Official Development Assistance and Poverty Reduction - Essay Example

Official Development Assistance and poverty reduction Introduction Official Development Assistance (ODA) has received significant attention as to its effectiveness in meeting its objectives. ODA has over the years been plagued by corruption, in effectiveness, and inefficiencies, thereby receiving tough criticisms and calling for various restructurings that would make aid effective. This is because aid had been plagued with abuses both form the donor countries and the recipient countries (Cramer, Stein, & Weeks, 2006). While the donor countries often attach stringent measures, conditionality, and reform policies packages with these aid in such a manner that the positive impact of the aid in the recipient countries is nullified, the very essence of the institutional structures, policies and corruption in the recipient countries even make worse the situation by aggravating the ineffectiveness of the aid received. This has resulted to disappointing results over that past where actually the aim of development or poverty reduction were only recognized in a few countries that had favourable conditions to work with (Pettersson, 2007). Schabbel (2007:2) in his analysis of foreign and poverty reduction notes that World Bank statistics shows that though the number of poor people in extreme poverty has reduced from 40.4% in 1981 to 21.1% in 2001, most of this reduction was traced from China. Excluding China from the analysis showed that in actuality extreme poverty rose. For instance in sub Saharan Africa, poverty rose from 41.6% in 1981 to 46.4% in 2001. And this has been the trend over the past in such a manner that it attracted global debate in effectiveness of such aid and necessitated a number of agreements, one in 2005 and the other in 2008 to help in achieving higher effectiveness. Indeed the effectiveness of aid, has been high on political agendas with a several agreements on how to make aid being more effective adopted by various governments both donors and recipients: that is the Accra Agenda for Action of 2008 and the Paris declaration of 2005 which provide commitments and principles for ensuring that ODA provided are effective and efficient in meeting their objectives (OECD Observer, 2007; OECD, 2008:1). The Reality of Aid Report (2010:9) though note that the manner in which these agreements are implemented is too technical to actually transform the manner in which aid is governed to actually make it more effective and relevant to the poor for whom it is aimed. It shows that the agreements have not changed the reality of aid relationships since what is actually practised are technical aspects related to aid management rather than a focus on development policy making. The report concludes that even though reforms in aid effectiveness have delivered some benefits, they have not made considerable difference in how aid is viewed or to the extent to which it empowers or improves the lives of those who need it most (pp.25). From ODA’s definition, its key objective is to promote “economic development and welfare of developing countries” (OECD, 2008:1). Such development such developing healthcare facilities, educational facilities or even infrastructural development is often aimed at reducing poverty levels experienced by these countries as it increases the capacity of the countries to earn a decent living and to live in healthy states. In essence therefore one may relate poverty reduction as the key objective of ODA. So if ODA is not able to effectively meet its objectives as noted by the rise in poverty over a twenty year period as shown, then should aid be counted as official development assistance even if it does not reduce poverty levels? This paper argues that nothing should be counted as official development Assistance until it has been proven to reduce poverty. Official Development Assistance (ODA) ODA is defined as aid flows from donor countries of the OECD Development Assistance Committee (DAC) list to countries eligible for such aid found on the DAC list, these aid must first and fore most be given by official agencies or countries to the other countries or official institutions within the country where each aid is given with the core purpose of promotion welfare and development in the developing countries. In addition such flows can also be concessional with “a grant element of at least 25%” (OECD, 2008:1). The area of focus of the definition in this paper is on the main objective of ODA whose purpose is to increase development and reduce poverty levels. The two key ways through which ODA is delivered to the poorer countries include through provision of aid from donor governments to the recipient governments and from the donor governments to non governmental institutions in the country (OECD, 2007:96-99). Official development Assistance was started in 1969 against the backdrop of the success of Marshall Plan in rebuilding aster war Europe. The rationale was that through capital provision, the poorer countries of the world could be boosted to develop and reduce the levels of poverty in such countries. The donor countries made a pledge to give 0.7% of their Gross National Income towards official development assistance targeted at poor countries to help in development (OECD, 2012). Even though few countries have been able to reach this target, the aid that has been to the poor countries have in most instances been highly ineffective especially in view of the various conditions that were attached to this grants. The donor countries required that the recipient countries adopt a pro market based way of reducing poverty, one that is focused on macroeconomic stability liberalisation and privatisation. These structural adjustment policies in some countries with poor institutional structures to support such policies did not help in enabling development but rather made the countries worse off as most of the aid would get wasted either on corruption deals or projects that do not have effective impacts on the poorest in such countries (Schabbel, 2007:2). Official Development Assistance and poverty reduction With the Monterrey consensus of 2002, most donor countries sought to align most of their ODA with the Millennium Development Goals (MDG) with the key focus mainly being poverty reduction. This increased the level of ODA flows to less developed countries. However, most donor countries have still to meet their commitment obligations of committing 0.7% of their Gross National Product to ODA (Kotte, 2008: Sagasti, 2005), with only a handful of countries such as Spain, the UK, and Belgium having reached this target. The development of the MDG and the quantifiable targets of reducing global poverty by 2015 helped to bring focus on ODA’s role in reducing and poverty and helped in scaling up commitments of financial resources to poverty eradication (Anderson, & Waddington, 2007). Over the past three years aid flows to poorer countries though have diminished and declines mainly due to the impacts of the recent recession. The level of ODA between 2008 and 2009 declined with various countries such as the U.S pushing back aid spending. Loan finance to poor countries though rose than grant finance with countries such as Germany, Japan and Germany increasing their loan finance by 20% in 2009. This implies that developing countries are accepting more expensive financing, and therefore are getting into more debts where they would dedicate more of their resources into repaying loans rather than enhancing development in their countries (The Reality of Aid Report, 2010:11) It is widely perceived that that aid flow boost to the poorest of countries especially in sub Saharan Africa would strongly help in lowering the levels of poverty in these countries (Feeny, & McGillivray, 2009). Recent research shows that aid does indeed foster economic growth, development and poverty reduction but only in states that have certain pre-existing conditions that favour such developments (Cramer, Stein, & Weeks, 2006:420; Anyanwu and Erhijakpor, 2010:51). World Bank studies show that in countries that have strong governance systems just 1% worth of aid of their gross domestic product has the potential of reducing poverty levels by 1% while cultivating a rise in GDP growth by 1.9% (Bayley, 2011). A closer look at how ODA is defined though shows that there are some components that may not actually constitute real aid that are also counted as ODA. For instance, for most of the ODA given to developing countries, only 39% could be classified as real aid under DAC, while the rests can be attributed to factors such as excessive transaction costs 13%, debt relief 14%, tied aid 4%, non poverty focused aid 7%, ineffective and overpriced technical cooperation 20%, excess administration costs 1%, and Hosting of refugees 2% (Bayley, 2011). In addition, some bilateral donors count spending in support of their foreign policies in the recipient country or even climate change objectives as ODA, yet climate change funding have been noted to be quite different from ODA (The Reality of Aid Report, 2010:11). If poverty reduction was the goal of these aid given to poor countries, the ODA would be allocated to the poorest of countries with a focus on ensuring that the real aid that reaches the poor in society is higher that 39%, while other components such as transaction costs or ineffective overpriced technical cooperation are reduced. In reality though the manner in which aid are given by donor countries is bordered on preferences and mostly on historical colonial ties with the less developed countries, or even commercial interest with such countries. In such instances, it is the various conditions that govern how aid is to be used and allocated that governs aid use rather than inspirations for how effective the aid would be in the countries for which they have been allocated (Cramer, Stein, & Weeks, 2006:420; Bayley, 2011). In this sense only a few preferable developing countries are able to get donor aid. For instance, excluding the cancellation of debts, 58% of the aid from ODA bilateral donors went to only 10 countries in Africa, while the rest went to the other 38 countries in Africa (The Reality of Aid Report, 2010:13). Though aid volume has increased over the past two decades and though their have been calls to increase the level of aid to meet the commitment levels that each of the DAC donors agreed to, the quality and impact of ODA cannot be measured just by the amount that is contributed. Indeed even with increased ODA levels in some countries, poverty levels have not significantly improved according to the improvement in the level of ODA. Various organisations have called for and conducted reviews on how effective the aid are in reducing poverty levels and most found that while ODA had the potential of boosting economic growth, key factors that obstructed such potentiality include poor coordination of policies, and conditions imposed on aid grants that undermine the effectiveness of the aid in carrying out its objectives (Driscoll & Evans, 2005). For instance tying up aid as conditionality reduces the amount that is available to countries for development projects. One notable example of how aid is tied is where the aid given is tied to procurement requirements of the donor countries that the developing countries purchase the expensive antiretroviral drugs for HIV/AIDS disease from the donor countries rather than purchasing cheaper generic drugs from countries such as India (Bayley, 2011). In these higher amounts of aid given is tied in business deals with the donor countries at expensive rates that the poor country would not afford, thereby reducing the impact that such aid would have on poverty reduction. Aside for aid being tied up, aid conditions that do not align with the capability of the recipient country’s institutional structures or even developmental needs are key challenges that have resulted to lesser impact in poverty alleviation over the past two decades. While certain aid conditions such as requirements for governance reforms, anticorruption measures, and change in macroeconomic policies within recipient countries may be intend to improve the purpose of the aid in the country, in most instances it has caused a myriad of problems (OECD 2001:15; The Reality of Aid Report, 2010:13). For instance, requiring changes in macroeconomic policies may not make the recipient countries be as receptive to the policies as they would have been if they were the ones instituting it thereby resulting to failure of such policies due to lack of policy ownership which is critical in any efficiently operating governance system. All these factor raised the need of not only ensuring that the conditionality given were coherent and applicable to the countries, but also raised the need to understand what can be done to make aid given more effective in meeting the goals for which they were intended: development and poverty reduction. Clearly development and eradication of poverty from lesson learnt over the past decades is much more than the aid that is provided for such objectives. Though the aid is certainly essential, studies have shown that the key to actual development is through the local recipient governments aligning the development needs with the aid provided rather than having the bilateral donors set conditions on how the aid is to be spent yet they do not have a clear view of on the development need of the recipient countries. How effective ODA can reduce poverty and inequality though has been found by Chong, Gradstein and Calderon (2009:61-62) to be dependant on the governance structure in recipient countries where corrupt governance structures would most likely still result to poor results. With the adoption of Paris principles to ensure aid effectiveness, various bilateral donors made commitments that would ensure reforms in aid effectiveness. These included reduction in the transaction costs involved in giving ODA, increased accountability through enhancing local ownership of development projects and policies, improved predictability of the aid transfer to the recipient countries, and a more firm commitment towards reduction of poverty. In addition, the bilateral donor interventions in recipient countries were rationalised and made more predictable enabling improvements in recipient country’s accountability on how such aid funds were used (The Reality of Aid Report, 2010:12; OECD 2001:91-92). With seven years down the line since the Paris declaration of 2005, and with more measures towards aid effectiveness taken such as the Accra Agenda for Action of 2008, ODA has increasingly been focusing towards poverty reduction more than in the previous years. Such measures have ensured that key constraint that impact the effectiveness of aid are identified and addressed in order to continually align ODA core objectives with what is actually practised and achieved on the ground. Indeed, by 2010 almost half of the DAC bilateral donors had updated or introduced new measures for implementing and enhancing aid effectiveness in accordance with the Accra Agenda for Action of 2008 for higher impact on poverty levels in developing countries. For instance, the UK uses a minimalist approach to Paris declaration and also does not take into consideration the Accra Agenda for Action pledges on technical assistance (The Reality of Aid Report, 2010:12). It essentially focuses prominently on ensuring UK ODA through Department for International Development (DFID) funds achieves poverty reduction by expenditures through government departments and ensuring higher transparency on how ODA is spent by incorporating detailed reporting to parliament from the DFID annual report (UK Parliament Business, 2012). Key actions that have been performed in order to increase aid effectiveness by government based on both the Paris and Accra principles includes a focus towards reducing the number of countries that bilateral doors allocate aid in order to reduce transaction costs that would both increase efficiency and ensure that more of the funds are available for the recipient countries to use and which will enhance poverty reduction. Countries such as Italy and Sweden are for instance currently focusing on how to reduce the number of funding allocations either to a limited number of sectors or to a smaller number of countries (The Reality of Aid Report, 2010:12: Pettersson, 2007). Such reductions though haven’t been unfinalised and rare still under unclear grounds. Other bilateral donors are tending towards focusing their funding only in specific sectors. For instance over the past seven focus has mainly been on the health sector and education, and this has been experienced by 28% decline in child mortality rates in developing countries while literacy levels have also increased. In refining its ODA towards more focus on poverty reduction, the Canadian government has shifted its funding focus in three key areas the children and youth in developing countries, sustainable economic growth and food security (The Reality of Aid Report, 2010:13). Though conditionality still remains an issue up to now, governments have take considerable steps to reduce the negative impacts of these conditions in order to improve poverty reduction. Indeed Anyanwu and Erhijakpor (2010:51) in their research to investigate whether international remittances do affect levels, collect data from 33 African countries and find that while indeed foreign aid does help in reducing poverty levels in most of these countries investigated, the level of poverty reduction was mainly dependant on how poverty was viewed, measured and defined. With all the focus and reformations all targeted toward ensuring that ODA is able to be effective in reducing poverty, its core purpose, then indeed nothing should be counted as official development Assistance until it has been proven to reduce poverty. Conclusion This paper sought to discuss the essence of what official development assistance consisted given the fact that in the past only part of the true value of assistance have been directed to wards towards poverty alleviation. Based on the changing policy reforms to include a more focus towards poverty reduction, and the changing why that aid effectiveness is being monitored, then certainly nothing should be counted as official development Assistance until it has been proven to reduce poverty. Development and eradication of poverty is much more than the aid that is provided for such objectives. Though the aid is certainly essential, studies have shown that the key to actual development is through the local recipient governments aligning the development needs with the aid provided rather than having the bilateral donors set conditions on how the aid is to be spent. How effective ODA can reduce poverty and inequality though has been found to be dependant on the governance structure in recipient countries where corrupt governance structures would most likely still result to poor results. Notably some bilateral donor countries have taken steps towards ensuring that aid is more effective in meeting its poverty reduction goals in line with both Accra Agenda for Action of 2008 and the Paris declaration of 2005.These include reduction in the transaction costs involved in giving ODA, increased accountability through enhancing local ownership of development projects and policies, improved predictability of the aid transfer to the recipient countries, and a more firm commitment towards reduction of poverty. In addition, the bilateral donor interventions in recipient countries were rationalised and made more predictable enabling improvements in recipient country’s accountability on how such aid funds were used. Though conditionalities and tying up of aid are still there to a degree, it has been an improvement, with conditions set being more coherent and aligning to the development goals of the recipient countries. References Anderson, E, & Waddington, H 2007, Aid and the Millennium Development Goal Poverty Target: How Much is Required and How Should it be Allocated?, Oxford Development Studies, 35, 1, pp. 1-31, Academic Search Premier, EBSCOhost, viewed 11 May 2012. Anyanwu, JC, and Erhijakpor, AE 2010, “Do International Remittances Affect Poverty in Africa,” Africa Development Review, 22, 1, pp. 51-91. 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