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The Case for Aid in Fiscally Constrained Times

The Case for Aid in Fiscally Constrained Times

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Published by: Andy Sumner on May 17, 2011
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The Case for Aid in Fiscally Constrained Times: Morals, Ethics and Economics Abstract

Aid (Official Development Assistance – ODA) is under pressure as fiscal constraints mount in OECD countries following the 2008-2009 global financial and economic crisis. The arguments in favour of ODA commitments from donor countries have been articulated by several writers over the years, but have consistently been challenged. This paper briefly and critically assesses the main arguments in favour of, and against, continuing substantial international aid programmes and makes a distinction between arguments relating to the short-term and to the long-term. The long-term is considered in the context of the cases for and against sustained ODA programmes. The short-term is discussed in the context of potential adjustments in ODA volumes due to economic decline, reduced tax revenue and public expenditure cuts in OECD countries.


1. Introduction The financial and economic crisis which beset advanced industrial countries in 2008 and 2009 has led to significant reductions in real GDP in OECD countries, implying reductions in tax revenue and a perceived need to reduce public expenditure. This raises the issue of whether Official Development Assistance (ODA) should be reduced in line with public expenditure cuts.1 Such reductions could be consistent with holding ODA at the UN target of 0.7 per cent of national income if that target had been achieved in every ‘donor’ country, but in many cases ODA still remains below the target. 2 In the United Kingdom (UK) – for example – a consensual agreement has emerged between the main political parties to the effect that the 0.7 per cent target should be achieved before 2013 (i.e. within the time span of the current Millennium Development Goals) (HM Treasury, 2010: 6).3 In the UK, with an active public expenditure reduction programme (with recurrent public expenditure set to fall significantly across all sectors other than health and ODA (HM Treasury, 2010: 5) the coalition government has explicitly ring-fenced ODA with the achievement of the 0.7 per cent target still being an objective. This position has been maintained despite substantial criticism from sections of public opinion and UK media which is antagonistic, or at least

ODA is defined in the Glossary to the annual report of the Development Assistance

Committee (DAC) of the OECD (OECD-DAC, 2010a: 273) and the “grant element” which is a critical component of ODA is defined in the same Glossary (OECD-DAC, 2010a:272). Refer also to OECD-DAC (2010b).

Statistics are presented in Table 2 below. We have taken the United Nations target as ‘given’ for this paper although it is open to


question. A comprehensive background on this target can be found on the UN Millennium Project website (United Nations, 2011) and an independent view is provided by Clemens and Moss (2005). 2

agnostic, about the consensual ODA commitment. Over the period 2010-11 to 2014-15 the real cumulative reduction in UK government recurrent expenditure is scheduled to be 8.3 per cent, while in the same period the real cumulative increase in ‘international development’ expenditure is to be 37 per cent (HM Treasury, 2010: 10). We distinguish between long-term and short-term considerations relating to ODA, and to discussion of ODA in the context of donor public expenditure constraints. ‘Long-term’ considerations are taken to refer to periods of ten, fifteen to twenty years (i.e. in terms of generations or periods over which changes in international socio-economic structures take place). ‘Short-term’ considerations are taken to refer to periods of three to five years during which fluctuations in national income, taxation and public expenditure occur. This distinction is important for a careful assessment of the case for maintaining or increasing ODA commitments during the recent global financial-economic crisis. We have not attempted a comprehensive review of the ‘aid literature’ for two reasons. First, the ‘aid literature’ is vast and has several distinctly different foci, so that – for example – the literature assessing developments in aid architecture or evaluating aid effectiveness would only be peripherally relevant to discussion of the arguments for and against ODA at a time of global financial and economic crisis. Second, our main focus is on the relationship between the contemporary global financial-economic crisis and the pressure which this has placed on the allocation of public expenditure to ODA in traditional ‘donor’ countries. Our focus is on ODA by governments to developing countries, with the emphasis on ‘official’, including neither aid contributed by NGOs nor non-ODA development assistance. No distinction has been made between bilateral and multilateral ODA since this would not be directly relevant to the discussion. We have also excluded consideration of interventions by private foundations which are not directly related to ODA. In addition it may be noted that ODA is increasingly a smaller proportion of international transfers – private remittances for 3

example, from developed market economies to developing countries now exceed ODA in global terms (Commission on Growth and Development, 2008: 154). Section two of the paper will review some of the main long-term arguments in favour of, and against, ODA, giving particular attention to the moral-ethical case. Arguments relating to the self-interest case have largely been omitted for reasons of space, although they are referred to in the third section.4 Section three considers the implications of the recent global financial and economic crisis for ODA from ‘traditional’ donor countries. Section four summarises the main conclusions of the paper.

2. The Long-term Cases for and against ODA 2 a The case for ODA The case for aid can be placed within two distinct areas: firstly the ethical or moral case, and secondly the self-interest case. 5 The bases of these cases are summarised in Table 1 below. Controversy has never been far away from the literature on ODA and well-known authors have argued the case for and against throughout the last half century. Bauer (1972) and Easterly (2007 and 2008) exercise robust arguments which are critical of ODA (neither are totally against aid), while some of the most supportive arguments have been articulated recently by Sachs (2005) and by Radelet (2003 and 2006). Further significant contributions to the literature are by Riddell (2007), Cassen (1994), Lancaster (2000 and 2007a), Lancaster and Van Dusen (2005) and Tarp and Hjertholm (2000). Riddell’s recent book is almost

And in a longer version of this paper, forthcoming. This paper is mainly concerned with the arguments for and against the commitment of ODA


contributions by donor countries. There is an obverse set of issues concerning why recipient countries accept (or do not accept) ODA which is not much touched upon in the literature. A recent paper by Nixson takes a broader overview of ODA than is found in much of the literature (Nixson, 2007-2008). 4

unique in discussing ‘why aid is given’ in four substantial chapters, albeit in the middle of the volume rather than at the beginning (Riddell, 2007: Chapters 6, 7, 8 and 9). 6 Baulch (2006: 933-4) suggests that there are many factors determining donor decisions about ODA including: historical and commercial ties, governance and institutions, absorptive capacity, recipient government attitudes towards donors, and geopolitical considerations. Baulch’s discussion is supportive of the findings of Alesina and Dollar (2000) that in practice donor allocations are driven as much by political and strategic considerations as by recipients’ economic needs and policy performance. They argue that allocation patterns – commonly inconsistent with the ‘demand side’ of aid markets – are partially responsible for why aid has not had more of an impact on growth and poverty reduction, presumably because the patterns have not lined up with ‘poverty efficient’ allocations. They find that three major donors (the USA, France and Japan respectively) allocate significant amounts of their aid to strategic allies, former colonies, or in ways highly correlated with UN voting patterns. They also report a clear trend for ‘democratisers’ to benefit from more generous ODA allocations (Alesina and Dollar, 2000). Recent contributions to the literature on ODA have questioned the rationale for ODA without challenging the underlying need for donor transfers. For example, Severino and Ray (2009 and 2010) have argued that a wholesale reconsideration of the role of aid in the context of 21st century international development is needed, taking into account increased complexity in the relationship between advanced industrial countries, newly emerging economic powers, and more ‘conventional’ developing countries. They discuss a ‘triple revolution’ in ODA in

Most ‘development texts’ include substantial discussion of ODA. From the more

‘economic’ direction these include Todaro and Smith (10th edition, 2008: Chapter 14) and Thirlwall (9th edition, 2010, Chapter 14). More multidisciplinary ‘development studies’ texts covering ODA include Desai and Potter (2008: Chapter 10), Clark (2006: Chapter 29) and Chari and Corbridge (2008: Part 6). 5

terms of goals, players and instruments, questioning the validity of the current definition of ODA and foreseeing an eventual end to ODA as conventionally understood. Key issues of the moment, and possible future ‘game changers’, include: the emergence and rise of non-DAC donors (accounting for an increasing proportion of global ODA) (Manning, 2006), contributions from significant private foundations, new financing and delivery mechanisms, and the possible dwarfing of traditional ODA by climate-change financing. Others have focussed on aid governance, aid effectiveness, aid architecture and the relationship between development policy formulation and the aid system – with Barder (2009b), Birdsall (2009), Brainard et al. (2003), Fischer (2009), Hudson and Mosley (2008), McGillivray et al. (2006), and Mavrotas (2010) being particularly notable in this respect. Easterly has also contributed to this discourse through an edited book (2008) in addition to his more polemical book (2007). Table 1 summarises the range of arguments which together make up the case in favour of ODA. Inevitably there are overlaps between some of the categories. For example, the moral-ethical argument relating to poverty reduction can be applied to ODA focused on stimulating economic growth in developing countries, which can also be linked to the selfinterest case for ODA. A number of the elements of the ‘security’ case for ODA might also be linked to economic growth, socio-economic development and the moral-ethical case. Such ‘overlaps’ are common in attempts to set up logical categorisations. The following subsection of the paper focuses on the moral-ethical dimensions of the case for ODA focusing on the theme of this special issue of the journal.

Table 1 about here

2 b The moral-ethical case for ODA 6

Poverty and International Socio-Economic Justice: In an article published in the 1980s Riddell made it clear that public opinion gave ethics a major role in the justification for aid (Riddell, 1986:24) at that time. A recent study found that, depending upon the nature of the question asked, between 50 percent and “over 6 in 10” of a sample supported the moral/ethical stance on aid in the UK (Henson and Lindstrom, 2010). This public view appears to transcend aid-weariness, international security threats and ideological shifts in developed market economies which might have been expected to change public opinion somewhat more. Riddell’s more recent major overview of aid highlights the moral case for aid (Riddell, 2007: Chapters 6, 7, 8 and 9) but other specialist ‘aid’ literature gives little attention to the ethical case. A fundamental argument in favour of richer countries giving aid to poorer countries relates to the application of moral, ethical or humanitarian principles to the phenomenon of global poverty and is analogous to the intellectual basis for income transfers from richer to poorer people within any one country. Economic theory relating to inter-personal welfare comparisons within any particular society has tended to be very restrictive, avoiding moral or ethical judgements.7 However, it is logical that the arguments on which income transfers within a country are based should be extended to the global society. This extension raises The conventional Paretian approach within economic theory is that one welfare position


cannot be said to be ‘better’ than another unless at least one person is better off and nobody is worse off. However, there is a substantial literature which extends Paretian optimal redistribution principles to provide theoretical support for re-distributive public finance systems based particularly on the work of Hochman and Rodgers (see for example Hochman and Rodgers, 1977). Political scientists have focused considerable attention on the concept and practice of global social justice and a recent books by David Miller (2007) and by Richard Miller (2010) for example. 7

questions of legitimacy because there is presently no system of global governance involving conventional forms of democratic consent. The decision-making of many international bodies is based on a form of derived legitimacy through representation of member governments, and this lies behind acceptance of the 0.7 per cent of Gross National Income target for ODA by the international community. The principle of the more privileged in – global – society giving some of their income through ODA to those who are less privileged is a form of international socio-economic justice comparable with the adoption of progressive taxation and public expenditure programmes by national governments.8 Since most richer countries have elements of poverty within their societies, and poorer countries have elements of privilege within theirs, it is logical that international aid programmes which have poverty reduction objectives (such as the adoption of the MDGs) would not aim to enrich the more privileged groups within developing countries. ODA as Compensation: One aspect of the case for ODA as compensation from richer countries to poorer countries case is based on past ‘transgressions’ of the former colonial powers, including the slave trade. To the extent that imperialism/colonialism exploited or immiserated former colonies it may be argued that transfers should be made from the former colonial powers to the countries which suffered from the exploitation. The economic impact of the slave trade can be compared to that of the extraction of mineral wealth (i.e. plundering rather than commercial transactions recognising the property rights of the indigenous population) in its immiserating effects. It would be extremely difficult to place a value on the level of transfers which might be associated with this ‘exploitation’ element of the case for aid, and many people within the

Tribe and Lafon (2010) report the view that ODA transfers should become, at least partially,

automatic in the form of ‘international taxation’ and this view received support from a thousand economists in a letter to the G20 and its adviser, Bill Gates in April 2011 (Europeans for Financial Reform, 2011). 8

richer countries would reject these arguments for compensation either on the grounds that ‘exploitation’ simply reflects legitimate market forces, or that their country was not involved in the slave trade or in past imperial/colonial exploitation. Equally, not all developing countries were involved in these forms of colonial exploitation, and of those which the impacts were diverse. Fair and equitable compensation would be difficult to achieve even if basic principles relating to the impact of exploitation were to be accepted. A more tangible aspect of the ‘compensation’ argument relates to contemporary, rather than past, ‘exploitation’ either through movements of the international terms of trade against developing countries (and in favour of the richer countries), or through the process of richer countries receiving merchandise imports from countries which have significant reserves of cheap labour in an international variation of the ‘Lewis model’ (Tribe, Nixson and Sumner, 2010: Chapter 2). This has been recognised in two particular instances relating to distinctly different logical arguments: i) In a review of the impact of Structural Adjustment Programmes on six sub-Saharan African countries it was found that during the “adjustment period” ODA had been at a level which offset income lost through deterioration of the international terms of trade, implying that ODA had not made any net contribution to these economies (Husain, 1994: 7). Although this link to a compensatory principle is uncommon in official discussions of aid policy the fact that it appeared in a World Bank source is of great interest. These arguments relate to secular deterioration in the net barter terms of trade and its impact on the international purchasing power of developing country exports, essentially based on the well-established arguments of the Prebisch-Singer thesis and its derivatives (Tribe, Nixson and Sumner, 2010: Chapter 2). ii) The EU’s STABEX programme was devised in order to cushion the economic impact of fluctuations in export earnings due to changing world market conditions (Aiello, 9

1999). The STABEX scheme was never intended to relate to the deterioration of international terms of trade, but was explicitly focussed on the uncertainties created by fluctuating export revenues – focussed on instability rather than on secular and sustained changes in international trading relationships. Poverty Reduction through Economic Growth: A more dynamic framework relating to the positive relationship between economic growth and poverty reduction in developing countries would emphasise the role of ODA in contributing to sustained economic growth and to poverty reduction. This contrasts with an alternative approach emphasising static income redistribution from high income countries to poorer countries. The link between economic growth in developing countries and poverty reduction is provided by the ‘poverty elasticity of growth’.9 ODA which supports agricultural, industrial, infrastructural or trade development as part of the economic growth and development programmes of recipient countries is directly related to objectives of long-term sustainable poverty reduction through the link between economic growth and reduced poverty. Historically there has been emphasis on a ‘two-gap’ approach to analysis of the contribution of ODA to economic growth in recipient countries, dating back to a paper by Chenery and Strout (1966). The intellectual basis for this approach consists of the notion that ODA provides funds which supplement domestic savings (and private capital inflows) and therefore increases the capacity to invest, which should have the result of increasing the rate of economic growth. However, investment in recipient countries tends to be foreign exchange intensive, so that the binding constraint may not be savings per se but rather foreign exchange availability. Through providing foreign exchange, ODA was viewed as easing both these

The poverty elasticity of growth links economic growth to poverty reduction (Heltberg,

2002; McKinley, 2009), and is a more sophisticated approach to the growth/poverty relationship than that provided by Dollar and Kraay in their ‘Growth is Good for the Poor’ (Dollar and Kraay, 2002 and 2004). 10

savings and foreign exchange constraints – or what are referred to as the ‘financing gap’. This ‘financing gap’ is based on the difference between the levels of savings and investment required to sustain the rate of economic growth which is aspired to, and the levels available in the absence of ODA. The ‘financing gap’ approach has been criticised robustly by Easterly (1999) and, more recently, by Clemens and Moss (2005). Such papers do though implicitly omit reference to the role which ODA can have in the context of contemporary economic growth theory. This ‘modern’ growth theory emphasises the roles of technology change, institutional change, labour force quality and the ‘economic environment’, in addition to savings and investment rates, within what is referred to as ‘endogenous growth’ (Pack, 1994; Romer, 1994; Tribe, Nixson and Sumner, 2010: Chapter 4).10 Although there has been little research on the contribution of ODA to ‘endogenous growth’ there can be little doubt that it is probably quite substantial and that it needs to be incorporated more fully into discussion of the relationship between ODA flows, economic growth and poverty reduction. White (1992) provides a systematic review of many of the macroeconomic issues associated with the impact of ODA on the economies of recipient countries and Killick and Foster (2011) have recently revisited such arguments for Africa in depth. One implication of all this is that for aid to have a poverty-reducing role it does not necessarily have to be committed to explicitly poverty-related projects, programmes or policies. Equally, a broader definition of poverty which extends beyond income poverty means that public health, water and sanitation and other social infrastructure development programmes usually have clear poverty-reducing impacts – being evident in improvements to Human Development Index or Human Poverty Index composite indicators. These programmes often involve a ‘public goods’ dimension in the sense that benefits to the individual arise through community-based services.

A more elaborate criticism of the financing gap approach to ODA is contained within a

forthcoming paper by Sumner and Tribe (2011 forthcoming). 11

While ‘poverty reduction’ is often used as a short-hand for promoting widespread, poverty-reducing economic growth, in reality there are a series of trade-offs and sacrifices which come at the expense of facilitating such growth. If the focus of donor objectives is simply on the growth aspect of poverty reduction there is a risk of marginalising other legitimate objectives, such as reducing chronic poverty or providing social services (Barder 2009a: 1-2). In contrast, by adopting too many diverse objectives, donors risk negatively affecting the performance of ODA (Edgren 2002). Indeed, Easterly (2002: 39-40), for one, has argued for a reduction in our expectations: “Aid agencies should set more modest objectives than expecting aid to launch the takeoff into self-sustained growth”. Climate Change and the Environment: Another form of compensation linked to ODA recognises the negative economic role which the demonstrable global environmental impact of high developed country consumption levels (and global warming emission levels) has on developing countries, and on their agricultural production in particular (for a detailed review of studies of climate related poverty impacts see Skoufias et al., 2011). This is an example of the transmission of international external diseconomies. However, the forms of compensation which have been suggested, for example in documents produced at the time of the 2009 international conference in Copenhagen (UNFCCC, 2008), have not usually been conceptualised as being part of ODA. However, in the new, wider, view of ODA reflected in Table 1 this type of financial flow does need to be included although whether ‘climate finance’ is additional to, or part of, ODA has been a source of considerable discussion. Conflict and Stress: One of the most challenging issues within international development has been the role of conflict and civil strife in dislocating economies and societies over long periods of time. This has been notable in sub-Saharan Africa and South East Asia in particular, but extends to other regions as well. The response of the ODA sector to this problem has involved two strands: efforts to control and resolve conflict, including 12

provision of international armed forces (which also relate to the international security argument for ODA), and contributions to the recovery and rebuilding of fragmented economies and societies. It is the second of these which properly belongs within the ethical/moral argument for ODA through the application of the principles of international social justice (Fukuda-Parr, 2010). Responses to Disasters: The final element of the moral/ethical case for aid relates to international responses to disasters. This argument has an illustrious record and has become considerably more sophisticated over the years and now involves significant collaboration between bilateral aid agencies, international institutions and international NGOs. Governmental institutions contribute not only funds but also a coordinating and emergency response role (see for example DFID, 2010b).

2c The Case Against ODA There have been considerable arguments marshalled against ODA over the years from a diversity of political perspectives. Bauer (1972), Moyo (2009), Hayter (1971) and Escobar (1995) approach the issues from a range of radical positions across the political spectrum. Others, and Easterly (2007) in particular, have launched their criticisms from a more apolitical stance.11 Essentially these negative perceptions are of a long-term nature, and shorter-period fiscal constraints are not directly relevant. Be that as it may, those who take a negative overall view of ODA would be likely to welcome short-period cuts in ODA commitments and would wish to convert them into long-term reductions. It should be apparent that, to a considerable extent, negative views of ODA do not place a high priority on

A very good summary of some of the main arguments for and against ODA can be found

in a recent working paper by de Haan (2009). Discussion of the diverse views of the nature of ‘development’, including the position of the ODA donor community, can be found in Chapter 2 of Sumner and Tribe (2008). 13

the moral-ethical case in favour of ODA. Broadly the case against ODA might be broken down into six elements: First, ODA has consistently under-achieved its objectives, and the record of aid effectiveness is not good. This argument is contentious but is significantly dependent upon empirical evidence, which is itself open to question (see the systematic review by Doucouliagos and Paldam, 2009). Booth (2011) reminds us of the limited role which external assistance can play in fostering or developing political economy processes within recipient countries. Second, ODA is an inefficient means of achieving long-term economic growth and poverty-reducing objectives, and it is better to depend on market solutions in aiming for these objectives (this is the argument of Moyo, 2009). This element is dependent upon ideological pre-conceptions to a considerable extent, representing the neo-liberal critique of aid. Third, ODA suffers considerably from the heavy hand of bureaucracy, making it unresponsive to democratic pressures, and leading to a ‘donor-driven’ set of priorities and predilections. This is a variant of the second element in many respects, but does not necessarily include the ideological baggage of the neo-liberal view of the world (de Haan, 2009). Fourth, ODA has consistently failed to tackle corruption, and has tended to reinforce privilege and power-relations in recipient countries (de Haan, 2009). Fifth, a view which is found in domestic political discourse in donor countries explicitly rejects ethical and moral arguments supporting ODA, reverting to a myopic nationalism and taking the view that advanced industrial countries should focus on domestic issues rather than commit resources to the reduction of poverty in the rest of the world (see for example blog responses from the public to The Guardian, 2010; or Scottish Daily Express, 2011). This position is not directly identified in de Haan’s (2009) review paper, but needs to be recognised explicitly. Sixth, ODA perpetuates a neo-colonial, or imperialist, relationship between ‘recipients’ and ‘donors’ (former metropolitan powers – vide the views of Alesina and Dollar, 2000) which is mainly to the advantage of the donors 14

and to more privileged groups in recipient countries (Hayter, 1971 and Escobar, 1995). Set against these longer term arguments against aid are those which take the view, in the shorter term, that ODA should take its ‘fair share’ of public expenditure cuts at a time when a serious economic and financial crisis has occurred in the developed market economies, comparable with (and probably more serious than) the East Asian crisis of 1997. In many respects this argument for short-term, temporary, cuts in ODA do not necessarily imply an antagonistic view of ODA in the longer-term, but at least represent an ‘agnostic’ view.


3. ODA and fiscal constraints associated with the global financial/economic crisis A major issue for this paper is whether fiscal constraints, and public expenditure cutbacks, which are currently being experienced across developed market economies should be the basis for reductions in allocations of ODA. This is essentially a short-term preoccupation, rather than being within a long-term perspective of the appropriate position of ODA with public expenditure commitments by donor countries. In this section, in addition to attempting to identify the extent of the economic contraction in OECD countries caused by the 20072010 global economic crisis, a series of arguments in favour of maintaining, or even increasing ODA, in this time of economic crisis will be elaborated, followed by a series of arguments for reductions in ODA at this time. Table 2 presents data taken from the OECD online statistical country profiles (OECD, 2011) for fourteen developed market economies. The main limitations of this data are that for key variables they end at 2008, and cannot provide any indication of the intentions of the governments of these countries with respect to ODA commitments beyond the end of 2008. Five of these countries experienced a decline in GDP between 2007 and 2008, and the remainder experienced a reduction in the rate of economic growth. Between 2008 and 2009 twelve of the countries experienced a decline in GDP ranging between 5.6 (Ireland) and 0.5 per cent (France). However, by the end of 2010 thirteen of the countries were again experiencing increases in GDP, the exception being Ireland, suggesting that most of these economies are resilient and that the decline resulting from the crisis was only a temporary phenomenon.12

Some of these OECD countries have experienced economic setbacks which are not directly

associated with the main financial-economic crisis of 2008-2010 which are likely to delay recovery, and to influence public expenditure levels and allocations. Examples include the sustained impacts of the very considerable Irish financial sector crisis and of the Japanese earthquake and tsunami of early 2011. There is also a possibility that the current UK 16

Table 2 about here

From the perspective of this paper the incidence of fiscal constraints are manifested by a combination of reductions in GDP and reductions in the proportion of GDP received by governments in the form of tax revenue. For the eleven countries with data on tax revenue available from the OECD, only one has an increase in the proportion of GDP taken as tax revenue between 2007 and 2008, although some of the changes are comparatively marginal and are within the context of fluctuations rather than distinct trends. The data in Table 2 on the percentage of GNI committed to ODA is of special interest. To some extent countries fall into clusters – some having around 0.2 per cent, some around 0.4-0.5 per cent, and others having around 0.8-0.9 per cent committed to ODA. The first group includes Italy, Japan and the USA; the second includes Australia, Canada, Finland, France, Germany and the UK; and the third includes Denmark, the Netherlands, Norway and Sweden; Ireland represents a transitional case with an increase from about 0.3 per cent in 2000 to about 0.6 per cent in 2008. Eleven of the fourteen countries have either attained, or are within reach of, the 0.7 per cent target: there is significant international consensus in practice.

Table 3 about here

Table 3 provides some more easily comprehended statistics on the reduction in GDP for six OECD countries from the beginning of 2008 until the end of 2009, taken from an


OECD table presenting comparative data for economic/financial crises since the 1970s13. For these countries the reduction ranges from a low of about 2 per cent for the USA to a high of about 6 per cent for the UK and Italy. The implication of this is that government revenues would have been expected to have fallen by approximately the same proportion as GDP.

Table 4 about here

Table 4 presents some calculations based on an assumption that there is an approximate equivalence between GDP (Gross Domestic Product) and GNI (Gross National Income) giving an estimation for the proportion of total tax revenue allocated to ODA in


these fourteen countries.14 The proportion of Total Tax Revenue committed to ODA depends in part on the ratio of tax revenue to GDP. For example, in Ireland tax revenue is about 30 per cent of GDP, so that the 0.6 per cent of GNI contributed as ODA represents about 2 per cent of total tax revenue and for the UK the equivalent proportion is about 1.2 per cent of tax revenue. The UK’s GDP fell by about 6 per cent between the beginning of 2008 and the end of 2009, so that if tax revenue fell proportionately, and for ODA to contract in line, it would have to fall by about 0.07 per cent of the total tax revenue in 2008 (i.e. 6 per cent of 1.21 per cent), a comparatively insignificant change in the context of public expenditure management as a whole. This review of the economic and public finance impacts of the global crisis suggests that if ODA were to have been reduced in line with fiscal constraints the economic and financial dimension would hardly have been significant, and would perhaps have been regarded as nominal and symbolic. We will now set out some of the issues relating to support for ODA in the context of the current global financial and economic crisis. The first relates to the ‘0.7 per cent target’, the second to a mutuality of interest, the third to the nature of the ODA commitment process, the fourth to emergency and disaster-related aid, the fifth to security arguments, and the sixth to environmental arguments. The target 0.7 per cent of GNI as ODA from economically advanced countries is a long term one, and several countries experiencing contraction of GDP and of tax revenues during the current crisis have not yet reached it (see Table 2). For most of these countries even with the contraction of GDP, holding ODA constant would still not lead to the 0.7 per cent target being met. Indeed, for the UK even with a substantial increase in ODA over the current spending review period the target will barely be met by 2013 (HM Treasury, 2010: 6). This provides a partial argument for maintaining or increasing ODA despite the short-term 19

contraction of GDP. One of the key ‘mutuality’ arguments supporting ODA has related to expenditures from aid disbursements being made in the domestic economies of donor countries. The Accra Agenda for Action committed donors to ‘untie’ ODA, potentially increasing the effectiveness of ODA, but reducing the ‘mutuality’ element (OECD-DAC, 2008). However in practice, even for donor countries which have most or all of their ODA ‘untied’, there are still


significant expenditures from ODA programmes which occur in their domestic economies.15 Expenditure on, for example, capital equipment, consumables, consultancy fees and scholarships can strengthen the mutuality of interest in maintaining or increasing ODA commitments. Recipients obtain tangible benefits from ODA, and donors benefit from expenditure through its favourable impact on the ‘home’ economy and on recovery from the crisis. One factor making short period cutbacks in ODA commitments dysfunctional is that they would be made in a medium- to long-term context. Individual development programme aid allocations are made for expenditures over a number of years ahead, rather than for single years. Short-term cuts therefore run the risk of endangering the projected outcomes from past expenditures in these development programmes, risking higher degrees of ‘waste’. ODA which is committed to emergency and disaster aid could be subject to cuts simply because the reasons for the expenditures are not foreseeable at the time of setting budgets. Donor governments might therefore reduce budget commitments for emergency and disaster relief, citing the significance of private contributions by the general public as one form of justification. However, this type of ODA probably has considerable public support, with media reporting of international emergencies and disasters being very visible and eliciting great public sympathy. Likewise, ODA linked to international security issues can receive significant support, particularly where linked with domestic security threats in donor countries and to military actions in countries where donors have committed armed forces (such as Afghanistan). International peace-keeping actions, where linked to ODA expenditure, might also be regarded as having a strong argument for ring-fencing. Equally, the arguments for retaining ODA expenditures associated with the environment are also likely to be strong since these are of a long-term nature and ‘mutuality’ links exist between donor and recipient countries. International inter-connectedness is likely 21

to be a significant factor supporting a case for maintaining ‘environmental’ ODA. Another approach relating to potential ODA cutbacks would be to increase sectoral selectivity. The social sectors have particularly benefited from ODA increases over the last decade. At a global level bilateral ODA went up in absolute terms between 2000 and 2008 from $46bn to $74bn and from 0.14 per cent of donors’ GNI to 0.20 per cent but has actually fallen slightly as a percentage of recipients’ GNI (McKinley, 2010). There has been a structural shift towards social sector allocations and away from economic and productive sectors. In absolute terms, social sector, bilateral ODA spending has doubled between 2000 and 2008 from about US$20bn/year to over US$40bn/year. In contrast production-sector ODA has stagnated (McKinley, 2010). In this sense a form of selectivity has already been operating, with increasing focus on ‘direct’ poverty reduction through social sector interventions as opposed to ‘indirect’ poverty reduction through focussing on infrastructure and productive sector interventions. Reducing ODA commitments can also be related to directing aid more selectively to countries with a high proportion of the world’s poor. It is arguable that some ‘poor’ countries contain only a small proportion of the world’s poor people, while other lower middle or even upper middle income countries, through being more populous, contain a higher proportion of the world’s poor. Through switching ODA to focus more finely on higher concentrations of the world’s poor, and away from a focus on ‘poor countries’, could have a larger impact on global poverty. Evans (2010) and Sumner (2010) and Kanbur and Sumner (2011) have discussed this ‘new geography of global poverty’ which includes the proposition that many of the world’s poor live in middle income countries such as India and Indonesia that may – in the medium term – neither need nor request significant levels of ODA and will instead of resource transfers be more interested in ‘policy coherence’ meaning the range of non-aid development policies such as trade, tax havens, migration and remittance policy and so on 22

and global public goods. ODA might then be increasingly focused in an ever smaller number of low income countries that are fragile or conflict-affected states (Moss and Leo, 2011). However, even if some middle-income countries can support their own poverty reduction programmes through internal resource mobilisation others cannot (Ravallion, 2009) and even in countries with substantial resources the poor will often lack ‘voice’ within governance structures. Further, some countries such as Pakistan are only just within the ‘middle income threshold’ so that withdrawing ODA suddenly could lead to a slip back into the ‘low income’ status. The issues discussed above are illustrative of changes in financial and economic conditions in developing countries over the years, so that some of these countries now have substantial domestic resources and are even donors themselves (see for example Manning, 2006). Estimates for India’s aid programme are $550m in 2008, for China’s aid programme are in the region of at least $1-2bn/year, and Brazil’s aid programme is estimated at


$1bn/year.16 This would mean that new donors are set to overtake some ‘traditional’ DAC donors including Australia, Belgium, or Denmark. At the same time net annual ODA into India is $2.1bn and to China $1.5bn raising a question over the ethical case for ODA flows to countries which themselves have substantial domestic resources (World Bank, 2010). However, fragile and conflict-affected states are regarded as having a very strong case as recipients of ODA, particularly where the mobilisation of domestic resources, including tax revenue, is a particular problem (for ‘fiscal space’ in low income countries see Kyrili and Martin, 2010). However, whether ODA can be absorbed in fragile states and even non-fragile low income countries remains a point of contention (Killick and Foster, 2011; Feeny and McGillivray et al., 2010).

4. Conclusion In this paper we have sought to present a coherent set of arguments in discussing issues surrounding the cases for and against reducing, maintaining or increasing the level of ODA commitments to developing countries by donors in fiscally constrained times. These arguments fall broadly into two categories: the moral or ethical case and the self-interest case. The paper focused mainly on the moral and ethical case, but in relating to donor responses to fiscal constraints the self-interest case was found to be significant. There are significant long-term arguments based on the moral/ethical case in favour of donor commitments to ODA. The arguments against ODA tend not to consider the moral/ethical case, rejecting it in an extreme variant, and also do not give much attention to the self-interest case. Some of those taking an antagonistic or agnostic view of ODA would accept a moral/ethical case with respect to emergency relief in particular. There have been significant arguments marshalled in favour of making ODA more selective and effective, and more responsive to global socio-economic structural change. Donor-related arguments in 24

favour of ODA reform focus on changing sectoral priorities, the ‘new geography of poverty’, and changes in aid allocation criteria. The arguments for and against ODA relate to long-term considerations rather than to short-term considerations linked with temporary economic, financial and fiscal constraints. The recovery of most OECD economies from the 2008-2010 crisis has followed soon after the decline, making the case for short term cuts in ODA weaker. From the viewpoint of donor countries there are arguments for maintaining or increasing ODA during economic and financial crises as a measure contributing to recovery strategies, based largely on the selfinterest case. The case for ODA is stronger for fragile and conflict-affected states, and particularly those with serious crisis impacts, based on both the moral/ethical and self-interest cases.


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Table 1 Table 1. Arguments in favour of ODA
Arguments in favour of ODA Ethical-Moral arguments Compassion/humanitarian Compensation Aid is required to address or promote… Poverty and deprivation Compensation for colonialism; unfair trade and investment patterns; climate change Impact of natural or man made disasters Redress for the adverse effects of developed country impacts on the global environment to the detriment of developing countries Conflict prevention, resolution, and reparation Improve welfare in both donor and recipient countries: income growth in developing countries creates markets for developed countries’ exports; income growth in developed countries creates markets for developing countries’ exports To support commercial interests of donors -development of economic and social infrastructure (transport, education etc) improves economic performance of MNCs; supply of essential materials and agricultural products at competitive prices aids profitability of international firms Ensure ‘spillovers’ from conflict and fragility don’t create international problems; to support geo political interests of donors Examples of references in the literature Riddell, 2007. Aiello, 1999, Husain and Faruqee, 1994, Miller, 2007; Nixson, 2007-8. Wisner et al, 2004. UNFCCC, 2008.

Disasters Climate change Environmental

Self interest arguments

Conflict and Stress – fragile states Mutuality in income growth/welfare

Fukuda-Parr, 2010. Independent Commission on International Development Issues, 1980; Sayanak and Lahiri. 2009.

Supply of raw materials and agricultural products

Baulch, 2006; Berthelemy, 2005.

International security

Berthelemy, 2005; Hattori 2001; Riddell, 2007.


Table 2


Table 2 – GDP, Government Revenue and ODA Statistics for Selected OECD Countries
2000 Australia GDP growth (annual %) Total Tax Rev. (%GDP) Net ODA (%GNI) 1.90 31.1 4 0.27 2005 3.00 30.8 2 0.25 2006 3.30 30.6 3 0.30 2007 3.68 30.8 3 0.32 2008 2.29 n.a. 0.32 0.29* * 0.32** * 2009* 2.61* 2010* 2.71*

Canada GDP growth (%) Total Tax Rev. (%GDP) Net ODA (%GNI) Denmark GDP growth (%) Total Tax Rev. (%GDP) Net ODA (%GNI) Finland GDP growth (%) Total Tax Rev. (%GDP) Net ODA (%GNI) France GDP growth (%) Total Tax Rev. (%GDP)

5.23 35.6 4 0.25 3.53 49.3 6 1.06 5.06 47.2 2 0.31 3.91 44.3 5

3.02 33.3 8 0.34 2.45 50.8 2 0.81 2.77 44.0 1 0.46 1.90 43.9 1

2.85 33.5 5 0.29 3.39 49.6 3 0.80 4.92 43.4 8 0.40 2.22 44.0 5

2.53 33.2 8 0.29 1.69 48.6 7 0.81 4.20 43.0 1 0.39 2.32 43.4 7

0.41 32.1 7 0.32 -0.87 48.2 9 0.82 1.04 42.7 8 0.44 0.43 43.0 7

-1.10* 0.30* * -3.11* 0.88* * -5.52* 0.54* * -0.52*

3.21* 0.33** * 2.67* 0.90** * 5.05* 0.55** * 1.47*

government’s strategic reduction in public expenditure will slow economic recovery from the crisis, compounding the variety of country experiences.

The statistics in Table 3 come from the same OECD source as those in

Table 2 but there are apparent inconsistencies between the two tables, which can be reconciled. For example, for the UK Q4 of 2008 has a GDP decline of 2.75% over the same quarter in 2007, and for 2009 the equivalent figure was 2.84%, giving a cumulative reduction over the two years of 5.5%, much closer to the decline of about 6% reported in Table 3.

knowledge of the differences between these two measures.

This issue is explored in the 2010 OECD-DAC Annual Report (OECD-

Data were not available for two of the countries for 2008, but the

DAC, 2010: 16, 23, 225 and 226).

calculation could readily be made for 2007. In the OECD source for the statistics in Table 2 Total Tax Revenue is given as a proportion of GDP and ODA is given as a proportion of GNI (as is conventional) with the ‘heroic’ assumption of identity between GDP and GNI having been made in full 38

On India’s aid programme see Ramachandran and Walz, 2010; on

China’s see Lum et al., 2009 or Lancaster, 2007b; and on Brazils’ see Cabral and Weinstock, 2010. Another interesting source on this issue is Dreher et al., 2010.

Net ODA (%GNI) Germany GDP growth (%) Total Tax Rev. (%GDP) Net ODA (%GNI) Ireland GDP growth (%) Total Tax Rev. (%GDP) Net ODA (%GNI)

0.30 3.21 37.1 9 0.27 9.45 31.2 8 0.29

0.47 0.75 34.7 9 0.36 6.18 30.3 6 0.42

0.47 3.16 35.5 9 0.36 5.36 31.6 9 0.54

0.38 2.47 36.1 7 0.37 6.02 30.8 1 0.55

0.39 1.26 36.4 3 0.38 -3.04 28.2 6 0.59

0.47* * -2.00* 0.35* * -5.64* 0.54* *

0.50** * 5.05* 0.38** * -0.69* 0.53** *

0.76 Sweden 4.40 51.7 9 0.80 UK 3.92 36.3 9 0.32 USA 4.17 29.8 9 0.10

0.94 3.30 49.4 8 0.94 2.17 35.7 6 0.47 3.06 27.5 4 0.23

0.89 4.25 49.0 5 1.02 2.85 36.6 2 0.51 2.67 28.2 0 0.18

0.95 2.54 48.3 1 0.93 2.56 36.0 8 0.35 2.14 28.2 9 0.16

0.88 -0.22 47.1 1 0.98 0.55 35.7 1 0.43 0.42 26.8 6 0.19

1.06** -1.60*

1.10*** 7.23*

1.12** -2.84*

0.97*** 1.46*

0.52** 0.19*

0.56*** 2.70*



continued Italy

2000 3.69 42.2 9 0.13

2005 0.66 40.8 5 0.29 1.93 27.4 0 0.28 2.05 38.5 0 0.82 2.74 43.5 2

2006 2.04 42.3 4 0.20 2.04 27.9 7 0.25 3.39 38.9 1 0.81 2.28 43.9 7

2007 1.56 43.4 6 0.19 2.39 28.3 3 0.17 3.61 37.5 4 0.81 3.13 43.6 3

2008 -1.04 43.1 7 0.22 -0.70 .. 0.19 2.00 .. 0.80 2.13 42.0 9

2009* -2.91*

2010* 1.49*

0.16** -1.75*

0.15*** 2.53*

Japan 2.86 27.0 0 0.28 Netherlands 3.94 39.6 6 0.84 Norway 3.25 42.6 4 -0.89* 1.54* -2.44* 2.09*






Notes to Table 2 Notes to Table 2: Notes: * These quarterly statistics represent the percentage change compared with the same quarter in the previous year ** These statistics are from the OECD-DAC’s ‘Aid Flows’ website provided in collaboration with the World Bank – accessed on 28th March 2011 from oecd.org. *** These statistics are from the OECD’s Newsroom “Development aid reaches an historic high in 2010 – accessed on 9th April 2011 from www.oecd.org Source: OECD, 2011 - Statistics: Country Profiles - www.oecd.org


Table 3 Table 3 – Reduction in GDP for Selected OECD Countries 2008-09 2008 2009 Time Period Q1-2008 Q2-2008 Q3-2008 Q4-2008 Q1-2009 Q2-2009 Q3-2009 Q4-2009 France 100.00 99.56 99.32 97.81 96.49 96.80 97.05 .. Germany 100.00 99.44 99.12 96.70 93.28 93.69 94.37 .. Italy 100.00 99.44 98.64 96.61 93.98 93.52 94.05 .. Japan 100.00 97.91 96.91 94.34 91.41 92.02 92.33 .. UK 100.00 99.92 98.99 97.21 94.76 94.12 93.97 94.06 USA .. 100.00 99.32 97.96 96.35 96.17 96.70 98.06 Source: OECD, 2011 - Statistics: Country Profiles - www.oecd.org


Table 4

Table 4 Net ODA as a percentage of Total Tax Revenue 2008 Australia Canada Denmark Finland France Germany Ireland n.a. 1.01 1.69 1.02 0.89 1.05 2.09 Italy Japan Netherlands Norway Sweden United Kingdom United States 0.50 n.a. n.a. 2.09 2.08 1.21 0.69

Note: The data in this table are based on the assumption of an equivalence between GDP and GNI statistics, which is not perfect but gives an indicative order of magnitude. Source: calculated from OECD, 2011 - Statistics: Country Profiles - www.oecd.org


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