Will the recent (re-)emergence of new international donors change the way official development assistance (ODA) is provided? What opportunities and risks will this new development landscape present? This article from the Development Policy Review analyses recent trends in the sources of development assistance and makes short-term projections of future aid flows. It argues that while increasingly multi-polar aid sources will raise overall aid levels and broaden developing countries’ options, newer donors should comply with international standards in development assistance to avoid repeating past mistakes.
Although the 22 member countries of the OECD’s Development Assistance Committee (DAC) have dominated recent worldwide aid expenditure, non-DAC countries like the former Soviet Union and OPEC nations also have a history of providing development assistance. India and China are two ‘heavyweights’ whose provision of development assistance could change the development paradigm in Africa.
Despite the diversity of DAC members’ aid procedures, they agree on broad standards for ODA, which must be undertaken by the official sector, promote economic welfare and be on concessional terms. Some commentators fear the recommendations and best practice guidelines produced by DAC members in such reports as the Paris Declarations may not be followed by non-DAC donors.
Recent patterns in aid flows represent a change in the way low- and middle-income countries receive development assistance:
- Stronger developing economies have more access to private capital. Their dependence on ODA and multilateral development banks loans has reduced partly because of the complexity of such borrowing procedures.
- For lower-income countries, options are widening. With likely DAC increases in aid to sub-Saharan Africa and falls in China’s projected aid receipts, many African countries will receive historically high aid levels by 2010. Even small aid increases from non-DAC donors will give developing countries more bargaining power with the established donor community.
- Many formerly Heavily Indebted Poor Countries (HIPCs) have recently reduced their debt levels, giving them greater freedom of policy action. However, the sustainability of these lower debts levels is still uncertain.
- There are risks in the new aid environment. Ex-HIPCs may return to unsustainable debt levels through ill-considered recourse to private funds, export credit and low-concessionality loans. If non-DAC donors offer unearmarked finance or invest in over-ambitious capital projects, developing country recipients could unduly postpone important reforms and implement unproductive ventures.
DAC donors should welcome increasing non-DAC involvement in development assistance but continue to draw on lessons learnt from their own aid programmes:
- DAC members should (re-)build links with other donors, especially non-DAC OECD countries, through increased in-country meetings.
- DAC countries should avoid preaching to new donors: for instance, middle-income donors may start by tying aid to trade, despite the long-term riskiness of this approach.
- However, the DAC should be firm in stressing the Millennium Development Goals on sustainable development, poverty reduction and welfare of the poor.
The DAC should encourage non-DAC participation in triangular development co-operation and multilateral finance.
- OECD and middle-income donors should examine their commercial relationships with the developing world, especially protectionism and mercantilism in their trade policy.
- Non-OECD donors’ use of export and aid credits to fund non-commercial social projects should maintain the same standards as the OECD-based credit rules.