By Roberto Bissio
The numbers provided by the Organization for Economic Cooperation and Development (OECD) about the assistance contributed by its members to developing countries are “inflated”, include “fictional figures”, suffer from “fundamental flaws of overcounting, incoherence and premature implementation of an unfinished system” and have therefore “become incoherent as a statistical quantity”, argues Simon Scott, former head of the statistical division of the OECD’s Development Assistance Committee (DAC) in an article recently published by the Brookings Institution.
Official Development Assistance (ODA), frequently called “foreign aid” by the press, is mentioned explicitly or indirectly in the implementation targets of all but one of the 17 Sustainable Development Goals (SDGs) in the UN 2030 Agenda. SDG 5, the goal on gender equality, is the only exemption.
For the last several decades, the dependency on ODA of many developing countries has diminished, but for the least developed countries official assistance still represents the main source of foreign income (above remittances and foreign direct investment), according to UNCTAD’s November 2019 Least Developed Countries Report.
Yet, shortly after the ambitious 2030 Agenda was approved, in February 2016 the OECD unilaterally announced an “update” on what it considers ODA, which thenceforth “can be used to support the military in fragile countries on issues that promote development, such as human rights and the prevention of sexual violence”. Further, “tackling violent extremism” is now also accounted for as a development activity, based on the argument that “90% of terrorist attacks occur in states with weak governance and poor human rights records”. And, in the most contentious change, official subsidies to private for-profit investment are also included, even when such business is not part of any official development plan, as long as it “helps the private sector to boost economic development and create jobs in some of the world’s poorest countries”.
The UK government’s Department for International Development, one of the main promoters of these changes, celebrated them as “historic” and “aimed at ensuring the new Global Goals (i.e., the SDGs) are delivered in the most effective possible way”, quoting SDG 16, on peaceful and just societies, as the justification for accounting military support as part of ODA.
Commenting on this new definition in December 2018, an open letter by J. Brian Atwood, Richard Manning, and Hedwig Riegler stated that “the ‘modernizing’ effort appears to be dominated by politically-motivated discussion guided by Finance Ministries” whose “main interest in the aid field is not to safeguard statistical integrity, but to reduce pressures to increase expenditure” and “get maximum ODA credit from a minimum of outlays”.
Atwood was administrator of the US AID and chair of the Development Assistance Committee (DAC) of the OECD from 2010 to 2012; Manning chaired the DAC from 2003 to 2008 and Riegler was chair of the DAC’s working party on statistics from 2009 to 2013. The main point of their common letter is that all ODA transactions should be “concessional in character; in other words, they must reflect real government effort and give something of value away”.
UNCTAD’s 2019 Least Developed Countries Report emphasizes that “ODA recipients were not effectively party to the decision-making processes that led to ODA reform”. It characterizes the trend to subsidize private sector investment in developing countries as a way for donors to “engage in ‘picking winners’ deemed worthy to receive the embedded subsidies of ODA-backed private sector instruments, which ultimately amounts to a sort of transnational industrial policy initiated and financed by donors that takes place in countries benefiting from aid.” This is done while “the mechanisms to hold the private sector accountable to recipients of ODA […] remain unclear”.
“Private sector instruments” (PSI) are official mechanisms of support to the private sector (e.g. loans, guarantees or equity investment), generally offered at market terms, to avoid distorting competition and spoiling markets.
Accounting for them as part of ODA is difficult, because there is no concessionality on those private sector instruments. In fact, as the loans are paid back, the ‘donor’ State ends up profiting, unless the investment ends in bankruptcy. Therefore, Scott argues in his Brookings article that “a suite of arbitrary and artificial discount rates have been proposed in order to generate ‘grant-equivalent’ figures to be recorded as ODA for PSI transactions”.
The concept of grant equivalency suggests that repayment of the loan is lower then what it would be if it had be contracted using market terms and interests rates. But Scott explains that “the DAC’s discount rates take no account of a loan’s currency or duration, or of the actual country risk of the borrower”. Instead, the DAC uses fixed rates between 6 and 9 percent, which includes “risk margins” of 1 to 4 percent, depending on the borrowing country’s per capita income. A 5 per cent “base rate”, with no risk margin, is used for loans to major multilateral agencies, even when those agencies are usually ranked as AAA borrowers. This results in “inflated grant equivalents, even for loans that are actually at market terms”.
Further, Scott explains, “other fictional figures now in ODA are for equity investments sold at a profit”. If the donor government ends up selling its equity in an investment at, say, USD 2 million, when its original investment of USD 1 million was recorded as ODA, the DAC will ignore the profit and only count as “negative ODA” the original amount of the investment, without even adjusting for inflation in the meantime. “This again biases ODA figures high”, he notes.
Responding to Scott in October 2019, Susanna Moorehead, current chair of the DAC, wrote last October 2019 that “applying the new grant equivalent methodology has not led to inflation of the amount of ODA”. The UNCTAD report notes that the shift in metrics “across all DAC donors, entails a slight expansion of 2.5 percentage points in ODA flows to developing countries, albeit variations can be as large as 40 per cent for individual donors”. But while “private sector instruments – as captured through the provisional methodology – so far only play a marginal role […] the way in which the private sector instruments is operationalized may have serious consequences on the development finance landscape”.
Moorehead further argues that the DAC “is a consensus-based organisation and political compromises are always and inevitably a bit messy”. She expresses her hope that Scott, “as a former staff member of the OECD, you will understand such processes well and that negotiations and decisions combine technical and political considerations”.
But this type of political compromising is precisely the point that her predecessors were trying to make in their warning. Atwood, Manning and Riegler urged the DAC to “not sacrifice practical feasibility, technical soundness and statistical integrity on the altar of a swift political consensus”. The former DAC chairs warned that “if the present excessive political influence on decision-making is not curbed, even the basic role of the OECD/DAC in measurement may well be questioned” and that “if members continue to expand the coverage of ODA in ways that violate its basic concept and definition, we see a clear danger that the UN may in future bypass the OECD/DAC and institute its own measurement system”.
Such a danger is not unheard of. After all, already in 1979 many major US newspapers had decided to ban their writers from scoring baseball games due to conflict-of-interest concerns, and in 1980 Major League Baseball began to hire independent official scorers. Controversies related to perceived bias or errors in scoring have led to questions about important baseball records, including Joe DiMaggio’s 56-game hitting streak of 1941. According to Wikipedia, a 2006 academic study confirmed the historical existence of a home-team bias in scoring decisions, but this measurable bias decreased after 1979.
Given the presence of ODA in so many of the indicators in the Global Indicator Framework that measures progress on the SDGs, maybe this is the right moment for the UN Statistical Commission to start debating the biases in ODA accounting methodology and to separate the players from the scorekeeping roles.
What is ODA?
Even if ODA is mentioned in many UN resolutions establishing targets and dates for these targets to be reached, the statistics provided by the OECD (in no way supervised by the UN) are the only source of data on aid provided by the 30 members of the OECD-DAC and 80 other providers of development cooperation (other countries, multilateral organizations and private foundations).
ODA was defined in 1969 as “government aid that promotes and specifically targets the economic development and welfare of developing countries”, but
- the list of countries able to receive ODA is not the United Nations list of developing countries, since any country defined by the World Bank as “high income” (over USD 15,000 per capita) is excluded. Chile, Seychelles and Uruguay were de-listed in 2018. Palau, Panama and Antigua are scheduled to be out in 2020.
- assisting refugees in donor countries is counted as ODA during the first year after arrival
- aspects of military aid, peacekeeping and activities to combat terrorism can be counted as ODA
- the “grant equivalent” of loans can be counted as ODA, even when loans are repaid with a profit for the donor capital contributions to Development Finance Institutions and private sector instruments can be totally or partially be accounted for as ODA as well as individual loans to private sector entities in developing countries.