The Case for Aid in Fiscally Constrained Times

Andy Sumner and Michael Tribe 1

DSA Conference 2010

DRAFT

Abstract

Aid (Official Development Assistance – ODA) is under pressure as fiscal constraints

mount in OECD countries. The arguments in favour of commitments by (mainly)
higher income countries to contribute financially through aid programmes to
developing countries have been articulated by several writers over the years, but
have consistently been challenged. However, in these difficult economic times it is
still not that easy to find a coherent set of reasons in one place justifying ODA.

There are a several important questions: What is the case for aid? What are the
different ways of approaching the case for aid? Does the case for aid differ in fiscally
constrained times? Does the case for aid differ by types of aid? Is the case in favour
of aid affected by the nature of different types of aid, by its ‘effectiveness’, by the
objectives of ‘donors’, and by the criteria relating to its allocation between countries,
purposes and sectors?

This note reviews the literature and aims to summarise cogently the main arguments
in favour of continuing substantial international aid programmes. These arguments
have a significant economic content, but also extend to moral and ethical issues and
to political pressures. The discussion revolves largely around the reasons why higher
income countries should contribute ODA to developing countries, rather than to the
reasons why developing countries should accept international aid from the ‘donor
community’.

1
Respectively IDS and University of Bradford and University of Strathclyde. Correspondence to:
a.sumner@ids.ac.uk and m.a.tribe@bradford.ac.uk and michael.tribe@strath.ac.uk

1
1. INTRODUCTION

We approach international aid (official development assistance – ODA – as defined

by the OECD‟s Development Assistance Committee in Box 1) from a direction which
is essentially within the economics discipline, but with a multi-disciplinary mindset. A
distinction is often made between „narrow‟ and „broad‟ economics. The former is
focused principally on a „positivist‟ approach as opposed to a „normative‟ approach,
while the latter is focused more broadly in an approach which may be described as
„political economy‟ or as „heterodox economics‟.

We should make it clear that this paper attempts to go back to first principles in
considering the arguments for ODA, and is – at this point – still in a preliminary form.
We have not attempted to base the paper on a comprehensive review of the „aid
literature‟ for two reasons. First, in attempting to work on the basis of first principles if
we had simply focused on critically summarising the literature our approach would
have been insufficiently radical. Second, the „aid literature‟ is vast and has several
distinctly different foci, so that – for example – the literature assessing developments
in aid architecture would only be marginally relevant to discussion of the case for
giving ODA.

An example of a paper which took a notably different starting point to ours is that by
Alesina and Dollar (2000). The following quotation states some of their main findings
very clearly:
“We find considerable evidence that the pattern of aid giving is dictated
by political and strategic considerations. An inefficient, economically
closed, mismanaged non-democratic former colony politically friendly
to its former colonizer, receives more foreign aid than another country
with a similar level of poverty, a superior policy stance, but without a
past as a colony. We also find significant differences between donors.
Certain donors (notably the Nordic countries) respond more to the
„correct‟ incentives, namely income levels, good institutions of the
receiving countries, and openness. Other countries (notably France)
give to former colonies tied by political alliances, without much regard
to other factors, including poverty levels or choice of politico-economic
regimes. The United State‟s [sic] pattern of aid giving is vastly
influenced by that country‟s interest in the Middle East.” (Alesina and
Dollar, 2000: 33-34).
This represents what might be considered as a „revealed preference‟ approach to
analysis – i.e. which factors have actually accounted for ODA allocations. This
contrasts with the concerns of this paper which relate to a) which factors are widely
accepted as justifying ODA allocations in principle and b) which are widely accepted
as the official criteria for the allocation of ODA.

Collier and Dollar (1999) take a similar approach to that of Alesina and Dollar in
searching for systematic factors accounting for aid allocations, and particularly
relating these to poverty reduction objectives and to “adequate policies”. Again, this
does not lend itself to the „first principles‟ approach which is being attempted in the
current paper.

2
Analysis of international aid within a more narrow „positive economics‟ approach
does not allow for moral, ethical or value judgements, while the „political economy‟ or
„heterodox‟ approach recognises that moral, ethical and value judgements are
possibly as much at the centre of concern as „pure economic‟ issues and often
cannot realistically be avoided. Positive economic analysis does not have much
regard for multidisciplinarity or for the broader approach, and we would argue that
this narrowness limits its relevance to many of the important issues relating to
analysis of international aid and ODA, and particularly to systematic discussion of
the case in favour of international aid. If „narrow‟ economists draw back from
discussion of the case for aid then „broader‟ economists might relish the opportunity
to enter this intellectual exploration?

Box 1. The Definition of Official Development Assistance (ODA)

“Official development assistance (ODA). Grants and concessional loans for development and welfare
purposes from the government sector of a donor country to a developing country or multilateral
agency active in development. A loan is considered sufficiently concessional to be included in ODA if
1
it has a grant element of at least 25%, calculated at a 10% discount rate. ODA includes the costs to
the donor of project and programme aid, technical co-operation, forgiveness of debts not already
reported as ODA, food and emergency aid, and associated administrative expenses.*
Other official flows (OOF). Consists of: i) grants or loans from the government sector not specifically
directed to development or welfare purposes (e.g. those given for commercial reasons) and ii) loans
from the government sector which are for development and welfare, but which are not sufficiently
concessional to qualify as ODA.
Private flows at market terms. Flows for commercial reasons from the private sector of a donor
country. Includes foreign direct investment, bank loans, and the purchase of developing country
bonds or securities by companies or individuals in donor countries.
Private grants. Funds from non government organisations for development or welfare purposes.”

1
The grant element is measured as the difference between the face value of a loan and the present
value, calculated at a discount rate of 10%, of the service payments to be made by the borrower
during the lifetime of the loan, expressed as a percentage of the face value.

Source: OECD-DAC. 2008.

We should make clear that this paper is focused on ODA, with the emphasis on
„official‟ and so is relevant for bilateral and multilateral aid to developing countries,
but not for aid contributed by NGOs. We have also excluded consideration of major
new initiatives such as the Global Alliance for Vaccines and Immunisation (GAVI)
and the Gates Foundation which are not directly related to ODA. In addition it is
worth noting that private remittances from developed market economies to
developing countries now exceed ODA in global terms (Commission on Growth and
Development, 2008: 154).

ODA has a long history. The Development Decade of the 1960s (Encyclopedia of the
Nations, 2010) was a period of comparative optimism, and the Pearson Commission
(Commission on International Development, 1969) and the Brandt Commission
(Independent Commission on International Development, 1980) continued a similar
intellectual tradition. The IFI‟s (International Financial Institutions) Structural
Adjustment Programmes in the 1970s, 1980s (and into the 1990s) changed the

3
development agenda. However, the World Bank‟s „Comprehensive Development
Framework‟ combined with a shift to a poverty reduction and policy-related emphasis
and the introduction of international debt write-offs in more recent years has again
changed the perspectives of international development and of the „aid industry‟
(Wolfensohn and Fischer, 2000).

Controversy has never been far away. There have been well-known authors arguing
the case for and against aid throughout this period, including Bauer (1972) and
Easterly (2007). One of the most supportive cases in favour of foreign aid has been
articulated recently by Sachs (2005), and Radelet (2003 and 2006) has produced
significant contributions to the literature which are searchingly critical but with
positive conclusions. In this paper we aim to discuss the case for aid systematically
and cogently without adoption of some of the more polemical slants which have
appeared in the literature.

There are many major single-authored, jointly-authored and edited books which have
focused on ODA, international aid, or plain „foreign aid‟. A few of these have run to
second or even third editions. In our review of the literature it has been apparent that
there has been comparatively little attention to „first principles‟ in the sense of why
ODA is „given‟ or „accepted‟ at all. We include is this literature recent contributions
such as those by Riddell (2008), Cassen (1994), Lancaster (2000 and 2007),
Lancaster and Van Dusen (2005) and Tarp and Hjertholm (2000), rather than
extending back to the 1960s and 1970s. In this context Riddell‟s recent book is a
notable exception.

There are, in addition, „development texts‟ which include substantial chapters and
sections which review many significant issues relating to ODA. From the more
„economic‟ direction these include Todaro and Smith (10th edition, 2008: Chapter 14)
and Thirlwall (8th edition, 2006, Chapter 15). From a more multidisciplinary
„Development Studies‟ direction basic texts which cover international aid quite
substantially include Desai and Potter (2008: Chapter 10), Clark (2006: Chapter 29)
and Chari and Corbridge (2008: Part 6)

2. THE CASE FOR ODA

We take the view that the case for aid can be placed within two distinct areas: firstly
the ethical or moral case, and secondly the self-interest case. The „developmental‟
case for aid bridges these two lines of argument (see Figure 1). 2 A recent
contribution to the literature by Nixson takes a broad overview of many of the issues
raised in this paper (Nixson, 2007-2008).

Issues surrounding the effectiveness of aid is a second-order issue. If the objectives

established by the moral/ethical case, or by the self-interest case, are not effectively
achieved then the arguments in favour of aid would be significantly weakened. This
will be explored in more detail in the third section of the paper.

2
Most of this paper is concerned with exploration of the case to be made within developed countries
for aid to be given to developing countries. There is an obverse exploration of the case for developing
countries to accept (or not to accept) such aid which is not much touched upon.
4
 Figure 1 Summary of the Main Arguments in Favour of ODA

A) Ethical – Moral Arguments

i) Compassion / Humanitarian
– response to international poverty: „international social justice‟
ii) Compensation
– recompense for the sins of the past – colonialism, imperialism, slavery etc
– deterioration of international terms of trade (e.g. Stabex)
– climate change and environmental impacts
iii) Responses to disasters

B) Self-interest
i) Mutuality – income growth in LDCs creates markets for developed countries‟ exports –
and vice versa – an interdependent world
ii) Support for MNCs/FDI (e.g. infrastructure, education etc – supply of essential materials
and agricultural products)
iii) International security

2.a) The ethical case for aid

ODA, ethics and international social justice

The first argument in favour of richer countries giving aid to poorer countries is the
ethical, moral or humanitarian one which is similar to the argument for income being
transferred from richer to poorer people within any one country. In other words the
more privileged in – global – society give some of their income to those who are less
privileged. In the context of discussion about the rationale for ODA we should be
clear that this is not related to private charitable income transfers, but is
internationally comparable with the adoption of progressive taxation and expenditure
programmes by national governments. Some forms of conditionality and means
testing may, or may not, be applied to such transfers. At the international level one
factor which needs to be recognised is that most richer countries have elements of
poverty within their societies, and poorer countries have elements of privilege within
theirs. Thus, 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.

Box 2 – Public Opinion and the Ethical Case for Aid

“In a 1983 national opinion poll, people in Britain were asked if they believed rich countries should
give help to poorer countries: 71 per cent were in favour and 13 per cent against. Of those in favour
78 per cent gave an ethical explanation for their positive attitude to aid, citing specifically morals,
humanitarian reasons, conscience, duty, Christian duty, and the needs of the poor as the underlying
reason for their support. It is, moreover, not only the general public which has made reference to
ethical considerations when arguing the case for aid. In 1969 the Pearson Report answered the
question „Why Aid?‟ as follows: „The simplest answer to the question is a moral one; that it is only right
for those who have to share with those who have not‟. Eleven years later, the Brandt Commission
gave as its motives for addressing the problems of Third World poverty „human solidarity and
commitment to international social justice‟.” (Riddell, 1986: 24)

5
The quotation from Riddell‟s 1986 article on the ethical case for aid which has been
reproduced in Box 2 makes it clear that in the mid-1980s public opinion gave ethics a
major role in the justification for aid. Riddell‟s more recent major overview of aid
contains two chapters focussing on the moral case for aid (Riddell, 2008: Chapters 8
and 9) but other literature relating to international aid gives little attention to this
dimension of the case. Perhaps surprisingly contemporary surveys of public opinion
suggest that, although the numbers are somewhat lower than in the mid-1980s,
there is still a strong public view that there is a moral/ethical argument in favour of
aid. A recent publication from the IDS, Sussex shows 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 (Henson and Lindstrom, 2010). This public
view transcends aid-weariness, international security threats and ideological shifts in
developed market economies which might have changed public opinion somewhat
more.

Perhaps the most radical approach to the reform of ODA would be to embody ethical
principles into domestic and international fiscal policy. Discussion around what
comes after the MDGs when the year 2015 is reached has in part focussed on the
issue of whether aid transfers should be „automatic‟ rather than discretionary (i.e. at
the discretion of the „donor‟ countries – see for example the discussion at the 2009
Policy Forum in Brussels – Tribe and Lafon, 2010). To what extent should at least
some aid be provided as transfer payments through a form of internationally
progressive taxation and grants? Although such a transfer payment system would
resolve the issue of the source of funding, it would beg the question of the
destination of the transfer payments – which countries would receive the aid and
how much would each receive? It would be possible to construct a composite index
based on measures of poverty as a criterion for the destination of such aid if the
funding sources were to deposit the income transfers into a global fund – but this
would have to be associated with multilateral aid systems rather than bilateral
systems. Aid allocation between receiving countries, sectors and programmes would
remain an issue.

ODA as Compensation

The second part of the moral/ethical case for aid relates to the issue of
compensation from richer countries to poorer countries. One aspect of this case is
based on past „sins‟ or „transgressions‟ of the former colonial powers including the
issue of the slave trade. To the extent that imperialism/colonialism exploited or
immiserated former colonies (which are now independent developing countries) it is
possible to argue that transfers should be made from the former colonial powers to
the countries which suffered from the exploitation. While such the logic and ethical
basis for such an argument is appealing from many points of view it is clear that
many contemporary higher income countries would argue that they were never
directly involved in the slave trade, and many developing countries might not
themselves have suffered directly from the slave trade.

The negative economic impact of the slave trade on developing countries which
were sources of slaves would have been based on the impact of the removal of an

6
able-bodied swathe of the population reducing the productivity of the affected
economies on a cumulative basis. The economic impact of the slave trade can be
compared with 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 richer countries would reject these arguments for compensation either on
the grounds that „exploitation‟ simply reflects the working out of legitimate market
forces, or that their particular country was not involved in the slave trade or in past
imperial/colonial exploitation. Equally, all developing countries were not involved in
these forms of colonial exploitation, and of those which were some were more
seriously affected than others. Fair and equitable compensation would be difficult to
achieve even if the basic principle were to be accepted.

Another aspect of the compensation element of the 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 seeking merchandise imports
from countries which have significant reserves of cheap labour (perhaps an
international variation of the „Lewis model‟). This aspect of compensation has been
recognised in two particular instances which recognise distinctly different logical
arguments:

i) In the World Bank‟s 1994 review of the impact of Structural Adjustment

Programmes on six sub-Saharan African countries the point was made 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 type of
compensatory link is uncommon in official discussions of aid policy the fact that it
appeared in such an influential source is of great interest. These remarks 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.

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, 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 and Public Service Provision

A more dynamic framework consistent with 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 approach which would emphasise a static form of

7
income redistribution from high income countries to poorer countries. The link
between the growth of national income in developing countries and poverty reduction
is provided by the „poverty elasticity of growth‟.3 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.

The implication of this is that for aid to have a poverty-reducing role it does not have
to be committed to explicitly poverty-related project, 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.

Thus ODA-supported programmes can have a significant poverty-reducing role

through contributions to both the stimulation of economic growth and public service
provision (particularly water and sanitation, public health and education).

Climate Change and the Environment

Another form of compensation which is linked to ODA is that which recognises the
negative economic role which the demonstrable global environmental impact of high
developed country consumption levels (and global warming emission levels) is
having on developing countries, and on their agricultural production in particular.
This impact is an example of the transmission international external diseconomies
but 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 which is reflected in Table 1 below this
type of financial flow needs to be included in consideration of the arguments for
ODA.

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 problematic 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 prongs. First, the issue of contributions
towards attempting to control and resolve conflict, including international armed
forces (which properly belongs to the security dimension of argument for ODA).
Second is the contribution which can be made by ODA to recovery and rebuilding

3
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 the Dollar and Kraay arguments in their „Growth is Good for the Poor‟ (Dollar and Kraay,
2002 and 2004).
8
fragmented economies and societies. It is the second of these which properly
belongs within the ethical/moral argument for ODA – part of 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 now involving 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.

2.b) The Self-Interest Case

Mutuality of Interest

It was as long ago as the Brandt Commission (Independent Commission on Growth

and Development Issues, 1980) that the issue of „mutuality‟ of interest‟ was
articulated within an international public policy context. Essentially this aspect of the
case for ODA relies on the fact that the stimulation of stronger economic growth in
developing countries creates demand for exports of goods and services from
developed market economies which provide the ODA. More crudely this argument
could be seen as supporting „tied aid‟, which would give the „mutuality‟ a more
institutional dimension. However, the tying of ODA is not an essential part of the
argument for the mutuality of interest.

A further argument which has been articulated in a political context relating to

mutuality concerns the connection between international investment (particularly
foreign direct investment) and ODA. For example, there is narrow complementarity
between the performance of foreign private investment and public investment
supported by ODA in economic infrastructure (such as transportation, water and
waste management, energy and telecommunications) and in social infrastructure
(such as education). There is a broader complementarity between the profitability of
foreign private investment and ODA to the extent to which aid programmes improve
„governance‟ and policy management (for example through the elements of the
CPIA) (Alexander, 2010; Burnside and Dollar, 2000; African Development Bank
Group, 2009; World Bank, 2007; World Bank, 2009). Another broader
complementarity can exist between the performance of foreign private investment
and ODA supporting social development programmes which enhance labour
productivity, although this may be less tangible and longer term in its impact.

International Security

The security dimension of the argument for ODA has been given much emphasis
recently (Mitchell, 2010). In the case of the United Kingdom this has recently
particularly been associated with policy concerning internationally collaborative
operations in Afghanistan which relate to direct military activity, to Afghan socio-

9
economic development, and to the connection between domestic and international
security and its link to the Al Qaeda network. In the case of Afghanistan the
international security dimension extends to the production and export of narcotic
drugs, and the ODA connection to this may be seen as including development
programmes which can provide sustainable livelihoods in the absence of narcotic
drug production. The Iraqi situation has also related to allocations of international
ODA, as is clear from the US data in Table 1.

There are other aspects of the contemporary security case for ODA for which
Somalian developments have been relevant. Somalia is an example of a failed state
which has experienced difficulty in maintaining a sustainable government and
administration. Meanwhile, immediate neighbours of Somalia have suffered
considerable disruption, and there have also been significant international
ramifications including piracy at sea, terrorist operations in East Africa, and
international criminal activity.

In this context there is an issue over which parts of governments‟ expenditures

should be regarded as part of their defence policy (and be allocated from the
defence component of national budgets) and which parts should be regarded as part
of their international development policy (and be allocated from the ODA part of
national budgets – allowing for the broader definition of ODA outlined below).

There are other elements of the security dimension which relate to the provision of
training of personnel, and equipment for, military and police forces in fragile – and
even not-so-fragile – states which need to be viewed within the context of ODA. This
can involve the strengthening of domestic police services (and judicial systems) in
pursuit of greater stability of markets for goods and services and of personal security
within the ambit of some elements of the CPIA measure (refer to the citations
relating to the CPIA above).

In the past the security dimension of ODA has been regarded as being related to
major international military concerns, and the Cold War in particular. Aid to Pakistan
and to Turkey, for example, have been viewed in this connection in the past.
However, the Cold War is no more. Of course, recent arguments for the allocation of
ODA to Pakistan would be more related to disaster relief (earthquake and floods)
and to the security threat posed by Al Qaeda.

A final element of the security element of ODA might be represented by the means
of financing international peace-keeping operations, many of them undertaken by the
United Nations, but there have been comparable operations undertaken by other
international bodies. The same issues relating to whether such funding should be
regarded as part of defence expenditure or of ODA expenditure would occur.

2. c) The nature of ODA

Table 1 below is directly relevant to recent discussion about the nature of ODA in the
United Kingdom. The definition of ODA from the OECD‟s DAC which has been
reproduced earlier in this paper does not limit ODA to aid flows emanating from only

10
the principal aid institution in any one country. Thus, countries which have ODA
programmes may have substantial flows from institutions other than the principal aid
institution (DFID in the UK). Table 1 shows that USAID contributed only US$4.5
billion to ODA in 2004 as compared with over US$6 billion from the Department of
State, and about another US$4 billion from other US government institutions. This
does not allow for the near US$18.5 billion indicated for the Iraq reconstruction – and
it is questionable whether this should be included in US ODA. At the time of writing
comparable recent data for the United Kingdom was not readily available.

Table 1 – The Diversity of US Official Development Assistance – “US Foreign Aid Programs,
2004” – (millions of dollars)
Department of State
Refugee 756
International Organizations and programs 320
ESF* (policy) 3,263
NIS (distribution) 584
SEED (distribution) 442
HIV/AIDS (distribution) 488
Andean Counter-drug 727

Department of the Treasury

Contributions to international financial institutions (IFIs) 1,383
Technical Assistance and advice 19
Debt relief 94

Department of Agriculture
PL-480 II (budget) 1,185

US Agency for International Development

DA, child survival, disaster 4,511

Millennium Challenge Cooperation 994

Peace Corps 308

InterAmerican Foundation 16

African Development Foundation 19

White House
Emergency Fund for Complex Crises 100
a
Iraq reconstruction 18,439
b
Other departments and agencies 500-1,000

a. Iraq reconstruction funding is considered a one-time exceptional financing program.

b. This is an estimate since data are not available for the technical assistance and other
programs funded abroad by non-foreign affairs agencies. In 1994 OMB estimated about this amount
for these expenditures. Thus the amount reflected here could be construed as conservative.

Source: Lancaster and Van Dusen, 2005:14.

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2. d) ODA and fiscal constraints in OECD countries associated with the post-
global crisis context

Two of the main issues implied by the title of this paper are those of whether the
fiscal constraints, and public expenditure cut-backs, which are currently being
experienced across developed market economies, affect the factors justifying
allocations of ODA and the overall volumes of ODA.

We have stated that the arguments justifying ODA commitments to developing

countries set out in this paper have been based on first principles. In this sense they
are affected by short-term economic considerations affecting developed market
economies. Indeed, the mutuality of interests between ODA „donors‟ and „recipients‟
would tend to suggest that continued ODA commitment might be part of the recovery
process. Arguments for ODA based on moral/ethical principles are certainly not
affected by short-term considerations based on the ramifications of the 2008-2009
credit crunch, and the same applies to arguments based on security considerations
and on long-term environmental considerations. There is still a long-term
commitment by the developed market economies to allocate 0.7 per cent of their
GDPs to „foreign aid‟, and this is not affected by short-term factors.4

The issue of whether, at times when public expenditure is being cut in many
developed market economies, the aid budget should take its share of the cuts is a
different order of question. Where individual donors have not reached the 0.7 per
cent target, a logical approach would suggest that efforts should be continued to
reach that target – implying that in several countries ODA allocations should
continue to increase in real terms and as a proportion of GDP. In those developed
market economies where the impact of the 2008-2009 credit crunch has been to
reduce GDP then, perhaps perversely, the ratio of ODA to GDP might have
increased (even with a constant level of ODA allocations in real terms) and the target
of 0.7 per cent could be closer to being achieved.

Perhaps the main difference of opinion between those who are supportive of the
moral imperative for ODA allocations and those who are more sceptical would
govern attitudes over whether ODA should be cut in line with overall public
expenditure cuts or whether ODA should be maintained at a steady level or be
increased.

One question is whether the cases for ODA which we have outlined – i.e. the ethical
and the self-interest cases – are significantly different during periods of fiscal
constraint in the aid „donor‟ (see Table 2). One could argue that the ethical case for
ODA is largely independent of the fiscal context in the „donor country – this case is a
long-term one. However, one could also say the compassion-ethical argument might
be stronger, depending on the socio-economic situation in the potential recipient.
What might be important is the relative impacts of the global crisis in recipient and
„donor‟ country.

4
For a critique of the 0.7% „target‟ see Clemens and Moss (2005).

12
The self interest case for ODA may also be stronger in fiscally constrained times if it
stimulates the global economy more than the same spend at home (but whether this
can be accurately assessed is another matter).

Further, the self-interest arguments related to security might also be stronger. Again,
the impacts of the global crisis in „recipient‟ relative to the „donor‟ country might
shape the argument. If a fragile state was particularly badly impacted by the crisis
(lost remittances, falls in exports, etc) the resultant pressure on the country might
form the basis of a self interest-security argument in favour of ODA which seeks to
prevent further pressure on the country.

Table 2. The global case for ODA

Case for ODA Is this case for ODA stronger, weaker

or neutral in fiscally constrained times
in ODA „donor‟?

Ethical arguments

Compassion – global socio-economic Stronger – depending on economic

justice situation in recipient?

Compensation Same – these are long-run arguments

Disaster relief Same – given acuteness of need – for

example Pakistan 2010

Self-interest arguments

Mutuality Stronger – depending on the relative

multiplier effects on the global economy?

MNC inputs Stronger?

Security Stronger – depending on the relative

crisis impacts on recipient and „giver‟
country?

3. IMPLICATIONS OF THE CASE FOR ODA FOR CONTEMPORARY AND

EMERGING DEBATES

This section seeks to discuss how the case for ODA that has been outlined can be
related to contemporary and emerging debates on the practice of ODA and in
particular what ODA seeks to achieve – i.e. aid effectiveness. This particularly
relates to the ethical case for ODA and in particular the compassion/humanitarian
and poverty reduction objectives of ODA but also can be related to the self-interest
case for ODA outlined and notably international security and/or political objectives of

13
ODA (which in themselves raise ethical questions).

The case for ODA is in some ways independent of aid effectiveness but the „case‟
would be weaker if aid does not really have a positive effect on the variables relative
to ethical and self-interest arguments.

We discuss here the case for ODA to contemporary debates on what ODA is
seeking to achieve (aid effectiveness debates) and to the shifting nature of global
poverty (linked to the ethical case for ODA) and in doing so seek to raise the
question, is the case for ODA affected by the nature of the objectives of different
types of ODA.

3a. Contemporary debates on ODA

ODA and aid more broadly and „aid effectiveness‟ are going through somewhat of a
ferment (see detailed discussion in Evans 2010a). This ferment has several
dimensions as follows:

The goals, players and instruments of aid are all mushrooming (Severino and
Ray (2009; 2010);
The transparency and accountability „revolution‟ (see for details Barder 2009;
2010).
The questioning of whether aid effectiveness debates have missed the point by
focusing on quantity or quality of aid rather than aid as a catalyst for economic
or political change (Fischer 2010).

Key drivers of the rethink have been the changing landscape and nature of aid –
notably the new non-DAC donors (accounting for perhaps 15 per cent of global
ODA) and other actors such as the foundations, the new modalities (innovative
finance mechanisms) and the likely dwarfing of traditional ODA by climate financing,
as well as new institutions such as cash-on-delivery and output-based aid (see
Birdsall and Savedoff 2010).

In short, there is considerable ferment on what ODA hopes to achieve (as well as
what actually counts as „aid‟). Add to the mix some pressing timelines such as that
for the Paris Declaration in December 2010, the high-level Seoul meeting in 2011
and the post-MDG debates emerging following the September 2010 MDG summit,
and we have some fundamental questions that can relate the earlier discussions the
case for aid with the contemporary practice of ODA.

3b. The case for ODA and differing objectives of ODA

Historically aid objectives have included reducing international inequality; filling forex
and savings gaps and more recently poverty reduction or intermediate variables
thought to be supportive of poverty reduction – i.e. social sector spending, growth,
infrastructure and „good governance‟.

In particular, the social sectors have benefited from ODA increases over the last
decade (see Table 3). At a global level, bilateral ODA has gone up in absolute terms
14
since 2000 from $46bn to $74bn and from 0.14% of donors GNI to 0.20 but actually
fallen slightly as a percentage of recipients‟ GNI. There has been a structural shift
towards social allocations and away from economic and productive sectors. In
absolute terms, social sector, bilateral ODA spending has doubled 2000-2008 from
about US$20bn/year to over US$40bn/year. In contrast production-sector ODA has
stagnated.

Table 3. ODA Disbursements to developing countries, 2000 and 2008.

2000 2008
Net ODA from DAC countries, excl. debt relief (constant 2007 US$m)
Bilateral 46,454 74,120
Multilateral 25,429 33,190
Net bilateral ODA (% of OECD-DAC donors‟ GNI)
Bilateral 0.14 0.20
Multilateral 0.07 0.09
ODA from OECD-DAC donors to developing countries (% Recipients‟ GNI) 0.7 0.6
Sectoral Allocation of Bilateral ODA to from OECD-DAC donors to
developing countries (by sector, % total)
Social Infrastructure and Services 50.2 57.9
of which: Basic social services 15.8 14.2
Economic Infrastructure and Services 26.0 24.1
Production Sectors 11.0 9.6
Multisector/Cross-Cutting 12.8 8.4
Source: McKinley (2010) calculated from IDS-DAC online.

The move from productive sectors to social sectors, which one can partly attribute to
the MDGs, can be seen as a good thing (focus on achieving health and education
goals which are important); but it can also be seen as a distortion as it gives the (at
least partly) impression that countries can have long-term sustainable progress in
education and health without a well-functioning, inclusive and growing economy (See
discussion in Bourguignon et al., 2008). Also, short run increases in social indicators
could be achieved without any reduction in aid dependency or long-run structural
political or economic change.

In short, the current situation is one where the objectives of ODA are open to
contestation and potentially large trade-offs between short run and long run
objectives. Further different donors and different projects have different objectives
that may well not be complementary at all.

As noted above there is some consensus that the objective of ODA is to reduce
poverty and this of course links to the earlier discussion of the ethical case for aid.
The reduction of what exactly what in poverty reduction – i.e. what types of poverty
or deprivations are reduced differs by ODA donor and project.

The goal of development for the last 20 years has largely been growth-led poverty
reduction as Barder (2009:2) argues but this objective needs revisiting because the
“emphasis on the one goal – poverty reduction defined as a permanent
reduction in the global poverty headcount through economic growth –
has contributed both to poor program selection and poor program
design and implementation, and it has thereby undermined the
effectiveness of aid… [Further, a new agenda should,]… not target a

15
 single measure of poverty reduction but explicitly manage a portfolio of
objectives that (a) promote long-term and permanent changes in
developing countries by investing resources and sharing knowledge;
(b) tackle the causes of poverty by changing the policies of rich
countries and investing in global public goods; (c) transfer income and
consumption from the world‟s rich to the world‟s poor to enable them to
live better lives while development is taking place, as a matter of global
social justice; and (d) target more assistance on those in chronic and
deep poverty.” (Barder 2009: 2)

This discussion of ODA objectives can be related to the case for ODA thus – if the
case for ODA is one an ethical one – humanitarian/poverty reduction then the ethical
case for ODA could be strengthened in the short run by quick, MDG-type results
(more children in primary school) at the same time as the ethical case for ODA could
be weakened in the long run if there was no structural political and economic change
leading to a reduction in aid dependency. This resonates with other calls for a new
approach to development objectives:

“The objective, through economic development and statebuilding, is

transformation of developing countries into middle class societies in which
citizens hold their governments accountable for provision of physical security
and basic social services… A good indicator of progress in transformation is a
growing middle class that has the economic heft and consequent political
voice to hold government accountable for the domestic social contract.”
(Birdsall 2009: 2)

This means the ethical basis for aid may actually raises deeper fundamental
questions about that arise from governance objectives of some ODA – those that
fund or seek to catalyse political change and the role of donors in domestic politics
and governance structures. Aid may seek to catalyse change by funding the
progressive forces and coalitions of pro-poor change. This means question marks
over what are the ethics of intervening in other countries for the „common good‟. In
short the ethical case for ODA outlined earlier raises deeper ethical questions in the
practice and trade-offs arising from ODA objectives.

3c. The case for aid and the new geography of poverty

Alison Evans (2010a) has discussed the „new geography of global poverty‟ – that
many of the world‟s poor live in middle income countries like India and Indonesia that
may neither need or what ODA.

If the case for ODA is one of poverty reduction, where the poor live and what
resources their own governments have at their disposal are useful questions to pose.

Of the world‟s „US$1.25 poor‟ 960m or 72% live, not in poor countries but in middle
income countries and most of them in stable, non-fragile MICs (see table 4 and
discussion in Sumner, 2010). Only about a quarter of the world‟s poor – about
370mn people or so live in the remaining 39 low-income countries (LICs), which
are largely in sub-Saharan Africa. These findings are similar across nutrition
16
indicators and the UNDP‟s new multi-dimensional poverty index. Education –
children out of primary school - is an exception; 60% of the children out of primary
school are in LICs and just 40% in MICS. This is a dramatic change from just two
decades ago when 93% of poor people lived in low-income countries.

What is „new‟ about this? The poor haven‟t moved nor are these „newly‟ poor people.
What has largely happened is the countries in which many of the world‟s poor live in
have got richer in average per capita terms – transitioning from LIC to MIC status
under World Bank classifications – whilst at the same time the number of poor
people hasn‟t drastically fallen.

Table 4. Estimates of the change in global distribution of world‟s $1.25/day poor (percentage)
1988–90 and 2007–8

% of world‟s poor Millions

1988-90 2007-8 1988-90 2007-8
Middle-income countries (MIC) 7 72 120.88 956.57
MIC minus China and India 7 22 120.88 293.18
MIC FCAS 1 11 18.25 143.51
MIC NON-FCAS 6 61 102.64 813.06
Low-income countries (LIC) 93 28 1,547.13 370.76
LIC minus China and India 31 28 408.68 370.76
LIC FCAS 13 12 210.08 156.38
LIC NON-FCAS 80 16 1,337.05 214.38

Fragile and conflict-affected states (FCAS = 43) 14 23 228.33 299.90

Sub-Sahara Africa 13 27 223.99 355.07
Least Development Countries (50)* 14 25 241.06 334.98
China and India 68 50 1,138.45 663.39

Total 100 100 1,668.02 1,328.69

Source: Sumner (2010:14).

One read of this is that the case for ODA in some countries with substantial domestic
resources is weakening or that global poverty may be increasingly turning from an
international to a national distribution problem, potentially making governance and
domestic taxation and redistribution policies more importance than Official
Development Assistance (ODA). This is not to say the global distribution of wealth
and assets is no longer important. Merely less so that was once the case.

The emerging powers – the G20 minus G8 countries – are home to most of the
world‟s poor (the BRICS to more than half) and by the end of 2011, the Economist
notes, $7 trillion in foreign exchange reserves (half of which is accounted for by
China).

Further, many MICs are now donors themselves. Estimates of India‟s aid programme
are $550m/year in 2008 and estimates of China‟s aid programme are in the region of
at least $1-2bn/year (Brazil‟s aid programme is estimates at $1bn/year). 5 This would
5
For data estimates see:
India‟s aid programme: http://blogs.cgdev.org/globaldevelopment/2010/10/india-emerges-as-an-aid-
donor.php
China‟s aid programme: http://www.fas.org/sgp/crs/row/R40361.pdf or
http://www.cgdev.org/files/13953_file_Chinese_aid.pdf
17
mean the new donors are set to overtake some DAC donors including Australia,
Belgium, or Denmark. At the same time net annual ODA into India is $2.1bn and to
China $1.5bn (see Table 5).

Table 5. Selected large MICs and poor people, net ODA, aid dependency and forex reserves

Country Number of poor Net ODA ($bn, Aid dependency Forex reserves
people (under 2008) ratio (2008, >9% (average
$1.25/day, GNI = high) 2008–2010,
millions, 2007) $bn)
China 207,559 1.5 0.0 1953.3
India 455,830 2.1 0.2 279.0
Indonesia 47,002 1.2 0.3 71.8
Nigeria 88,592 1.3 0.7 53.0
South Africa 11,528 1.1 0.4 42.0
Sources: World Bank – World Development Indicators; Global Development Finance (GDF);
International Monetary Fund (IMF); Economist Intelligence Unit (EIU)

This raises questions over the ethical case for ODA flows to countries with
substantial domestic resources and might lead to a wider discussion of aid
instruments and relationships beyond ODA.

Further, on the case for aid – even if some middle income countries (MICs) can
support their own poor people, others cannot (or more often the poor may lack voice
in governance structures due to inequalities). Some MICs such as Pakistan are only
just past the threshold and withdrawing aid suddenly might mean they slip back to
LICs. Even when domestic resources appear more substantial political will may be
ambivalent. So in MICs the donor strategy should include a broader range of aid
instruments beyond resources - for example, focusing on issues such as trade,
migration, tax havens, innovative finance and climate change, Northern consumption
patterns (i.e. the footprint of red meat) and security cooperation (the „do no harm‟
narrative).

This is very different from the current donor approach to MICs because the current
approach is still largely framed by money rather than a broader range of aid
instruments which may well include funding progressive forces such as CSOs.

There‟s a further ethical debate for ODA and the international community in all of
this. Is the international community committed to reduce poverty in some countries
not all or in all countries? If the poor live in stable MICs, do those countries need aid
flows or are domestic resources available? Whose „responsibility‟ are the poor in
MICs – donors or governments or both?

There are further questions that relate to the case for ODA: If most stable MICs don‟t
need aid – judging by their aid dependency ratios (see Table 6) – should aid flows be
redirected to LICs, FCAS LICs and/or to global public goods? What should the
donor-recipient partnership/strategy and aid instruments for MICs be?

Brazils‟ aid programme: http://www.odi.org.uk/resources/details.asp?id=5120&title=brazil-election-

emerging-donor-aid
18
Table 6. Data on resources: Forex reserves, ODA and structural indicators in the 27 new MICs
versus other groups (averages for countries with 2 data points)

Net ODA received (%

Total reserves in Net ODA received (%
of gross capital
months of imports of GNI)
formation)
1988-90 2007-8 1988-90 2007-8 1988-90 2007-8
27 new MICS (2000-9) 1.3 5.0 7.0 5.8 40.4 28.4

MIC 2.9 5.3 7.2 4.5 33.6 15.7

MIC FCAS 1.8 4.2 13.6 9.4 73.7 53.9
MIC NON-FCAS 3.1 5.5 6.1 3.3 26.5 8.3
LIC 2.3 4.3 16.4 15.4 88.3 62.6
LIC FCAS 2.2 4.5 17.0 19.3 108.5 77.4
LIC NON-FCAS 2.3 4.1 15.9 10.7 68.9 44.4

FCAS 2.1 4.4 15.7 15.5 95.9 68.9

Sub-Sahara Africa 2.3 4.3 15.3 13.0 93.9 54.4
LDCs 2.3 4.1 19.1 15.7 - 66.0
Source: Sumner (2010:21).

This would all suggest the global case for ODA as previously outlined, may not differ
not only in fiscally constrained times in the „giver‟ but also by the type of country (see
table 7) and in particular the recipient‟s (i) available domestic resources (proxies -
LIC and MIC status) and their state capacities to deliver for their population a
functioning state (proxies - FCAS or non-FCAS status).

The ethical argument for ODA might be weaker if there were substantial domestic
resources available (for example in stable MICs). However, the ethical argument is
complicated because there is no guarantee the people who needed the resources
would be able to access them. Further, the self-interest case for ODA might be
stronger in fragile and conflict-affected states depending on the crisis impact, speed
of economic recovery and fiscal space available (estimated to be very limited in LICs
by Oxfam, 2010).

19
 Table 7. Is the case for ODA stronger, weaker or neutral in fiscally constrained time and does
this differ by type of recipient country?

Case for ODA Is this case for ODA stronger, weaker or neutral in fiscally constrained
times in ODA giver?

Global ODA LIC stable LIC, FCAS MIC stable MIC FCAS
(e.g. (e.g. DRC, (e.g.
Tanzania, Nigeria,
Ghana) Pakistan)
Ethical arguments

Compassion Stronger if Stronger if Stronger if Weaker if Weaker if

impacts impacts impacts substantial substantial
worse in worse in worse in domestic domestic
recipient? recipient? recipient? resources? resources?
Might
depend on
state
capacities to
deliver
.
Compensation Same as Same as Same as Same as Same as
long-run long-run long-run long-run long-run
arguments arguments arguments arguments arguments

Disaster relief Same – due Same – due Same – due Weaker if Weaker if
to acuteness to acuteness to acuteness substantial substantial
of need of need of need domestic domestic
resources? resources?
Might
depend on
state
capacities to
deliver
.
Self-interest
arguments
Mutuality Stronger? Stronger? Stronger? Stronger? Stronger?

MNC inputs Stronger? Stronger? Stronger? Stronger? Stronger?

Security Stronger if Stronger if Much Stronger if Much

impacts impacts stronger if impacts stronger if
worse in worse in impacts worse in impacts
recipient? recipient? worse in recipient? worse in
recipient? recipient?

20
4. CONCLUSIONS

In this paper we have sought to present in one place a coherent set of arguments
which can form the basis of a case for ODA at firstly, a global level of analysis and
secondly, how this argument might differ between different recipient countries.

The main points we make are as follows:

First, the ethical and self-interest case for ODA at a global level is based on 6
components as follows: a) Ethical/Moral Arguments: i) Compassion, ii)
Compensation, and iii) Responses to disasters and urgent needs; and b) self-
interest: i) Mutuality of interest; ii) Support for MNCs and iii) Security.

Second, the compassion or „international social justice‟ case for aid is a very strong
one, and underlies continuing public support for ODA programmes in developed
market economies. There are issues over the extent to which the „global social
justice‟ argument should be transformed into forms of taxation and international
transfer payments which are „automatic‟ rather than „discretionary‟ – and this has
been raised within the current debate over the future of the MDGs.

Third, the ethical case for ODA outlined is somewhat independent of fiscal context –
the case relates to the long-term. However, the self interest case for aid may be
stronger in fiscally constrained times if ODA stimulates the global economy in the
context of mutuality.

Fourth, the case for ODA is inter-related with ODA objectives (including aid
effectiveness) and the „new geography of poverty‟. This suggests that the global
arguments for ODA may not apply to all countries or to aid beyond ODA.

Fifth, the ethical case for ODA may be stronger in countries with more serious crisis
impacts and the self interest security case could be much stronger in fragile and
conflict-affected states.

In sum, at the global, or general, level of argument the case for ODA is clear but at
the level of individual country ODA allocations the application of the principle may be
considerably more difficult.

We have noted that ethical arguments which relate to such long term issues as the
impact of the slave trade of centuries ago can provide a general context within which
part of the case for ODA can be articulated. However, because not all developing
countries were subject to the slave trade, because the economic impact would be
difficult to estimate with any accuracy, and because impacts on economic
performance by factors other than the slave trade will have been significant over the
intervening centuries and decades, this principle can hardly be seriously considered
as one for the determination of individual ODA allocations in the 21 st century. There
may, of course, be arguments concerning compensation for contemporary forms of
„slavery‟, but these may be equally imponderable. A similar problem applies to the
application of the principle of compensation for deterioration of the international
terms of trade affecting developing countries.

21
We should also note that our frame of reference has related to „countries‟ which in
the context of ODA means „governments‟. In some circumstances this creates
difficulties: i) a government may have resources and capability but for whatever
reason governance structures are unresponsive to the needs of the poor, ii) there
are cases of „failed states‟ where in particular countries no effective government is in
place for periods of time.

Our frame of reference has also related to ODA as defined by the OECD DAC.
However, ODA is far more complex than this definition encompasses. . For example,
historically the UK has not included government-funded scholarships for developing
country students but other European donors have done so. Other questions remain
in terms of aid instruments beyond conventionally defined ODA? There is a „do no
harm‟ narrative – arguing that the North can help the South such as with
compensation relating to climate change negotiations, trade policy, migration policy,
tax havens and innovative finance which are often not included within definitions of
ODA. These aid instruments are potentially larger financially than current ODA flows
to some countries.

Finally, we have alluded to the conclusions of Alesina and Dollar (2000) which
contrast global arguments and principles supporting the case for ODA and the the
reality of international politics, and history. Aid effectiveness and the „policy
environment‟ is another important dimension of their argument. The US relationship
with the Middle East (Egypt and Israel in particular) plays a significant role in US
ODA allocations; and the recent experience in Iraq and Afghanistan has had a major
impact on the allocation of ODA internationally.

22
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