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The alarm bells are ringing on aid, but the UK is leading the way

Written by Simon Maxwell

The aid volume statistics for 2008 were published on 30 March by the Development Assistance Committee (DAC) of the OECD. They show a marked increase, but also ring alarm bells about the future. The evidence is that the alarm bells probably need to ring even louder, not least in Europe. The UK, however, has taken the brave political decision to maintain aid at planned levels, despite the impact of the recession on public finances.

To begin with 2008, the DAC reports that total aid rose by 10.2% in real terms over 2007, to a total of $120 billion. The largest volume increases came from the US, the UK, Spain, Germany, Japan and Canada. The largest increases in percentage terms came from Greece, the UK, Portugal, Spain and the US – all more than 15% year on year. Aid from the 15 EU members of the DAC increased by 8.6% to $70.2 billion, representing 59% of all DAC aid. As a share of Gross National Income (GNI), the DAC EU members reached 0.42%. An important change is that the bulge in debt relief that marked 2005 and 2006 has worked through the system, which means that actual flows have increased by more than the total aid figure.

Significant increases are still required to reach the targets set for 2010, never mind the higher targets set for later years. The DAC says that current commitments are to reach $145 billion in 2010, at 2008 prices, and that another $25 billion will be needed. For some donors, this is within reach. For others (Austria, Italy and Greece are mentioned), aid will have to more than double. The increase in Italy, for example, is 145%. The DAC concludes that ‘only a special crisis-related effort can ensure that the 2010 targets for aid are met ’.

The European Commission has provided further detail on future plans in its recent survey on financing for development issues post-Doha, including a country by country analysis. Recalling that the EU has committed to reaching a figure of 0.56% of GNI as aid by 2010, the report concludes that ‘the pace for moving to the individual baseline targets . . . is by and large insufficient’. Greece, Portugal, Austria, Germany, France and Italy are all identified as being off-track. Volatility is signalled as a difficult problem, and the report laments the fact that ‘progress remains slow towards establishing multi-year timetables’. Ireland is not listed here, but has announced four cuts in the aid budget, amounting to a reduction for 2009 of 22% from the figure announced as recently as October 2008.

One reason why this matters – and why alarm bells need to ring – is the discrepancy between targets set in volume terms and targets set in terms of GNI shares. The financial crisis means that GNI will be significantly lower in 2010 in OECD countries than originally forecast, even if growth begins to recover. A target set as a percentage of GNI – like the EU target of reaching 0.56% in 2010 – implies significantly lower flows. There will be many DAC countries tempted to use the percentage as their guide rather than the volume. Australia, for example, might be one.

As an example of the risk, take the UK comprehensive spending review of 2007, which set planned aid levels for the years 2008-09, 2009-10 and 2010-11. This was based on growth in the range 2-5% to 3% each year. The budget of the Department for International Development (DFID) was then planned to increase at 11% per annum in real terms, putting the UK on track to reach 0.56% of GNI by 2010-11, and providing a platform to reach 0.7% of GNI by 2013. But if growth is lower, then does the financial target take precedence or the percentage target? In principle, the financial target should dominate, since the comprehensive spending review cites specific numbers, with the percentages for reference. Indeed, the annual DFID Departmental Report contains large numbers of appendices which work with numbers not percentages. If overall economic growth were lower than planned and the Government were to stick to the numbers, well, this would imply that the percentage would rise: aid in 2010-11 would exceed 0.56% of GNI.

Before the UK budget on 22 April, NGOs were concerned that the Government would take advantage of the fact that commitments had been made in percentage terms to cut actual aid flows. Oxfam, for example, suggested that the aid budget could be cut by as much as £860 million in 2010. To this cut should be added the reduction in the international purchasing power of UK aid, caused by the devaluation of the pound. Max Lawson of Oxfam was cited as estimating that the combined effect of these two factors could reduce the value of UK aid by one third in 2010.

In the event, the budget confirmed a highly favourable outcome for aid, with the following commitment to maintain levels previously agreed: 'the Department for International Development will be able to make additional savings while its budget increases at an annual average real growth rate of 11.4% over the 2007 CSR period. The Government also remains on track to deliver £9.1 billion of Overseas Development Aid by 2010-11 as set out in the 2007 CSR.' There are some relatively minor qualifications about efficiency savings and reallocations, but it this is a good outcome, and one that was far from automatic. It will take the ODA/GNI percentage to over 0.6% by 2010, greater than originally promised.

The question now is whether other countries will follow suit and show similarly strong commitment.

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