Rethinking ODA

Towards a Renewal of Official Development Assistance

A Background Paper for the United Nations Financing for Development Process

by Jens Martens

INTRODUCTION

A growing number of critics around the world call for radical reform in Official Development Assistance (ODA). They have raised many serious issues that cannot be ignored:

First, critics point to the huge gap between the internationally agreed quantitative ODA targets and the donors' payment record. Clearly, there is a wide gulf between rhetoric and reality of assistance. In 2000 alone, developing countries lost about $116 billion because donors failed to meet the internationally agreed ODA target of 0.7 per cent of Gross National Product (GNP).

A second issue concerns the definition and measurement of ODA. Governments now use the term ODA to cover far more than the original OECD definition, sowing doubt about how much of today's ODA is "real" assistance. Many critics also find fault with the OECD criteria, which include not only government grants but also the full value of concessional loans with a grant element of at least 25 per cent. An alternative approach includes only the grant share of these loans, resulting in a significantly lower figure for what is called "Effective Development As-sistance" (EDA). Some critics go further still, questioning the logic of the 0.7 per cent Target itself. They insist that instead of basing the assistance target on the GNP of the donors, the UN should define need-based targets that take into account the develop-ment requirements of the recipient countries.

A third important issue is the quality of assistance, especially aid effectiveness. A 1998 study by the World Bank titled Assessing Aid triggered a recent round of debate on this topic. The study insists on a "good policy environment" as a precondition for effective development assistance. This has led to the controversial proposal that assistance should be selective - scarce ODA resources should be focused on those countries with both high poverty and economic policies approved by the Bank. A broader debate about "effectiveness" also touches on conflict-laden issues between the "owner-ship" of development programs by recipient countries and the "conditionality" imposed by donors. It includes a heated discussion about abandoning project funding in favour of programme funding and budget support. NGOs raise another issue, insisting that aid must be "untied" if it is to become truly effective and organized around recipient needs.

A fourth issue focuses on fundamental questions about the role and future of ODA. Many ask whether official capital flows still can have a perceptible impact on development, given economic globalisation and growing private foreign investments. Some ask whether ODA loans simply worsen the debt crisis. Other basic questions arise: Won't redefining development policy as "global structural policy," which Germany has done, result in a complete de-parture from traditional development assistance? Should development funds be used more for the provision of Global Public Goods in future, or would this be contrary to the interests of the countries in the South? There has already been talk of the "death" of traditional ODA. Some now pin their hopes entirely on new forms of resource transfer between North and South such as proposals for internationally harmonised taxes, above all a Currency Transaction Tax or Tobin Tax.

Such wide-ranging discussion on the crisis of ODA and the need for reform is not new. In the late sixties, the Pearson Report spoke of an "acute crisis" in development assistance. Many times since then, critics have questioned the principles of development policy. In 1976, Julius Nyerere insisted that the entire con-cept of aid was wrong. While it miti-gated problems, he said, it was not a successful means to overcome poverty throughout the world. And it had the fundamental flaw of reducing the poor to the status of beggars.

A permanent bone of contention in North-South negotiations on all subjects has always been the level of aid or official resource flows. These discussions have now changed somewhat, because of fundamental changes in the global system. Western capitalism no longer faces a challenger from the East, trans-national private investments have grown rapidly along with worldwide liberalisation and deregulation, and global problems have intensified (destruction of the environment, armed conflicts in and between states, HIV-Aids, etc.). Against this background, the critics have increasingly called for a new development paradigm - an entirely new frame-work for international development financing.

A number of governments and agencies have proposed "poverty eradication" as a new leitmotif for co-operation between North and South. Though the idea is scarcely new, it has quickly won a leading place in aid discourse. Only recently, Great Britain and Germany passed national action programmes to com-bat poverty, the EU and the ACP states assigned poverty eradication a key role in their new partnership agreement (the Cotonou Agreement), and the World Bank is now making debt reduction measures for the highly indebted poorest countries (HIPC) conditional on their compila-tion of Poverty Reduction Strategy Papers (PRSP). In 1999, even the IMF renamed its Enhanced Structural Adjustment Facility (ESAF) a Poverty Reduction and Growth Facility (PRGF). At the UN's Millennium Summit in September 2000, Heads of State and Government committed themselves to a number of International Development Targets to be reached by 2015, including halving the percentage of people living in absolute poverty, i.e. on less than one US$ a day.

This (new) development priority easily won a broad consensus. No one disagrees with eradicating pov-erty as long as it remains an empty concept, to be filled with miscellane-ous political banalities. As soon as policy makers consider concrete measures and serious means to reach the goal, their consensus is be bound to end quickly. Inevitably a discussion about the (re-) distribution of re-sources would arise, a discussion bound to result in conflict. Norwegian scholar Else Øyen pointed this out in an essay on the policies of poverty alleviation:

No social problem can be reduced (and certainly not eradicated) without some kind of distribution or redistribution of economic, political or social resources. All kinds of distribution and redistribution have a built-in conflict potential, no matter how trivial the distribution or redistribution seems to be.

Therefore, poverty alleviation cannot be separated from a conflict over resources. This brings us back to the issue of financial flows between the North and the South and the future of ODA.

The International Conference of the United Nations on Financing for Development, to be held in Mexico in 2002, offers governments an op-portunity to grapple with this thorny question. Once they have reached an agreement on a minimum set of international development goals, they will have to reach a consensus on providing the resources. The current framework for the talks warrants a fundamental debate. The official agenda includes a discussion on "Increasing International Financial Co-operation for Development through, inter alia, Official Development Assistance." The following topics will be considered:

• Volume of Official Development Assistance
• Aid Effectiveness and Efficiency
• Global Public Goods and Services
• Other Innovative Sources of Financing

This paper, prepared as input to the FfD process, will consider current trends and debates on the quantity and quality of ODA and it will make a number of policy recommendations for the FfD Conference.

You can download the whole document here as PDF-file: Rethink ODA (221 KB)

You can order the German original as a brochure here: Orginalfassung

Bonn, April 2001