Why ODA Still Matters

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:

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  1. 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. Continue reading