Wednesday, December 1, 2010

ODA, Economic Growth and Poverty Reduction

Recent contributions to the debate on the role of international aid (i.e. Official Development Assistance – ODA – according to the OECD’s Development Assistance Committee’s definition) have focussed on an apparent dichotomy between on ‘security’ objectives and ‘poverty reduction’ objectives. This note will attempt to put forward two main arguments.

First, within the tangled and emotive dispute around the security / poverty reduction dichotomy we are in danger of losing sight of fundamental features of the economic role of ODA.

Second, in some respects the dichotomy between security and poverty reduction may be less clear cut than some of the protagonists have suggested.

Since the mid-1990s the international aid community has given much higher priority to poverty reduction objectives of policy in developing countries and has made this a key criterion for the design of ODA programmes. This has sometimes overlooked the role which policy interventions (and components of ODA programmes) which are not directly and obviously connected to poverty reduction can contribute to the achievement of that objective. This part of the note is concerned especially with the relationship between ODA and economic growth in developing countries.

In the mid-1960s Chenery and Strout introduced the ‘two-gap’ approach to the justification for ODA – the two gaps being ‘savings’ and ‘foreign exchange’. This was linked to the Harrod-Domar capital coefficient approach to economic growth. The idea was that ODA could increase the level of ‘savings’ and investment in recipient countries leading to accelerated economic growth. Given that a significant amount of investment requires imports, the second constraint was eased through the receipt of ODA in the form of foreign exchange.

However, contemporary theories of economic growth focus less on the role of savings and investment (although they are still regarded as being very important) and place more attention on technology change, labour force skills and the policy or economic ‘environment’. The argument in this note is that ODA can make considerable contributions to these three additional ‘gaps’ – making five gaps rather than two.

Further, some researchers have argued that ‘aid effectiveness’ (the extent to which aid objectives are achieved) is much better with a ‘good’ than with a ‘poor’ policy-economic environment. This begs the question of how this ‘environment’ is measured – or at least how its quality is evaluated. More to the point in the current context is the relationship between ODA and the policy-economic environment. About ten years ago Burnside and Dollar concluded that in order to increase aid effectiveness ODA should be targeted on developing countries with a ‘good’ policy environment. However, this conflicts with the fact that many of the countries which have the highest ‘need’ for ODA are precisely those which are most ‘challenged’ in this respect. Countries with significant levels of poverty and which are suffering from the effects of either internal or international conflict, or which are recovering from periods of significant economic mismanagement (or ‘bad’ governance), are precisely those which are likely to have a good case for receipt of ODA. If ODA is designed at least in part to improve the policy-economic environment then its role in contributing to both economic growth and poverty reduction (as well as to aid effectiveness) can be significant. Therefore the Burnside and Dollar argument can logically be ‘turned on its head’.

The second issue targeted by this note is the role of the ‘security’ objective for ODA allocations. This can be conceptualised within the context of conflict prevention, conflict resolution and recovery from the effects of conflict. Significant improvements to aid effectiveness, economic growth and poverty reduction can be achieved through ODA allocations in these areas, and it is difficult to see why there is necessarily a conflict between ‘security’ and more traditional objectives of ODA in this respect.

It is clearly possible that ODA expenditures might be regarded by governments as being ‘fungible’ between ‘development’ criteria (including the security dimensions mentioned above) and ‘defence’ criteria – and in some cases distinctions might be deliberately blurred. However, there is no reason in principle why the ‘security’ dimension cannot be regarded as being of significant ‘development’ interest.

Thus far this note has not distinguished between ODA which is associated with long-term development objectives relating to economic growth and poverty reduction on the one hand, and that associated with ‘emergency relief’. Some types of emergency relief are likely to be linked with ‘security’ and conflict situations rather than to ‘natural disasters’. Again, a degree of flexibility is required in viewing the multiple objectives of ODA within a complex set of ‘international development’ interactions.

This brief note has inevitably skirted around a number of complex issues. A longer version can be viewed on the blog within Simon Maxwell’s website (

Mike Tribe is the Honorary Secretary of the DSA, and is now semi-retired with current academic connections to the School of Social and International Studies, University of Bradford; the Department of Economics, University of Strathclyde; and the Institute for Development and Policy Management, University of Manchester. In the 2009-10 academic year he also contributed to the Masters Programme in the Centre for Development Studies, University of Glasgow.