Unbundling Aid and Ending Extreme Poverty

Development aid can be a way for certain countries to express compassion for their fellow man, or support their own strong held beliefs abroad. Giving to others in need does seem to make people feel good about themselves, and with annual numbers in the billions, I’m sure Development Assistance Committee (DAC) countries are all warm and fuzzy inside. However, Development Initiatives has recently published a report that seeks to unbundle large packages of sometimes ambiguous aid in order to comprehensively analyze who gives what, where and how.

Poverty projections
Poverty Projections

To begin, the report states the UN goal of total eradication of extreme poverty by the year 2030, with extreme poverty being quantified as less than $1.25 a day. It also indicated that even with the most optimistic projections, economic growth alone is not nearly enough to greatly impact the issue of global poverty as, “…the richest tenth of the population received 54.6% of global income, compared with 5.6% for the poorest two-fifths.” The projection provided by the Brookings Institution shows how global poverty may look in the future with current projections of individual consumption as a baseline. Of course the distribution could always change for better or worse as development aid is not always perceived as effective and is subject to political pressures.

One issue is that in general, people perceive Official Development Aid (ODA) numbers as cash transfers, or some form of money going from one donor to a recipient. This is not always the case; included in ODA are various types of goods and services such as food or consultants. These aid bundles also include things that never actually reach the donor country; such as debt relief or more surprisingly, “costs of developing-country students and of supporting refugees in donor countries and development awareness.” One of the most extreme examples outlined in the report is the Democratic Republic of the Congo. While it is the single largest recipient of ODA, almost 70% of aid reportedly sent is attributed to debt relief which, while important, does not directly give the country resources to work with.

Another aspect of the report is the gap between ODA reported from donor countries and aid reported by receiving countries. There are multiple examples of huge discrepancies between aid sent and received and it is important to find out where that money is going in order to improve aid effectiveness. In the past, aid efficiency has generally been measured in terms of the donor countries reported investment compared to economic benefits in the targeted area, which ignores the obvious problem of ODA never making it to the recipient. If one were to look at tangible aid received specifically we might see a significant increase in its economic impact. It also raises the question of how to properly measure ODA to ensure donor countries are reaching their %.7 of GNI pledge by 2015.

resource flows
Resource Flows by Government Spending

Perhaps the most important implication of the report is the ability to analyze the impact of ODA based on the unpackaged data. When the data is more specific, donor countries can pin point what methods of aid are most effective in certain countries. When broken down further, the report also indicated what sectors ODA is being used in. Combined, governments could more effectively funnel aid through the most efficient local channels to the most effective sectors. With the data becoming more transparent, private sector aid such as FDI can be more appropriately distributed to different sectors in a manner which compliments ODA.

Ultimately this report sheds a positive light on what may previously have been thought to be a naïve and idealistic dream. The resources available between ODA and private sector financing are vast enough to remedy the most extreme examples of poverty. Though ODA is significantly smaller by value when compared to other international flows, it is the dominant aid resource for weaker states with lower amounts of spending per capita. Ideally ODA can be used to improve domestic situations and provide the conditions necessary to attract private investments. With the concept and practice of unbundling ODA for analysis, one can hope that beneficiary targeting and distribution channels are properly utilized in the most efficient and effective way to help lift people out of poverty and keep them from falling back in.

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