The Development Assistance Debate: What does it mean for Korea’s ODA Program

June 2008

Edward P. Reed, Ph.D.Korea Representative

Promotes peaceful, prosperous, just and open Asia-Pacific region

Non-profit, non-governmental organization founded in 1954

18 offices across Asia, San Francisco HQ Funding:

• Bi-laterals (US & others), Multi-laterals, Private

Key program areas:- Economic reform and development,- Governance, law and civil society,- Women’s empowerment,

- Environment, and- International relations

The Asia Foundation

1. Ongoing debate on aid effectiveness;

2. The relationship between ODA, economic growth & development;*

3. Some proposals on ODA Reform, including use of the MDGs; and

4. Implications for Korea’s ODA.

Outline of the Presentation

*Key reference: Radelet, Center for Global Development, WP 92

FLAVOR OF THE DEBATE

“Our generation’s challenge is to help the poorest of the poor to escape the misery of extreme poverty so that they may begin their own ascent up the ladder of economic development.” -- Jeffrey Sachs (The End of Poverty, p. 24)

“Aid cannot achieve the end of poverty. Only homegrown development based on the dynamism of individuals and firms in free markets can do that.” -- William Easterly (The White Man’s Burden, p. 368)

“Bad Samaritans are recommending free-trade, free-market policies to the poor countries in the honest but mistaken belief that those are the routes their own countries took in the past to become rich.” -- Ha-Joon Chang (Bad Samaritans, p. 16-17)

Development: What are we talking about?

Goal: broadly distributed and sustainable improvements in living standards and life opportunities with virtual elimination of absolute poverty.

Process: multi-dimensional changes in a society that enable economic expansion to contribute to the goal of development.

Millennium Development Goals (MDGs): targets, if achieved, that will greatly reduce absolute poverty and create a stronger societal basis for progress toward development.

“We estimate that the effect of this food crisis on poverty reduction worldwide is on the order of seven lost years.”

- Robert Zoellick, President, World Bank

Some immediate thoughts: Development progress is difficult and fragile. Many development factors are outside the control of

individual societies. Overall economic relations between prosperous and

poor countries are more important than aid. Development assistance (ODA) is only one tool

among an array of policies that affect development.

International Cooperation & ODA International Cooperation: The net gain/loss in the

entire economic relationship between states• Trade (balances and terms)• Foreign direct investment• Capital flows• Migration and foreign workers• Foreign aid

Foreign Aid: External assistance for development goals• Official Development Assistance (ODA)

From donor governments or multi-lateral organizations Grants, commodities, technical assistance Concessional financing

• Private Voluntary Assistance From NGOs, religious groups, private companies (CSR)

ODA, Growth and DevelopmentODA usually designed to meet at least one of

four broad objectives:1. Foremost, to push economic growth

through infrastructure, support sectors like agriculture, or introduce new technology;

2. to strengthen education, health, environmental, or political systems;

3. to support relief and humanitarian work; or 4. to help stabilize an economy following

shocks.

• (Public) Services• Advocacy• Expression• Community Building • Value Guardian

But relationship between aid and growth is not clear

Many factors affect both aid and growth -- endemic disease, poor geography;

In conflict countries, aid may have positive impact even if overall growth remains weak.

Causality could be opposite: donors give more to slow-growth countries, much less to rapid growers;

Once all factors considered, positive relationship seen.

Aid works well under some circumstances, fails in others.

Aid can help countries with good economic policies, but fail where corruption is rife, economy mismanaged.

Intense Debate Ongoing

Much debate on overall trends, conditions under which aid works or does not work, and on what steps can be taken to make aid more effective.

Empirical evidence is mixed, with different studies reaching different conclusions depending on the time frame, countries involved, and assumptions;

Analysis difficult, results unclear

Aid successful in some countries (Botswana, Indonesia, Mozambique, Tanzania);

Aid has helped improve health by supplying essential medicines,

Aid useful in emergency relief after disasters.

Much aid wasted or stolen (Marcos in the Philippines, Duvalier in Haiti),

Even under best circumstances aid can have adverse incentives on economic activity.

Some Agreements on Aid

1. Aid has positive relationship with growth on average but with diminishing returns as volume of aid increases;

2. Aid has no effect on growth, and may actually undermine growth; and

3. Aid has a conditional relationship with growth, helping to accelerate growth under certain circumstances.

Three Views on Aid and Growth

Three key channels through which aid might spur growth:

First, aid augments saving, finances investment, adds to capital stock;

Second, aid might increase worker productivity through investments in health or education.

Third, aid could provide conduit for technology transfer.

Best documented area is health, where aid has helped eradicate small pox, nearly eradicate polio, control river blindness, spread oral rehydration, and dramatically increase immunization rates.

View 1: Aid has positive relationship with growth but with

diminishing returns

1. Aid is wasted, i.e. corruption, poorly designed projects;

2. Aid helps keep bad governments in power, delay reform. Aid may perpetuate conflict;

3. Countries may have limited absorptive capacity;4. Aid can reduce domestic saving (through impact

on interest rates and revenues). 5. Aid may reduce incentives for investment or

productivity improvements. Aid can cause currency to appreciate, undermining profitability of production of all tradables (Dutch disease). Food aid can reduce farm prices, hurt farmers

View 2: Aid has no effect on growth, and may actually

undermine growth

“conditional” - effectiveness of aid depends on:

1. the characteristics of the recipient country,

2. practices and procedures of the donors, or

3. type of activity that the aid supports.

View 3: Aid has conditional relationship with growth, helping

to accelerate growth under certain circumstances

WB projects had higher rates of return in countries with stronger civil liberties;

Aid stimulated growth in countries with good policies and strong institutions;

Other possible factors: geography and climate, export price shocks, terms of trade, macro & trade policies, political leadership, conflict.

Does this mean that only “good” governments and favorable countries should receive aid?

View 3a: Aid Effectiveness Conditional on Recipient Country

Characteristics

Multilateral more effective than bilateral aid; “Untied” aid better than “tied” aid; Smaller donors coordinate more with other

donors, Donors with poor M&E reduce own effectiveness; Aid more effective with greater “country

ownership” or broader “participation”; Basis for Paris Declaration, but so far little

systematic research on donor practices and aid effectiveness.

View 3b: Aid Effectiveness Conditional on Donor

Practices

1. Emergency/ humanitarian (negatively associated w/ growth, since aid tends to increase sharply as growth falls following shock);

2. aid that affects growth after a long period of time, so relationship may be difficult to detect (health, education, environment, support for democracy);

3. aid directly aimed at affecting growth (roads, ports, electricity, or support for productivity).

Strong positive relationship between 3rd type of aid (about half of all aid) and growth.

View 3c: Aid Effectiveness Conditional on Type of Aid

ODA and Poverty Reduction*

Growth in Asia has been characterized by reduced absolute poverty but sharply increasing inequality.

Severe inequality is bad for long-term growth: poorly functioning markets; non-functional markets; backlash.

More equitable growth requires:• Access by poor to finance, economic infrastructure,

markets;• Human capacity building at all levels of society;• Risk-management mechanisms (weather, health,

markets);• Access to effective justice systems;• Special attention to disadvantaged regions and groups;

* Michael Walton, ADB, Nov., 2007

1. Not all aid is based on the goal of development.2. Development depends on more than aid;

starting conditions and global environment critical

3. Economic growth is necessary but not sufficient for poverty-reducing development.

4. Some aid has been wasted, but some has been helpful when conditions are favorable

5. Aid must be carefully planned based on in-depth knowledge of local conditions.

6. Aid should focus on strengthening country policies proven to enhance growth, i.e. improve institutions and conditions for effective public and private investment.

Summary of Debate on Aid Effectiveness

1. Country selectivity (support or “reward”, not “conditionality”);

2. Recipient participation and country ownership (country-led, participatory, reduces “principal-agent” problem),

3. Harmonization and coordination (MDGs, like-minded donors, fund pooling), and

4. Results-based management (MDGs, strong M&E).

5. Public-Private-NGO Partnerships

Key Proposals to Improve Aid Effectiveness

Korea’s Development: Are there lessons for today’s developing countries? Environmental Factors

• Post-conflict conditions• Human resources• Preferential US aid and markets• Absence of international trade or aid conditionalities• Leadership• Cultural heritage (?)

Policy factors• Wealth redistribution (1950 land reform)• Development State approach; central planning• Social investment, especially education• Two-step agricultural/rural policy (scissors then subsidies)• Protected markets, limited FDI• Strengthened institutions; political restrictions

“Kicking Away the Ladder”? (Ha-joon Chang)

“Kicking Away the Ladder,” Jang Ha-joon

Possible Implications for Korea’s ODA Draw appropriate lessons from Korea’s development. Consider prioritizing partner countries based on:

• Developing countries that provided troops during Korean War*

• UN-mandated missions• Good governance and institutions• Global emergencies

Base analysis of context on total bilateral economic relationship.

Develop integrated ODA country strategies, coordinating all grant, loan and technical assistance programs.

Continue to focus aid on Korean competencies (IT, infrastructure, education), but reduce ties to promoting Korean business.

*Philippines, Thailand, Ethiopia, Colombia, South Africa, Turkey(?)

Possible Implications for Korea’s ODA Strive to implement the Paris Declaration on Aid

Effectiveness Build human capacity for ODA: research,

planning, management, evaluation, international cooperation.

Collaborate with local, Korean and international development NGOs.

Mobilize Korean public support based on humanitarian impulse and enlightened mutual interest.

Korea is a natural leader and partner for effective development cooperation.

Thank you!

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