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Is there a case for a fresh approach to aid measurement?
By:- Jonathan Glennie and Annalisa Prizzon
Date: April 14th 2012
Last week, new figures from the Organisation for Economic Co-operation and Development (OECD) suggested that 2011 marked the first reduction in aid for 15 years. Few countries are likely to reach 0.7% in the present economic context. Does that matter? The 0.7% target is an important symbol, but it can obscure the focus on what's really important, which is not the proportion of donor income given in aid, but the proportion of the recipient economy depending on it. High levels of aid, while sometimes necessary in the short term, are increasingly viewed as antithetical to development in the longer term.
While it has always been acknowledged that aid should eventually work itself out of a job, that objective is being voiced more frequently as more and more countries express their desire for a gradual reduction in aid levels in the medium term, rather than just over the long haul. When even the president of Liberia, one of the poorest countries in the world, says she wants to see her country free of aid dependence in a decade, a significant shift is clearly taking place.
Last month, we published a report arguing it is time to turn aid measurement on its head. The report proposes a new classification of countries according to their aid receipts.
The most familiar country grouping is the World Bank income categorisation on the basis of per capita GNI: high income countries (HICs), middle income (MICs) and low income (LICs). This categorisation helps track countries in their economic growth path. But categorisation by aid receipt may help policymakers in both donor and recipient countries monitor progress on this other increasingly important variable – aid as a proportion of the economy. No such classification yet exists.
We suggest classifying recipient economies in four categories depending on their level of aid (high-, middle-, low- and very low-aid countries). High-aid countries (HACs) rely on aid for more than 10% of their GNI, while very low-aid countries (VLACs) receive less than 1% of their GNI in aid. The other obvious option would have been to look at aid as a proportion of government expenditure, as in ActionAid's Real Aid 3 report. However, in some countries significant amounts of aid are spent outside government systems, and we wanted to know the role aid plays in the economy overall, not just in the government budget.
The results are interesting. The number of HACs decreased from 48 to 37 between 1990 and 2009, while LACs and VLACs rose from 40 to 54. This chimes with general opinion about a move away from aid dependency. However, when we split this 20-year period into decades, an interesting picture emerges that appears to contrast with the conventional wisdom.
In the 1990s, 48 countries, almost half those with data, moved down at least one band, becoming less aid dependent, while only three moved up (at least) one band. Contrastingly, in the 00s more countries moved up in the classifications (20) than down (only 14), implying a general pattern of increasing aid-to-GNI ratios. In the 00s, the number of HACs actually increased while the number of LACs/VLACs fell from 47 to 42.
While the trend in the 90s is probably best explained by declining aid levels during the cold war, the mixed picture in the 00s can be explained by a combination of strong growth in some countries, leading to a higher denominator in the ratio, and a significant increase in the aid effort focused on some countries in particular.
One interesting implication of reading the data in this way is the differentiation between "reducing aid" and "reducing aid dependence". As countries grow, they are likely to reduce aid receipts as a proportion of their national income. While it is tempting to characterise reductions in aid levels as indicative of reduced aid dependency, the classification of countries by aid guards against this assumption. Countries that have been LACs or VLACs for decades may reduce aid without reducing dependency, quite simply because they were never aid dependent.
This segues directly into the aid to middle-income countries debate, better known as: "Should we give aid to India?" As donors prioritise reducing aid to MICs, the report asks what has changed to make them think aid reductions deemed inappropriate 20 years ago are now appropriate. While the common reason given is that the new MICs no longer need aid, our data imply they never really needed it.
Do the present tendencies to reduce aid to MICs have more to do with the changed financial context of traditional donors than a serious assessment of the potential continuing role of aid at relatively low levels (as a proportion of GNI)? This question is vital, especially given that three quarters of the world's poorest people live in LACs or VLACs, while only about 15% live in HACs (as a forthcoming ODI paper will show).
Rather than seeking to end aid, one option would be for countries to try and join the ranks of LACs or VLACs. That would mean bringing aid down to sustainable levels where returns are higher (if the evidence of diminishing returns is correct) and the risks associated with aid dependence are reduced. It is acknowledged that there are diminishing returns to aid levels, and that high aid can be harmful. However, evidence that no aid is better than low aid is thin on the ground. Aid at low levels can be an important source of finance for specific sectors and geographical regions; it can catalyse change, boost civil society's efforts to hold powerful actors to account, and help to attract other types of finance.