Unit 5: ODA

1. Overview of official development assistance (ODA)

1.1 Definition of ODA
- OECD: ODA is financial resource provided by official
agencies (government, non-government organizations, inter-
government or international organization) to LDCs or
developing countries in an effort to promote their economic
and welfare development.
- WB: ODA finances certain types of projects that promise
large social and economic returns but nevertheless seldom
attract the interest of private capital.
- Aid provided by the US through the Marshall Plan to
Western Europe amounting to as much as 2.5% of the donor’s
GNP, played a vital role in securing European recovery from
the WWII after 1948.
- In 1960, WB established IDA, an affiliate, to provide highly
concessional assistance (50 year loans with a zero interest
rate and a substantial grace period) to the poorest
countries.
- UN adopted target is that the each donor was supposed to
contribute at 1% of GNP. But the OECD DAC targeted to
contribute 0.7% of GNP of each donor to ODA fund. But
so far only 0.4% of donors’ GNP was collected every year.
1.2 Classification of ODA
1.2.1 According to preferential treatment, ODA are
classified into 3 types:
- Non-refundable aid is grant not to be refunded.
- Refundable aid is concessional loans.
- Mixed aid includes both non-refundable and refundable
aid.
 1.2.2 According to purpose, ODA is classified:
 - Development aid (accounting for 50 – 60 percent) is
directly controlled, structured and paid off by the recipient
governments and is used for:
 (i) basic infrastructure projects;
 (ii) sustainable development projects including
employment creation, poverty reduction, environment
protection;
 (iii) projects in agricultural, forestry, fishery or other
leading sectors (in this category, responsibility for loan
use, management and payment off is handed over to
enterprises).
 - Technical advice is used for (a) expert training, (b)
competence improvement of government organs, (c)
economic and institutional reforms. Normally, this is non-
refundable ODA.
 - Balance payment support (or otherwise called structural
adjustment loan) is used to assist recipient government in
paying off due principal and accumulated debt service fees.
In some cases, it helps recipient countries recover after a
financial crisis.
 - Humanitarian and relief aid include emergency, food and
disaster or war relief aid. It accounts for a small proportion
in total aid.
 - Military aid mainly consists of bilateral aid to allied
countries during the Cold War. The U.S. and former Soviet
Union were the two largest donors of military aid..
 1.2.3. Per conditions to be attached aid granting, ODA
includes:
 - Non-tied means that ODA is provided with no conditions
attached to specific suppliers or purposes.
 - Tied is ODA tied to specific conditions such as:
 (i) suppliers: purchase of recipient countries is limited to
some exports from the donor (where bilateral aid is
applicable) or donors (where multilateral aid is applicable)
and;
 (ii) purposes: aid is used for predetermined sectors or
projects.
 - Mixed has a proportion of it to be tied to suppliers in the
donor country, the remainder is not tied.
 Generally, conditionality set up certain difficulties for
recipient countries. ODA is clearly differed from foreign
direct investment in this very point.
 1.2.4 Per forms, ODA is classified:
 - Project ODA is used for specific projects. This type may
include technical advice, ODA for basic infrastructure,
non-refundable or concessional aid and is the principal
type of aid.
 - Non-project ODA includes:
 (i) balance payment support: direct financing or provision
of goods. Foreign currencies and goods are transferred to
the recipient country to support its budget;
 (ii) debt payment support provide developing countries
with a helpful tool in paying off some due debts in order
to gain additional loans or to reduce debt burden and
pressure on the economy;
 (iii) Program ODA is provided on certain time frame for
broad purposes rather than being limited to specific ones.
 1.2.5 Per financial sources, ODA is classified into
bilateral and multilateral
 - Bilateral aid is mainly originated from: (i) DAC
members; (ii) OPEC countries and; (iii) former Soviet
Union and Eastern European countries; (iv) NGOs
 - Multilateral aid agencies, including:
 (i) The specialized agencies of the United Nations, such as
UNDP, UNICEF, WFP, UNFPA, WHO, FAO;
 (ii) EU;
 (iii) Non-government organizations (INGOs);
 (iv) International Financial Institutions, such as IMF, WB,
ADB, the African Development Bank (AfDB), OPEC
Assistance Fund; Kuwai Fund.
 2. ODA Provision Strategy of the donors
 The basic strategies and philosophies of development
underlying foreign aid have shifted markedly over time.
Below are five major approaches:
 2.1 Strategy in the fifties and sixties: a top-down
strategy
 - Development was equated with industrialization and the
expansion of the largely urban-based “modern” sectors of
Third World economies at the expense of the “traditional”
rural sectors.
 - Most lending went to state-owned infrastructure projects,
including such as dams, roads, electrical grids,
communications networks, and port facilities.
 - Agriculture took a back seat to industry, and the rural
population was viewed primarily as an enormous reserve of
potential wage labor.
 =>the benefits of industrialization were not tricking clown
to the poor majority as its expectations.
 2.2 Strategies in the seventies: bottom-up strategy
 - The IDA (WB) began to focus more directly on
eliminating Third World poverty. This orientation was often
referred to under the slogan of “growth with equity”.
 - It was expected that poor people, if given the proper
training and financial resources, could become productive
contributors to development rather than drags upon it.
 - Some critics charged that much of the money allocated for
the poor actually benefited those who were already
relatively well-off in Third World societies, either because
elites found ways of siphoning off aid for their own uses or
because aid agencies used too sweeping definition of the
poor.
 2.3 Strategies in the eighties
 - Previous approaches to foreign aid placed too little
emphasis on the encouragement of free markets and private
enterprise. The centerpiece of the new strategy designed to
correct this oversight became known as “policy dialogue”.
 - The WB began to expand program and structural
adjustment lending. These loans were not tied to specific
projects, as in the past, but instead provided budgetary or
balance of payments support.
 - To qualify for such loans, recipient governments were
required to agree to policy reforms, namely:
 (i) the privatize state-owned enterprises: (IFC),
 (ii) cut down social welfare subsidies,
 (iii) reduce government budget deficits,
 (iv) lower trade barriers,
 (v) and the eliminate barriers to foreign investment.
 - These demands were justified on the grounds that strong
state intervention stifled economic growth and that aid
provided leverage to correct such impediments to
development.
 2.4 Strategies in the nineties
 - ODA in the 90 decade have brought two new
programmatic objectives: sustainable development and
democracy promotion.
 - The so-called Earth Summit, held in Rio de Janeiro,
Brazil, in June of 1992 called for aid agencies to reallocate
some existing funds toward environmental projects
 - The eighties and early nineties witnessed a wave of
democratization in the Third World and the former Soviet
bloc. Northern countries, led by US, have directed a small
but growing proportion of ODA to nurture and strengthens
these fledgling democracies.
 2.5 Strategies at the present time
 - DAC donors have restructured their owned ODA organs to
operate more effectively.
 - DAC focused its operations on four priorities, namely: (i)
promoting democracy, (ii) protecting the environmental,
(iii) fostering sustainable development and (iv) controlling
population growth to achieve millennium goals:
 a. to reduce one half of the poor in 2015;
 b. to make compulsory primary education available in
2015;
 c. to eliminate gender discrimination in primary and high
education in 2005 as a progress to sex equality;
 d. to reduce infant and child mortality rate by two thirds
and mature mortality rate by three quarters in 2015;
 e. to perfect initial health care, ensure pregnancy health in
2015;
 g. to implement national and global strategies for
sustainable development;
 h. to focus on environment protection.
 - Many experts proposed developed countries to increase
their ODA to GNP ratio from 0.25% in 2004 up to 0.54 %
in 2015 to raise $ 180 billions in absolute terms, threefold as
compared to 2005 level.
 3. ODA Assessment
 3.1 For donor economies
 3.1.1 Strengthen the donor political position and their
influence in the international arena
 - In donor countries, aid agencies mostly belong to the
Ministry of Foreign Affairs:
 (i) the U.S. publicly provides aid on a basis of cooperative
attitude towards its counterterrorism activities;
 (ii) Japan shares the same behavior when it normalized
relations with Southeast Asia through war compensation
program;
 (iii) the Scandinavian countries recently tend to tie aid to
democracy and human right matters or to support from
recipients in the international forums.
 3.1.2 Strengthen donor economic interest and influence
 - The donors use aid to encourage recipient countries to
follow socio-economic development models embraced by
the donors such as trade and investment liberalization, and
privatization.
 - The donors often tie aid to solutions to social matters,
environment protection, and poverty elimination.
 - The purpose of tied ODA is to allow manufacturers in the
donor’s own country to capture a larger share of the sales
stimulated by foreign aid.
 - Some donors require the recipient to provide strategic
material and economic preferences
 - The conditions attached to Japanese aid include: (i) loans
to be disbursed in the Yen; (ii) ODA to be provided to the
projects with the participation of Japanese firms.
 - Conditionality is attached to ODA such as regulations on
the hard proportion (equipment) and the soft proportion
(salary paid to outside expert, know-how, etc.) in the aid
package. The hard-to-soft ration is usually set up at 70/30,
and even 60/40 in many cases.
 - Numerous studies point out tying aid reduces its value by
25 percent.
 => The above analysis reveals potentially great benefits for
donor countries. The development of developing countries
will bring about benefits to developed countries.
 => Many DAC members try to reduce tied aid to 80%.
From 2001, non-tied aid accounts for only 20 percent of
total bilateral and multilateral aid.
 3.2 For recipient countries
 3.2.1 ODA efficiency for recipient countries
 - First, ODA is an import financing source for developing
countries to promote economic growth and social welfare.
 - Second, foreign aid is mainly used to improve public
sector, but seldom attract private capital both at home and
abroad.
 - Third, ODA projects provide recipient countries with
opportunities to have access to high technologies, especially
in the leading sectors in conformity with their selected
development orientation.
 - Fourth, ODA assist recipient countries in completing
institutions and policies from making stage to implementing
stage.
 - Fifth, foreign aid enhances attractiveness of the recipient
country to foreign direct investment (FDI).
 - Sixth, ODA projects helps the recipient country to kick up
internal resources in all economic sectors.
 - Seventh, ODA projects create more jobs in the recipient
country, where employment is always sensitive social
concern.
 - Eighth, ODA provides resources that help bolster the
political power and legitimacy of the existing leadership.
 3.2.2 Some weaknesses in ODA reception of recipient
countries
 a. Poverty and Misallocation of Aid
 - The misallocation of ODA (education, per capita) is
derived from political and economic considerations.
 - Dutch Disease:
 Trong suốt thời gian từ sau WWII đến những năm 1960, Hà Lan
đã đạt được: (i) tăng trưởng trong hầu hết các lĩnh vực, (ii) lạm
phát dưới 3%/năm; (iii) tốc độ tăng GNP 5%; (iv) thất nghiệp
khoảng 1%. Đó là do khu vực xuất khẩu truyền thống của HL có
sức cạnh tranh mạnh như nông sản và hàng điện tử.
 Vào những năm 1960, HL đã phát hiện một nguồn khí đốt với trữ
lượng lớn ở vùng biển Bắc. Chính phủ Hà Lan đã quyết định khai
thác khí đốt.
  Từ 1973 đến 1978 Hà Lan xuất khẩu một lượng khí đốt lớn làm
tăng 10% tổng giá trị KNXK và tăng 4% GNP.
 =>Chính phủ Hà Lan đã (i) tăng NK do giá NK rẻ (đồng nội tệ lên
giá), (ii) đầu tư vào nhiều lĩnh vực kém hiệu quả, không có sức
cạnh tranh thay vì tiếp tục tập trung đầu tư cho nông nghiệp và
điện tử…
 => Khi khí đốt được khai thác hết, nguồn thu NS không đủ để đáp
ứng những nhu cầu chi tiêu của quốc gia => cầu trong nước giảm
=> nền kinh tế Hà Lan gặp nhiều khó khăn:
 (i) SX và XK các sản phẩm truyền thống như nông sản và hàng
điện tử giảm sút;
 (ii) tỷ lệ thất nghiệp tăng;
 (iii) tốc độ tăng GNP giảm từ 5% xuống còn 1%;
 => Điều này làm cho nền KT HL trì trệ và để lại những hậu quả
nặng nề.
 - Terminology “Dutch disease” was named by the
Economist in 1977 to describe the decrease of
manufacturing sectors when increasing the export of natural
gas.
 Sau đó, đến năm 1982, hai nhà kinh tế học là W. Max
Corden và J. Peter Neary đã mô hình hóa hiện tượng nói
trên:
 - Mô hình cân bằng cục bộ của Corden và Neary dựa trên giả thiết
rằng nền kinh tế quốc dân có 2 khu vực xuất khẩu: (i) KV đang
bùng nổ là khu vực khai thác tài nguyên; (ii) KV đang trì trệ (so
với khu vực kia) là khu vực chế tạo. Ngoài ra, nền KT còn có 1
khu vực không XK.
 - Các giả thiết khác là tổng LLLĐ không đổi; nền KT trong trạng
thái toàn dụng lao động; và tỷ giá hối đoái danh nghĩa cố định.
 b. Efficiency of food assistance
 - Food aid falls into 3 categories: (i) Emergency
assistance (accounted for only 5 percent of total
aid); (ii) Project aid (accounted for 25 percent) and
(iii) Program aid (accounted for 70%).
 c. ODA and environment
 - The WB and other donors, has been criticized for
devastation of the environment and reduction of quality of
local inhabitants
 - WB and other donors have begun to pay attention to
measures to protect ecological environment and promote
sustainable economic development.
 d. ODA and over-reliance on foreign experts
 - Development agencies have been criticized for relying too
heavily on foreign experts in the design and implementation
of aid project.
 - Foreign-aid staffs are often clustered in separate project
unites, outside of the recipient country’s governmental
apparatus.
 e. ODA and solvency
 - Aid agencies tend to prefer large-scale, capital-intensive
investments that require a sizable import component to
smaller, labor-intensive projects relying principally upon
locally produced inputs.
 - Due to concessional terms of ODA, recipient countries are
not aware of the burden of future debt payment. Many loan
funds are not directly invested into manufacturing sectors,
particularly in export-oriented activities in.
 f. Corruption in the ODA recipient countries
 - Corruption, non-transparency and the insensitivity of elites
to the plight of the poor in many developing countries
seriously hamper even sincere efforts of the ODA agencies
to help the poor.
 - For these reasons, democracy is increasingly viewed by
many economists as a prerequisite to equitable
development.