Survey Says: Donors Bullish on MICs, Bearish on LICs (Warning: heavy on acronyms)

Added 06 Nov 2014
I have just gone through the results of the 2014 survey by the Organisation for Economic Co-operation and Development (OECD) Development Assistance Committee (DAC) on donor countries’ forward spending plans and it points out some worrying emerging trends, in particular a continuing decline in aid to the poorest countries. Alongside the more high-profile failure to meet the overall aid target of 0.7% of Gross National Income (GNI), this trend further undermines the credibility of donor countries stated commitment to development and poverty eradication.

The survey raises several other concerns related to donor ‘herding’ of aid to a small set of ‘donor darling’ countries and challenges of predictability of aid resources, so it is certainly worth a closer look. Below I highlight some thoughts that occurred to me while going through it: 

Key points gleaned from the survey 
  • The case for aid to fill huge public spending gaps in the poorest countries is unquestionable –targeting aid to them is obviously sensible.
  • The unanswered question is how to define the poorest countries. Both Least Developed Countries (LDCs) and Low Income Countries (LICs) are subsets of the very poorest countries. However, many Lower Middle Income Countries (LMICs) are also desperately short of public financing.
  • This leads to a ‘graduation problem’ where countries that progress from the lowest groups suddenly find themselves cut off from crucial financial resources.
  • At the same time, giving more aid to Upper Middle Income Countries (UMICs) leads to the conclusion that donors are using aid to support their own foreign policy priorities, making this type of aid harder to justify.
  • But the real missing discussion is how to allocate funds fairly overall, as even within LICs/LDCs some countries are ‘donor darlings’ while others get left behind (the survey notes that 17 DAC donors consider Mozambique a priority country compared to 4 for Malawi and 1 for the Central African Republic). 
  • The clearest message from the survey is that one of the main challenges as far as aid is concerned is that it follows donor priorities, rather than recipient priorities. 
What the survey says

The survey covers, where information is available, future Official Development Assistance (ODA or ‘aid’) flows from donors to partner countries that qualify as Country Programmable Aid (CPA). It gives useful insights into emerging trends and future allocation priorities. CPA is the portion of ODA that is actually programmed for individual countries where partner country governments could have a say in how it is used. Under this criteria, CPA does not include: 
  • Flows that are unpredictable (e.g. humanitarian aid, debt relief).
  • In-donor costs (e.g. student scholarships and refugee costs).
  • Flows that do not form cooperation between governments (e.g. food aid, equity investments, non-governmental organisation (NGO) core funding etc…).
The poorest countries should plan for difficult times 

Over the years, donor countries have repeatedly reaffirmed their commitment to achieving several funding targets, including 0.7% of GNI as aid and 0.15-2% of GNI as aid to the poorest countries. Despite these reaffirmations, the DAC has noted that aid allocated to LICs and LDCs, in particular sub-Saharan Africa (SSA), is either decreasing or stagnating. The results of the survey do not indicate any changes in this direction in the future (see graph below from the survey): “CPA to LDCs and other LICs is programmed to decrease by 4% from 2014 to 2017, leaving two-thirds of the LDCs with less aid in 2017 than in 2014.” 

CPA by region and per capita by region (2000-17)
Left graph: CPA by region 2013 USD billion
Right graph: CPA per capita by region 2013 USD

Source: Authors’ calculations based on data reported to the Survey complemented with Secretariat estimates based on OECD/DAC statistics. For more information on the methodology, see Annex 1. 

These countries are extremely sensitive to shifting aid allocations as it can make up to 70% of external finance available to them. Even slight reductions have huge implications for their finances. The International Monetary Fund (IMF) noted in a recent paper “in a quarter of LIDCs [Low Income Developing Countries], ODA could decrease at least 2 percentage points of GDP. A shock of this magnitude to budgetary resources, whether to revenues or concessional loan resources, would place a severe strain on budgetary finances, either forcing significant fiscal adjustment or worsening debt dynamics unless offset by revenue mobilization efforts.”

It’s not just the poorest countries that will be adversely affected. Countries that have graduated to Lower Middle Income Country (LMIC) status can expect a decline of 3% by 2017. A recent study by the World Bank notes that reductions in aid to these countries leads to reductions in economic growth. These countries are quite vulnerable, as they still suffer from huge financial constraints. Yet they are perversely rewarded for their success with diminished resources to secure their progress.

However, Upper Middle Income Countries (UMICs) can expect an 8% increase by 2017, most likely in the form of loans. As recent discussions at the DAC have pointed out, these loans come with their own set of problems. The decline in aid for the poorest countries in favour of UMICs seems to support the findings of another recent paper by Yale economist Nancy Qian, who points out that “the literature shows that the primary purpose of aid is often not to alleviate poverty and that out of all of the foreign aid flows, only 1.69% to 5.25% are given to the poorest twenty percent of countries in any given year”.

What is to be done?

A recent document prepared for the OECD DAC Senior Level Meeting held in October 2014 highlights that all donors are concerned about the trend of aid shifting away from the poorest countries, but they can’t seem to agree on what to do about it. Several proposals have already been raised by DAC members such as an agreement that 50% of aid should go to LDCs. However, so far donors have been unable to reach a consensus. 

This most recent document takes a different approach and proposes that donors should accelerate and take seriously the UN commitment to provide 0.15-0.2% of GNI as ODA to LDCs. This renewed commitment would be demonstrated by an agreed action plan to reach the target by 2020, approved at the next High Level Meeting of the OECD DAC in December 2014. While this is certainly a step in the right direction, it is somewhat diminished by the inability of those donors who committed to allocating 0.7% of the GNI as ODA by 2015 to meet that commitment.