What is the future of (UK) oda?

The building blocks of UK oda appear earthquake proof. However, there are tremors racing across the landscape which may shake political commitment and challenge current legislative frameworks. A new narrative of aid may be required, backed up by new rules – and soon, in time for the 2015 general election.

The current building blocks include: a mission to reduce poverty in the developing world, underpinned by the 2002 Act and reinforced by the reporting requirements of the 2006 Act; a political commitment to 0.7, a figure that will be reached for the first time in the coming year and may also be underpinned by law, as promised by all political parties; and an international framework, agreed by the Development Assistance Committee of the OECD, which defines oda and lists eligible developing countries.

So, what’s the problem? There are four perturbations to watch.

First, aid to middle income countries will become increasingly hard to defend. Second, it may be difficult to spend the aid available in remaining poor countries. Third, there are discussions about softening the definition of oda. And fourth, climate finance may swamp traditional aid and distort geographical priorities.

Working through these issues leads to three scenarios for the future of oda, each with legislative and political repercussions. Can political parties assume that the status quo will continue, effectively the best-case scenario? Should they assume another scenario? Or is the best bet to assume uncertainty, plan legislative changes in that context, and deliver a political message accordingly?

Will aid to middle income countries become increasingly hard to defend?

This is a familiar debate, which I and others have written on many times, and I do not want to go over old ground, especially about the economics of resource transfers (see e.g. here). However, the scale of the current challenge to aid agencies is illustrated by the following graph, supplied by the National Audit Office as background to support the International Development Select Committee’s Enquiry into the DFIDDepartment for International Development Departmental Report for 2011-12. The graph shows a sharp fall in the share of bilateral aid going to low income countries, from 80% in 2010-11 to 65% in 2011-12. The NAO comments that ‘the reduction in funding to Low Income Countries reflects the increasing sums the Department is spending in countries classified as Lower Middle Income Countries; some £791 million in 2011-12 (up 82 per cent on 2010-11 levels). Of its five largest programmes, three (India, Pakistan, and Nigeria) are in Lower Middle Income Countries, with Pakistan and Nigeria recently being reclassified from low income status’.

How much further will this curve fall? And how much should it fall? DFID, remember, used to have a target of spending 90% of bilateral aid in LICs, and used to point an accusing finger at the EU, whose share of spending on low income countries was below 50%. Will there be convergence?

The Select Committee commented on this, and concluded that

‘DFID has switched expenditure from low to middle income countries. This has occurred in part because several countries with a large number of poor people have recently graduated to middle-income status. The Department's policy towards middle income countries is contradictory: it is ending grant aid to India in 2015, but programmes in Nigeria and Pakistan are due to grow rapidly. The Department explains that this is because both countries have a massive share of the remaining MDG burden, yet the same logic applies to India where a different approach is being taken. As expenditure on middle income countries increases, it is even more important that decision-making is rational and consistent; we recommend that the Department establish and make public the criteria it will use to inform decisions of when and how it should cease to provide aid.’

On this topic, it is worth reading the transcript of the evidence of the Permanent Secretary, Mark Lowcock, and the extract in the Select Committee report, as follows:

‘We need a degree of consistency…, but I do not think we can have a mechanistic formulaic approach to this, because countries are all different and our relationships with countries are different. We do have a view on the kinds of criteria that will be relevant to when aid ceases. Progress on the MDGsMillennium Development Goals is one. Growth of the economy is another. The building-up of their own tax base is a third. A fourth one is the country's own preferences and desires. We need to take account of that as well, as, importantly, we did with India. There is a set of things we need to look at, but we cannot be too mechanistic about it and it will be different in each country.’

Consider also that GDPGross Domestic Product estimates are being revised in many poor countries and that this will affect both the number of poor countries and, depending on the calculation method, the number of poor people. Morten Jerven wrote about this in the Guardian in October, and has now published a book on the subject. In the Guardian, he observed that

‘Two years ago Ghana's statistical service announced it was revising its GDPGross Domestic Product estimates upwards by over 60%, suggesting that in the previous estimates about US$13bn worth's of economic activity had been missed. As a result, Ghana was suddenly upgraded from a low to lower-middle-income country . . . Meanwhile, in Nigeria an upward revision is pending. Their base year for the national accounts, 1990, is even more outdated than that of Ghana. According to reports from the National Bureau of Statistics (NBS), Nigeria plans to change its base year to 2008. It has been boldly announced that this could lead to a "huge jump" in GDPGross Domestic Product figures.  This radically challenges our current understanding of economic development in Nigeria and in Africa. According to the World Development Indicators' most recent data, the total GDPGross Domestic Product in 2010 was above $200bn (in current US$). Nigerian GDP, before the predicted revision, already accounts for 18% of sub-Saharan Africa's total (about $1,200bn). The reports in the media, from the IMFInternational Monetary Fund and the NBS all indicate that Nigeria's GDPGross Domestic Product will increase at least as much as it did in Ghana.  Let us be conservative and assume that the GDPGross Domestic Product in Nigeria merely doubles following the revision. This alone will mean that the GDPGross Domestic Product for the whole region increases by more than 15%. The value of the increase amounts to nothing less than 40 economies roughly the size of Malawi's. The knowledge that currently there are 40 "Malawis" unaccounted for in the Nigerian economy should raise a few eyebrows.’

There are many different estimates about the likely number of middle income countries in coming years, and also active debates about the definitional boundaries and about whether it is right to provide aid to MICs. I’ve written about those topics many times. However, it seems to me that the politics are inevitably going to militate against aid to MICs. Mark Lowcock did not mention UK domestic opinion in his evidence, but it must have influenced the decision of DFIDDepartment for International Development ministers. Where India goes, how many will follow?

In this connection, it is a mystery to me (as it was last year to the International Development Select Committee, in its Report on Europe) why the DAC list of oda-eligible countries should include Upper Middle Income Countries (UMICs). The list is reproduced below. None of these are on the DFIDDepartment for International Development list of 28 priority countries (though South Africa benefits from regional programmes), but many are on the multilateral list, for example of the EU. At least five DFIDDepartment for International Development countries, by the way, are already on the LMIC list (Ghana, India, Nigeria, Pakistan, West Bank/Gaza Strip). A number of others are close.

Can remaining aid be spent in Low Income Countries?

If LMICs and UMICs are excluded from development aid (while remaining eligible for humanitarian aid), then more aid will be available for LICs. This is fine, provided that absorptive capacity is not exceeded. What are the chances of that?

The answer depends on how many LICs are available to receive aid and what happens to global levels of aid, both over the next decade or so. These are imponderables about which it is possible to speculate, but a more concrete answer can be found by looking at thesituation today. Consider that

• The World Bank database shows only 36 countries currently classified as low income, with a total population of 820m and total GNI of approximately $US 470bn.
• In those countries, about 50% of the population lives on less than $1.25 a day, giving a total number of poor of about 410m.
• According to the latest OECD/DAC Development Cooperation Report, total net oda in 2011 was $US 130bn, of which 57% was Country Programmable Aid (a measure excluding humanitarian aid, aid through NGOs and some other items). ODAOverseas Development Assistance amounted to 0.31% of DACDevelopment Assistance Committee (of the OECD) Members’ GNI.

On this basis, total oda currently amounts to 28% of the GNI of LICs and to $317 per poor person in LICs. CPA amounts to 16% of LIC GNI and $US 180 per person. If donors were to reach 0.7, these numbers would more than double.

This is an oversimplification. For example, fragile states and least developed countries which are not low income are excluded. Also, it would be impossible to target aid perfectly. Nevertheless, the numbers suggest that there is already more than enough aid to lift all poor people in LICs out of poverty, certainly if the denominator is net oda, and probably also if it is CPA. That would be doubly true if all donors were to reach 0.7.

The more interesting question is about absorptive capacity. Research findings suggest that ‘most studies indicate that an ‘aid saturation point’ could be reached anywhere between 15% and 45% of GDP, beyond which the marginal benefits of additional aid inflows become negative’. In a recent speech, Ivan Lewis, the Shadow Secretary of State for International Development, defined aid dependency as when aid is equivalent to 20% of GNI – and pledged to end it. On this basis, aid to LICs could already be within the saturation range. Even CPA would be close to the upper ceiling if donors reached 0.7.

For some countries, aid dependency is high. The ActionAid Real Aid report, published in 2011, uses CPA as a share of Government expenditure as the metric, and has the following table of aid dependency in 2009, showing numbers up to 200%. The average for all LICs is over 30%.

Remember, these figures are for today. They do not allow for countries passing the middle income threshold, which many of the 36 are very likely to do in the next few years – especially given current rates of growth in developing countries, and recalculation of GDP.

The conclusion to be drawn is not that aid should be cut today. Rather, the calculation serves to raise some questions about the longer-term landscape legislation would be designed to shape. Bluntly, and heretically, do we actually need 0.7?

Will softening the definition of oda open the floodgates to expenditures of marginal development value?

This is an old chestnut, but one with a new lease of life, as the DACDevelopment Assistance Committee (of the OECD) has agreed to re-open the question of which expenditures are eligible to be counted as oda. Purists feel threatened by the possibility that expensive and marginally developmental items like military spending might be counted as aid, and gobble up, so to speak, the available funds. Their opponents counter that the current definitions are too tight, and exclude legitimate expenditures.

The core definition of oda and the rules about coverage are provided by the DACDevelopment Assistance Committee (of the OECD) and are summarised in a factsheet dated November 2008. In brief, oda is defined as follows:

‘Official development assistance is defined as those flows to countries and territories on the DACDevelopment Assistance Committee (of the OECD) List of ODAOverseas Development Assistance Recipients and to multilateral development institutions which are:

i. provided by official agencies, including state and local governments, or by their executive agencies; and

ii. each transaction of which:

a) is administered with the promotion of the economic development and welfare of developing countries as its main objective; and

b) is concessional in character and conveys a grant element of at least 25 per cent (calculated at a rate of discount of 10 per cent).’

As far as coverage is concerned, DACDevelopment Assistance Committee (of the OECD) members have agreed to limits on oda reporting, for example as in the figure below:

It is too soon to say where the latest round of DACDevelopment Assistance Committee (of the OECD) discussion might lead, but there are pressures both to exclude and include items from the list.

On the exclusion side, aid advocates have long argued that assistance to refugees in developed countries should be excluded from oda. This amounted to nearly $US 4bn in 2010. Other controversial elements (picked up e.g. by ActionAid ) include debt relief, tied aid, and technical assistance. Allowing for various other quality adjustments, including alleged misallocation, they discount as much as 45% of current oda. For their Commitment to Development Index, the Center for Global Development discount debt relief and tied aid, among other things (including misallocation). They discount up to 55% of current flows – in the case of the UK 54% and the EUEuropean Union 58%. Misallocation is probably a step too far for a redefinition of oda (though see above on the country list); and it is about time someone stood up for technical assistance, which can be valuable. However, there are elements here which deserve careful consideration: assistance to refugees in the home country (which the UK has not claimed), tied aid (which the UK does not use), and debt relief.

On the other side of the fence, the main debate has been about whether to include various categories of military spending (the first three bullets in the figure above). Michael Brozska reviewed this issue in Development Policy review in 2008. He concluded that the cost of ‘development-enhancing security expenditure’ in 2007 was between $US 33bn and $US 37 bn, excluding US expenditures in Iraq and Afghanistan.  That was then equivalent to about a third of oda. However good the case, Brzoska concluded that

‘there are some valid reasons for including additional security-related expenditures in the ODAOverseas Development Assistance guidelines, but with regard to items that would substantially change the amount of ODA, thus affecting political commitments, or where the acceptance is questionable, expansion of the guidelines is not a good idea. Nevertheless, the desire of some OECDOrganisation for Economic Cooperation and Development DAC member countries for greater recognition of security-related expenditures which, in their view, promote economic development and welfare, is plausible. The challenge is to find a place for them within the OECDOrganisation for Economic Cooperation and Development DAC reporting system but outside ODA.’

Brzoska recommended that a new category of expenditure should be created, reported to the DAC, but not counted as part of oda. He called this Official Security, Peace and Stability Assistance (OSA).

It remains to be seen whether this sensible advice will be followed.

In addition to these points, there are some arguments to sort out about how to count blended finance, especially that which leverages funding from the private sector. There is also the question of whether the DACDevelopment Assistance Committee (of the OECD) guidelines should set a position with regard to climate finance, discussed in the next section.

Will climate finance swamp traditional aid and distort geographical priorities?

The issue of climate finance has risen up the agenda since the climate talks at Copenhagen in 2009 resulted in commitments to long and short term funding, contained in the Copenhagen Accord. Paragraph 8 of the Accord said that

‘The collective commitment by developed countries is to provide new and additional resources,  including forestry and investments through international institutions, approaching USD 30 billion for  the period 2010 - 2012 with balanced allocation between adaptation and mitigation. . . .  In the context  of meaningful mitigation actions and transparency on implementation, developed countries commit to a  goal of mobilizing jointly USD 100 billion dollars a year by 2020 to address the needs of developing  countries. This funding will come from a wide variety of sources, public and private, bilateral and multilateral, including alternative sources of finance. ‘

This paragraph generated a great deal of follow-up work, not least by the UN Advisory Group on Climate Change Financing. From the point of view of oda, however, the key questions relate to the words ‘new and additional’, and to the geographical allocation of climate finance.

In the extreme case, from some perspectives the ‘best’ case, climate finance would indeed be entirely new and additional, unrelated to current and planned oda levels, and probably separately managed, as an entitlement owing to developing countries rather than a gift. In other words, the poorest developing countries could expect to receive their share of 0.7 from donors, on aid terms, plus a share of $US100bn, on some other terms; and less poor countries, not eligible for oda, would receive a share of the $US100bn.

In practice, this seems very unlikely to happen. In 2010, ODI researchers identified four main definitions, summarised in the Figure below. Only the fourth fully meets the ‘best case’ test. Option (1) would be worth considering if 0.7 looked like a feasible option. Options (2) and (3) are the most discussed. Note that Gordon Brown, when Prime Minister, set a policy that would limit climate funding to 10% of UK oda. This has been confirmed by current ministers, and is in fact a level not yet reached.  The UK provided £1.5bn ($US 2.4bn) as its contribution to fast start finance 2010-12 (an amount equivalent to 8% of the $US30bn target); and committed £2.9bn for the period 2011-12 to 2014-15, to be disbursed through the International Climate Fund. The ICF website confirms that ICF expenditures are to be treated as oda.

Will public sector climate-related expenditures increase or not? Will they continue to be treated as oda? And will they therefore be limited to oda-eligible countries? All these are unanswered questions.

Some back-of-the-envelope calculations to illustrate the range of possible outcomes:

Say that the entire promise on climate funding, of $US 100bn by 2020 is met by the public sector; that the UK provides 8% of the total, as it did for fast start funding (equivalent to about £5.3 bn p.a.); that all the money is oda; that is it funded from within the commitment to 0.7 (£11.3m in 2013-14); and that GNI rises only slowly to 2020 – then up to half the aid budget would be devoted to climate finance.

Or, say that public sector finance was highly leveraged in the $US 100 bn pledge, and that only $US 10-20bn of public sector finance was required; that the UK provided 8%, as before; and that 0.7 is maintained – then only 7-14% of the aid budget would be committed to climate finance.

Obviously, this is a very large range, from 7% to over half. In the former case, climate finance seems easily manageable; in the latter case not.

An additional issue is the geographical distribution. It is likely that a large share of climate financing will go to middle income countries rather than low income countries, if only because they are bigger economies with larger populations and a greater ‘entitlement’ to adaptation and mitigation finance. If needs are at the lower end of the range suggested above, then few problems are likely to arise. However, expenditure at the higher end of the range would doubtless cause significant problems.

Implications for the future

There seem to be quite a few scenarios in this paper, so here are three more, reflecting the challenges outlined in preceding sections. The question then will be about the probability of different scenarios actually occurring, about the appropriate legislative and political response, and about spending arrangements.

In the best case:

• A commitment to 0.7 is maintained;
• This money can be spent on legitimate poverty-reducing ends in mostly poor countries and fragile states;
• Security-related expenses are kept off-budget;
• Climate finance to MICs absorbs only a small part of the budget; and
• There is international agreement on these arrangements.

In the worst case:

• A commitment to 0.7 is hard to sustain;
• Even though budgets are tight, limits to absorptive capacity mean that it is hard to spend the money on legitimate poverty-reducing activities in mostly poor countries;
• Security-related expenses begin to encroach on the budget;
• Climate finance, much of it to MICs, begins to eat up a large share of the aid budget; and
• There is pressure from other donors further to weaken the definitions of both oda and climate finance.

Lying between these two is a third case, which combines elements of both best and worst:

• It is possible to sustain a commitment to 0.7, but only by compromising on what the aid budget is spent on, especially as regards climate change;
• The poorest countries receive what they need, taking account of absorptive capacity, but a good part of the aid programme is spent on climate finance, and perhaps some on security;
• It is accepted that climate finance will go partly (mostly?) to MICs;
• There is international agreement on these arrangements.

Personally, I think this third option is the most likely; but it is a matter of judgement, of course. The practical issue is that it may be too soon to tell how the geography of poverty will evolve, what kind of climate architecture will be put in place, and how the DACDevelopment Assistance Committee (of the OECD) discussions will conclude. In that case, some flexibility will be required.

First, the 2002 International Development Act specifies that assistance may be provided by the Secretary of State if it is likely to contribute to a reduction of poverty. Thus:

‘The Secretary of State may provide any person or body with development assistance if he is satisfied that the provision of the assistance is likely to contribute to a reduction in poverty.

(2) In this Act “development assistance” means assistance provided for the purpose of—

(a) furthering sustainable development in one or more countries outside the United Kingdom, or

(b) improving the welfare of the population of one or more such countries.

(3) For the purposes of subsection (2)(a) “sustainable development” includes any development that is, in the opinion of the Secretary of State, prudent having regard to the likelihood of its generating lasting benefits for the population of the country or countries in relation to which it is provided.’

It is interesting to ask whether climate finance or security assistance, especially but not only to MICs, would qualify under this Act. Note there is a ‘double-lock’: aid must both contribute to poverty reduction and either further sustainable development or improve welfare. The second part of the lock is so open as to cover almost any spending. The first part, however, is more restrictive.

The 2002 Act refers repeatedly to the ‘Secretary of State’, and it is interesting that the accompanying explanatory notes were prepared by DFID. Does the Act apply to all oda, or only to that part disbursed by DFID? My sense is the latter, in which case it is worth noting that over 10% of UK oda is spent by other Departments. The details are given in the latest DFID Departmental Report as in the table below: in 2011, £218m was spent each through the Conflict Pool (FCO and MoD) and otherwise by the FCO, £144m by DECC, and £91m by ECGD. If counted as oda, these expenditures are subject to DACDevelopment Assistance Committee (of the OECD) rules. However, are they subject to the 2002 Act?

It would be interesting to consider amending the 2002 Act, in order to make sure that all oda is covered, if not already the case. Further amendments would be required to deal with a possible increase of climate funding, and also any changes to the DACDevelopment Assistance Committee (of the OECD) guidelines.

Second, the 2006 International Development (Reporting and Transparency Act) is, as its name implies, mostly about reporting. It refers to ‘international aid’ (not ‘aid disbursed by DFID’), requires reporting on progress towards 0.7, and asks specifically for information about the share of aid spent on low income countries (without indicating a desired level). There is a requirement for reporting on policy coherence, viz non-aid polices (including security  and climate?). Because climate change was a nascent issue at the time the Act was drafted, there is little specific mention of climate change or climate funding. It would be useful to amend the Act in order to include reporting on this issue. The same might be true for security expenses, especially if a separate reporting procedure is established by the DAC.

Third, if there is to be a 0.7 Bill in the UK parliament, it will need to adjudicate on some of the issues here, especially definitions of oda and climate finance.

In all three cases, it might be useful to make reference to the definition of oda, as decided by the DACDevelopment Assistance Committee (of the OECD) or any successor body.

As far as the DACDevelopment Assistance Committee (of the OECD) itself is concerned, the logic of the argument suggests that the country list should be updated. The oda definition could also usefully be tightened, especially to eliminate refugee costs in developed countries and perhaps to revise the terms on which debt relief is treated. It would not seem desirable to change the definition in order to make it easier to include security issues.

The climate finance issue also requires urgent attention in terms of the DACDevelopment Assistance Committee (of the OECD) guidelines. Which of the four definitions of ‘new and additional’ will the DACDevelopment Assistance Committee (of the OECD) agree? And if some or all of climate finance is to be treated as oda, what are the implications for geographical coverage and uses of oda? Might there be some countries, for example, which qualify for climate oda, but not for poverty oda?

All this also poses a political challenge. Can political parties assume that the status quo will continue, effectively the best-case scenario above? Should they assume another scenario? Or is the best bet to assume uncertainty, plan legislative changes in that context, and deliver a political message accordingly?

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