From 0.7% to IRPs

Aid through an Individual Recipient Plan (IRP):

In education in the U.S., it is a common practice to assign learners an Individual Educational Plan (IEP).  It’s a kind of SWOT analysis for students, used to help measure a student’s assets and identify problematic areas in their individual learning styles.  Portugal may benefit from framing its development aid using a similar approach: an Individual Recipient Plan (IRP).  Portugal recently approached the European Union (EU) and IMF for a bail-out loan.  The restructuring of the Portuguese economy, required in a bail-out,  may have impacts on their Official Development Assistance.  As questions remain about how the bail-out will impact total aid dollars, it might be worthwhile to think about the aid Portugal gives developing countries not in quantitative terms but more in the scope of quality.

Thinking about the Bail-out:

José Sócrates, in his position as the caretaker prime minister following his resignation on March 23, 2011, formally applied for assistance from the E.U. on April 6, 2011.  This came after weeks of building speculation on Portugal’s need for such a bail-out due to its mounting debt crisis and the associated internal political turmoil.  The Economist recently reported World Bank/IMF figures that show Portugal having “outstanding debts to foreigners that are over twice its national income“.  On May 5, 2011, Mr. Sócrates announced that Portugal would be receiving a €78billion ($116billion) bail-out from the E. U. and IMF.

Portugal, which has only seen 1.0% Growth in GDP per capita over the last decade (1999 – 2009), suffers from high unemployment (11.8% at present) and rising inflation (at 2.7% in April), according to the Economist Intelligence Unit (EIU).  The EIU predicts that an EU/IMF rescue package, which will drive Portuguese economic policy decisions as a condition of support, will be guided by fiscal tightening and potential structural reforms.  Structural reforms may include attention to the flexibility of the labor market and privatization of large parts of the public sector.

Haunted by the “Ghost of 0.7%”:

In a previous posting, I raised the question of what a bailout might mean for Portugal’s Official Development Assistance (ODA).  A clearer picture should unfold this month as the E.U., IMF, and EFSF formalize a plan for the bail-out.  In terms of ODA, all signs seem to point to a drop in “Real Aid“, particularly as ‘the European Central Bank will be pursuing a sterner insistence that weaker euro-zone countries pay back their debts in full’.

The “sterner insistence” is quite interesting in itself as the ECB just raisied interest rates to 1.25%.  A rise in the interest rate, purportedly to stave off inflation now at 2.8% in the E.U. region, would make it harder for Portugal to pay back its bail-out loans.   All this does not necessarily mean that the quality of Portuguese aid has to change though.

Michael Clemens and Todd Moss, of the Center for Global Development, did a piece back in 2005 entitled, “Ghost of 0.7%: Origins and Relevance of the International Aid Target”.  The working paper looked at the history and relevance of the United Nations target for rich countries to devote 0.7% of their Gross National Income (GNI) to Official Development Assistance.  Clemens and Moss frame their paper around the relevance of considering development assistance in terms of a strict quantifiable benchmark and whether or not that target of 0.7% of GNI is a good metric for evaluating the purpose, effect, and success of development aid going forward.  They say that the 0.7% level was “[o]riginally intended as a political tool to goad rich countries to modestly increase their aid budgets”.  Should Portugal’s role in development assistance, in the wake of a coming economic restructuring, be considered in its twilight because of a dated quantifiable target, or does it deserve more profound consideration as the scope of assistance is based on quality?

A Political Mantra:

Clemons and Moss dissect the political and academic background of the 0.7% target and walk through the mechanisms by which we have arrived at that popularized target level today.  From its origins out of the Geneva based organization, World Council of Churches in 1948, through the several rounds of the United Nations Conference on Trade and Development (UNCTAD), and the Nixon administration’s tactical balancing of the “aversion to targetry” in Congress with avoiding a broader negative stance on aid in general, the authors elicit the question of whether or not a quantifiable benchmark should supersede a scope of quality in aid giving.  They argue that, in addition to the changing dynamics in public and private aid giving, the span of time that has elapsed since the 0.7% target was originally settled upon plays an enormous role in evaluating its continued relevance, if it ever deserved such esteem.

Clemons and Moss explained that the 0.7% target really started to take shape with a non-voted on U.N. resolution to increase international assistance and capital flows to 1% of the combined national incomes of economically advanced countries in 1960.  They explain how the subsequent U.N. Development Decades lead to a working out of the “financing gap” and the use of the Harrod-Domar economic growth model to secure the current target.

The Harrod-Domar model, named after Sir Roy Harrod and Evsey Domar, looked at the consequences of employment and changes in the capital stock when considering economic growth.  The model was used to determine the extent to which international support was needed to assist developing countries overcome poverty and work towards convergence with the developed world.  The model basically said that if a country required 5% annual growth to achieve convergence, then 5% in capital investment was needed to achieve that growth.  The capital requirements that made up the appropriate amount of investment were to be provided by domestic savings.  The gap between what savings rates could provide and what was needed to achieve growth was to be filled by foreign assistance: a “financing gap”.  The Harrod-Domar model, which estimated the “financing gap”, assumes a relationship between capital and growth in developing countries.

This model, which used the income levels, savings rates, and global capital flows of the 1950’s to estimate the total “financing gap,” demonstrated that the desired rate of economic growth could be achieved with investment filled in by a coincidental 0.7% of developed economies income.  This model does not take into account the endogenous adjustments and technological shocks, both mechanical and structural, which are required over time to sustain continued growth into the future.  It also does not evaluate economic progress and gains made to this point.  Clemons and Moss additionally found that if the same methodology was used today to determine the “financing gap,” the 0.7% figure would over estimate “aid need by one hundred percent.”

Clemons and Moss conclude that “ODA/GNI does not tell us anything about the ‘right’ absolute size of flows to a particular set of countries.”  They argue that:

  • “The 0.7% target was always intended as a tool to lobby rich governments to raise their aid budgets”;
  • “It is an arbitrary figure based on a series of outdated assumptions going into a dubious model and measured against the wrong metric”; and
  • “For an international aid goal to be useful as an actual practical target, it must be matched to the needs and conditions of recipients and also to the political process and budget priorities of the donors”.

Clemens and Moss further move to realign the question of how best to deliver development assistance by explaining that it is “far better to estimate aid needs by starting on the recipient side with a meaningful model of how aid affects development.”  They say it is backward to think about the correct size of aid flows to poor countries in terms of the size of rich economies.

An IRP to the Rescue:

It may be unreasonable to think about Portugal’s aid, its performance, its continued significance, and its value using the dated metric of the 0.7% ODA benchmark.  In 2010 CGP Index, Portugal was cited as contributing 0.27% ODA as a percentage of GNI.  The 2009 contribution was 0.22%, and in 2008 it contributed 0.21%.  As we move forward the quality of Portuguese aid may be more significant, particularly as it pertains to its “priority partner countries”, and as its available ODA is impacted.  As Clemens and Moss suggest, over the past five decades the dynamics between public and private aid flows have changed dramatically as well, with private flows in many circumstances boasting a disproportionate share of aid flows.  In the U.S., the share of private flows dwarfs that of ODA; ODA in 2008 was $27billion while private outflows were $161billion.

Wouldn’t it be better to look at the conditions in the recipient country, their specific needs, and the particular strengths of a donor country when evaluating an effective assistance plan?  Clemens and Moss suggest some topical questions that might help to evaluate an ‘Individual Recipient Plant (IRP)’:

  • What are the recipient countries development needs;
  • Where are the shortages of capital for the recipient country;
  • What interventions might reasonably be externally financed; and
  • What would the effects of financing be on recipient institutions, policies, technologies?

Dissecting Portugal’s 2009 aid figures to Mozambique for instance, one of its “priority partner’s”, we see that Portugal allocated 100% of its Food Aid sector ODA and almost 40% of its Agricultural sector ODA to Mozambique.  The CIA World Fact Book entry for Mozambique indicates that since the end of the 1977-92 civil war, a majority of the population is reliant on subsistence farming for employment.  By identify the agricultural sector as a major source of employment, and subsequently a high needs development sector, Portugal was making a high quality use of its aid dollars.  Portugal also allocated more than 11% of its total Social Infrastructure and Services sector ODA to Mozambique.  This sector is Portugal’s second largest allocation of ODA; with a sizable percentage being broken out for Mozambique this also speaks to an intensive quality component of the 11% allotment.

Under the current system of a 0.7% benchmark for ODA, only five DAC countries have consistently met the target.  These countries include: Sweden; Luxembourg; Norway; Denmark; and the Netherlands.  This type of calculation fails to grasp the quality scope of aid flows from DAC donor countries and, as the metrics for coming to this calculation have been shown to be out dated by Clemons and Moss, do not represent the impact of development aid appropriately.  Countries like Portugal, who have increased their total dollar amount, in terms of combined public and private dollars, tend to be inappropriately represented in the old model.


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