When Is a Country Too Rich for Aid? Rethinking ODA Eligibility

The OECD’s Development Assistance Committee (DAC) is discussing changes to the rules on which countries are eligible to receive official development assistance (ODA), the primary measure of foreign aid.

Currently, countries’ eligibility is based solely on whether they are “high-income” according to the World Bank, who base this on gross national income (GNI) per capita: above this threshold, countries are not eligible. The proposals being considered would expand eligibility to include more countries based on criteria other than GNI per capita. In other words, the proposals would allow some countries to qualify even if they exceed the current income threshold.

In a new note, we argue against adding non-income criteria to eligibility criteria, and make the case for a different measure of income to be used. That’s because the specific measure of “income” used to define eligibility is not the best for assessing living standards.

Assessing income instead by a “purchasing power parity” (PPP) measure which reflects different costs of goods and services across economies reveals that some countries eligible to receive ODA are better off than DAC members, and historical comparisons suggests that many others are better off than the richest countries in the world were only decades ago. The PPP measure suggests that rather than expanding ODA eligibility to more countries, it should be tightened to ensure that dwindling resources are focused on the places that need it most.

The World Bank has different goals to the DAC

Since the mid-2000s, the DAC has used the World Bank high-income threshold as the threshold for ODA-eligibility. A country that exceeds that level for more than three years is no longer ODA-eligible (unless the DAC unanimously agree to postpone graduation). To define the high-income threshold, the World Bank uses GNI per capita measured by the Atlas method, which converts GNI per capita in local currency to dollars using an average exchange rate over the prior few years to smooth out fluctuations. Crucially, market exchange rates don’t take into account the cost of living: many goods and services are not traded internationally, and so prices reflect local living standards. Two countries might have similar income according to the Atlas measure, but very different consumption levels, because of this difference in prices.

The Atlas measure makes sense for the World Bank lending thresholds, which is concerned not just welfare, but also creditworthiness and ability to service debt. Given that the Bank lends in hard currency over long periods of time, exchange rate movements can have a big impact on ability to repay.

By contrast, the majority of bilateral aid from DAC members is in the form of grants, and ODA is explicitly about the welfare of people in developing countries. And in that context, a measure of income that takes into account purchasing power is much more relevant (it is notable that in calculating poverty estimates, the World Bank uses the PPP measure).

PPP-adjusted income correlates better with everything we care about

Development is about fewer people dying of curable diseases, children getting educated, people having access to modern amenities such as electricity and infrastructure. GNI per capita is a useful measure because it correlates well with the above outcomes. But it is notable that those correlations are much higher if GNI per capita is adjusted for purchasing power.

Table 1 presents correlations between the two different measures of GNI per capita and other metrics that we care about intrinsically. In every case, the correlation is stronger for the PPP measure than the Atlas measure. In choosing a measure to define a threshold under which countries are ‘developing’, the superiority of the PPP measure is obvious.

Table 1. Pearson’s correlation between GNI per capita measures and welfare indicators, 2010-2024

Sources: World Bank, UN
Notes: Table shows Pearson’s correlation coefficient between the variables for each country-year observation with data available for both variables between 2019 and 2024. Being as inclusive as possible for each variable means that observations differ between rows (for example, if maternal mortality is unavailable for a country in 2019, but child mortality is available, it will be included in one row but not the other). All countries (including developed) are included for which there is data. *Data is downloaded from HDI and just refers to 2023.

Is using the PPP measure plausible?

One justification for sticking with the Atlas measure may be that it is simpler. It is incredibly difficult to accurately compare the cost of living across countries in which typical consumption bundles differ substantially. The International Comparison Programme (ICP) that produces the purchasing power parity adjustments need to make substantial assumptions in order to produce their datasets. And the PPP adjustments are only fully updated every few years, relying on extrapolations in intermediate years.

Furthermore, the World Bank defines a convenient (if arbitrary) threshold for ODA-eligibility. There is a logic to arguing that a country is no longer ‘developing’ if it has reached the highest possible income group. The World Bank do not define such a threshold for the PPP measure, meaning that the DAC would have to set a threshold themselves, which could be contentious.

Neither argument is strong enough to justify sticking with the Atlas measure. It might be true that measuring PPP is hard, but the correlations in table 1 suggest that it is capturing something real, those challenges notwithstanding. And even if there is some discomfort with relying on extrapolations between ICP rounds, the cadence of those rounds is roughly every four years. Given that countries need to exceed the threshold for three years before graduating currently, this delay will not be a significant factor in decision-making in most cases. As for the threshold, it is clearly already contentious, as evidenced both by the decision to review eligibility criteria, the controversy around some of the countries that are still ODA-eligible (such as China) and the OECD’s own past papers exploring arguments for changing the threshold.

Where should the threshold be set for a PPP measure?

The DAC would have to set their own eligibility threshold if they shifted to a PPP approach, given that the World Bank only sets them for the Atlas method. What would the options be?

One option would be to set the threshold at the same percentile of the distribution of GNI per capita as the Atlas threshold: the high-income threshold is at roughly the 66^th percentile across countries, so the PPP threshold could be set at the 66^th percentile of the PPP data. That would give a threshold of $32,300. It would lead to five countries becoming eligible who are not currently—Antigua and Barbuda, Barbados, Costa Rica and Seychelles—and five graduating—Kazakhstan, Malaysia, Mauritius, Montenegro and Türkiye.

The fact that four of the five countries to fall back into ODA-eligibility are small island developing states (SIDs) is significant: they are likely to have higher costs of living because they do not benefit from economies of scale, and are more reliant on imports from afar.

But the $32,300 threshold leaves may countries ODA-eligible that are wealthy by historical standards. We argue in the note that the threshold should not be higher than $25,000. This was roughly the US’s GNI per capita in 1960 when the DAC was formed (adjusted for inflation). The UK surpassed that income level just before 1980, Spain and Portugal in the late 1980s, Korea in the 1990s and Poland in the mid-2000s. These countries were not considered developing at those dates.

A $25,000 threshold would exclude several countries that few would argue need bilateral ODA today, such as China, Mexico and Malaysia. But Barbados and Nauru would still be eligible.

Setting the threshold at the level of the richest DAC member at the point the DAC was formed is logical. Few would argue that US citizens of the roaring 1960s would be fitting recipients of foreign aid. And since then, living standards have also improved in ways not captured by GNI per capital: at any GNI per capita level, child or maternal mortality are likely to be lower now than they were in the 1960s. By many measures, a country with income of $25,000 today is better off than the US was in the 1960s.

The eligibility threshold is too permissive

Any line that the OECD picks will be arbitrary, because there is no clear, objective dividing line between “developed” and “developing.” But the status quo is also arbitrary, and so that is not a reason to stick with it.

As aid provision declines across bilateral providers, the DAC should think carefully about whether grant aid to China or Mexico, or other countries richer than the US was in the 1960s, is a good use of ODA resources.