ODA redefinition database posted

As promised, I have posted a database of variables that I developed for my analyses of the contributions of loans to aid. Also now available is an SQL Server database with the underlying data and logic (You can download the needed software, SQL Server Express, for free but you need to know what you’re doing.) This database includes a construction of the new DAC ODA variable—which I think you can’t get anywhere else—and my preferred alternatives based on DDRs. All are back-calculated to 1980. I have also posted a new version of my ODA redefinition paper, “Straightening the Measuring Stick,” which updates last year’s CGD working paper. I presented the newer one last month in Geneva at a conference jointly organized by the IMF and the Graduate Institute Geneva. The proceedings of the conference, including my paper, are now in process with a journal. The largest changes were necessitated by the Development Assistance Committee rule changes agreed in December: rather awkwardly, I had to switch my theme from what the DAC should do to what it had and ought to have done. I blogged the most interesting updates to my...

Net aid transfers data updated to 2013

Years ago when I was building parts of the Commitment to Development Index, I decided to tweak the official computation of countries’ foreign aid spending. It didn’t make sense to me that Net Official Development Assistance (ODA) was “net” of principal repayments received on old aid loans, but not of interest paid on those same loans. As if $1 million flowing from Ghana to Japan had different consequences when it was interest instead of principal… Meanwhile, ODA totals would spike when donors officially recognized losses on aid loans that hadn’t really been serviced in years. Yet writing off loans gone bad didn’t in itself increase transfers from rich to poor nations. Addressing the first of these concerns was easy. The Development Assistance Committee reports interest received even if it doesn’t subtract it from Net ODA. Addressing the second concern proved surprisingly hard using the information that DAC made available. So I documented both tweaks in a CGD working paper, created a variable called Net Aid Transfers (NAT), and shared the data set publicly. Last month, the DAC released its full data set for 2013. In turn, I have just updated the NAT data to 2013 here. This graph shows total aid from members of the Development Assistance Committee computed the two ways for 1960-2013, in inflation-adjusted dollars of 2012:...

Political compromise is not mathematically beautiful

As they committed to do, the members of the Development Assistance Committee have struck a deal to revise how loans are counted as Official Development Assistance (ODA). They announced it today at the end of their two-day High-Level Meeting in Paris. The specifics validate the rumors I passed on last month. The benchmark discount rate will be changed from the fixed 10% to the IMF’s new “unified” rate. Now, that rate is 5%. Based on a 10-year moving average of the U.S. 10-year treasury rate, it will plunge to 4% in a little over two years, I estimate, if its formula is followed faithfully. However, I believe that the IMF has not yet committed  to updating the rate so mechanically, perhaps because a lower rate would make borrowers’ current debt loads look less sustainable, leaving less room for new lending, to the discomfort of some donor governments. So the DAC has hitched itself to a benchmark whose future is a bit fuzzy. To the IMF rate will be added a simple risk premium, so that loans will count more as aid when going to countries deemed more likely to default: a 1% premium for upper-middle-income countries (UMICs), 2% for lower-middle-income countries (LMICs), and 4% for low-income countries (LICs). As it happens, the IMF’s sibling, the World Bank, curates this three-way classification of developing countries, which is effectively annexed to the statistical definition of aid. The new formula has one other key component, and this I missed in my last writing despite a strong hint from Jon Lomøy, director of the OECD’s Development Co-operation Directorate, at a CGD meeting in October. Recognizing the concern that I and others voiced...

An aid loan is not just a throw of the dice

After two years of communiqués, consultations, and commentary, the Development Assistance Committee has gotten down to brass tacks in fixing the definition of Official Development Assistance (ODA). I hear that a negotiating group composed of key donor representatives named for its chair, the UK’s Mark Lowcock, has reached a tentative deal. The Lowcock group’s role being unofficial, DAC chair Erik Solheim has turned its consensus into a proposal for discussion with the entire DAC membership. I have not seen the document, so I cannot report definitively on it. It appears purely focussed on the issue that forced the discussions in the first place, which is when and how much to count loans as aid. I gather that the principle elements of the compromise are: Counting only the grant element of loans, not the face value, toward ODA. (This CGD post of mine explains the concept.) Dropping the fixed 10% discount rate in favor of an established benchmark system that will adjust as world interest rates rise and fall. I’ve heard cited both the “unified” rate of the IMF, currently at 5%, and the Differentiated Discount Rates of the OECD. The IMF rate appears favored. Adjusting the new benchmark for risk, country by country. One formula floated would follow the World Bank’s tripartite division of aid recipients into low-income, lower-middle-income, and upper-middle-income. It would add 4% to the benchmark for LICs, 2% for LMICS, and 1% for UMICs, on the idea that wealthier countries are less likely to default and thus cheaper to lend to. (You know, like UMIC Argentina…) I appreciate how this compromise would balance financial realism with simplicity. The IMF’s 5% + 1%/2%/4% is elementary as financial formulas go. Despite...

Who has the power to count chickens?

In March I recounted how former colleagues Michael Clemens, Steven Radelet, and Rikhil Bhavnani wrote an excellent paper in 2004 on the impact of foreign aid on economic growth, “Counting Chickens When They Hatch.” The idea captured in that title is that it is important to think about the likely timing of the impacts of aid. Don’t design your analysis as if you expect that funding for teaching 6-year-olds will raise economic growth in four years. Match the follow-up period to the type of aid. Count your chickens only when they hatch. Some years later, and joined by another CGD recruit, Samuel Bazzi, those authors overhauled their paper and published it in the top-flight Economic Journal (ungated version). The final version is quite different but also excellent (it won the journal’s best-article prize). Instead of doing its own econometrics afresh, it modifies the three most-cited studies in the aid-growth literature in light of the “counting chickens” insight. Although those studies disagree on whether and when aid “works,” in the sense of boosting growth, Clemens, Radelet, Bhavnani, and Bazzi (CRBB) conclude that revising the studies to take timing into account causes all results to converge, to a ginger but positive appraisal. (Listen to Michael speak cautionarily about “Chickens” in this Library of Economics and Liberty podcast.) I say “excellent” and I mean it. But, true to type, I actually doubt the econometric reasoning. I am not persuaded by these results that “aid inflows are systematically associated with modest, positive subsequent growth.” In 2010, the journal Public Finance Review inaugurated a section for replication studies, in order to increase incentives to...

Editing ODA: What to Omit and Add in the Definition of Aid

The last of my three posts for CGD on redefining Official Development Assistance (ODA) tries to get away from the loan business (which has gotten most of my attention and is the reason the definition of ODA is up for discussion at all). In the new post I talk about what activities ought to dropped from or added to the definition in order to keep it credible and up to...

More on the Definition of ODA: Proper Credit for Credits

I promise this is the last post on the incorporation of loans into the measurement of Official Development Assistance. Actually, it’s a cross-posting of something I just wrote for CGD. Leaving aside the question of whether to factor default risk into the determination of whether a loan is aid, I enunciate four principles for counting loans as aid. Next week I’ll be in Paris, where I will participate in several meetings at the DAC on these very questions, and present my work to staff. I’m sure I’ll learn a lot about the substance and the process. I’ll report back to you after that....

The Crisis in Official Development Assistance (ODA) Statistics: Needed Revamp Would Lift Japan, Lower France

Sorry for the silence here. I worked on two main projects over the last month. For GiveWell and Good Ventures, I began reviewing what is known about the economic impacts of immigration in receiving countries, particularly on low-wage workers. Good Ventures is considering labor mobility as an area in which it could actively support policy advocacy. But they want due diligence on the concern that allowing more immigrants in will depress earnings for those already here. I’ll share more of that work when it’s ready. And for my old employer, the Center for Global Development, I wrote a paper that expands on my earlier work on how foreign aid should be defined for purposes of statistics. CGD posted the paper last Thursday and a blog post about it this morning. Go read that. (More blogging for CGD will follow.) I think that for once, my timing is good. The Development Assistance Committee, which manages aid statistics, has been reviewing the definition of Official Development Assistance for the last 18 months. It will convene several consultative meetings in the next few weeks and more in the fall. Over the rest of the year, the DAC staff will be bringing options to the governing board, which consists of donor representatives, which will need to confront the policy and political issues and hash out a...

Of Technocrats and Autocrats: Review of Bill Easterly’s Tyranny of Experts

The title of Bill Easterly’s new book pretty much conveys the message: The Tyranny of Experts: Economists, Dictators, and the Forgotten Rights of the Poor. Out of arrogance and political convenience, Western donors are designing and financing destructive top-down development “solutions” to be imposed on the poor. The donors are playing into the hands of dictators, even becoming mini-dictators themselves. The just and surer path to economic development lies in respecting the rights of poor people and empowering them to solve their own problems in ways no expert could plan. Through choice quotes, an Easterly trademark, the book dramatizes how rife is the “technocratic illusion” in the development business today. In particular, the technocratic illusion “would capture Bill Gates and Tony Blair” and World Bank president Jim Kim. Here’s Easterly excerpting the killer quote from Jim Kim: Dr. Kim called for the World Bank to become a “Solutions Bank.” The Bank should offer “evidence-based, non-ideological solutions to development challenges.” The Bank should reach agreement with other development agencies, with foundations, with academics, and with the private sector “to advance shared goals” for solutions. He called for a new “science of delivery” to implement the evidence-based solutions. This new science would include “the design, execution and demonstration of results.” Probably Easterly would have preferred if Jim Kim had said something more like this quote, from a different World Bank president: I do not mean to suggest that we have ready-made solutions for every development problem. We do not, nor is this our goal. Rather…we will work with our partners, clients, and local communities to learn and promote a process of discovery....

Comment on “Counting Chickens”

In 2012, the top-flight Economic Journal published an article by my former CGD colleagues about the impact of foreign aid on economic growth in receiving countries. It is called Counting Chickens When They Hatch: Timing and the Effects of Aid on Growth (ungated version on cgdev.org). The journal’s publisher, the Royal Economic Society, awarded the authors its annual prize for best article. I think you’ll see why, if you read the paper. It’s sharply written and firmly argued, yet judicious in its conclusions. Those conclusions are that “aid inflows are systematically associated with modest, positive subsequent growth”; and that “the most plausible explanation is that aid causes some degree of growth in recipient countries, although the magnitude of this relationship is modest, varies greatly across recipients and diminishes at high levels of aid.” One of my first projects at CGD was to assist Bill Easterly and Ross Levine in replicating and questioning (ungated) an older paper favoring the theory that aid causes growth. Perhaps this baptism into econometrics permanently converted me to skepticism. Perhaps it merely reinforced my distrust as a mathematician of a structural tendency in the social sciences to use equations full of Greek letters to claim objectivity and superior insight. At any rate, I’ve doubted such aid-growth studies ever since. Here is a comment that explains why I’m not persuaded by “Counting Chickens.” A version of this comment has been accepted for the new replication section of the Public Finance Review. Here is the code needed to reproduce the results. It runs off the CRBB data sets. Perhaps the authors of “Counting Chickens” will respond. And perhaps they will change my mind. For now, this...

What’s the best way to count loans as aid?

In the close of my last post, I indicated that I had more to say about how best to count loans as aid. Now I’ll say it. The Development Assistance Committee (DAC) currently handles loans this way: To count as Official Development Assistance (ODA), as explained in the last post, loans must meet two criteria: They must have a grant element of at least 25% when using a discount rate of 10%. They must be “concessional in character,” which as far as I know is not defined anywhere; and this ambiguity has led to a dispute over whether a loan makes the cut if it can be expected to lose money only after factoring in the risk of default. All loans meeting those criteria are counted in full on a capital flow basis. That is: Disbursements are counted positively, in full. Repayments are counted negatively, in full. Interest payments are not counted at all, even though they figure in the grant element. Interest receipts, you see, are income, not capital flow. Treatment of debt relief depends on whether the loan being relieved was considered ODA at disbursement (some details in this paper of mine; more in the DAC reporting guidelines): Relief on a loan originally counted as ODA does not itself count as ODA, because that would be double-counting. Relief on non-ODA loans does count as ODA. Somewhat bizarrely, even though interest does not count against ODA, forgiveness of interest counts in favor of it—and regardless of whether the underlying loan was ODA. Got that? In critiquing this system, a few themes arise. The first is what benchmark interest rate...

Undue credit: Are France, Germany, and Japan subverting the definition of aid?

Last April, former Development Assistance Committee chair Richard Manning penned a scorching alarum in the Financial Times. Unbeknownst to the public, donors were inflating their aid totals by including loans that would profit the donors if paid in full. And the DAC, whose job it is to validate and publish these tallies, had proved feckless in defending the principle that for a loan to count as aid, it should profit the recipient not the donor. The OECD must put in place a definition of concessionality that reflects the real cost of capital and requires real fiscal effort. It is shocking that the OECD should publish official statistics that allow “different practices” on such a key issue and which make a mockery of its own requirement that loans are concessional in character. It is encouraging OECD finance ministries to get away with murder as they seek to massage reported aid upwards at minimum cost. If the OECD cannot do a professional job on this, the UN should take over the reporting for international aid flows. Richard’s causticity would impress you even more if you, like me, had observed his conduct as chair at last October’s board meeting of 3ie, which was a masterpiece of understatement and diplomacy. I assume his jibe about professionalism was aimed not at the staff who support the DAC, who are quite sharp, but at the Committee per se, whose membership consists of donor representatives and whose collective positions tend toward least-common-denominator consensus and inertia. So what’s the issue? Ever since the aid world began, foreign assistance has come in two main forms: grants and loans. 1 The DAC counts all grants as aid,...