How much aid actually reaches the countries with the greatest poverty? Facts and principles of ODA allocation

Global challenges are driving aid away from targeted development investments in the countries with greatest poverty

Even before the Covid-19 pandemic and the Ukraine war, there were clear concerns about the zero-sum implications of competition for official development assistance (ODA). These concerns included the use of ODA to finance global public goods (GPGs), the rise of emergency humanitarian assistance as a growing proportion of ODA in the face of growing humanitarian needs and increasing use of ODA to leverage private finance with no targeted development focus.^[1]

As a result of the pandemic and the effects of the Ukraine war, increased demands for ODA became evident in stronger calls for: (a) investments in GPGs, and (b) investments that also serve national self-interest. The rise of transnational development challenges such as global health, climate change and security means that GPGs are competing with traditional development priorities: there are calls for investment in both global initiatives and in countries other than those with the lowest incomes, as wealthier countries are considered better able to drive regional and global progress in areas such as political and environmental security. The result is reduced ODA to countries experiencing the greatest poverty. In other words, the additional needs generated by these external events mean there is less funding left to spend on traditional priorities in the countries needing it the most.

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The comparative role of ODA in meeting growing global needs

ODA is a limited resource that needs to be focused and used wisely where it is most needed to maximise its comparative advantage. If shared equally between every person worldwide experiencing extreme poverty, the US$189 billion in gross ODA provided in 2021 equates to US$0.75 per person per day. Balancing growing, competing demands – as well as other motivations and uses of ODA – while maintaining a focus on eradicating poverty or promoting economic growth, is the fundamental challenge facing policymakers.

There is a diverse set of public and private sources of finance that, if used appropriately, can contribute to development and a more equitable recovery. Development Initiatives has long tracked the diverse set of global public and private finance available for poverty reduction.^[2] The Organisation for Economic Co-operation and Development (OECD’s) initiative, Total Official Support for Sustainable Development (TOSSD), published its first data collection in March 2021.^[3] This initiative seeks to bring transparency to all official resources and private finance mobilised by official interventions in support of sustainable development, taking into account both cross-border flows and support to international public goods.

Objectives for investing different financial resources, as well as how they impact people in greatest poverty, vary considerably. These underlying objectives drive quite different patterns of distribution between and within countries in the Global South. For instance, commercial foreign direct investment, concentrated in larger emerging economies to support economically productive sectors, contrasts with remittance income concentrated in countries with large diaspora populations. Differences in objectives, motivations and advantages means that finance sources are not substitutable. It is thus more important than ever to move beyond the question of just scaling up total financing and focus instead on the quality of investments, backed up by political will to drive the right choices. We need to focus on the types and sources of financing being used, the areas where they are being invested and the people who are benefiting.^[4]

The financing needed to meet the Sustainable Development Goals remains substantial, and further out of reach following global crises that resulted in both increased needs and reduced national capacities to address them. One of the most recent and comprehensive estimates^[5] suggest that, by 2025, financing worth US$3.7 trillion will be needed in emerging markets and developing economies other than China, rising to US$5.9 trillion in 2030. Much of this will be met by increases in domestic resource mobilisation and private finance, although ODA has comparative advantage among international sources of finance when it comes to reaching the people living in greatest poverty.

ODA is unique among official and other international development resources, playing a central role in making and catalysing investments for people living in poverty and increasing their resilience to shocks. A significantly larger proportion of ODA flows has been directed to high-poverty countries, compared with other external sources of finance. At the same time, to respond to multiple priorities, ODA has been dispersed more widely than foreign direct investment or remittances, for example, which are more concentrated in a limited group of countries with healthier economies or large diaspora.^[6]

ODA remains critical for the people and places with greatest poverty

ODA, and grant financing in particular, has a comparative advantage in places where other sources of finance are hard to raise. In practice, this means the countries with greatest poverty. We use countries classed by the OECD’s Development Assistance Committee (DAC) as either least developed (LDCs) or low-income countries (LICs) to proxy this.^[7] Out of 46 LDCs, 40 are now at moderate or greater risk of debt distress, making loan financing problematic.

In many countries where poverty is deepest and domestic resources lowest, ODA supports investments in key sectors for poverty reduction such as agriculture, education and health. Similarly, ODA has a critical role to play as a key international public resource directed towards climate adaptation in countries especially vulnerable to the impacts of climate change.

ODA is particularly relevant for sectors that have low economic returns, such as health or education, and where the private sector lacks incentives to operate. Unlike in the private sector, a key driver for ODA is social rather than economic return. A potential exception is impact investing, whereby private investors accept lower economic returns if their investment also achieves social returns. However, such investors still generally require sufficient economic return to preserve their capital, and largely focus on high-income-country markets.^[8] Additionally, there is still much to learn about how the private sector can support those living in the greatest poverty as well as the most vulnerable in social sectors.

Furthermore, the necessity of focusing ODA on the countries of greatest poverty, such as LDCs, will only increase. Currently, governments are discussing important reform efforts of the multilateral development bank (MDB) system that will allow greater leverage of MDB balance sheets to unlock hundreds of billions of additional development finance. However, this additional finance is likely to be directed towards middle-income countries (currently, only 16% of disbursements from MDBs are to LDCs) and will be largely in the form of loans. Given that the majority of LDCs are currently at ‘moderate’ or higher risk of debt distress,^[9] there are question marks over the extent to which they can significantly scale up even concessional borrowing.

It is therefore more important than ever to increase knowledge about the role and impact of other types of finance and how they can be combined, sequenced and layered in different contexts for maximum usefulness. We need also to limit perverse incentives. such as using and inflating volumes of ODA when other types of non-concessional public finance may be more appropriate.

We need a coherent allocation framework that prioritises the people living in greatest poverty

This paper proposes the foundations of a decision-making framework that informs allocations of development assistance that disproportionately prioritise the people living in the greatest poverty. ODA will retain a central role into the future, and there is now a critical opportunity to define the criteria that identify how it can be used most effectively. In this paper we argue for a more coherent vision of ODA that targets poverty directly. Donors and governments need to know where their scarce concessional international public finance can make the most difference in the absence of other sources of investment. The international community needs to be more considerate about how ODA is spent to address immediate crises and to drive sustained pathways out of poverty. We propose a focus on ODA allocations that prioritise the people living in greatest poverty. Investments must identify who will benefit, where and over what timeframe, as well as demonstrating that they disproportionally benefit those living in poverty. This report focuses on the fundamental role of ODA, reminding us that these considerations are more important than ever before at a time when ODA is being appropriated by multiple and competing interests.