ountries around the world are staring at a COVID-19-induced recession that is being described as the worst since the (1929-1939) Great Depression.
During normal times, government aid—or what is called ‘Official Development Assistance’ (ODA)—from rich countries is used to boost economic development and welfare in developing nations. In times like these, ODA has become one of the primary sources of finance that help the developing world to recover.
During previous crises such as the 2008 global financial crisis and the 1982 Mexican debt crisis, donor countries deployed counter-cyclical policies to provide much-needed government aid to developing countries. Increased ODA action is also likely in the coming months and during the post-pandemic period.
China’s emergence as a geopolitical and geo-economic force is altering government aid dynamics. China already provides government aid (highly concessional finance) and “commercially oriented state financing” to countries in need, while expanding its influence in the process. China’s foreign aid is also being used to take forward its mega-connectivity project called the Belt and Road Initiative (BRI).
According to UN Conference on Trade and Development’s (UNCTAD) estimates, developing countries barring China will need a $2.5 trillion COVID-19 crisis package. This is to help them deal with economic fallout from the pandemic including “capital outflows, growing bond spreads, currency depreciations and lost export earnings, including from falling commodity prices and declining tourist revenues.” This crisis package, UNCTAD suggests, should include liquidity injection and debt cancellation—each to the tune of $1 trillion, in addition to ODA worth $500 billion.
Mobilization of ODA Thus Far
How the mobilization of ODA has played out so far is not promising. ODA provided by 29 donor countries, including the US through the OECD’s Development Assistance Committee (DAC) totaled $152.8 billion in 2019. The US was the biggest ODA donor with $34.6 billion. This ODA amount (on a grant equivalent basis) as percent of the Gross National Income (GNI) of the US was only 0.16. Keep in mind that the UN had adopted a target of 0.7% of donor GNI as ODA.
In 2019, total ODA provided by DAC member countries as a percentage of their combined GNI was just 0.3. Only the UK, Denmark, Sweden, Norway and Luxembourg had an ODA/GNI ratio of 0.7 per cent or above that year. The picture was more or less the same in 2018.
It is important to consider ODA’s history. An ODA/GNI ratio target of 1% was proposed and circulated at the UN-level in 1958. After detailed discussions, the 0.7% target was agreed upon in 1970 and an UN General Assembly Resolution was adopted to this effect.
However, this target has largely remained on paper. Only a few DAC member countries such as Sweden, Netherlands, Norway, Denmark, Finland, Luxembourg, and the UK have met this target so far, while the “weighted average of DAC members’ ODA has never exceeded 0.4% of GNP (Gross National Product, a concept equivalent to GNI)” (also see here).
UNCTAD estimates that if the DAC countries had been meeting the 0.7% target, it would have resulted in the developing nations receiving an additional USD 2 trillion over the decade since the 2008 financial crisis.
China’s Expanding Aid Footprint
Meanwhile, China has been quietly expanding its official finance (a combination of ODA and other forms of state financing) footprint across the world. It has now nearly caught up with the U.S.—the world’s largest donor country.
China’s official finance during the 2000-2014 period was $354.3 billion as against $394.6 billion of the U.S. during the same period, according to a report by the College of William & Mary research lab AidData.
The composition of aid from the US and China displays substantial differences. Nearly 93% of U.S. official finance was ODA and the remaining was “Other Official Flows” (OOF)—or what was mostly non-concessional finance and mainly for commercial or representational objectives.
On the other hand, the ODA element of China’s total official finance from 2000 to 2014 was only $81.1 billion (23%), while the OOF component formed the majority at $216.3 billion (61%). The remaining 16% was categorized as “vague Official Finance” (clearly official finance, but there was not enough information to categorize them under either ODA or OOF).
Africa received the majority of Chinese official finance, but countries in Latin America, Southeast Asia, South Asia, and Central Asia—as well as Russia—were also beneficiaries. China’s focus with this aid was mainly on energy and connectivity-related sectors.
While Chinese government-aided projects have helped bring down inequality in the beneficiary countries, there are also negative effects from China’s official finance as well in the recipient nations. These include debt traps, instances of corruption, as well as problems relating to inadequate protection of labour rights and environment.
Aid in a Time of Pandemic
Following the spread of COVID-19 across the world, China (still considered a developing country) has been sending aid (government and private) to several developed European countries that have been and are still ODA donor countries. However, there has been criticism regarding the quality of aid and the geopolitical motive behind China’s help.
China has also been quick to send aid supplies to several African nations. Critics claim China has not shown the needed flexibility to waive off the debt that some African countries owe it. This results in countries which rely on commodity exports being shackled in their ability to repay loans to China.
Aid from Western donors has also come under fire. A former OECD insider in 2019 criticized problems regarding how ODA is defined and reported. In its response, the OECD DAC said though some steps have been taken in this regard, there is still “unfinished business”. Western donors have also been accused of paying insufficient attention to crucial areas such as development of infrastructure, especially energy-related, manufacturing and technology in the developing country recipients, in turn leading to sub-optimal outcomes.
The Future of Government Aid
Former World Bank chief economist Justin Yifu Lin and Peking University senior fellow Yan Wang referred to such problems and instead supported a development assistance strategy—similar to China’s—that combines aid, trade and investment (both public and private). Such a strategy, they suggested, would ensure developing countries increase their public sector assets, industrialize faster, and better utilize their comparative advantages.
While government aid still has a role to play in addressing development concerns, the COVID-19 pandemic shows that risks arising from the interconnected and inter-dependent nature of a globalized world can only be solved collectively. This requires new thinking and novel approaches. It also requires donors—which previously saw government as a way to expand influence—to learn from their past mistakes.
They should consider the concept of principled aid where aid is allocated on the basis of the requirements and vulnerabilities of the recipient countries. Adoption of the principled aid concept can also ensure that ODA is not used to push commercial or geo-strategic interests of the donors.
Reforms of the ODA mechanisms are also important in the context of ‘leakage’ of the aid amount from aid-dependent countries. A recent research paper found that when World Bank disbursed aid to some of the most aid-dependent nations, there was a coinciding increase in deposits to offshore financial centers known for bank secrecy and private wealth management. This reflected “aid capture” by politically connected and influential people.
It is therefore important for poor aid recipient countries to adopt better aid management practices so that such funds are channeled to meet their “national development priorities” in such a manner that they can get rid of their aid dependency sooner.
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Government Aid Post-Pandemic
May 19, 2020
C
ountries around the world are staring at a COVID-19-induced recession that is being described as the worst since the (1929-1939) Great Depression.
During normal times, government aid—or what is called ‘Official Development Assistance’ (ODA)—from rich countries is used to boost economic development and welfare in developing nations. In times like these, ODA has become one of the primary sources of finance that help the developing world to recover.
During previous crises such as the 2008 global financial crisis and the 1982 Mexican debt crisis, donor countries deployed counter-cyclical policies to provide much-needed government aid to developing countries. Increased ODA action is also likely in the coming months and during the post-pandemic period.
China’s emergence as a geopolitical and geo-economic force is altering government aid dynamics. China already provides government aid (highly concessional finance) and “commercially oriented state financing” to countries in need, while expanding its influence in the process. China’s foreign aid is also being used to take forward its mega-connectivity project called the Belt and Road Initiative (BRI).
According to UN Conference on Trade and Development’s (UNCTAD) estimates, developing countries barring China will need a $2.5 trillion COVID-19 crisis package. This is to help them deal with economic fallout from the pandemic including “capital outflows, growing bond spreads, currency depreciations and lost export earnings, including from falling commodity prices and declining tourist revenues.” This crisis package, UNCTAD suggests, should include liquidity injection and debt cancellation—each to the tune of $1 trillion, in addition to ODA worth $500 billion.
Mobilization of ODA Thus Far
How the mobilization of ODA has played out so far is not promising. ODA provided by 29 donor countries, including the US through the OECD’s Development Assistance Committee (DAC) totaled $152.8 billion in 2019. The US was the biggest ODA donor with $34.6 billion. This ODA amount (on a grant equivalent basis) as percent of the Gross National Income (GNI) of the US was only 0.16. Keep in mind that the UN had adopted a target of 0.7% of donor GNI as ODA.
In 2019, total ODA provided by DAC member countries as a percentage of their combined GNI was just 0.3. Only the UK, Denmark, Sweden, Norway and Luxembourg had an ODA/GNI ratio of 0.7 per cent or above that year. The picture was more or less the same in 2018.
It is important to consider ODA’s history. An ODA/GNI ratio target of 1% was proposed and circulated at the UN-level in 1958. After detailed discussions, the 0.7% target was agreed upon in 1970 and an UN General Assembly Resolution was adopted to this effect.
However, this target has largely remained on paper. Only a few DAC member countries such as Sweden, Netherlands, Norway, Denmark, Finland, Luxembourg, and the UK have met this target so far, while the “weighted average of DAC members’ ODA has never exceeded 0.4% of GNP (Gross National Product, a concept equivalent to GNI)” (also see here).
UNCTAD estimates that if the DAC countries had been meeting the 0.7% target, it would have resulted in the developing nations receiving an additional USD 2 trillion over the decade since the 2008 financial crisis.
China’s Expanding Aid Footprint
Meanwhile, China has been quietly expanding its official finance (a combination of ODA and other forms of state financing) footprint across the world. It has now nearly caught up with the U.S.—the world’s largest donor country.
China’s official finance during the 2000-2014 period was $354.3 billion as against $394.6 billion of the U.S. during the same period, according to a report by the College of William & Mary research lab AidData.
The composition of aid from the US and China displays substantial differences. Nearly 93% of U.S. official finance was ODA and the remaining was “Other Official Flows” (OOF)—or what was mostly non-concessional finance and mainly for commercial or representational objectives.
On the other hand, the ODA element of China’s total official finance from 2000 to 2014 was only $81.1 billion (23%), while the OOF component formed the majority at $216.3 billion (61%). The remaining 16% was categorized as “vague Official Finance” (clearly official finance, but there was not enough information to categorize them under either ODA or OOF).
Africa received the majority of Chinese official finance, but countries in Latin America, Southeast Asia, South Asia, and Central Asia—as well as Russia—were also beneficiaries. China’s focus with this aid was mainly on energy and connectivity-related sectors.
While Chinese government-aided projects have helped bring down inequality in the beneficiary countries, there are also negative effects from China’s official finance as well in the recipient nations. These include debt traps, instances of corruption, as well as problems relating to inadequate protection of labour rights and environment.
Aid in a Time of Pandemic
Following the spread of COVID-19 across the world, China (still considered a developing country) has been sending aid (government and private) to several developed European countries that have been and are still ODA donor countries. However, there has been criticism regarding the quality of aid and the geopolitical motive behind China’s help.
China has also been quick to send aid supplies to several African nations. Critics claim China has not shown the needed flexibility to waive off the debt that some African countries owe it. This results in countries which rely on commodity exports being shackled in their ability to repay loans to China.
Aid from Western donors has also come under fire. A former OECD insider in 2019 criticized problems regarding how ODA is defined and reported. In its response, the OECD DAC said though some steps have been taken in this regard, there is still “unfinished business”. Western donors have also been accused of paying insufficient attention to crucial areas such as development of infrastructure, especially energy-related, manufacturing and technology in the developing country recipients, in turn leading to sub-optimal outcomes.
The Future of Government Aid
Former World Bank chief economist Justin Yifu Lin and Peking University senior fellow Yan Wang referred to such problems and instead supported a development assistance strategy—similar to China’s—that combines aid, trade and investment (both public and private). Such a strategy, they suggested, would ensure developing countries increase their public sector assets, industrialize faster, and better utilize their comparative advantages.
While government aid still has a role to play in addressing development concerns, the COVID-19 pandemic shows that risks arising from the interconnected and inter-dependent nature of a globalized world can only be solved collectively. This requires new thinking and novel approaches. It also requires donors—which previously saw government as a way to expand influence—to learn from their past mistakes.
They should consider the concept of principled aid where aid is allocated on the basis of the requirements and vulnerabilities of the recipient countries. Adoption of the principled aid concept can also ensure that ODA is not used to push commercial or geo-strategic interests of the donors.
Reforms of the ODA mechanisms are also important in the context of ‘leakage’ of the aid amount from aid-dependent countries. A recent research paper found that when World Bank disbursed aid to some of the most aid-dependent nations, there was a coinciding increase in deposits to offshore financial centers known for bank secrecy and private wealth management. This reflected “aid capture” by politically connected and influential people.
It is therefore important for poor aid recipient countries to adopt better aid management practices so that such funds are channeled to meet their “national development priorities” in such a manner that they can get rid of their aid dependency sooner.
