1. Aid and Development Cooperation: Theory and Practice
Kim, Chong-sup
Graduate School of International Studies
Seoul National University
Aid and Development Cooperation: Theory and Practice

2. Contents 1. Introduction: Definition and History 2. ODA in Figures
3. Main Issues in Aid
4. Evaluation of Development Aid

3. What is Foreign Aid? Definition in Economics
All official grants and concessional loans, in currency or in kind, that are broadly aimed at transferring resources from developed to less developed nations on development or income distribution ground (Todaro, Economic Development)
Noncommercial objectives
Concessional terms: interest rate and repayment period for borrowed capital should be less stringent than commercial terms
Standard definition by OECD DAC
Financial flows, technical assistance, and commodities that are:
designed to promote economic development and welfare as their main objectives (thus excluding aid for military or other non-development purposes); and,
provided as either grants or subsidized loans.
Official Development Assistance (ODA)
must have a grant element of at least 25% (using a fixed 10% rate of discount)
When discussing foreign aid, most people have in mind ODA…

4. Method for calculating ODA
Old
if grant element is at least 25% (r=0.1 discount rate)
𝐷− 𝑡=1 𝑛 𝑃 𝑡 (1+𝑟) 𝑡 𝐷 ≥ 0.25
ODA=disbursement-reimbursement
New: The ODA calculation varies depending on the financial instrument.
Grant contributions are counted at their face value
Loans are counted on a grant equivalent basis. The discount rate for the grant element calculation will be differentiated by income group. Grant equivalent must be at least 45% (LDC/LICs, with r=9%), 15% (LMICs, with r=7%), 10% (UMICs, with r=6%)
ODA=disbursement*grant equivalent

5. History of Aid Modern Aid: Origins from Colonial Era
UK: provisions made for assisting colonial government
To promote British exports and employment: ‘tied aid’
Grants and loans for infrastructure, education, resource corporation
US: to resolve food surpluses and expand its influence overseas
Good Neighbor Policy: to Latin America
Post-World War Period
Marshall Plan: symbol of ‘bilateral’ assistance
UN system: multilateral assistance mainly by World Bank & IMF
Development in a New Context
Concept of ‘development cooperation’: need for ‘aid coordination’
Focuses on specific sectors
Health, infrastructure, education, environment, gender, etc.
Millennium Development Goals (MDGs)
Growing importance of aid effectiveness and evaluation

6. Millennium Development Goals (MDGs)
8 goals with 21 targets
Goal 1: Eradicate extreme poverty and hunger
Goal 2: Achieve universal primary education
Goal 3: Promote gender equality and empower women
Goal 4: Reduce child mortality rates
Goal 5: Improve maternal health
Goal 6: Combat HIV/AIDS, malaria, and other diseases
Goal 7: Ensure environmental sustainability
Goal 8: Develop a global partnership for development

7. Sustainable Development Goals

8. Evolution of Aid Doctrine (1)
s: colonial relationship and geopolitics
Aids to help finance national development plans in recipient countries
For compensation for colonial relationship or post-war recovery
State-led initiatives with focus of overall national income growth
To Europe, Japan, India and those geopolitically important
s: focus shifted to basic human need
Attention turned to developing countries: poverty & social sectors
New multilateral arrangements
UN, IMF, WB and regional development banks
1980s: the era of ‘structural adjustment’
Turned to ‘market-oriented’ development
Global economic instability: oil shocks, debt crises in LA and Africa
‘Washington consensus’: financial program aid & debt relief

9. Evolution of Aid Doctrine (2)
1990s
Decrease in net ODA with the end of Cold War
Criticized for being ineffective in spurring growth and development
Donor domination and selectivity
Transition of formerly communist economies in line with market-oriented development
Focus of development back to poverty reduction and sustainable economic growth in poorer economies
Discussion on international cooperation and ‘donor coordination’ led by OECD DAC
In 2000s
More focuses on financing of aid and aid effectiveness
2000 Millennium Development Goals
2005 Paris Declaration on Aid Effectiveness
0.7% ODA/GNI target by 2015

10. Types of Aid
Bilateral assistance: Historically most aid has been given directly from one country to another.
Multilateral assistance: Donors also provide aid indirectly as multilateral assistance, which pools resources together from many donors.
World Bank, IMF, AfDB, ADB, IDB, and various United Nations agencies such as the United Nations Development Programme

11. ODA in Figures

12. ODA in Figures
ODA by bilateral donor 2015

13. ODA in Figures
ODA by largest bilateral donors since 1970

14. ODA in Figures
ODA by largest multilateral donors since 1970

15. ODA in Figures
By components

16. ODA in Figures
Regional share of total net ODA since 1990

17. ODA in Figures
Top 10 ODA recipients with share of debt relief grants

18. Major Aid Recipients, 2004 Total ODA (millions US$)
Aid as % of recipient GNI
Aid per capita (US$) 1
Iraq
4,658
Sao Tome & Principe 67
Nauru
1368 2
Afghanistan
2,190
Guinea-Bissau 64
Mayotte
1226 3
Viet Nam
1,830
Micronesia 47
Palau
978 4
Ethiopia
1,823
Eritrea 42
Marshall Islands
852 5
Congo, Dem. Rep.
1,815
Timor-Leste
Tuvalu
801 6
Tanzania
1,746 41
Micronesia, Fed. States
719 7
China
1,661
Burundi 39
Cook Islands
438 8
Egypt
1,458 35
Dominica
417 9
Pakistan
1,421
Sierra Leone 32
Palestinian Adm. Areas
337 10
Bangladesh
1,404
Malawi 31
Cape Verde
298

19. Objectives of Aid
Most foreign aid is designed to meet one or more of four broad economic and development objectives:
to stimulate economic growth through building infrastructure, supporting productive sectors such as agriculture, or bringing new ideas and technologies,
to strengthen education, health, environmental, or political systems,
to support subsistence consumption of food and other commodities, especially during relief operations or humanitarian crises,
to help stabilize an economy following economic shocks.

20. ODA in Figures
ODA by sector since 1990

21. ODA in Figures
Analysis of social sector ODA since 1990

22. Two Main Issues in Aid Analysis
Determinants of Aid flows: who gives to whom and why?
Analysis of donors’ decision on:
To which countries
How much
For what
Motivations and objectives vary by donors and their relationship with the recipients
Effects on receiving countries
Relationship between aid and growth
Positive or no (even negative) effect?
Or conditional relationship?
Aid effectiveness depends on recipient countries’ political and economic circumstances…

23. Why do Donors Give Aid?
Foreign policy and political relationships are the most important determinants of aid flows.
US to Israel and Egypt
Taiwan and China
UN friend (political alliance)
Colonial past and political alliance are important determinants.
Small countries receive very large amounts.
For political reasons, donors generally want to influence as many countries as possible, which tends to lead to a disproportionate amount of aid going to small countries.
Poverty reduction
Donors generally provide their most concessional aid to the poorest countries.
In general, more aid goes to recipients with high income, less population, democratic institutions, open trade policies

24. Why do Donors Give Aid? Economic interest
Bilateral aid is often designed at least partially to help support the economic interests of certain firms or sectors in the donor country.
Many donors “tie” portions of their aid by requiring that certain goods and services be purchased from firms in the donor’s home country.
If funds must be spent in the donor country, it reduces competition for services so that the cost is higher.
One study found that tying aid added percent to its cost, thus significantly reducing its impact on recipient countries.

25. Effects of Aid on Growth
Frustration in empirical investigations: Who are right?
Aid is effective only in a country with good policies
Aid has a significant positive and non-linear effect on growth, rather reflecting diminishing returns or deep structural differences than importance of ‘good policies’
There is no robust effect of aid on growth unless using artificially restricted sample
Tendency for negative studies to dominate the debate, but they are in the minority.
Problems
Models sensitive to data and without careful specification
Development is a complex process: are there regularities in the impact of aggregate aid across countries?

26. Critics
Aid has enlarged government bureaucracies, perpetuated bad governments, enriched the elite in poor countries, or just been wasted

27. Relationship between Aid and Growth
Disappointing results
Other factors affect both aid and growth.
Countries facing endemic disease or poor geography, or those emerging from long-standing civil conflict may receive large amounts of aid may face.
In these cases, aid might have a positive impact on growth even if the overall growth performance remains weak.
Reverse causality: donors give more aid to countries with slow growth rates.
Aid works well under certain circumstances, but fails in others.
Corruption and institutional quality
Aid is misallocated: Aid has not been allocated for growth and poverty reduction.

28. View 1
Aid has a positive relationship with growth on average across countries (although not in every country), but with diminishing returns as the volume of aid increases.
The classic view is that aid augments saving, finances investment, and adds to the capital stock. Poor countries are unable to generate sufficient amounts of saving to finance the investment necessary to initiate growth. Aid might help relax a foreign exchange constraint in countries that earn relatively little foreign exchange (“two-gap” models)
Second, aid might increase worker productivity through investments in health or education.
Third, aid could provide a conduit for the transfer of technology or knowledge from rich countries to poor countries by paying for capital goods imports, through technical assistance, or through direct transfer of technologies such as the introduction of new seeds and fertilizers in the Green Revolution.

29. View 2 Aid has no affect on growth, and may actually undermine growth.
Aid simply could be wasted, such as on limousines or presidential palaces, or it could encourage corruption.
It can help keep bad governments in power, thus helping to perpetuate poor economic policies and postpone reform.
Countries may have limited absorptive capacity to use aid flows effectively if they have relatively few skilled workers, weak infrastructure or constrained delivery systems.
Aid flows can reduce domestic saving, both private saving and government saving.
Aid flows could undermine private sector incentives for investment or to improve productivity. (Dutch Disease).

30. View 3 Aid has a conditional relationship with growth.
Recipient country characteristics
Aid works better in countries with good policies and institutions.
Donor practices.
Multilateral aid might be more effective than bilateral aid
“Untied” aid might have higher returns than “tied” aid.
Donors that have large bureaucracies, do not coordinate with other donors, or have poor monitoring and evaluation systems undermine aid effectiveness.
Aid would be more effective with greater “country ownership”.
3 types of aid.
emergency and humanitarian aid (negatively associated with growth, since aids tends to increase with an economic shock)
aid that might only affect growth after a long period of time (such as aid for health, education, the environment, and to support democracy);
aid that is directly aimed at affecting growth (building roads, ports, and electricity generators, or supporting agriculture).

31. Principal-Agent Problem in Domestic Projects
Tax payers
(beneficiaries)
Service providers
government
In domestic public programs (such as trash collection or local schools) the taxpayers and ultimate beneficiaries are the same people, so they have clearer information about success or failure and can reward or penalize their agents accordingly by re-electing them or voting them out of office.

32. Principal-Agent Problem in Foreign Aid
Tax payers
Elected
gov’t
officials
Aid agencies
(heads)
Agency employees
Contractors
Consultants
Recipient
gov’t
officials
Implementing
officials
Final beneficiaries
No feedback
A unique and striking characteristic of foreign aid is that the people for whose benefit aid agencies work are not the same as those from whom the revenues are obtained.

33. Improving Aid Effectiveness
Paris Declaration on Aid Effectiveness (2005)
5 Partnership Commitments
Ownership
Alignment
Harmonization
Managing for results
Mutual accountability

34. Improving Aid Effectiveness
Country Selectivity
Donors should be more selective about the countries to which they provide aid, based on the view that aid works best in countries with good policies and institutions.
Recipient Participation and Country Ownership
Aid has been weakened by donor domination in setting priorities, designing programs and implementing projects
Either a more “country led” approach in which recipient governments take a stronger role, or a “participatory” approach in which various groups in recipient countries play a more active role, is required.

35. Improving Aid Effectiveness
Harmonization and Coordination. It is necessary for donors to more closely coordinate their activities; harmonize their systems; or “pool” their funds.
Results based management. The emphasis on demonstrating the effectiveness of aid has led to calls for improved monitoring and evaluation and results-based management.
Aid programs should aim to achieve very specific quantitative targets, and decisions about renewing or re-allocating aid going forward should be based on those results.
There are three basic objectives: (1) helping donors allocate funds towards programs that are working; (2) detecting problems at an early stage to help modify and strengthen existing programs; and (3) improving the design of future programs.

36. Indicators of Aid Quality
Maximizing Efficiency
Fostering Institutions
Reducing Burden
Transparency and Learning
Share of allocation to poor countries
Share of aid to recipients’ top development priorities
Significance of aid relationships
Member of IATI
Share of allocation to well-governed countries
Avoidance of PIUs (Project Implementation Units)
Fragmentation among agencies within a given donor country.
Recording of project title and descriptions
Low administrative unit costs
Share of aid recorded in recipient budgets
Median project size
Detail of project descriptions
High country programmable share
Share of aid to partners with good operational strategies
Contribution to multilaterals
Reporting of aid delivery channel
Focus/specialization by recipient country
Use of recipient country systems
Coordinated missions
Share of projects reporting disbursements
Focus/specialization by sector
Coordination of technical cooperation
Coordinated analytical work
Completeness of project-level commitment data
Support of select global public good facilities
Share of scheduled aid recorded as received by recipients
Use of programmatic aid
Aid to partners with good M&E frameworks
Share of untied aid
Coverage of forward spending plans/Aid predictability
Source: Birdsall and Kharas (2010)

37. Maximizing Efficiency
If donors optimized aid practices and policies, they could potentially save billions of dollars.
Collier and Dollar (2002) suggested the effectiveness of aid on poverty could double if selectivity in terms of governance and pro-poor orientation were optimized.
Tying aid is believed to add anywhere from 10 to 30% of costs. More than 10 percent of all DAC donor aid is still tied, or $12 billion, so the costs of tying are in the range of $1.2~$3.6 billion. And non-DAC donors tie considerably higher portions of their aid.
AidWatch reports that “buying food locally in sub-Saharan Africa… costs 34 percent less than shipping it from the US, and gets there on average more than 100 days more quickly”.
Volatility also has significant costs, estimated at $6.8 billion.
One-fifth of the explained volatility is associated with donor behavior (as opposed to such recipient issues as conflict or elections), or $1.3 billion.

38. Maximizing Efficiency

39. Fostering Institutions
Carefully planned development assistance can be harmonized with recipient systems, while go-it-alone or parallel approaches to aid delivery risk substituting for local institutions and stunting their growth.
Higher aid levels tend to reduce institutional quality significantly. This effect is larger for grants—the dominant form of aid—than for loans, perhaps because grants and loans are often administered by different donor agencies.
The key point is that the way in which aid is provided can affect the impact of aid depending on whether domestic institutions are strengthened or weakened in the process.

40. Fostering Institutions

41. Reducing the administrative burden
The fragmentation of official development assistance has created a huge burden on recipient country administration. With many bilateral and multilateral relationships to manage, recipient administrators are spending an increasing share of their time and resources receiving donor missions.
The OECD estimates that the deadweight losses associated with an average of 263 missions annually to aid-recipient countries could be as high as $5 billion.
Some countries must prepare more than 800 new foreign-assisted aid projects annually and present 2,400 quarterly reports on progress.

42. Reducing the administrative burden

43. Transparency and learning
The benefits of transparency come from the improvements in development effectiveness that can result from better information within partner countries, which empirical studies indicate is associated with reduced diversion of aid-funded government expenditures to other purposes .
The Aidinfo report includes an estimate of the benefits of this greater transparency within countries on the order of $1 billion a year.
Accessible, standardized, timely information has the potential to dramatically enhance effectiveness.

44. Transparency and learning

45. Aid Quality by Country

46. Aid Quality by Country

47. Evaluation of Development Aid
Why is evaluation important?
Past performance is no indication of future return: As we can recognize these failures, we shouldn’t be forced to repeat them.
Evaluation of development programs provides information about what works, what does not and why.
This learning contributes to improving the development effectiveness of aid and helps hold donors and partner country governments accountable for results.

48. Evaluation of Development Aid
Definition of Evaluation (OECD)
An assessment, as systematic and objective as possible, of an on-going or completed project, program or policy, its design, implementation and results.
Main purposes are:
To improve future aid policy, programs and project through feedback of lessons learned
To provide a basis for accountability, including the provision of information to the public

49. Evaluation of Development Aid: Practice (1)
OECD Principles for Evaluation of Development Assistance (1991)
5 Criteria for Evaluating Development Assistance (pdf)
Relevance, efficiency, effectiveness, impact, sustainability
Based on these principles, DAC Members
Set their own evaluation guidelines (link to the list), and
Promote collaborative approaches to evaluations among development agencies and partner countries (pdf)
DAC Evaluation Resource Centre (DEReC)
Evaluation Reports available here
MDG Monitor (
Shows how countries are progressing in their efforts to achieve the MDGs

50. Evaluation of Development Aid: Practice (2)
World Bank Monitoring and Evaluation (M&E)
Ten-Step to a Results-Based M&E System: A Handbook for Development Practitioners (2004) (pdf)
World Bank Independent Evaluation Group (ieg.worldbankgroup.org)
In charge of evaluating the activities of IBRD and IDA (the World Bank), the work of IFC in private sector development, and MIGA's guarantee projects and services

51. Aid and Development Cooperation: Theory and Practice
Q&A
Aid and Development Cooperation: Theory and Practice