Don’t Change ODA Graduation Rules To Score Assistance to Rich Small States

The OECD’s Development Assistance Committee (DAC) chair Carsten Stauer suggested on Monday that any changes to ODA graduation rules would be limited to highly aid dependent countries nearing the high-income cutoff:

“At present, countries which reach high-income country (HIC) status (14,375 USD in GNI/cap) will leave the DAC list of ODA recipients. At that point, most of these countries will only receive very limited ODA and graduation will be manageable. Some countries. . . may still depend significantly on ODA, when they approach HIC status. These countries often face serious vulnerabilities, which call for a careful approach to graduation.”

We were relieved to hear that this was the justification for examining graduation criteria because the list of countries facing this issue is short, and the involved economies are small.

In 2023, the income cutoff for countries to be eligible to receive ODA was set at $14,005 GNI per capita (that is the last year with considerable aid and World Bank Atlas GNI data in the World Development Indicators). The table below lists all economies with GNI per capita above $10,000 where average net ODA received was equivalent to more than 2 percent of GNI over the five years to 2023.

Source: World Development Indicators. The list may miss some ODA-eligible microstates and territories for which the World Bank doesn’t have data which the DAC has agreed are upper middle income, potentially including St Helena (population: 4,439) Wallis and Futuna (11,151) and Niue (1,689). It also excludes high income but still eligible Montserrat (4,399). 

It is worth noting that while aid dependency is not a term with an official definition, 10 percent of GNI is one cutoff used in the literature, which would leave the DAC concerned with Palau and Naoero alone. But the more relevant metric is likely bilateral aid dependency (excluding multilateral support that is not bound or influenced by DAC definitions and would likely continue as is regardless of DAC ODA graduation decisions). Even using the much lower threshold of 2 percent of GNI for bilateral aid, (once again) only Palau and Naoero meet this “dependence” standard.

And even the seven economies listed in the table (who receive total ODA equivalent to two percent of GNI) together account for just 0.05 percent of the combined GNI of all low- and middle-income economies and a fraction of a percentage of total ODA flows. It would be an odd decision to weaken decades of practice on global graduation rules and risk further diluting the DAC brand purely to accommodate a desire to continue to label financing to these countries as ODA.

To be clear, examining non GNI-per capita measures does not necessarily imply diluting the DAC standard. But the asymmetry—only examining countries with vulnerabilities not captured by GNI per capita and ignoring strengths—makes it appear as if this is more about loosening standards to preserve ODA-eligibility of particular countries.

Again, even under the current rules gradation is not automatic, and must be agreed by members. And there is nothing that prevents any DAC donor from providing assistance to a country that has graduated from the ODA threshold. Given all of that, it is surely possible to leave the current graduation rules as they are, but clarify and codify DAC discretion on graduation dates.

The committee could agree that otherwise ODA eligible financing to highly aid dependent countries that pass the income threshold will remain ODA eligible on a sliding percentage scale over a period of years. Negotiation within the group could involve the definition of highly aid dependent and the number of years over which that sliding scale would run.

We would suggest as an opening gambit of defining aid dependence as net bilateral flows equal to a minimum of 10 percent of GNI alongside a 10-year transition.