Foreign Aid and Development

The Development Assistance Committee (DAC) of the Organisation for Economic Co-operation and Development (OECD) defines “development assistance” (or foreign aid) as financial flows that qualify as official development assistance (ODA). ODA is calculated as the sum of grants and loans to aid recipients that are (a) undertaken by the official sector of the donor country, (b) with promotion of economic development and welfare in recipient countries as the main objective, (c) at concessional financial terms, where the grant element is equal to at least 25%. In addition to financial flows, technical cooperation costs are included in ODA; but grants, loans, and credits for military purposes are excluded, and transfer payments to private individuals are in general not counted. The same goes for donations from the public, commercial loans, and foreign direct investment (FDI). It is common to treat ODA and foreign aid as equivalent, but this can be misleading. Assistance funded by nongovernmental organizations (NGOs) including church-based agencies has grown significantly in the past 25 years and now amounts to about one third of ODA.

Only official aid to “traditional” developing countries counted as ODA until 2005. For these (Part I) countries, there is a long-standing United Nations (UN) target from 1970 that they should receive 0.7% of donors' gross national income (GNI) as aid. Assistance to the “more advanced” Eastern European and “more advanced” developing (Part II) countries was recorded separately by DAC as “official aid,” not included as part of ODA. DAC countries have over the years accounted for some 95% of all ODA flows, but the distinction between Part I and Part II countries is no longer used. All flows that fulfill the established criteria are now included in the aggregate measure of ODA, but NGO-funded contributions are not added.

In 2009, the total amount of ODA disbursed by donors to developing countries and multilateral organizations reached US$123.1 billion according to the OECD/DAC 2010 statistics. (For the data in this and subsequent paragraphs, see OECD, 2010).

This means that the average citizen in the donor countries contributed around US$149 as ODA. This can be compared with a figure of around US$64 in 1960–1973 and US$99 in 1992. However, the UN target of 0.7% of GNI is with few exceptions far from being reached. Donors disbursed 30.4% of total foreign aid to multilateral organizations in 2006, and some 70% of this flow was disbursed to developing countries, with [Page 912]the European Union and the International Monetary Fund and World Bank as the dominating sources followed by the UN and the Regional Development Banks.

It is a widespread perception that foreign aid amounts to a very significant resource, in both absolute and relative terms, and that aid is not insignificant measured relative to developing country production and income. At the same time, aid is much less sizeable when measured in relation to GNI or government budgets in the donor countries or in comparison with population size of aid-receiving countries. Moreover, aid has been on a declining trend since the early 1990s as a share of GNI in recipient countries. Most recipient countries receive aid to the order of 1.8% of their GNI per year with a median of 3.2%. This corresponds to a distribution of aid per capita with a mode of US$17.9 per year and a median of US$31. Accordingly, the relative size of the aid inflow varies significantly among recipients, and while the 13.2% size of the aid to GNI ratio in, for example, Tanzania may seem high, this share reflects not only the size of the aid flow but also the very low level of income. With this background, modest expectations are advisable when analyzing the overall impact of past aid on development.

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