Development’s Great Depression
If your paycheck fluctuated unpredictably from year to year, you’d probably have a hard time planning for the future. That’s exactly the predicament many countries that receive international aid face. When Bono throws a series of global concerts or a disaster strikes, aid can post a banner year. But when donations dry up due to ...
If your paycheck fluctuated unpredictably from year to year, you'd probably have a hard time planning for the future. That’s exactly the predicament many countries that receive international aid face. When Bono throws a series of global concerts or a disaster strikes, aid can post a banner year. But when donations dry up due to unmet conditions or a U.S. dollar in free fall, the drop in official development assistance is often devastating to poor countries.
If your paycheck fluctuated unpredictably from year to year, you’d probably have a hard time planning for the future. That’s exactly the predicament many countries that receive international aid face. When Bono throws a series of global concerts or a disaster strikes, aid can post a banner year. But when donations dry up due to unmet conditions or a U.S. dollar in free fall, the drop in official development assistance is often devastating to poor countries.
Just how painful are these shocks? A recent study of aid volatility during the past four decades finds that fluctuations in aid have produced income shocks in developing countries just as large as and more frequent than those that developed countries experienced during the two world wars and the Great Depression, when GDP per capita plunged 15 percent or more. In fact, the study found that the unpredictability of aid leads to an overall loss of 15 to 20 percent of the total aid sent, meaning countries would have been just as well off if they had received billions of dollars less each year, as long as the flow of money had remained steady.
Sharp swings in aid often lead to dramatic changes in poor countries’ fiscal spending. In Kenya, official development assistance for the health sector wavered from $91 million in 2000 to $17 million in 2002 to $147 million in 2005 to $111 million in 2006. As a result of these swings, health clinics had to be closed and large numbers of doctors and staff were laid off.
Some rich donors are guiltier than others for the volatility. The United States is the most unpredictable donor, whereas Scandinavian countries are the most consistent. Homi Kharas, a senior fellow at the Brookings Institution and author of the study, explains that U.S. aid is most prone to volatility because the funds are discretionary at the executive level. "If [a U.S. administration] decide[s] they like somebody, they can ramp up aid very quickly, and if they decide they don’t like somebody, they cut it off very rapidly," says Kharas.
One way to reduce volatility is for countries to commit stable amounts of aid over a multiyear time frame — say, $50 million a year for three years. Britain already has multiyear financing in place, and the aid arm of the European Union is considering it. Bringing a little more stability to the world’s most fragile countries seems like the least donors could do.
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