A Closer Look at Official Development Assistance
We’ve seen through differential diagnosis how targeted investments in agriculture and health, in education, in infrastructure can help a very poor country, or region to spring itself free from extreme poverty. And once it’s free from that trap of extreme poverty, then by virtue of a higher income and the saving that can go along with that higher income, it can begin to make investments on a self sustaining basis.
A big part of the poverty trap however, is that when a country is impoverished, it can’t afford the very investments, for instance, in electrification, or in health and in education, that are the key to raising productivity to put that country onto a self-sustaining growth path. That, of course, is the poverty trap. How to break free of the poverty trap? Well, the, the best is if a incredible technology comes along, that’s even affordable by the poorest of the poor. Mobile telephony is such an example. Mobile phones have spread massively from a few tens of millions a little over 20 years ago, to more than 6 billion subscribers today reaching the poorest parts of the world, on a purely market basis. But alas, most technologies they are not so effective, that markets alone are, enough. We know that helping the poorest people get healthcare even to buy the bed nets to protect them from malaria or the medicines that they need to stay alive after an effective malaria bite by a mosquito, that they don’t often have the money for that low cost life saving measure that’s needed.
And therein lies the reality of the poverty trap. Certain investments remain out of reach. And therefore, we need to find effective ways to help those countries stuck in extreme poverty get out of the trap. There are two basic ways. One is for poor countries to borrow the funds they need, thereby raising the income. And using a part of that higher income to pay off the debts. Unfortunately, this is a somewhat unreliable process. Maybe the government borrows, but it’s not able to collect the added tax revenues that it needs to service the debts. Of course, creditors understand that. And they don’t lend to some of the world’s poorest countries in the first place. Even international agencies like the International Monetary Fund have said the very poor countries don’t borrow so much, you could get into a debt crisis. The poor country governments say, yes, but what are we to do if we can’t borrow but we still need electricity, we still need clinics, we still need schools and we can’t afford them out of our own incomes. That is where the idea of temporary official development assistance, ODA in the jargon, should come in. The idea’s been around now for more than 40 years on an officially agreed basis. It’s been around in human experience for more than 60 years, really starting with the Marshall Plan funds of the United States to help rebuild Europe after World War II, that a temporary injection of funds, not as a loan but as a grant, to very poor places or maybe places destroyed by war, can jump start a process of self-sustaining growth. It’s important to understand that nobody advocates or should advocate the use of aid or ODA, Official Development Assistance for the long term as a way of life. Advocates of aid and I am very much one of them, believe that it is a temporary easure to give the help to a poor country so that it can make the crucial investments needed so that it can stand on its own and develop on its own. Indeed we use a term aid graduation to say that aid isn’t a permanent way of life. But the countries that receive aid, by virtue of the economic growth that it promotes, reach a level of income, such that that country graduates from the need for aid and graduates from being in the category of an aid recipient.
Roughly speaking, graduation occurs when a country passes from the low income category to the middle income category. Somewhere around $1,000 or $1,200 per person, per year. Now ODA as a concept, was adopted by the world community around 1970. There was a famous commission headed by then, prime minister of, Canada Lester Pearson, a Nobel Peace Prize laureate. Called partners in development. And it recommended a kind of partnership to enable the poor countries to get out of the poverty trap. Mitt said that rich countries should devote around 1% of their income to help poor countries in meeting basic needs and basic investments. And of that 1% of national income, 7 10ths of that or 0.7 of 1% of national income, should come through official channels, mainly government to government, or at least government to poor countries. And the other 0.3 of 1% should come mainly through private contributions. Corporate contributions or individual contributions or charitable organizations. So back in 1970 and 1971, the United Nations adopted a standard that the high income countries, which became known as donor countries, should give through official channels 0.7 of 1% of their national income in the form of official development assistance. Consider the United States for example. A $15 trillion economy each year. 0.7 of 1% of that is 0.7 of 150 billion, or $105 billion dollars of official development assistance each year.
That’s the international standard. Alas, the United States isn’t doing anything close to that, because the official development assistance given by the United States is around $30 billion per year, not $105 billion. So rather than being 0.7 of 1% of the national income, it’s closer to 0.2 of 1% of the national income, less than one-third of the international standard. Have a look at how countries are doing in their official development assistance. You can see on this graph that is ordered from the top being the smallest share of national income, to the countries with the biggest bars at the bottom that five countries among the donors reach at least the targeted threshold of 0.7. Some are up to 1% of their national income, purely through official channels. Those five countries are Sweden, Norway, Denmark, Luxembourg and Netherlands. And those five countries, all for many, many years have honored the 0.7% of national income threshold. At the other end of the spectrum, are countries that give quite low amounts. The United States is one of those, because rather than 0.7 as I mentioned, it’s closer to 0.2. And in many years, it’s dropped even below 2 10ths of 1% of national income. Now, the United States still gives a lot of money in an absolute level. You can see on the graph showing the total amount, not as a share of income, but the total aid. The United States is the world’s largest donor country, with $30 billion a year currently of development assistance. But as a share of the world’s largest economy, that’s a pretty modest amount, even though in absolute dollars, it’s a large amount, and it makes a big difference. What kind of spending does this money support? Official development assistance has to have the following categories. First, the money is going to poor countries. Once in a while, a rich country gives to another rich country, maybe for foreign policy or military reasons. That’s not part of Official Development Assistance. So first, the recipient country has to be eligible. Second, the money has to be provided by an official agency of the donor country, or by money that goes from an official agency to an international organization, like the World Bank, which then gives the money to an eligible recipient country. Third, the money has to be used for economic development. It can’t be used, for example, for military sales. It can’t be used to support troops. It can’t be used to support soccer games or cultural events as nice as those are. Those aren’t counted as official development assistance, because the idea is that the ODA should be for D, that is for development. There is another important distinction to make because aid comes in many shapes, and sizes, and forms. If the aid is given as a, an emergency relief, for instance food in the middle of a famine, it saves lives, it’s humanitarian relief. Similarly, if it’s emergency help after a massive flood, or an earth quake. That’s also counted as aid. But it won’t do more typically than the crucial job of keeping people alive. It’s only compensating for a terrible disaster. The kind of development aid that can help a country make a break through out of poverty is something else. That’s official development assistance that ends up as paved roads or an extended power grid, or clinics, or schools, or support for community health workers. Or antiretroviral medicines to fight AIDS, or insecticide treated bed nets for malaria. So, looking at these two pictures. One kind of aid is for emergency relief. Very valuable, but only compensating for disaster. And the other is aid as a real investment. In this case, in supporting a farmer’s cooperative, a beekeeper’s cooperative to promote economic development. There’s a lot of confusion about whether aid works or not, because not all aid is the same. If a donor agency in a rather cynical way says, we’re going to give, shoe boxes of cash, to warlords because that’ll be good for our war effort or our foreign policy. Or we’re going to give money to such and such government. We know it’s corrupt, but we, for whatever reason, want to support that dictator. Well that can get counted as aid. But it’s not going to do anything for economic development. The kind of development assistance that works, is development assistance that is truly professionally transferred to real investments in critical areas. Such as disease control. Such as schools, and teachers, and school materials. Such as infrastructure like roads or rail systems. Such as safe drinking water and, sanitation. When that kind of aid is given, the evidence is very strong. Development assistance works. It promotes long term economic development. Make no mistake about it, aid can be wasted, but aid can be crucial to meet human needs, to help countries achieve the millennium development goals. And beyond that, to help countries escape from the poverty trap and get onto a trajectory to end extreme poverty. During the MDG period, my favorite kind of aid has been aid directed at public health needs. And as this graph shows, which measures the total development aid over the period 1990 to 2010 there was a major increase of development assistance, especially after the year 2000. And that increased assistance has played a huge roll in helping to control AIDS, malaria, tuberculosis. In helping to insure that mothers are safe in child birth. That newborns are kept alive and have a chance to thrive. That children can get nutritional benefits, and can be protected against scourges that otherwise would claim their lives or claim their potential. And we have seen the big breakthroughs that have come. The decreases in mortality rates from killer diseases. The declines of the infant and child mortality rates, especially after 2000, when those reduced mortality rates really showed the huge benefits of these kind of targeted investments. Official development assistance, in other words, can make a huge difference, when it’s operated for development and on a professional basis. It can be the difference of success or failure in breaking free of the poverty trap. It comes at very low cost by definition, under 1% of the gross domestic product. The world, the rich world should make that effort, should make that investment so that we can be the generation that ends extreme poverty.