A note on current problems with ODA as a statistical measure
By Simon Scott In 1969, the OECD’s Development Assistance Committee (DAC) created official development assistance (ODA) as a measure of foreign aid effort. To qualify as ODA, transactions had to be “concessional in character,” i.e., to give something of value away. In 1970 the U.N. set a target for ODA of 0.7 per cent of donors’ national income.
The DAC has recently changed ODA reporting rules to include transactions that require no financial sacrifice. This deprives ODA of its meaning as a gauge of aid effort, and vitiates the point of setting the U.N. ODA target.
The changes have also rendered ODA incoherent as a statistical measure, making it a faulty tool for monitoring and analysis. ODA now fails to meet basic statistical quality standards.
ODA was never perfect, and for years critics complained about the inclusion of items – such as the costs of students and refugees in donor countries – which transferred no resources to developing countries. But since 2014, DAC decisions mean that ODA is not just counting debatable items, but inventing numbers that do not exist in the real world.
One example is loans to governments and other public sector borrowers. These are now measured not in observed flows of capital but in claimed “grant equivalents.” The grant equivalent is a model estimate of the amount being given away in a loan. It represents the loan’s value, minus the present value of its expected repayments.
Grant equivalents are only credible if donors work out the present value of repayments using current market interest rates. Yet in 2014 the DAC decided instead to use fixed discount rates of 6, 7, or 9 per cent (comprising a “base rate” of 5 per cent, plus a “risk margin” of 1, 2, or 4 per cent, depending on the borrowing country’s per capita …read more