ODA reform: Change for the sake of change?
+++ Guest post by William Hynes+++
Official Development Assistance (ODA) has for 45 years been the global standard for measuring donor efforts in support of development co-operation objectives. There have recently been calls for the concept to be modernised. Yet the reform proposals on the table constitute modest adjustments rather a radical overhaul. The scope for reform is also bounded by some high level decisions. The 2012 DAC High Level Meeting agreed to “maintain the definition of ODA”, while investigating how to modernise and clarify it, and discussions on the post 2015 development agenda – including the High Level Panel report – have renewed calls for donors to meet past commitments and retain the 0.7% target for ODA.
The Pandora’s Box
Given the continuing pressure on aid budgets, some commentators felt that a discussion on redefinition at this time risked opening up a Pandora’s box of issues or lead to dilution. Yet so far the debate has been limited to relatively modest suggestions to restrict or expand coverage. Some suggestions would clean up the concept by deleting items that may not have a primarily developmental motive; others seek to extend ODA to cover the concessionality in certain financial instruments not currently included. But the deliberations are nothing new. While the 1969 agreement on a consensus measure of ODA was a major achievement, debate on its appropriate boundaries never ended.
A review of previous efforts to change ODA indicates that the concept has a deep resonance and perhaps should be treated in a conservative way. Dramatic moves to different measurement concepts and criteria could have far-reaching and unintended consequences for the conduct of international development co-operation. The ODA concept will almost certainly continue into the post 2015 development arena. But now is an appropriate time to refine it, recognising the political risks to ODA’s credibility if certain issues are not addressed.
The Politics of Concessionality
The ODA definition has endured and while elements remain unchanged since the early 1970s, many decisions have been taken concerning the inclusion or exclusion of various new or unusual types of expenditure. ODA is based on interpretation and therefore allows for flexibility. Over time, some items have been included which critics have claimed are difficult to justify in terms of their development motivation. These include in-donor expenditures on refugees, the implicit subsidy of overseas students in countries with low tuition fees, and development awareness programmes. Such spending accounted for 5% of ODA or USD 7 billion in 2011 (USD 4.5 billion for refugees and USD 2.3 billion for imputed student costs). But the amounts vary widely among donors and between programmes, which poses challenges in reaching overall agreement.
A particular focus of concern has been the concessionality of loans. While loans make up only 30% of ODA there are differing interpretations among DAC members about which loans are concessional in character. With a world-wide low interest rate environment following the global financial crisis in 2008, donor countries can borrow at very low interest rates, and then re-lend to developing countries at higher rates while still meeting the grant element test of ODA if loan maturities and grace periods are sufficiently long. This is because the grant element test uses a fixed 10% discount rate. Eurodad recently issued a detailed paper with recommendations on how to reform loan reporting, while academics are starting to comment on the political economy of the issue.
Fairer Measurement; More Effective Disbursement
In a recent paper, Simon Scott and I also propose a way of better capturing donor effort on loans. Instead of measuring the payments and repayments on loans that qualify as concessional, we suggest counting only the concessional element of loans itself, measured at signature of the loan agreement. If a discount rate was used that reflects the risk of non-repayment, this would also dispense with the need for reporting of eventual debt forgiveness, which has long been a contentious issue. Our calculations also showed that the terms and volumes offered by donors vary considerably, and with them the budgetary effort in providing these loans.
During the last major reform of ODA in the early 1990s, some limited ODA coverage was allowed of expenditure on global issues such as environment, peacekeeping and narcotics control. It was felt this would help maintain the relevance of ODA, whereas failing to expand coverage would see ODA concentrating on a declining number of less developed countries. Yet in the long run there may indeed be a good case for further concentrating ODA to the poorest countries. As Middle Income Countries have many options and sources of development finance, the concessionality of resources becomes less important to them, allowing scarce ODA funds to be increasingly targeted on the least developed. In one way or another, donors may well decide to commit to channelling more ODA resources to LDCs as part of the post 2015 development agenda.
ODA is still an important instrument in international development co-operation. In a development community obsessed with embracing new fads and fashions, it is remarkable that ODA has lasted, essentially unchanged, for so long. The current debate should not be about change for the sake of change. Rather it is an opportunity to further refine the concept, target the resources and improve their effectiveness.
William Hynes is Policy Analyst in the Development Co-operation Directorate at the Organisation for Economic Co-operation and Development (OECD). His personal website can be found here.
The views expressed here are those of the author, and may not necessarily represent those of ECDPM.