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Aid, debt and development: an overview

STWR
19 May 2008

Levels of international aid have been criticised as seriously insufficient for over 50 years, debt cancellation programs have failed to reach most developing countries, and the Millennium Development Goal for halving poverty will not be met by 2015. Without a fundamental restructuring of global economic priorities, the needs of the majority world will continue to be overshadowed by commercial interests. Below is a brief overview, some key facts and further resources that relate to international aid, debt and economic development. 

Content

Overview

Insufficient hand outs of international aid and highly criticized mechanisms of debt cancellation continue to be the primary means by which the international community addresses poverty in the developing world. Despite many high profile campaigns and a 40 year old commitment to strengthen these measures, donors continue to prioritize their own economic interests and consequently sanction the needless deaths of around 50,000 people each day.

The Call for Aid

Development aid or Official Development Assistance (ODA), is distinguished from humanitarian aid as it is generally aimed at eliminating poverty through longer-term development. Aid is usually provided bilaterally to individual developing nations from wealthier donor countries, or multilaterally through institutions such as the IMF and World Bank.

The urgent need for aid is reflected in the World Bank's poverty statistics, with 40% of the world - around 2.7 billion people - living on less than $2 a day, resulting in 25,000 people dying each day from hunger alone. In recognition of the prevalence of poverty, the Pearson Commission first stipulated in 1969 that donor countries should provide at least 0.7% of their GDP as international aid. There have been numerous reports and campaigns since then, including the widely read Brandt Report and the Millennium Development Goals (MDGs), all calling for significant increases in aid. Yet forty years since the initial recommendations, the average ODA accounts for a mere 0.3% of GDP from donor countries. In comparison, military expenditure currently accounts for around 2.5% of the world's GDP.

Ineffective and Conditional Aid

Of the relatively insignificant proportion of aid donated, it is estimated that 58% is tied to conditions, a practice which promotes the economic and political aims of donor countries. For example, donors often expect recipient countries to spend their aid money on exports from the donor country. However, the OECD argues that the primary motivation for this practice is political, including maintaining historical and cultural relations, and securing geopolitical and trade interests.  ActionAid estimates that roughly half of all aid is "phantom aid", which is to say it is not genuinely available to developing countries to help relieve poverty.

In addition, significant amounts of aid are lost through poor donor coordination and excessive administrative costs, and it is estimated that one quarter of all aid is spent on over-priced technical assistance.  Confusion also arises through ‘double counting' - the practice of including debt relief in aid figures; and surplus food in rich countries is also often distributed as aid, which can adversely affect local farmers and industry.

The amount and effectiveness of donor aid is grossly insufficient.  According to recent research however, even if the Millennium Development Goals are met, which most analysts doubt, 900 million people will still be living on less than $1-a-day in 2015.

Debt in Developing Countries

The prevalence of debt in developing countries is another key factor stifling development. Left with little choice but to trade in global markets, cash-strapped developing countries are often forced to approach the IMF and World Bank for loans. To ensure the viability of these loans, they come attached with conditions such as Structural Adjustment Programs (SAPs) which often divert public funding away from essential welfare services. Combined with odious debts accumulated through loans from countries intent on furthering their own security objectives, the total debt in developing countries stands at around $2.5 trillion.

Despite ongoing international campaigns to ‘drop the debt', the existing debt relief framework has had only limited success.  It is likely that many struggling economies will be burdened with unfair debt indefinitely, maintaining the vicious cycle of economic subjugation imposed upon them by creditor nations.

The neoliberal financial prescriptions of the IMF and World Bank have provoked widespread revolt, particularly in Latin American countries where the presence of these institutions have been replaced by regional finance initiatives such as the recently appointed Bank of the South.

Cancelling Debt and Giving Aid is Not Enough

Debt cancelling is an absolute imperative for developing countries, but it is also crucial that the focus of development shifts from ineffectual aid donations to a fundamental restructuring of global economic priorities. Greater international co-operation and the establishment of a framework to prioritise development over other economic interests will ultimately benefit all nations.

A global economy based on greater economic sharing is likely to be a much more effective tool for development, and an emergency program of relief to immediately address extreme poverty and facilitate sustainable development must be the priority for the international community.

Key facts

Current and past levels of aid

Throughout the 1990s, ODA declined from a "high" of 0.33% of total DAC aid in 1990 to a low of 0.22% in 1997. 2001 onwards has seen a trend of aid decreasing about 20% since 1990.
 
Donors have also failed to significantly close their "generosity gap" which, according to Reality of Aid Reports, has been growing since the mid-1990s. ODA per capita in donor countries had increased by 50% from $55 in 1961 to $83 in 2004. On the other hand, wealth per capita (GNI) in these same countries grew by about 230% from $9,887 to $32,462 during the same period. 
 

DAC donors provided a mere 0.26% of their GNI to ODA in 2004, up slightly from 0.25% in 2003. The 2004 performance of the G7 donors - the world's seven richest countries - was even worse at 0.22% of their combined GNI. Meanwhile, the average country effortii for all DAC donors in 2004 was 0.42%, a little higher than 2003's 0.41 percent. Note that the average donor country effort has been sustained largely by five European donors that have consistently achieved or exceeded the UN target. The five donors include: Denmark (0.85%), Luxemburg (0.83%), Netherlands (0.73%), Norway (0.87%), and Sweden (0.78%).

Recipient countries

Since the Millennium Summit in 2000, donors have made available $27 billion in new aid resources. But despite the commitment to "spare no effort" to reducing poverty, not all of this increase in aid has been available for poverty reduction goals. In part, this is due to massive aid resources targeting two countries - Afghanistan and Iraq, which cornered 37% of new aid resources from 2000 to 2004.

Since 2000, there has been an increasing focus in allocation of total DAC aid to least developed countries (LDCs). However, this has been mainly the result of a shift from other low-income countries (OILCs) to LDCs and overall, there was little change in the allocation of donor aid by income group since 1990.

United States

Since 1992, Japan had been the largest donor of aid, in terms of raw dollars. That was until 2001 when the United States reclaimed that position, a year that also saw Japan's amount of aid drop by nearly 4 billion dollars.

As in recent years, relative to other donor countries the US disbursed the largest quantity of aid in 2004 at $19.7 billion - an 18.3% increase over 2003. However, overall performance of US ODA has changed little. As measured by its capacity to give based on the wealth of its economy, US ODA was only a mere 0.17% of its Gross National Income (GNI), vying with Italy for last place among the 22 donor countries.

USA's aid, in terms of percentage of their GNP has almost always been lower than any other industrialized nation in the world, though paradoxically since 2000, their dollar amount has been the highest. (Only since 2004 have they move up from last place, by just one or two places).

Americans privately give at least $34 billion overseas-more than twice the US official foreign aid of $15 billion at that time.

The United States representative at the 2005 UN Summit, reportedly lobbied to delete in the action agenda "every one of the 35 specific references to the MDGs", including the UN target of 0.7% ODA-GNI ratio and other "concrete obligations for the implementation of commitments."

Meanwhile U.S. military and security/anti-terrorism budgets have been expanding considerably. Based on the latest available comparative data in 2003, the U.S. spends 76 times more for its war in Iraq compared to its total ODA for health; 196 times more compared to education, and 480 times more compared to water supply and sanitation, all critical sectors for achieving the MDGs.

Proposed and promised levels of aid

Almost all rich nations have constantly failed to reach their agreed obligations of the 0.7% target. Instead of 0.7%, the amount of aid has been around 0.2 to 0.4%, some $100 billion short.

Donors' motivation in giving aid

The US has directed aid to regions where it has concerns related to its national security, e.g. Middle East, and in Cold War times in particular, Central America and the Caribbean; Sweden has targeted aid to "progressive societies"; France has sought to promote maintenance or preserve and spread of French culture, language, and influence, especially in West Africa, while disproportionately giving aid to those that have extensive commercial ties with France; Japan has also heavily skewed aid towards those in East Asia with extensive commercial ties together with conditions of Japanese purchases;

Inter Press Service noted that recent US aid has taken on militaristic angles as well, following similar patterns to aid during the cold war. The war on terrorism is also having an effect as to what aid goes where and how much is spent. For example:

  • "Credits for foreign militaries to buy US weapons and equipment would increase by some 700 million dollars to nearly five billion dollars, the highest total in well over a decade." (This is also an example of aid benefiting the donor)

  • "The total foreign aid proposal ... amounts to a mere five percent of what Bush is requesting for the Pentagon next year."

  • "Bush's foreign-aid plan [for 2005] actually marks an increase over 2004 levels, although much of the additional money is explained by greater spending on security for US embassies and personnel overseas."

  • "As in previous years, Israel and Egypt are the biggest bilateral recipients under the request, accounting for nearly five billion dollars in aid between them. Of the nearly three billion dollars earmarked for Israel, most is for military credits."

This militaristic aid will come "largely at the expense of humanitarian and development assistance."

‘Phantom aid'

ActionAid estimated that $37 billion-roughly half of global aid-is "phantom aid", that is, it is not genuinely available to poor countries to fight poverty.

  • $6.9 billion (9% of all aid) not targeted for poverty reduction
  • $5.7 billion (7%) double counted as debt relief
  • $11.8 billion (15%) on over-priced, ineffective technical assistance
  • $2.5 billion (3%) lost through aid tying
  • $8.1 billion (10%) lost through poor donor co-ordination
  • $2.1 billion (3%) on immigration related spending
  • at least $70 (0.1%) million on excessive administration costs.

As the Human Development Report 2005 noted, not all of the money counted as aid translates into transfer of resources. This has dire implications on the problem of financing gaps to achieve the MDGs, since bridging the gap means real money must be disbursed and used. It pointed out the case of debt relief, technical cooperation, and emergency assistance, which together comprised 90% of the $11.3-billion increase in bilateral aid between 2000 and 2004.

A substantial portion of the increases in ODA in 2005 may be considered paper increases. Total debt relief grants in 2005 (primarily for Iraq and Nigeria) reached US$22.9 billion, which accounted for 21.6% of DAC donors' ODA. The UK, which posted an impressive 34.6%-increase in ODA, would have registered a 1.7% decline if its debt relief grants were not added. The same scenario applies to Germany, which would have seen its ODA fall by 9.8% instead of rising by 30.7 percent. Overall, net ODA from DAC donors would have only increased by a much lower 8.7% instead of 31.4% if aid had not been inflated by the total face value of debt cancellation in this year. (See Table 19). It is expected that large debt cancellations will continue to affect the aid figures for 2006 and possibly 2007. As these are one-off increases, they bring into serious question the commitments of major donors to meet their aid targets in 2010.

Reality of Aid looked at levels of donor-directed technical assistance as an indicator of the degree to which aid is owned and directed by developing country partners. While the share of technical assistance in country-directed aid was declining in the 1990s, since 2000 it has come back to its 1990 high of more than 40% of total DAC country-directed ODA.

Donor government support to refugees from developing countries in their first year of in the donor country is also eligible for counting as ODA. Not all donors count this expenditure in their ODA, but overall this amount has been increasing for all DAC donors. Donors together charged $1.3 billion in 2003 for refugee support. Since 2001, donor allocations for this purpose in their total ODA have increased by $0.5 billion.

Tied Aid

Inter Press Service noted that aid tied with conditions cut the value of aid to recipient countries by some 25-40 percent, because it obliges them to purchase uncompetitively priced imports from the richer nations.

A separate estimate cited in the Human Development Report 2005 shows that "tied aid reduces the value of assistance by 11%-30% and tied food aid is on average 40% more costly than open market transactions." Furthermore, the report pegged the current overall losses of developing countries due to tied aid at $5 - $7 billion. Low-income countries collectively lose $2.6 - $4 billion; Sub-Saharan Africa, $1.6 - $2.3 billion; and the least developed countries, $1.5 - $2.3 billion.

Much of donor aid to Africa remains highly conditional on African governments' acquiescing to donor policy prescriptions and terms that undermine these governments' accountability to their citizens. The UK-sponsored Commission for Africa noted that aid to Africa "is accompanied by many onerous conditions that are often of dubious value," which have increased under IMF-World Bank approved PRSPs. There is ample evidence showing how conditionalities weaken the effectiveness of foreign aid. As noted in the Reality of Aid 2002 Report, "conditionality defeats the objectives of development cooperation because it enhances the inequality in the aid relationship. In many cases, it is contrary to the objectives of development for the recipient country and it abets the lack of accountability, undemocratic governance, and even corruption."

Sub-Saharan Africa is a massive $272 billion worse off because of "free" trade policies forced on them as a condition of receiving aid and debt relief.

While aid amounts to around $50 to 55 billion per year, the poor countries pay some $200 billion to the rich each year either because of debt servicing arrangements, asymmetries and imbalances in the trade system or because of inappropriate liberalisation and privatisation measures imposed upon them by the international financial and trading system.

Ineffectiveness of aid

The West spent $2.3 trillion on foreign aid over the last five decades and still had not managed to get twelve-cent medicines to children to prevent half of all malaria deaths. The West spent $2.3 trillion and still had not managed to get four-dollar bed nets to poor families. The West spent $2.3 trillion and still had not managed to get three dollars to each new mother to prevent five million child deaths.

Income per person in the poorest countries in Africa has fallen by a quarter in the past 20 years.

Further resources

Organisations and campaigns

Reports and articles

Books and further resources

Filed under: 
Finance and debt