Development Aid Falls Short, While Other Financial Flows Show Rising Volatility
New Worldwatch Institute trend examines international aid flows.
Michael Renner is a Senior Researcher and co-director of State of the World 2014.
Cameron Scherer is a program associate at Internews.
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|BY MICHAEL RENNER AND CAMERON SHERER | AUGUST 22, 2013|
As the world approaches its 2015 deadline for achieving the Millennium Development Goals outlined in 2000, development aid by the 26 members of the Development Assistance Committee (DAC) of the Organisation for Economic Co-operation and Development declined in 2012 for the second year. Preliminary data indicate that official development assistance (ODA) totaled $128.4 billion (in 2011 dollars) that year, down 4 percent from 2011’s $133.7 billion. The 2012 figure marks a 6 percent decline from 2010, when global ODA peaked at $136.7 billion.
The United States provided the largest amount of ODA, with a total of $29.9 billion in 2012, which was 23.3 percent of the DAC total. Trailing the United States are the United Kingdom, Germany, France, and Japan. When tracking ODA as a percentage of gross national income (GNI), however, a different picture emerges. Since 1970 the United Nations has set 0.7 percent of GNI as the target for ODA: in 2012, only Luxembourg, Sweden, Norway, and Denmark exceeded this target. In comparison, the U.S. figure was only 0.19 percent. Not surprisingly, given the severity of the Eurozone crisis, the 15 European Union members of DAC decreased their assistance by a total of 7.4 percent, with the most severe cuts coming from Spain, Italy, Greece, and Portugal.
It should be noted that DAC governments are not the only ones that provide development assistance: according to a 2012 UN report, non-DAC countries donated a total of $7.2 billion in development aid in 2010, with Saudi Arabia providing almost half of the total. Furthermore, assistance from private sources was estimated at $56 billion that same year, but reporting on such flows is much weaker than for government funds.
Humanitarian assistance, or short-term aid provided in response to disasters and humanitarian crises, is a numerically small but highly visible portion of ODA. Preliminary data indicate that in 2012 assistance provided by governments for such purposes fell 6.5 percent from the previous year, from $13.8 billion to $12.9 billion. (When including non-governmental sources, humanitarian aid fell by 7.7 percent.) This decline is not totally unexpected, as many of the world’s leading economies are still recovering from the financial crisis. Also, in 2012 the United Nations categorized 76 million people as in need of humanitarian assistance, fewer than the 93 million in 2011.
ODA is far from the only mechanism of international capital flows to or from developing countries and emerging markets. A multitude of vehicles—private and public, bilateral and multilateral—fill the global finance landscape. And against this broader canvas, ODA involves relatively small amounts of money.
Among public funds, outflows have actually exceeded inflows into developing countries and emerging markets for most of the past decade. According to the International Monetary Fund, net outflows of more than $180 billion in 2006 turned into net inflows of close to $140 billion in 2009, but by 2012 there was once again a net outflow of close to $42 billion.
Among private flows, the largest amounts are accounted for by foreign direct investment (FDI). Net FDI rose from under $100 billion per year in the 1980s and early 1990s to a peak of $480 billion in 2008. The financial crisis then caused a dip to $335 billion in 2009, but 2011 saw a recovery to $473 billion. The bulk of FDI flowing to developing countries is going to Asia and Latin America. In East Asia and South Asia, almost 90 percent of FDI goes to China and India; in Latin America and the Caribbean, about half goes to Brazil. Only 10 percent of global FDI is destined for Africa.
In general, FDI is more stable than other forms of private investments, especially where “greenfield” investments in new productive capacity are concerned, FDI is usually undertaken with a longer time horizon in mind, and happens mostly where macroeconomic conditions are stable. In contrast, portfolio investment and cross-border interbank lending are often driven by short-term considerations such as changes in interest rates.
However, the United Nations points to evidence that a growing portion of FDI in recent years is going to investments in financial companies or to intra-company debt. Also, a considerable portion of FDI relates to mergers and acquisitions—and thus represents a transfer of ownership rather than fresh investment. These shifts imply that capital can be moved more easily among countries, and indeed the share of short-term and more volatile financial FDI flows has increased.
Further highlights from the report: