Eurozone crisis takes toll on development aid

By ZRG | Last Updated: Apr 11, 2013, 10:17 AM IST

Ajay Vaishnav / ZRG

It’s no secret that development aid from the world’s richest countries is ebbing but the slide has been steep from last two years, courtesy Euro zone crisis and sluggish growth in other economies particularly the United States. Not only aid is shrinking, middle-income countries like India and China are cornering greater share of the aid pie now coming more via bilaterally funded projects and programmes.

In 2012, official development assistance (ODA) fell by four per cent in real terms following a 2 per cent dip in 2011, according to the Organisation for Economic Co-operation and Development (OECD).

The net ODA in 2012 amounted to US$125.6 billion, which represents 0.29 per cent of their combined gross national income (GNI) and well below the UN target of 0.7 per cent of GNI. The 4 per cent drop in ODA is the largest since 1997. What’s more grim, aid levels have fallen by six per cent in real terms since 2010.

While the decline is more evident in contributions to multilateral institutions where it fell by 7.1 per cent, the interesting trend is a two per cent increase in the aid for core bilateral projects and programmes which excludes debt relief grants and humanitarian aid. The Paris-based international organisation attributes the drop in aid for the second year in a row to European economic turmoil and sluggish growth in rich economies particularly the US. It, however, expects moderate recovery in 2013.

The trend of a two per cent increase in the aid for core bilateral projects, if anything, indicates increasing donor preference for bilateral ODA arrangements rather than through multilateral or regional bodies. The OECD has already suggested that the aid is shifting towards middle-income countries from the poor nations.

In development circles, aid coming from multilateral bodies is considered superior for transparency and impartiality even though it comes with more stringent terms and conditions for recipient nations. On the other hand, country-to-country aid is considered to be guided more by donor nation’s whims whether strategic, commercial or purely cultural links especially in the case of former colonies.

Bilateral net ODA to the group of Least Developed Countries (LDCs) fell by 12.8 per cent in real terms to about US$ 26 billion, according to the OECD. As for donor performance, while the US continued to be the largest donor by volume with net ODA flows amounting to US$ 30.5 billion in 2012, as percentage it is just 0.19 per cent of US GNI in 2012. The positive aspect of US aid is that contributions to international organisations reached a historic high of US$ 4.9 per cent representing a 30 per cent real terms growth compared to 2011.

The G7 countries provided 70 per cent of total net ODA in 2012. The largest percentage increases have been recorded in Australia (9.1), Austria (6.1), Iceland (5.7), Korea (17.6) and Luxembourg (9.8). On the other hand, the largest cut in ODA is recorded in Spain where it fell by almost 50 per cent due to the financial crisis followed by Italy, Greece and Portugal.

While aid to LDCs is ebbing, the most recent DAC Survey on Donors’ Forward Spending Plans suggests that aid will shift towards middle-income countries in the Far East and South and Central Asia primarily, China, India, Indonesia, Pakistan, Sri Lanka, Uzbekistan and Vietnam. It is most likely that aid to these countries will be in the form of soft loans. The trend has sparked concerns at the highest level. OECD Secretary General Angel Gurria sounded cautiously optimistic.

“It is worrying that budgetary duress in our member countries has led to a second successive fall in total aid, but I take heart from the fact that, in spite of the crisis, nine countries still managed to increase their aid. As we approach the 2015 deadline for achieving the Millennium Development Goals, I hope that the trend in aid away from the poorest countries will be reversed. This is essential if aid is to play its part in helping achieve the Goals.”

It is unlikely that ODA outflow from the developed north will be restored to early 2000 levels (even then barring Scandinavian nations, aid flows rarely attained UN goal of 0.7 per cent of the GNI). However, the silver lining is that new donors from middle income nations are emerging and volunteering for the African continent.

Marcelo Giugale, the World Bank’s World Bank’s Director of Economic Policy and Poverty Reduction Programs for Africa pins his hope on changing aid mentality among new donors.

“The real change in – and the future of – development assistance is not coming from its traditional donors but from its recipients. Some of the latter have developed enough to become donors themselves – think of the role that China, Brazil and India now play in Africa. These new-comers have learned the lessons of the past, ditched the aid mentality, and see themselves more as partners than as donors. They are more interested in trading raw materials and investing in infrastructure than in exporting their own way of thinking” wrote Giugale in the Huffington Post.