct investment in developing countries, another the role of nonconcessional flows. Several years ago three members of the Committee—Canada, the Netherlands, and the Nordic constituency—urged the creation of a Task Force on Concessional Flows. The Task Force was officially established at the May 1982 meeting of the Development Committee in Helsinki to study and assess the flows of short- and long-term ODA, their use, and their effectiveness, with a view to enhancing the quality and volume of such aid. (Its membership and methods of operation are detailed in the accompanying box.) The Task Force concluded its work with the presentation of its final report at the Committee’s meeting in Seoul in October 1985. The report contributes to the current debate about development strategies and the role that aid plays in them.

The Task Force took a decision at its first meeting, in October 1982, that influenced all its subsequent work. It decided that the major issues about aid could most fruitfully be approached in a systemic manner, that is, in a way that examined the relationships between the effectiveness of aid, political support for aid, and the volume of aid flows. While the Task Force carried out separate investigations in each of these areas, it called frequent attention to the links between them. It gave particular attention to the link between the volume and the effectiveness of aid. This article presents the principal findings of the Task Force and its analysis of the conditions that govern aid flows and their effectiveness.

Effectiveness of aid

The Task Force investigated the subject of aid effectiveness by carrying out a systematic review of four central aspects of concessional aid: its contributions to (1) economic growth of recipient countries; (2) poverty alleviation, particularly in the poorest countries; (3) improved policies and institutions through “policy dialogue” and the provision of technical assistance; and (4) enhanced market forces and development of the private sector. (For a detailed discussion of aid effectiveness, see the article by Robert Cassen in this issue.)

The most important conclusion reached by the Task Force in this area was that aid has been productive and helpful to development; without it, a number of countries would not have been able to graduate from the ranks of poor to middle-income nations, and the countries that remain poor would have been still poorer. In some cases, aid has been spectacularly successful—for example, the “Green Revolution” in South Asian agriculture was greatly facilitated by aid for agricultural research, credit, and improvements in infrastructure. In sub-Saharan Africa, where much aid has been legitimately criticized for not achieving fully its intended objectives, aid nevertheless has contributed significantly to the development of basic infrastructure—roads, dams, ports, and telecommunications facilities. A good example is the development of a national road network in Malawi, financed by aid. Educational development in sub-Saharan Africa has also been greatly stimulated by aid.

The Task Force recognized, however, that in some situations aid has been much less effective. In general it has had a better record in Asia than in Africa. For example, despite the commitment of large amounts of aid to African agriculture, food output per capita declined in 23 out of 33 countries in the region between 1975 and 1982 (based on most recent data available; there were no data for six other countries). This was a major reason for the stagnation (and even decline in some countries) in overall growth of per capita income. Even though the many reasons for retarded development in sub-Saharan Africa do not include aid as the main factor, aid donors could have done better—in encouraging more appropriate technical packages for rainfed agriculture, for example, or in displaying greater awareness of local conditions affecting production and employment..

Operations of the Task Force on Concessional Flows

Established in May 1982, the Task Force on Concessional Flows comprised governmental representatives from a diverse group of industrial and developing countries. The countries represented were Belgium, Canada, China, Costa Rica, the Dominican Republic, the Federal Republic of Germany, Finland, France, India, Indonesia, Italy, Japan, Kuwait, the Netherlands, Saudi Arabia, Senegal, Tanzania, the United Kingdom, and the United States. Belgium and Italy shared representation, alternating attendance at meetings. Professor John P. Lewis of the Woodrow Wilson School of Public and International Affairs at Princeton University was the Chairman. The work of the Task Force was carried out in a series of eight meetings from October 1982 to August 1985. Between meetings the Secretariat, provided by the World Bank’s International Relations Department, prepared issues papers and other supporting documentation for the members’ consideration.

To assist its work on the effectiveness of aid, the Task Force engaged a team of independent consultants, under the guidance of Professor Robert Cassen of the Institute of Development Studies. University of Sussex, to carry out a number of studies financed by contributions from some of the member governments themselves. The consultants examined aid effectiveness in seven countries—Bangladesh, Colombia, India, Kenya, Korea, Malawi, and Mali—and in a number of sectors. The Task Force’s judgments about the effectiveness of aid were assisted by, but not limited to, the consultants’ inquiries.

In the area of aid volume the Task Force reviewed the work of a study group of Dutch and Nordic experts established under its auspices to look at the possibilities for raising concessional resources by various “non-traditional” means—for example, seabed royalties and international taxes—that would not impose claims on donors’ national budgets. It concluded that “at the present time, there is no real scope for increasing ODA by such means.”

The Task Force also commissioned two consultants’ studies on the support for aid. One, prepared under the auspices of the Overseas Development Council, in Washington, DC, analyzed support in the United States and Canada; the other, prepared under the auspices of the Overseas Development Institute in London, analyzed support in Europe. In addition, donor-country members of the Task Force contributed papers on the nature of the support for aid in their respective countries.

Examination of the successes and failures of aid led the Task Force to conclude that there is considerable room for increasing the effectiveness of aid, both in how recipients use it and how donors supply it. For example, countries that receive aid need to devote greater attention to domestic resource mobilization so that aid resources complement local efforts rather than substitute for them. The effectiveness of both internal and external resources can be negated by bad policies, such as official pricing policies that act as disincentives to private producers or artificially overvalued currencies that discourage exports. Where macroeconomic policies are not designed to support long-term development, aid will be less productive.

But donors need to undertake reforms as well. Most important, they should display a greater awareness of the impact of their economic policies on the development prospects of recipient countries. Donors’ non-aid policies (on trade, for example) can have an indirect but substantial impact on the effectiveness of aid. Certain policies, such as the practice of “tying” aid to the purchase of goods and services in the donor country, reduce the contribution to development that aid can make. Donors also need to learn more from their own experience and those of other donors. In many cases donors have deliberately promoted “white elephants” based on noneconomic factors.

The importance to aid effectiveness of supportive recipient and donor policies underscores the need to coordinate development and aid more closely. Coordination must take several forms—between donors, between donors and recipients, and within various development agencies and departments working in recipient countries. The mechanisms for achieving this include consultative groups and aid consortia, greater coordination by central agencies within recipient countries, and better coordination in the field among aid donors.

One of the more important conclusions about aid effectiveness reached by the Task Force concerned the inadequacy of existing efforts at “learning by doing.” Transfer of information about successes and failures has not been adequate or effective within most aid agencies, and it has been even less effective between them. Individual donor agencies can improve the efficiency of the learning process in a number of ways, such as making information about their project and program experiences more available to others and ensuring that the relevant lessons are incorporated in new projects. Some agencies have done well, but in many cases improvements are still needed.

Support for aid

The Task Force directly addressed the question of whether the slowdown in the rate of increase of aid flows was the consequence of a weakening in the support for aid in donor countries. The available evidence suggests that levels of public support for the general concept of development assistance are high in most donor countries and have not changed much in recent years. The majority of people—in some countries more than 75 percent of people surveyed—say they are “in favor” of aid as a matter of principle. But this support for aid at a somewhat abstract level is subject to a number of qualifications. It varies across countries and even within the same country at different times. In most countries, furthermore, support is not well articulated; it is rather general and diffuse. Support is less apparent when the public is asked about its preferences on aiding specific countries or funding specific initiatives. Moreover, while the public tends to support aid in principle, most of the public does not hold strong views on the subject: the opinion polls in several industrial countries suggest that aid ranks low in the scale of the public’s priorities when compared to other more immediate or local concerns. Expressions of support for aid are greater when the appeal is phrased in terms of humanitarian concern or the alleviation of world poverty and hunger. In a 1979 poll in the United States, for example, 77 percent of the respondents were in favor of maintaining or increasing “aid to combat hunger”, but support dropped to 49 percent when put in terms of “economic aid” to developing countries.

The recent public attention and response to the drought and famine in sub-Saharan Africa are a particularly vivid demonstration of this. The Task Force was encouraged by its finding that the public has a generally positive attitude toward aid, since this would appear to facilitate efforts to increase aid volume.

A key issue deserving greater attention, therefore, is how to convert the reservoir of good will that exists for emergency and relief aid into support for long-term development assistance efforts. This is where the role of political leadership becomes critical. In a number of instances, governments have asserted the importance of aid and increased its volume. Four Nordic countries—Denmark, the Netherlands, Norway, and Sweden—have exceeded the 0.7 percent target of ODA as a proportion of GNP set by the United Nations in 1970. In order to achieve this, the governments have carried out well-conceived programs to educate the public about the importance of aid. The Japanese Government doubled aid between 1977 and 1981, and then doubled it again from 1981 to 1985. The first decision seemed to run ahead of public opinion but the Government’s commitment has since helped to foster a positive public attitude toward aid. In Italy, too, a dramatic increase in aid has been achieved in recent years, largely because of the efforts of political leaders.

Since maintaining and strengthening support for aid can be assisted by more effective communication of its role in the development process and the successes that aid has achieved, the Task Force stressed the important role of development education programs and nongovernmental organizations in donor countries. There is a special need for continuing and enhancing the development education role of nongovernmental organizations, especially those engaged in development work overseas. The Task Force called upon both bilateral and multilateral aid agencies to work closely with these organizations in providing a better understanding of development problems and the role of aid in alleviating them.

Volume of aid

The Task Force addressed the subject of aid volume from two perspectives: need and supply. It eschewed the conventional method of estimating aid needs by determining a priori the rate of growth for aid recipients, the resources needed to generate these rates, the proportion that could be met from domestic sources, and the proportion that had to be obtained from outside (foreign savings). This method of treating aid flows as a residual is not satisfactory, since it assumes domestic savings as fixed. Instead of adopting this excessively mechanistic approach, the Task Force carried out a more qualitative assessment. It identified four key areas where concessional assistance is urgently needed: (1) tackling the fundamental problems of poverty, particularly in the poorest countries; (2) helping a number of countries complete needed structural adjustments of their economies; (3) sustaining investment and growth in those low-income countries that have pursued effective policies and have succeeded in establishing development momentum; and (4) responding to emergencies.

Based on such a qualitative assessment, the Task Force believed that the currently projected growth in ODA—estimated by DAC at about 2 percent a year in real terms over 1985–90—would be insufficient to meet these needs. Accordingly, the Task Force urged all concerned in both developing and developed countries to help ODA recipients cope with increased needs for resources by one or more of the following options:

• Increasing the effectiveness of official aid;

• Changing present country allocations of ODA;

• Concentrating expected increments in ODA on low-income countries;

• Combining ODA with less concessional flows, mainly other nonconcessional official flows in ways that would result in a higher overall volume of external resources; and

• Supplementing ODA flows by encouraging one or more of the following: increased flows of voluntary contributions; contributions of ODA from new donors; earnings from trade; and foreign private investment.

Each of the “coping mechanisms” has some potential for helping recipients as follows:

Improvements in the efficiency of capital utilization. This could ensure that a given amount of aid goes further toward promoting development. There is particular scope for improvement in the low-income countries of sub-Saharan Africa where evidence shows declining rates of return on all investments including aid in recent years.

Reallocation of ODA. Redirecting aid, particularly from middle- to low-income countries, would be highly desirable on development grounds and would help to stretch ODA to the latter group. Currently, low-income countries receive only about 40 percent of ODA, with the remainder going to middle-income countries (if low-income countries are defined, as they are by the World Bank, as those with GNP per capita of less than $400 in 1983). Indeed, the share of upper middle-income countries in total ODA has lately been about as high as the share of low-income Africa, and the per capita aid receipts of a number of middle-income countries are extremely high. Even without substantial increases in aid volume, reallocation could ensure the greater concentration of ODA on countries that need it most.

Directing all increases in aid for the rest of the 1980s to the low-income countries. This could do much to close the gap between need and supplies. Even if total ODA grows at only 2 percent a year in real terms, concentration of the increment on low-income countries would boost their receipts by about 8 percent a year.

Combining ODA with less concessional flows. This is another possibility, although not for the poorest and least creditworthy. If the legitimate needs for aid of countries such as China, India, Pakistan, and Sri Lanka (the so-called “Asian blend” countries that have access to the commercial market, official non-concessional flows, and ODA finances) cannot be entirely met from budgetary sources, it is important that they obtain additional official transfers of a nonconcessional nature and not be left to the commercial market alone. To act as a reasonable substitute for ODA, however, the rates and maturities of such flows would need to be improved and their volume significantly increased.

Table 3Ranking of 17 largest DAC donors of aid, 19841
Volume of aid

(In millions of US dollars)
AmountShare

(Percent)
Percent of GNP
1. United States8,69830.41. Netherlands1.02
2. Japan4,31915.12. Norway0.99
3. France3,79013.23. Denmark0.85
4. Germany2,7829.74. Sweden0.80
5. Canada1,6255.75. France0.77
6. United Kingdom1,4325.06. Belgium0.56
7. Netherlands1,2684.47. Canada0.50
8. Italy1,1053.98. Germany0.45
9. Australia7732.78. Australia0.45
10. Sweden7412.610. Finland0.36
11. Norway5261.811. Japan0.35
12. Denmark4491.612. United Kingdom0.33
13. Belgium4341.513. Italy0.32
14. Switzerland2861.014. Switzerland0.30
15. Austria1810.615. Austria0.28
16. Finland1780.616. New Zealand0.27
17. New Zealand590.217. United States0.24
Total28,647100.0
Source: OECD Press Release (Press/A(85)44), June 18, 1985.

Preliminary estimates.

Source: OECD Press Release (Press/A(85)44), June 18, 1985.

Preliminary estimates.

Grants from private voluntary organizations. For overseas development activities in 1984 these were estimated at $2.5 billion, equal to about 9 percent of ODA. The idea of increasing the role of nongovernmental and private voluntary organizations in transferring resources for development is very attractive. In some DAC countries, new tax incentives might help to raise the receipts of such organizations. The DAC is currently exploring new forms of cofinancing between official aid agencies and nongovernmental organizations.

New donors. This term covers some (mostly upper middle-income) countries that long ago stopped receiving new disbursements of ODA. They include Argentina, Brazil, Colombia, Israel, Korea, Mexico, and Venezuela, as well as (among OECD countries) Greece, Ireland, Luxembourg, Portugal, and Spain. It is important to establish the principle that those who have benefited from aid in the past should begin to act as donors themselves, even in a small way. Eventually, ODA from such new donors may grow into sizable amounts.

All countries should enhance trading opportunities for the developing world. In light of the uncertain supply outlook for ODA, increased exports would help close the resources gap. Industrial countries need to resist increasing pressures for protectionism; developing countries need to restructure their economies, investing more in those tradable goods in which they have a comparative advantage and taking care to avoid sustained overvaluation of their currencies.

Direct foreign investment. Both direct and portfolio investment have the potential to satisfy a higher proportion of the financial needs of developing countries than in the past. The contribution that direct investment makes to development, however, depends significantly on the policy framework in which it takes place. Many developing countries have recently undertaken policy reforms that give more scope for private sector activities. They have also become more receptive to foreign direct investment since lending by commercial banks has declined.

Limitations

While these various coping mechanisms have some potential (some more than others) for helping developing countries face the prospective shortage of aid, they have a number of serious limitations as well. For example, there are clear limits to the extent to which increased aid effectiveness can substitute for increases in volume: gains stemming from the more effective use of aid will be gradual and incremental; they are a necessary, but not sufficient, response to the needs of developing countries.

Similarly, reallocation of ODA to low-income countries is highly desirable and would make a major contribution to meeting their needs even if total ODA were not to increase by much. But the scope for such reallocation appears to be limited for a number of reasons: some donors have already gone quite far in this direction; a reduction of ODA flows to lower middle-income countries could have severe disruptive effects; and some donors’ ODA allocations to middle-income countries are based in large measure on political, strategic, historical, or commercial reasons, which are not easy to adjust. The possibilities for reallocation within the group of low-income countries are also limited. Further reductions of aid to members of this group—and particularly to the largest among them, India and China—could have a negative impact on their fragile creditworthiness.

The Task Force’s review of the other coping mechanisms led to generally similar conclusions. For example, the Task Force found limited possibilities among the various schemes for blending highly concessional ODA with nonconcessional flows. How much “additionality” (in the total flow of resources) would result from such schemes was deemed open to considerable question. While private voluntary organizations now play an important role all over the world in providing development services, there are inherent limitations on their financial resources. Opportunities for significantly expanding private flows and earnings from trade seem mainly limited to middle-income countries and only a few low-income countries at present. Whereas expansion in world trade in the 1960s and 1970s was of tremendous benefit to the countries that graduated during this period from being aid receivers to aid givers, it appears that trade in the foreseeable future will make a smaller contribution to the growth of developing economies. Most poor countries are commodity exporters and, despite recovery in industrial countries, commodity prices have continued to decline.

These considerations brought the Task Force to its main conclusion about aid volume: that “no single one of the measures considered, nor any combination of them, will cope adequately with the challenge of development in the low-income countries. Since there is no escaping the need for predominant reliance on traditional, appropriated concessional assistance, donor governments should exert redoubled efforts to increase the supply of ODA as a matter of urgency.” The Task Force found the need for an increase in ODA volume “known and unmistakable” and urged each donor to adopt the most effective means at its disposal to increase the volume of aid. Donors that have not yet reached the international ODA target of 0.7 percent of GNP were urged to do so or, alternatively, to set their own national targets for increasing aid.

Conclusion

The main contribution made by the Task Force on Concessional Flows was to underscore the important links that exist between the effectiveness of aid, political support for aid, and the volume of aid flows. While there is no question that revival of growth in poor countries will only become possible if they have access to flows of concessional assistance larger than those currently anticipated by the DAC and the sum indicated by the turn of events affecting OPEC, the amounts needed will materialize only if the recipients can continue to demonstrate that they can use them effectively. Financial stringencies in donor countries and economic difficulties in some of them threaten aid budgets. If aid levels are to be maintained or increased, the public must not only continue to support aid in the face of tight finances but also such support needs to grow. The increase in this support will in turn depend on both a convincing demonstration of the aid needs of recipients and on their effective utilization of aid.

It was for these reasons that the Development Committee in its meeting in Seoul decided to keep the subjects studied by the Task Force on its agenda for some time to come. Urging that the report and its suggestions be taken into account by all governments concerned, the Committee called upon the World Bank to take the lead in following up on the Task Force’s conclusions and to report to future Development Committee meetings on progress achieved.

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