The definition of foreign aid—Official Development Assistance, or ODA—is in crisis. The statistical aggregate assumed its current form between 1968 and 1972, and has failed to adjust to the times. In particular, France and Germany are in open dispute with other donors over precisely when, in a world of low interest rates, a loan’s terms are soft enough to qualify it as ODA. In December 2012, the member governments of the Development Assistance Committee tasked their secretariat with reviewing the definition of ODA and considering how to develop broader a measure of external development finance. The issues matter because countries benchmark their aid giving against others’ giving, and against targets such as 0.7% of gross national income. The ODA definition thus generates incentives to focus on activities qualifying as ODA, at the expense of those that do not. After reviewing the debate, this paper reaches 14 proposals to change or preserve aspects of the official aid measurement system. The freshest proposals would eliminate incoherency in the system for counting loans as ODA, better aligning the benefit of a loan for the donor (as higher ODA) with the financial benefit for the recipient. In particular: In computing the grant equivalent of loans, drop the fixed discount rate of 10% in favor of Differentiated Discount Rates, whose use virtually all DAC members endorse for measuring subsidy in export credits. Count only the grant equivalent of loans, not their face value, and in so doing, include what are currently non-ODA development loans. End the opacity of data on bilateral non-ODA development loans. Finally, adjust grant equivalents for default risk only for loans that eschew stiff penalties for default and contain automatic risk sharing mechanisms such as reduced payments after economic shocks.
The data set for this paper includes a “what-if” spreadsheet tool to let users see how changes to the definition of ODA would affect donors’ totals. (Requires Excel. After downloading, click “Yes” or “Enable content” at any warning messages.)
Revised June 13th, 2014