The slow growth of aid flows falls far short of matching the claims of new recipients
Aid accounted for a third of net resource flows to all developing countries in 1992 and for nearly twice that share to the low-income countries.[1] The number of country claimants on aid has been growing fast, however, and donor objectives have been changing. At issue now is whether the underlying slow growth in real aid flows can be augmented to meet special needs. Also at issue is improving the quality of aid---in respect to distribution and tying to donor procurement. The aid "pie" at the end of the Cold War is limited just when new claimants and the exceptional needs of the reforming socialist economies have appeared. Donors are faced with the problem of how to raise additional resources if they are to meet environmental challenges and avoid shortchanging the needy in poor countries.
Two forces are impelling change. First is the imbalance between slow growth in donor aid budgets and fast growth in the list of claimants recognized as eligible for aid. Second is the change in donor objectives, resulting largely from the demise of communism in Eastern Europe and the emergence of the newly independent republics of the former Soviet Union (FSU).
Flows of official development assistance (ODA) in real terms have grown at a respectable but not especially fast rate over the past decade (see table). During 1981-91, the real growth of aid from OECD, Arab, and CMEA donors averaged 4% (including significant amounts of debt forgiveness in 1990 and 1991), using a developing country import price index to deflate current values. But aid as a percentage of GNP in countries that are members of the OECD Development Assistance Committee (DAC) averaged a mere 0.32% in 1978-82, 0.33% in 1983-87, and 0.33% for 1991. The main bright spot has been an increase in concessionality for the poorest countries, with grants often replacing loans.
Donors vary widely from the 1991 average of 0.33% of GNP devoted to aid---from 0.20% for the United States to around 1% each
for Denmark, Norway, and Sweden.
While some countries, such as Finland, France, Japan, and Switzerland, have raised their ODA-GNP ratios, others, such as the United States, have reduced their aid in real terms. In the United Kingdom, aid has been growing, following cuts earlier in the 1980s.
A recent example of unexpected budget stringency is Sweden, which in the autumn of 1992 was buffeted by the currency crisis in the European Exchange Rate Mechanism and forced to cut its aid budget. A similar example is Italy, whose aid budget rose strongly in 1979-89 but then declined.
Arab aid has shown major fluctuations, falling throughout the 1980s from its very high levels (in relation to donor GNP) in the 1970s. In its peak years between 1975 and 1981, aid from Arab donors reached more than US$8 billion a year and accounted for a substantial portion of total net ODA. In 1990, Arab donors offered strong support to countries later affected by the Gulf crisis, notably Bangladesh, Egypt, Jordan, Pakistan, and Turkey. For 1991 it appears that the amount of such support dropped sharply.
Aid from FSU and Eastern European donors has fallen since 1986. Although comprehensive data are not available, it appears that there was a further fall in 1991 and that aid is now confined largely to technical assistance. Previous major recipients were Cuba, Mongolia, and Viet Nam.
One hopeful note in aid flows is that from nongovernmental organizations (NGOs), which form a distinct and growing aid channel. In 1991, NGOs provided about US$5 billion in grants to developing countries, equivalent to 4% of total net resource flows. But since roughly one-third of that amount was funding derived from bilateral government sources, some of the NGO-mediated flow may represent a reallocation of rather than an addition to traditional aid sources.
The prospect in the 1990s, therefore, is for a limited aid pie in real terms.
Meanwhile, the number of claimants recognized as eligible or potentially eligible for aid has grown. The principal criterion for aid eligibility is per capita income, with low-income countries (those with a 1991 per capita income of US$635 or less) recognized as the most deserving. Other criteria include economic performance, the lack of access to private market financing, and the need for food or relief aid.
Three categories of countries have appeared as new claimants:
Some of these countries have been receiving substantial financial support from a single donor and now hope to attract broader creditor support. Viet Nam, for example, has recently (November 1992) become eligible for Japanese ODA.
Within the group of countries that appear able to support only concessional borrowing are some countries that have been receiving bilateral aid and are now deemed eligible for multilateral concessional funds through the International Development Association (IDA), the World Bank Group's concessional lending arm (for example, Côte d'Ivoire, Egypt, and Honduras).
Will official concessional support for the republics of the FSU and Eastern Europe divert aid from other developing countries? The question applies primarily to concessional flows because nonconcessional flows---for example, multilateral lending---are much less constrained.
ODA flows are indeed susceptible to diversion, to the extent that national aid budgets are not increased to cover grants and concessional loans to the FSU republics and Eastern Europe. So, donors need to take steps to ensure that resources allocated to the reforming socialist economies are additional, or diversion will become a valid concern for the future. Grants from OECD countries to the FSU totaled US$600 million in 1990 and US$2.6 billion in 1991 (while concessional loans were zero). Although comparable figures for earlier years are not available, the amounts for 1990-91 would appear to represent a big increase.
A rough order of magnitude for the potential additional requirements for ODA from all new low- and lower-middle-income claimants can be found by assigning ODA on the basis of population and per capita income and comparing each claimant to countries of similar per capita income levels. On this basis, the potential call on ODA by new claimants would be roughly US$5.5 billion a year, equivalent to 13% of 1991 net ODA to all developing countries. For the reforming socialist economies, the best measure of their exceptional requirements may be recent actual receipts, indicating balance of payments needs. Including the upper-middle-income countries of the FSU and Eastern Europe on that basis would add a further US$4.5 billion, bringing extra requirements to US$10 billion a year, or 23% of 1991 net ODA.
The figures suggest that the call of new claimants on aid is a major, but not insuperable, challenge for donor countries.