Overcoming the Crisis of ODA

The Case for a Global Development Partnership Agreement

Statement by Jens Martens,
World Economy, Ecology & Development Assoc. (WEED)
New York, November 7, 2000

Introduction

There is a broad consensus among the development community that official development assistance (ODA) continues to be of vital importance for many countries in the global South. To some extent its volume reflects the political commitment of the North to greater global justice. Of course, ODA is not the only but just one financial instrument to fight poverty and to promote sustainable development. ODA cannot be a substitute for other necessary actions, for example further debt relief, improved trade conditions for developing countries and reforms in the international financial system.

Nevertheless, the transfer of public resources has to play an important role because in central areas of sustainable development simple blind faith in private capital and the forces of the free market alone would lead to damaging or at best ineffective results. This is the case, for instance, in the areas of social security, health, education, cultural development, environmental protection, and civil conflict prevention. The provision of such national and global ‘public goods’ by governments and international organisations will, in the future, probably require far more official funding than has so far been made available.

Therefore, the major challenge for the Financing for Development Conference will be to offer a way out of the impasse to which North/South negotiations in past years have almost automatically led when it came to questions of financing.

The crisis of ODA

It is no exaggeration to say that financing for development is in a serious crisis. The most visible sign of this crisis is the continued downward trend in official development assistance in recent years. ODA contributions by all OECD countries fell from a previous high of 59.6 billion US Dollars in 1994 to 49.7 billion in 1998, and their share in GNP accordingly fell from 0.30 to 0.24%. Since in the same period, private net capital flows rose significantly, the ODA share in the overall resource flows from the North to the South fell from 41.4% in 1991 to a scant 20.7% in 1998. This trend also marks a remarkable shift in importance from official to private capital flows.

In its most recent report on development co-operation, the OECD’s Development Assistance Committee concludes that the negative deviation of official development assistance between 1992 and 1998, as compared to the long-term average of 0.33% ODA/GNP, has resulted in a net loss of 88.7 billion US Dollars for developing countries. Today, this figure is well over 100 billion US Dollars.

Inadequate responses by donor countries

The Governments of the donor countries are trying to make up for the cuts in their development resources mainly in three ways. First, they are putting more emphasis on the quality (instead of the quantity) of the assistance. In their view, the political focus should be less on the input than on the output side of development co-operation. Still, the question remains to be answered how the international development targets, most notably halving the number of people living in absolute poverty by 2015, can be achieved without clearly quantifying and providing the necessary resources. Therefore, the decision cannot be to increase quality or quantity of ODA alone, but should combine an increase in both quality and quantity.

Second, many governments are reacting to the shortage of resources by concentrating money on selected recipient countries. There is debate as to the criteria to be used for country selection, including the decisions on national programmes that are to be discontinued in the future. There is a substantial risk that the level of need will play a less decisive role than foreign (economic) policy considerations and political good conduct. Given that the trend towards regional concentration can be observed in several industrialised countries, there is an added danger that inadequate donor co-ordination is likely to shower some ‘model countries’ with resources while others are excluded.

Third, governments are trying to balance the shortfall in development funding by greater recourse to public-private partnerships (PPPs). In specific cases, this may be eminently sensible, for example when co-operation with small or medium-sized enterprises results in an increase in technology transfer and environmental standards, or when organic farming projects are facilitated that would otherwise be impossible. However, PPPs are not suitable as a ‘universal panacea’, for they run the risk of neglecting precisely those areas of basic social services and poverty eradication that are of high priority, just because they are not profitable for businesses. In addition, PPPs may have other negative side effects on development, for example because of aid tying (in the case of co-operation with businesses in the donor country) and distortions in competition (in the case of subsidising selected enterprises in the recipient country).

Policy recommendations

All in all, the political reactions to the cutting of development assistance budgets fail to solve the basic problem of the shortage of funds in many countries of the South. In fact they even distract from this problem. Instead of concentrating on how to manage these shortages as efficiently as possible, Governments should be using the current crisis to subject official development financing to a thorough-going review. In this connection the following fundamental aspects and policy recommendations should be explored:

1. A Global Development Partnership Agreement

The notion of "development aid" was always a misleading euphemism which reduced the co-operation between sovereign states to charitable or even paternalistic relations between donors and recipients. The Financing for Development ‘event’ could pave the way towards a more balanced relationship between North and South on the intergovernmental level. In order to overcome at least partly the traditional dependency relationship between ‘donors’ and ‘recipients’, new forms of contractual relations between all countries should be established under the auspices of the United Nations. What is required is a new ‘contrat social’, a social contract between North and South which lays down the rights and obligations of states and guarantees a reliable and sufficient flow of resources to the poorer countries.

This objective could be met by a Global Development Partnership Agreement, based on existing legal documents such as the International Covenant on Economic, Social and Cultural Rights. The contractual relationship between the European Union and the ACP countries under the new Cotonou Agreement can serve - in spite of some shortcomings - as an indication of the direction North-South co-operation could take in the future.

The proposal of many NGOs for a binding Anti-Poverty-Convention, discussed in Geneva at the Special Session of the UN General Assembly on Social Development ("Copenhagen + 5") in June 2000, very much follows the same reasoning. We fully support the idea to link the internationally agreed development targets to the binding commitment of the rich countries to provide the necessary resources to reach these targets.

Therefore, one of the outcomes of the Financing for Development Conference could be the clear decision to start an official negotiation process towards the formulation of such a new development agreement.

2. A reliable resource transfer from rich to poor countries

An increased reliability of the official resource pledging would ease long-term development planning in the countries of the South. Consequently, a new binding development agreement should contain as a core element new modalities to guarantee a predictable and sufficient transfer of resources at a level to be determined with reference to clearly defined development indicators. This new mechanism could replace - in part - the current system of discretionary spending. Some thought-provoking considerations aiming in this direction are outlined in a study by Keith Griffin and Terry McKinley, published by UNDP’s Office of Development Studies (ODS). Both authors call for a new global safety net - a progressive income tax on the GNP of rich countries, the proceeds of which would be allocated to the poorer countries in line with a fixed formula. Their appeal is unambiguous:

"In creating a new framework for development co-operation, the objective should be to abandon the present system, where aid contributions are voluntary, the aid burden is distributed randomly and inequitable, and the aid flows are unpredictable because they are subject to annual appropriations by national parliaments. The world should move instead to a system where contributions to the aid effort are obligatory, the burden is distributed progressively, and the annual flows are predictable. The idea of a progressive international income tax to finance foreign aid is not new, and if development aid is to have a future and be more than marginal in size, the idea should be taken seriously."

At first glance this proposal seems to be utopian. But there are already precedents of such an "institutionalized solidarity" on national and regional levels. In Germany, for instance, under the concept of financial adjustment among the federal states- the so called "state financing offset" - billions of Dollars are transferred from the economically stronger to the weaker regions each year. The European Union, to name another example, has the instrument of Structural Funds to support the poorer regions and weaker economic sectors within the Union. By these means, between 2000 and 2006 an estimated 195 billion Euro (about 24 billion US Dollars per year) will flow from the richer to the poorer sectors and regions of the EU.

During the preparatory process of the Financing for Development Conference the United Nations should undertake further analyses on the feasibility of such forms of an inter-country income transfer or a "state financing offset" on the global level.

3. A need-based target for ODA

In addition to the proposed qualitative changes in North-South relations there is also the need to rethink the quantitative target of ODA. So far, the Gross National Product of the ‘donor countries’ has served as the ‘assessment criterion’ for the level of official development assistance. Since the adoption of the ‘Strategy for the Second Development Decade’ by the UN General Assembly in 1970 the 0.7-target for the ODA/GNP ratio has been in the centre of development negotiations. It remains to be an important political criterion, as it highlights the (widening) gap between the promised aid commitments and the actual resources the donors are willing to provide - in other words, the gap between the rhetoric and the reality of aid. Nevertheless, there is no conclusive justification for setting exactly 0.7 as reference value or using the donor countries’ GNP as the only basis for assessment. Even if questioning the 0.7-target is tantamount to breaking a taboo, it is time to rethink this issue.

While this target reflects the "supply side" of ODA we should equally think about other indicators focusing on the "demand side". The scale of the official resources transferred to countries in the South needs to be made dependent upon the real financing needs of the ‘recipient countries’. Quantifying these needs is undoubtedly complicated, although for certain specific areas, such as the costs for the world-wide provision of basic social services, estimated values already do exist. This new need-oriented assessment of North-South transfers, however, must not be regarded as an attempt to justify a further decline of ODA flows. On the contrary, it may result in a potential financing volume substantially higher than the amount laid down by the current 0.7-target.0

The United Nations should use the Financing for Development Conference to further analyse and finally agree upon new need-based targets for ODA.

4. No development "on credit"

A large share of the current development assistance is provided in form of concessional loans. Even under favourable conditions (for instance low interest rates and long grace periods) this "aid" has to be paid back sooner or later. It means only "solidarity on credit" Any increase in this concessional kind of development assistance automatically leads to an increase in the foreign debt of the recipient countries. Especially with regard to those activities and programmes, which deliver neither sufficient yield nor enough foreign currency, this raises the general question of whether ODA should, in the future, be made available in form of repayable loans at all. This is particularly true in the field of basic social services (basic education, basic health care and nutrition, reproductive health, water supply and sanitary facilities) but also for environmental measures, capacity building, and support for non-export-oriented agricultural production.

In all these cases, loan-based development assistance exacerbates the debt situation of the recipient countries and, in the long run, will increase the transfer of resources from the poor to the rich countries. Therefore, official resources should be increasingly made available in the form of non-repayable grants. However, this argument should not be used as a pretext for further reductions in bilateral and multilateral transfers to the South and instead, an increased recourse to the responsibility of private donors. For precisely short-term loans from foreign commercial banks and the growing indebtedness via foreign bonds in the second half of the 1990s aggravated the debt crises in Asia and Latin America.

To help the highly indebted countries to escape from the vicious circle of indebtedness, debt relief and re-indebtedness, governments and multilateral development institutions should use the Financing for Development Conference to commit themselves to provide ODA increasingly in form of non-repayable grants. The United Nations should be commissioned to undertake further studies on the economic and social implications of loan-based ODA.

Strengthening the Economic Role of the United Nations

The implementation of the proposals outlined above - particularly for a Global Development Partnership Agreement and a more reliable transfer of resources - would require a strengthened role of the United Nations. In a genuinely multilateral and participatory system of global development finance, the United Nations (and not the World Bank or the Development Assistance Committee of the OECD) have to be the main body for decision making and policy co-ordination.

The Charter of the United Nations unambiguously states its central role in global macro-economic policy formulation and guidance. But it is no secret that in reality the relevant decisions in this field are taken at the G-7/8 Summits and the Annual Meetings of IMF and World Bank. The Financing for Development Conference could be a first step to reverse this trend and to revitalize the mandate of the UN in the field of (so called) "hard" economic issues. But other steps must follow. What we need are institutional reforms and a new "division of labour" between the United Nations, the World Bank and the IMF in the system of global development finance, with the United Nations as undisputed lead agency.

Closing remark

In their Millennium Declaration the Heads of State and Government reaffirmed, that solidarity has to be one of the fundamental values which are essential for international relations in the twenty-first century. They stated: "Global challenges must be managed in a way that distributes the costs and burdens fairly in accordance with basic principles of equity and social justice. Those who suffer or who benefit least deserve help from those who benefit most."

If this important commitment shall not remain pure lip-service, it has to be translated into concrete political action. The Financing for Development Conference offers the historic opportunity to give a signal of global solidarity. In order to meet this challenge, Governments frankly have to move beyond the "agreed language" of the past and to take credible steps towards a new North-South partnership.