By Samuel Ha
Foreign Direct Investment (FDI) now exceeds official development assistance (ODA) flows in Asia, Latin America, and Africa. Yet despite the falling “bull market” for ODA, many low-income countries continue to rely on foreign assistance to drive economic activity. According to a recent report published by the Center for Global Development, ODA flows to low income countries exceeded FDI by 72 percent in 2012, and in many cases accounts for a huge portion of the government budget. ODA is particularly critical as it often supports public goods that the private sector will not support and low-income countries cannot afford. Here are the main takeaways from the report:
- Aid is effective when aid levels are neither too low nor too high.
The finding that aid levels are subject to a Goldilocks principle of not too little or too much is intuitive, but has received little attention. However, the OECD-driven Global Partnership monitoring framework which tracks global progress on aid effectiveness and donor harmonization did not fully discuss appropriate levels of aid. In addition, the report notes that no mechanism exists for donors and recipients to analyze and moderate aid levels up and down to maintain optimum levels of aid.
- Aid is effective when political institutions are stable and centralized.
Domestic political institutions impact aid effectiveness. However, the precise kind of political institutions that will boost aid effectiveness has been less clear. Nevertheless, the evidence suggests that countries with political stability and higher levels of centralization leverage aid better than those that do not.
- Aid is less effective when its flows are volatile and/or fragmented.
The OECD Global Partnership process has highlighted the problems associated with aid volatility and aid fragmentation. The 2011 Paris Declaration Monitory survey found that only 43 percent of aid was predictable in 2010, up only 1 percent from 2005. Even more worrisome, there has been an increased use of multiple donors through common arrangements, joint donor missions, and joint analytic work.
Samuel Ha is researcher for the Project on Prosperity and Development at CSIS