BACKGROUND STUDY FOR THE DEVELOPMENT COOPERATION FORUM Allocating aid – practices and implications May 2008 Contents 1. Introduction ....................................................................................................... 1 2. Key trends in aid allocation.............................................................................. 3 2.1 Allocation across country groups......................................................................... 3 2.2 Allocation across sectors....................................................................................... 7 2.3 Allocation across recipient countries ................................................................. 10 3. Aid allocation models ..................................................................................... 21 3.1 Performance based allocation models............................................................... 21 3.2 Other allocation models ...................................................................................... 22 3.3 Other ways of allocating aid................................................................................ 24 3.4 Discussion............................................................................................................. 25 4. Aid concentration............................................................................................ 28 4.1 Concentration among donors ............................................................................. 28 4.2 Concentration among recipients......................................................................... 30 5. Aid allocation and climate change ................................................................ 36 5.1 Aid allocation and climate change mitigation................................................... 36 5.2 Aid allocation and climate change adaptation .................................................. 37 6. Conclusion ....................................................................................................... 39 6.1 Summary............................................................................................................... 39 6.2 Recommendations ............................................................................................... 41 References ............................................................................................................... 46 Tables Allocation of programmable aid by broad country group, 2006......................................... 4 Aid allocations by sector, 2006............................................................................................... 8 Variation in aid per capita explained by needs and performance (%).............................. 12 Negative and positive aid outliers........................................................................................ 20 Levels of concentration among donors, 2006..................................................................... 29 Levels of concentration among recipients, 2006 ................................................................ 32 Figures Aid allocation by region, 1997-2006 (unadjusted) ................................................................ 5 Aid allocation by region, 1997-2006 (adjusted)..................................................................... 6 Aid allocation by UN country category, 1997-2006 .............................................................. 6 Aid allocation by broad sector, 1997-2006 ............................................................................ 9 Allocation of aid to social infrastructure, 1997-2006 ............................................................ 9 Aid allocations per capita, 2006............................................................................................ 11 The relationship between aid per capita and GDP per capita ........................................... 16 Aid receipts and number of donors, 2006 ........................................................................... 33 Number of donors and share of largest donor, 2006......................................................... 34 Number of donors and share of five largest donors, 2006................................................ 35 Number of donors and the Herfindahl index, 2006............................................................ 35 1. Introduction As part of the substantive preparations for the first biennial high-level Development Cooperation Forum in July 2008, the Department of Economic and Social Affairs of the United Nations is undertaking a review of recent trends and progress in international development cooperation. This review will inform the analytical report of the Secretary- General, which will serve as the main background document for the DCF. The present study, which focuses on the current aid allocations practices and their implications, is part of this analytical effort.1 This paper examines the allocation of aid by OECD-DAC donors in recent years. Aid allocation as a crucial issue: having a large impact on the effectiveness of aid, in terms of meeting agreed development goals and targets, but also on the level of popular support for aid more generally. The paper focuses on three main issues: • Current aid allocation trends and practices; • Priorities and of different aid allocation models used by different donors; and • Trends in and possible implications of the concentration of aid. It also provides a brief overview of how future aid allocation may be affected by climate change. The data on aid used in the paper are all obtained from the OECD-DAC online database, International Development Statistics (www.oecd.org/dac/stats/idsonline). They are all based on disbursements of Official Development Assistance (ODA), from all DAC donors. The precise measure of aid used in the paper is designed to measure ‘programmable aid’. It is calculated as follows: ‘Programmable aid’ = ODA grants + ODA loans (gross) – debt forgiveness grants – humanitarian aid. The total amount of this measure of aid, to all developing countries, grew from $50.4 billion in 1997 to $69.3 billion in 2007 (in constant 2005 prices), an average increase of 3.6% per year. 1 The study was prepared by Edward Anderson ([email protected]), School of Development Studies, University of East Anglia, Norwich, NR4 7TJ. Opinions expressed in this paper are those of the author and do not necessarily reflect the official views of the United Nations. 1 Four main points are worth noting about this measure of programmable aid. First, it also excludes aid which is reported in the OECD-DAC database as being 'unallocated’ to any particular recipient country, since this is (by definition) not programmable ODA. Second, it includes ODA loans measured in gross rather than net terms (i.e. it does not net out repayments of ODA loans by recipients). This is justified on the grounds that repayments of ODA loans are not a choice variable for donors, so that a more accurate indication of donors’ allocation policies is obtained by excluding them. Third, the above measure is based on actual disbursements as opposed to commitments. Although an argument can be made for focusing on commitments, the focus is on disbursements here since the data are more readily available. Finally, the above measure is not an ideal concept of programmable aid, since it also includes at least some donor administrative costs, in- donor country refugee costs, and imputed student costs. However, it is the most readily available, and simplest to calculate and therefore monitor. A further issue which requires mentioning at the outset is that for some recipient countries basic demographic and socio-economic data (e.g. population, GDP) are not available in standard international sources (e.g. the World Bank’s World Development Indicators database). This raises a problem, in that any given allocation of aid can only be assessed relative to recipient country characteristics, and if the most basic of these are not available, the assessment is not possible. For this reason, the analysis in the paper at times has to exclude aid to recipient countries lacking basic demographic and socio-economic data. These are mainly very small countries and territories, accounting for a small proportion of total programmable aid. However, they also include Iraq and Afghanistan, which have from 2002 onwards accounted for a large and rising share of total programmable aid.2 This is not to deny that the large increase in aid to Iraq and Afghanistan is an important issue worth analysing, but it is one which would require significant additional analysis and data collection which is beyond the scope of the current paper. Finally, the data analysed in this paper focus on DAC donors, and do not include growing amounts of aid from non-DAC donors. This important issue is addressed in a separate paper. 2 The latest population and GDP estimates for Afghanistan and Iraq contained in the World Bank’s World Development Indicators database both refer to 1989. 2 2. Key trends in aid allocation 2.1 Allocation across country groups The allocation of aid across broad country groups in 2006 is shown in Table 1. The first column shows the percentage of total programmable aid allocated to each group. The second column then shows the equivalent percentage of ‘adjusted’ total programmable aid, which excludes aid to all recipients lacking population data. This second column is therefore directly comparable with the third column, which shows the proportion of the total