276 privatesector P U B L I C P O L I C Y F O R T H E NUMBER NOTE 31026 2004 The Supply of Aid OCTOBER Tim Harford, Bita How Are Donors Giving, and to Whom? Hadjimichael, and Michael Klein This Note reviews trends in official development assistance, focusing on volumes, sources, forms, and recipients. Several patterns emerge. Tim Harford (tharford@ifc.org) is First, a long-term trend of official flows taking the form of "hard" an economist, and loans rather than grants and "soft" loans, with low interest and long Bita Hadjimichael (bhadjimichael@world maturities, has been reversed in the past five years. Second, both bank.org) a senior PRESIDENCY grants and loans are increasingly aimed at middle-income countries economist, at the World rather than the poorest. And third, official flows have fallen relative VICE Bank and International Finance Corporation to rich-country income by 30 percent in the past 30 years. (IFC). Michael Klein The ever-shifting debate over the aid industry But it is early days for the results agenda, and (mklein@worldbank.org) and the right way to help the world's poor has most hard data collection still focuses on raw is chief economist at IFC acquired new elements in recent years. There flows. Those flows are not easy to interpret. Even DEVELOPMENT and joint World is a new, overdue, and welcome focus on meas- a simple question such as whether aid is increas- Bank­IFC vice president, uring results. No longer is it enough to point, ingly or decreasingly directed to the poor poses private sector SECTOR whether with pride or with criticism, at the raw difficulties: the poor in 1970 were not where they development. volume of money transferred. New debates This Note is the first of a have surfaced. Figure Official flows are shrinking PRIVATE series exploring trends Some of these debates center on how aid is 1 in the aid industry, delivered. Which is more important: better Percentage of OECD GNI 0.6 including patterns of aid monitoring of aid projects or reducing the flows, competition, and transaction costs of lending? Which kinds of GROUP 0.5 the effectiveness of recipients make the best use of aid: govern- Nonconcessional flows (OOF) different types of aid. ments, nongovernmental organizations, com- 0.4 BANK panies, or individuals? What organizations give the most effective aid? And which form should 0.3 aid take: grants, loans, or something else? The new focus on results adds spice to a third Grants and concessional loans (ODA) WORLD 0.2 trend:thecontinuingemergenceofcompetitionin 1970 1975 1980 1985 1990 1995 2002 the aid industry. Competition is forcing organiza- THE tions to demonstrate that they can produce results. Source: OECD Development Assistance Committee. T H E S U P P L Y O F A I D H O W A R E D O N O R S G I V I N G , A N D T O W H O M ? are in 2004. Some countries that were once poor Low-income countries are receiving a diminish- have grown quickly and are now classified as mid- ing share of grants, soft loans, and hard loans. dle income. Yet many countries now classified as Grants boomed after the collapse of the middle income still have huge numbers of poor Soviet bloc but are no longer rising even in people within their borders. Moreover, many nominal terms (there has been an uptick very new countries have been created, especially in recently, and it is too early to judge whether the past 15 years. this is a turning point or not). Nevertheless, some trends are apparent: A long-term trend of more official finance Official aid effort is shrinking 2 being provided on nonconcessional terms Official flows of finance from rich to poor coun- has been reversed within the past five years. tries are smaller than they used to be, relative to As a share of rich-country income, official the economies of the rich countries. Of the development assistance (ODA) has shrunk US$104 billion sent to poor countries in 2002, by 30 percent since the 1970s. just under a third, US$34 billion, was "other offi- The multilateral agencies emphasized non- cial flows" (OOF)--meaning that it took the form concessional ("hard") loans until recently, of loans at or near market interest rates or was but in the past few years these have declined.1 otherwise judged by the Development Assistance Bilateral agencies generally give grants Committee of the Organisation for Economic rather than loans. Co-operation and Development (OECD) to lack Concessional ("soft") loans make up a rela- a development purpose. The rest was ODA: tively small share of the funding from both grants or loans with generous payback periods bilateral and multilateral agencies. and low interest rates. ODA slipped from around Figure Rise of bilateral grants--and rise and fall of multilateral loans 2 Gross disbursements Bilateral and multilateral flows (percent) 100 Nonconcessional (OOF) 80 Bilateral loans Multilateral loans 60 Concessional (ODA) Bilateral loans 40 Multilateral loans 20 Bilateral grants Multilateral grants 0 1970 1975 1980 1985 1990 1995 2002 Bilateral flows (US$ billions) Multilateral flows (US$ billions) 60 60 40 40 Grants Concessional loans 20 20 Nonconcessional loans Concessional loans Nonconcessional loans Grants 0 0 1970 1975 1980 1985 1990 1995 2002 1970 1975 1980 1985 1990 1995 2002 Source: OECD Development Assistance Committee. Nonconcessional loans aimed at Figure Grants aimed less at poor countries Figure middle-income countries 3 4 Gross disbursements by recipient country income group Gross disbursements by recipient country income group Multilateral grants (percent) Multilateral loans (percent) 100 100 Upper middle income Upper middle income 80 Lower middle income 80 60 60 3 Lower middle income 40 40 Low income 20 20 Low income 0 0 1970 1975 1980 1985 1990 1995 2002 1970 1975 1980 1985 1990 1995 2002 Bilateral grants (percent) Bilateral loans (percent) 100 100 Upper middle income Upper middle income 80 Lower middle income 80 60 60 40 40 Lower middle income Low income 20 20 Low income 0 0 1970 1975 1980 1985 1990 1995 2002 1970 1975 1980 1985 1990 1995 2002 Source: OECD Development Assistance Committee. Source: OECD Development Assistance Committee. 80 percent of official flows in the 1970s to less Are poorer countries missing out? than 60 percent in the late 1990s, but has recently The aggregate trend in aid seems to be a shift recovered to more than 70 percent. away from low-income countries and toward Since the 1970s the flows of grants and soft middle-income countries (figures 3 and 4).2 loans have shrunk by more than a quarter rela- This trend is most apparent for grants. In the tive to the gross national income (GNI) of high- 1970s around 70 percent of ODA grants went to income OECD countries (figure 1). (This is a low-income countries (figure 5). In the 1990s measure that donor watchers call aid effort.) this share fell dramatically, to 50 percent. Growth in multilateral hard loans is reversed Poor countries missing out on both Figure grants and loans The fastest growing sector of the official aid 5 Official gross disbursements to low-income countries as industry was until recently hard loans from a percentage of those to low- and middle-income countries multilateral aid agencies, but these have 75 Grants declined sharply in recent years (figure 2). Bilateral agencies, which give or lend money 50 directly from one government to another, gen- Concessional loans erally give grants rather than loans. Such grants have maintained their market share since 1970. 25 Nonconcessional loans Over the past 30 years soft loans from bilateral agencies have lost ground to loans, both hard 0 1970 1975 1980 1985 1990 1995 2002 and soft, from multilateral agencies and hard loans from bilateral agencies. Source: OECD Development Assistance Committee. T H E S U P P L Y O F A I D H O W A R E D O N O R S G I V I N G , A N D T O W H O M ? Central and Eastern Europe and the Flows to the private sector outpace Figure grant boom Figure public sector flows 6 7 Grants (US$ billions) Gross disbursements (US$ billions) 50 400 viewpoint Private sector 300 Other grant recipients is an open forum to 25 encourage dissemination of Central and public policy innovations for Eastern Europe 200 Sub-Saharan Africa private sector­led and market-based solutions for development. The views 0 100 Public sector published are those of the 1970 1975 1980 1985 1990 1995 2002 authors and should not be Source: OECD Development Assistance Committee. attributed to the World Bank or any other affiliated The share of nonconcessional loans disbursed 0 organizations. Nor do any of 1970 1975 1980 1985 1990 1995 2002 to low-income countries also fell--from 29 per- the conclusions represent cent in the 1980s to 21 percent since 1990. Note: "Private sector" denotes nonguaranteed debt, grants by nongovernmental official policy of the World organizations, and workers' remittances, plus portfolio equity and direct investment, Although bilateral agencies recently expanded which are reported net. "Public sector" denotes gross disbursements from bilateral Bank or of its Executive and multilateral agencies (including the International Monetary Fund), export credit nonconcessional lending to low-income coun- guarantees, and private borrowing with a public guarantee. Directors or the countries Source: World Bank 2004. tries, this growth is from a very low base and does they represent. little to offset the decline in multilateral lending to these countries. middle-income countries and are more stable To order additional copies than private investment and official aid. Future contact Suzanne Smith, Where will growth in aid come from? Notes in this series will analyze the relationship managing editor, The fall in the share of grants to low-income coun- between private and official flows in more depth. Room F 4K-206, tries was driven largely by the boom in grants to The World Bank, 1818 H Street, NW, Central and Eastern Europe following the collapse Washington, DC 20433. oftheSovietbloc(figure6).Butwithoutthatboom, grants would look even more stagnant than they Notes Telephone: already do. This is part of a pattern of aid growth 1. The analysis of multilateral flows here excludes the 001 202 458 7281 beingdrivenbysuccessivereconstructionanddevel- InternationalMonetaryFund(IMF)becauseIMFfundingis Fax: opment booms. Such booms followed the end of concerned mostly with financial stability and because data 001 202 522 3480 World War II, the appearance of independent for- on IMF flows have not been consistently reported by mem- Email: mer colonies, and the collapse of communism. bers of the OECD Development Assistance Committee. ssmith7@worldbank.org 2. All classifications by income are based on World Private finance is providing competition Bank categories in 2004. So a fall in the share of aid to low- Produced by Grammarians, The private sector is now hugely important as both income countries indicates a fall in the share given to Inc. a source and a recipient of loans and even grants. countries that are poor today. Since countries tend to grad- The complexity of the picture defies neat catego- uate to middle-income status, this way of measuring under- Printed on recycled paper rization, but figure 7 gives a general impression, states the decline in aid to poor countries. comparing disparate sources of funding for the private sector with finance to or guaranteed by the Reference public sector. Private sector lending to middle- World Bank. 2004. Global Development Finance 2004: income countries competes with loans from the Harnessing Cyclical Gains for Development. Washington, D.C. development banks. Other private flows provide indirect competition. For example, workers' remittancesexceedofficialgrantsinbothlow-and T h i s N o t e i s a v a i l a b l e o n l i n e : h t t p : / / r r u . w o r l d b a n k . o r g / P u b l i c P o l i c y J o u r n a l