The concept of ‘development aid’ only began in earnest at the end of World War II when the victorious allies were faced with the task of rebuilding a devastated continent and dealing with millions of refugees.
Since then, the definition and scope of what development aid is has greatly expanded, but it is still largely predicated on a limited number of wealthier nations providing financial, material and/or technical assistance to less developed or developing countries with the professed goal of improving the living conditions in those nations.
The Organization for Economic Cooperation and Development (OECD) tracks the development aid sector (also known as Official Development Assistance (ODA)) of 47 countries and reports that, in 2022, more than a quarter of ODA (which totaled US$201.4 billion) provided by the richest 30 countries that are members of the Development Assistance Committee, DAC, came from the United States (US$55.3 billion) followed by Germany (US$35 billion), Japan (US$17.5 billion), France (US$15.9 billion), and the United Kingdom (US$15.7 billion). Thus, five countries accounted for 70% of DAC ODA tracked by the OECD. It is of note that China’s ODA figures are not published and are therefore not tracked by the OECD, but China is estimated to have committed as much as US$67.8 billion for development in 2022. However, this data is hard to analyze to determine the distribution between the grants and loans that make up the total amount of funding committed and disbursed by the Chinese government.
Fig.1. Official Development Assistance (ODA) by the OECD Development Assistance Committee
Source: Focus2030
Although the lion’s share (75%) of published ODA spend comes from member nations of the informal alliance known as the G7, each donor nation follows its own internal procedures and guidelines to measure the effectiveness of the aid given, and calls for adhering to an international standard have largely fallen on deaf ears.
The significance of development aid
The term ‘development aid’ is fairly flexible and can refer to any number of things, including providing technical assistance, providing guidance on legal matters, material goods such as food and emergency supplies, building infrastructure such as hospitals or schools, educational and training programs, mass vaccination campaigns, advocating for family planning and providing contraceptives, assistance to increase crop yields and improve food security, and combating trans-national problems such as climate change or human trafficking.
In absolute terms of monetary value, in 2022 aid in the form of a grant – which is money provided as a ‘gift’ – rose to 82% of all ODA by DAC members while the share of loans and equity investments in gross bilateral ODA dropped to 18%. However, a significant amount of investments by nations like China comes in the form of loans for various development projects such as infrastructure and construction.
Fig.2. Resource flows in DAC statistics
Source: OECD
Developing countries struggle to obtain sufficient revenue from domestic sources such as taxes and levies so they turn to donor nations to obtain funding, occasionally in the form of grants, but also in the form of loans. A government’s portfolio of loans can also include money from commercial banks, the private sector, or even a foreign government. For example, China is the biggest lender in the world, with a portfolio of investments totaling almost US$500 billion across developing countries. Although these loans can sometimes be at below-market interest rates, donor nations benefit from a unique arrangement called preferred creditor status, meaning that the government of the developing nation must pay their debts to donor nations first before anyone or anything else.
See also: DFI Files: China Development Bank and its impact on International Development
According to the United Nations, the increasing debt of the governments of developing countries and the trend to borrow from private creditors has led to an unsustainable public debt crisis in which nearly 3 billion people on the planet now live in countries where external debt payments are greater than expenditure on health or education. Effectively, global public debt is now outpacing gross domestic product (GDP), meaning that poorer countries are deeply mired in an inescapable spiral of having to spend more and more of their resources on paying off external debt rather than investing in education, healthcare, infrastructure, agriculture, and other areas that might help them to actually develop. According to the UN, “developing countries rely more on private creditors now, making credit more expensive and debt restructuring more complex”, with as much as 62% of the debt portfolio of the developing countries belonging to private creditors such as banks and bondholders.
Indeed, in the modern history of development aid, that is less than a century, only a single country, South Korea, has transitioned from being a recipient of development aid to being classified as ‘fully developed’ and it is now a contributor of development aid.
Critics of donor countries’ role in the development aid sector
Critics of the modern development aid architecture claim that the reason donor countries provide development aid is primarily to further their domestic political agendas and economies. The main argument is that monetary aid is committed not to the poorest countries, but mostly to countries that could present opportunities for the economies of donor countries.
In Japan, development aid has, essentially, been an unacknowledged way of paying reparations to the countries that it occupied and destroyed in World War II. Indeed, development aid assistance to China only came to an end in 2022, long after China had become a fully developed country with one of the biggest economies in the world. And much of the aid given by nations such as Britain and France is to their former colonies which is perceived to be another unacknowledged form of reparations.
China, which is the biggest lender in the world, often provides foreign aid in the form of preferential loans to many governments across the world. For example, China is Africa’s largest lender with over US$160 billion having been borrowed in the last 20 years. However, experts are skeptical about these financial flows which are mostly aimed towards infrastructure projects due to the debt trap for the governments that face difficulties in repaying the money.
Development aid programs also offer political benefits to donor nations as they are seen to be charitable efforts by many voters despite the fact that only one-third of all aid actually goes to and is managed by foreign governments, with the remainder going to private companies (usually based in the donor nation), NGOs, or being spent by the donor nation itself.
Fig.3. In-donor refugee costs reported as ODA (1992-2022)
Source: OECD
For instance, in Britain, expenditure on housing refugees from Ukraine and Afghanistan is classified as development aid despite the fact that none of that money goes to a foreign country (other countries also do this). Indeed, the OECD estimates that 14.4% of all ODA in 2022 was spent on in-country refugee hosting.
Responsibilities of donor countries to ensure effective aid
In attempting to improve the economies and lives of people in less-developed nations, donor nations have struggled to put in place a common mechanism to measure its effectiveness, apart from clear-cut examples such as providing emergency assistance in the wake of natural disasters.
At the same time, aid fragmentation, a lack of predictability, and a lack of coordination continue to be some of the problems that donor countries need to address in order to maximize the effectiveness of aid programs.
In some cases, development projects have been riddled with accusations of fraud, waste, corruption and ineffectiveness while others have had a harmful effect on the receiving country’s economies. As an example, the DrumNet program in Kenya piloted a mechanism to assist small farmers to access new export markets instead of growing crops for internal buyers but, after 12 months, due to the failure to obtain EU export certifications, nearly 1,000 farmers switched back to local markets.
Despite the ongoing discussions and arguments about the effectiveness of aid, the amount of funding sent to poorer nations by wealthy countries is on the rise.
Think-tanks and aid experts agree that donor countries are responsible for the aid flows and the efficiency of the monitoring of their programs. Although donors do have their internal monitoring and evaluation procedures and multiple mechanisms to detect fraud, the current shortcomings in transparency and communication regarding the results achieved sparks debate about the interpretation of the development aid concept as a whole.
However, the existence of aid programs and their efficiency is a prerogative to achieving the UN 2030 Agenda Sustainable Development Goals because the financial contributions and technical expertise provided by donor countries empower developing nations to combat poverty, improve healthcare, strengthen education systems, and improve infrastructure.
By channeling resources where they are most needed, donor countries lay the foundation for a more equitable and prosperous world.
