Smart Aid - Where ODA will still be useful

This post by Raundi Halvorson-Quevedo, a substantive reviewer for the OECD Development Co-operation Report 2013 provides a first look at Jon Lomøy’s piece for the Report. This post is part of the Wikiprogress  series on Post-2015. 

Concessional development finance is no longer the key source of finance for national development; non-concessional lending from both public and private sources has increased significantly over recent years and is now playing an important role.  Does all this mean that public concessional finance has become irrelevant, or does it still have a role to play?

The author has assessed empirical data regarding official development assistance (ODA) flows over the past decade and identified a number of trends that show how concessional finance from Development Assistance Committee members has adapted over time to emerging needs and urgent concerns – and drawn the following conclusions about where ODA will still be useful in future and how to ensure that aid will be even “smarter” in that context.

• Targeting the neediest  Providers of ODA have historically given priority to the poorest of the poor.  Since 2008, ODA to low-income countries (which today comprise 36 countries) has been around 30% of total ODA. Within this group, however, there are some countries which are not receiving enough ODA to meet their needs. The existence of under-aided countries – or “aid orphans” – results largely from donors’ uncoordinated allocation practices: one donor rarely takes into consideration how other donors allocate their ODA when making their own decisions. To address this vacuum, the OECD-DAC has developed a methodology for identifying potentially under-aided countries and monitoring assistance to them. This analytical tool will help us better target ODA, making it smarter still.

• Support to fragile states is fundamental for eradicating poverty  The past two decades have seen the rise of conflict and fragility as major global concerns, with serious implications for poverty eradication.  Between 2000 and 2010, support from DAC members to fragile states more than doubled – from USD20 billion to USD50 billion – reaching 38% of all ODA given by DAC countries. This support is fundamental for addressing global poverty: in 2010 these countries accounted for one-third of the world’s poor and by 2015 they are projected to be home to half of them, particularly in sub-Saharan Africa. Many argue that this is where the main future use of ODA should be.

• Tapping new resources   While traditional development finance, notably ODA, will continue to be important, there is now agreement that extra financing will be needed for sustained development in the majority of developing countries. The challenge for smart aid is to provide ODA in ways that will stimulate additional resources for development. Using aid to strengthen tax collection systems, for example, can capture home-grown resources for development.  ODA can also be used to encourage foreign investment, engage the private sector and encourage new innovative financing mechanisms such as guarantees, insurance facilities, “green” bond funds and advanced purchase arrangements to create incentives for private sector investment.

• A great deal more money will be needed to deal with climate change  To meet the challenges of climate change, substantial new financial resources will be required – from private investments to new forms of taxation. ODA for climate will also continue to be important, but it will need to be smart – using innovative mechanisms to attract other finance and to create the systems and capacity for monitoring and assimilating these resources in diverse developing country settings.

Raundi Halvorson-Quevedo

Can we Really End Poverty? A Debate on the Future of Poverty

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