Official international assistance plays a key role in financing for sustainable development

The Addis Ababa Action Agenda on Financing for Development -—
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—- clearly identifies ODAOfficial Development Assistance (ODA) are resource flows to countries and territories which are: (a) undertaken by the official sector; (b) with promotion of economic development and welfare as the main objective; (c) at concessional financial terms (implying a minimum grant element depending on the recipient country and the type of loan). In addition to financial flows, technical co-operation is also included -—
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—-. and OOFsOther official flows (OOF) are transactions by the official sector with countries and territories which do not meet the conditions for eligibility as ODA, either because they are not primarily aimed at development or because they do not meet the minimum grant element requirement -—
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—-. as a relevant element in the financing of sustainable development programmes. As shown in Robust and predictable financing sources, these flows are relatively small when compared to domestic public resources or private flowsPrivate flows consist of flows at market terms financed out of private sector resources and private grants. They include FDI, private export credits, securities of multilateral agencies and bilateral portfolio investment. Private flows other than FDI are restricted to credits with a maturity of greater than one year -—
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—-.. However, they still play an essential role since they frequently function as “seed funds” or catalysers of additional resource mobilization in sectors or projects where other funding options are limited, or where investors are reluctant to participate. Furthermore, for some countries in vulnerable situations, official funds are frequently the only source of financing available.

For this reason, the importance of official flows is often highlighted in the 2030 Agenda. In fact, they are referred to in 11 targets, including sector-specific official support to agriculture¹, health², water and sanitation³, clean energy⁴, biodiversity⁵ and others.

Gaps in official support affect financing for development

It is important to highlight the commitment of developed economies under SDGSustainable Development Goal target 17.2 to dedicate 0.7 per cent of their GNIGross national income to ODA to developing countries, including 0.15 to 0.20 per cent exclusively to LDCsLeast developed country. As shown in figure 1, actual ODA funds made available for developing countries have yet to reach half of this commitment in any year, while those made available to LDCs fare relatively better, although reaching their target range only once since 2002. The increasing cumulative shortfall could compromise the financing of the 2030 Agenda.

While there exists much debate around the efficacy of ODA in general, studies have found positive relationships with ODA in sectors such as agricultural productivity -—
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—-, water infrastructure -—
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—- and infrastructure construction projects -—
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—-. These and other studies note, however, shortcomings in how ODA is deployed and the difficulties in assessing its impacts.

Reflecting such assessments of the efficacy of official support, as well as changing priorities by both donors and recipients, the sectoral allocation of official support has changed substantially in the last 15 years. Figure 2 shows a shift in official support away from some social infrastructure sectors like education and civil society and into economic infrastructure related to energy, transport, banking and financial services and other areas. In terms of productive sectors, industry has been increasingly prioritised, while support to agriculture has declined.

Official flows play an important role in supporting the response to the COVID-19Infectious disease caused by the strain of coronavirus SARS-CoV-2 discovered in December 2019. Coronaviruses are a large family of viruses which may cause illness in animals or humans. In humans, several coronaviruses are known to cause respiratory infections ranging from the common cold to more severe diseases such as Middle East Respiratory Syndrome (MERS) and Severe Acute Respiratory Syndrome (SARS). The most recently discovered coronavirus causes coronavirus disease COVID-19 -—
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—-. pandemicCommonly described by the WHO as ‘the worldwide spread of a new disease’, no strict definition is provided. In 2009, they set out the basic requirements for a pandemic: • New virus emerges in humans
• Minimal or no population immunity
• Causes serious illness; high morbidity/mortality
• Spreads easily from person to person
• Global outbreak of disease.
The US Centre for Disease Control uses a similar approach, but with a reduced set of criteria. It is very difficult to gauge whether the spread of a disease should be termed an outbreak, epidemic or pandemic. In other words, when to declare a pandemic isn’t a black and white decision -—
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—-. and its fallout on sustainable development, as the OECDOrganization for Economic Cooperation and Development -—
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—- underline. This applies in particular to LDCs and other countries with financing constraints. OECD also stresses the importance of safeguarding ODA budgets and ensuring the continuation of official support during this health and economic crisis.

This chapter covers concessional resources to two areas: economic infrastructure and agriculture. Although the role of this source of financing is essential everywhere, in these two areas they are directly linked with productive growth and its contribution to sustainable development.

Official flows remain supportive of infrastructure projects

Investment in modern and efficient economic infrastructure (transport, information and communication technologies, water supply, electrical power) is essential to achieving sustainable development objectives. Long-term strategies for economic growth, poverty reduction and environmental sustainability all have infrastructure development as a common element. A 2015 report -—
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—- estimates that the global economy needs to invest between US$5 and 6 trillion (in constant 2010 prices) in economic infrastructure every year over the period from 2015 to 2030. Additional funds equivalent to US$600 to 800 billion per year will be necessary to make this investment sustainable. Developing countries will account for about two thirds of the investments required to accommodate higher growth and structural change. These figures do not take into account soft infrastructureIdeas and conceptual frameworks that give shape and direction to what is eventually physically manifest -—
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—-., which also plays an important role in economic development, including, for example, national data infrastructure -—
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—- estimate the sectoral breakdown of global infrastructure needs with a 2030 horizon as 38 per cent for transport, 30 per cent for power, 17 per cent for telecommunications, and 15 per cent for water. Given these needs and the current and expected investment trends, the largest infrastructure investment gaps will be concentrated in the generation and distribution of electricity, followed by transport infrastructure.⁶ In addition, significant additional resources are needed across all sectors for climate change mitigation and adaptation -—
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Even if most of the funds for infrastructure investment will come from the public sector and private actors, including through public-private partnerships and other forms of blended financeBlended finance combines concessional financing—loans that are extended on more generous terms than market loans— and commercial funding., ODA will also play a significant role, particularly for LDCs and countries in vulnerable situations. For this reason, SDG indicator 9.a.1 monitors “total official international support (official development assistanceOfficial Development Assistance (ODA) are resource flows to countries and territories which are: (a) undertaken by the official sector; (b) with promotion of economic development and welfare as the main objective; (c) at concessional financial terms (implying a minimum grant element depending on the recipient country and the type of loan). In addition to financial flows, technical co-operation is also included -—
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—-. plus other official flowsOther official flows (OOF) are transactions by the official sector with countries and territories which do not meet the conditions for eligibility as ODA, either because they are not primarily aimed at development or because they do not meet the minimum grant element requirement -—
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—-.) to infrastructure”.⁷

Figure 3 shows the evolution of total official flows and those directed to economic infrastructure. While the global financial crisis of 2007/2008 had a profound impact on overall concessional financing flows, those targeting infrastructure projects were sustained. This has led to an increase in the average annual share of infrastructure in total flows, from 14 per cent before the crisis (2002-2008) to 23 per cent after (2009-2019). From 2016, after a marked increase in 2015, official support flows increased only modestly each year. ODA and OOFs in support of infrastructure reached US$65 billion in 2019, their highest level ever, accounting for 24 per cent of total flows.

Of this amount, the majority was assigned to energy and transportation projects (see figure 4). Communications received a relatively low share, but this can be attributed to the large participation of the private sector as a source of financing in this area.

An important source of funding for infrastructure in LDCs, LLDCs and SIDS

In 2019, just 13 countries received half of all official international support to infrastructure. The largest recipients were India (12.8 per cent of the total), Egypt (5.4 per cent), Bangladesh (4.6 per cent), China (4.3 per cent) and Indonesia (3.5 per cent). However, these are also among the largest developing economies and official support represents only a small share of their total sources of domestic and external financing.

For other countries, official international support has a higher weight relative to the size of their economies. In some cases, because of special needs in terms of economic infrastructure or lack of access to other sources of development financing, official support is fundamental. Figure 5 shows the international support to infrastructure relative to GDPGross domestic product by groups of economies. LDCs, LLDCsLandlocked developing country and SIDSsmall island developing States receive a higher share of funds from ODA compared to other developing or transition economies.

The need for infrastructure development, particularly transport, is of central importance for economic development in LLDCs due to their isolation from international markets. However, there is an important investment gap in this area -—
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—-. This points to the importance of all sources of funding for infrastructure projects. LLDCs were recipients of US$8.3 billion of development assistance to economic infrastructure in 2019, equivalent to one per cent of GDP. This continues an increasing trend in terms of volumes and share of GDP since 2015.

Due to their structural characteristics, such as small population size, geographic remoteness, economic reliance on trade and tourism, as well as high vulnerability to natural disasters and climate change, SIDS have significant infrastructure requirements, both in terms of building new facilities and maintaining and adapting existing ones -—
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—-. As seen in figure 5, the importance of official international support to economic infrastructure in these economies has grown in recent years, increasing from about 0.2 per cent of GDP in 2006 to 0.9 per cent in 2019.

Despite the growing infrastructure challenges, long-term investment in infrastructure for sustainable development in developing countries remains insufficient. Stronger consideration should be given to the positive impact of infrastructure, as developing countries will require large-scale investment to build high quality, resilient and inclusive infrastructure -—
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—-. Official international support will remain a key component in the financing of the infrastructure investments required to achieve the SDGsSustainable Development Goal.

Agriculture no longer a priority for ODA, even when challenges keep mounting

The agricultural sector employs a considerable share of the labour force and plays an essential role for food security and rural development. Agricultural products are traded internationally and constitute an important source of revenue for many countries. However, even if agriculture remains a crucial economic sector in many developing economies, agricultural productivity remained stagnant during the 1960s to 1980s and has only increased gradually since then. This could be attributed to several factors, including unsupportive policies and insufficient resources to develop this sector -—
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In addition to the urgent need for increases in productivity, agriculture must also embrace sustainable practices and adapt to climate change. On one hand, the sector contributes to greenhouse gas emissions, natural habitat loss and unsustainable use of water resources, among others (see Make or Break for Green Economy), and reducing its environmental impact would require important investments. On the other hand, agriculture is strongly affected by climate change and extreme climatological or meteorological events. Significant resources are needed for adaptation and mitigation. In many countries, official flows in the form of ODA and OOFs play a key role in financing agricultural development. In this sense, SDG indicator 2.a.2 measures “total official flows (official development assistance plus other official flows) to the agriculture sector”.⁸

During the 1970s and 1980s, agriculture was a major recipient of international assistance, accounting for 15 to 20 per cent of total ODA -—
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—-. However, the relative importance of agriculture as a beneficiary of ODA has declined since then. Several factors are behind this shift, including changing donor priorities, pressure from environmental groups and insufficient evidence of its contribution to increasing productivity -—
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—-.⁹

As shown in figure 6, while ODA to agriculture has increased in absolute terms every year since 2012, its share of total concessional resources has remained stable, at a low level. Indeed, since 2005 the four-per-cent mark has not been exceeded. Flows in 2019 were higher than in 2018, reaching US$9.9 billion, equivalent to 3.6 per cent of total official international support.

Even if ODA to agriculture has remained stagnant relative to other sectors (see figure 2), it still represents an important source of funding for many developing economies. Map 1 shows the weight of these flows relative to the value added of the primary sector.¹⁰ It can be seen that several economies in Central and West Africa, Central Asia and the Caucasus still rely on ODA as an important source of financing for the development of their agricultural sector.

The agricultural sector is facing mounting environmental challenges, including changing climatological patterns, water shortages, treatment-resistant plagues and increased incidence of natural disasters. These factors, combined with an increasing food demand caused by population growth and changing consumption preferences, could translate into important threats for food security in many parts of the world. The COVID-19 pandemic may have exacerbated these risks by restricting the mobility of people and products and disrupting trade and global value chains. This could lead to lower yields, scarcity of specific food commodities and food price increases -—
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—-. Given the importance of agriculture for people’s life and livelihoods, this productive sector could well regain its priority in official support programs for sustainable development.

Are official international flows to the agricultural sector effective? A recent study on the effectiveness of agricultural ODA in Sub-Saharan Africa found that development assistance is positively related to agricultural productivity, in general terms. However, the specific effects vary according to the destination of the funds and the characteristics of the recipient economies. For example, it has been argued that ODA creates a substitution effect towards agricultural production activities related to the industrial or other export sectors, and away from food crop production. Furthermore, institutional factors such as government effectiveness, property rights and business freedom have been found to strengthen the positive impact of international support on agricultural productivity -—
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—-. For policymakers in both donor and recipient economies, it is important to consider the appropriate mix of funds and ensure supporting institutional reform in order to maximize the positive impact of ODA in agriculture.

Notes

1. SDG indicator 2.a.2: Total official flows (official development assistance plus other official flows) to the agriculture sector.
2. SDG indicator 3.b.2: Total net official development assistance to medical research and basic health sectors.
3. SDG indicator 6.a.1: Amount of water- and sanitation-related official development assistance that is part of a government-coordinated spending plan.
4. SDG indicator 7.a.1: International financial flows to developing countries in support of clean energy research and developmentResearch and development (R&D) comprise creative and systematic work undertaken in order to increase the stock of knowledge – including knowledge of humankind, culture and society – and to devise new applications of available knowledge -—
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   —-. and renewable energy production, including in hybrid systems.
5. SDG indicator 15.a.1: Official development assistance and public expenditure on conservation and sustainable use of biodiversity and ecosystems.
6. For more information on investment needs specific to transport infrastructure, see chapter Mitigating risks to build transport infrastructure.
7. Note that the definition of infrastructure for the purpose of this indicator could vary from other classifications. According to the DAC classification, official flows to infrastructure can be divided into social and economic sectors. The former includes education, health, population policies, water supply and sanitation, and government and civil society; the latter comprises transportation and storage, communications, energy, banking and financial services, and business services -—
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   —-. As specified in its official metadata, funding from all official international donors directed to infrastructure in economic sectors in developing countries is considered for SDG indicator 9.a.1 -—
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8. According to the official metadata, this indicator measures funding from all official international donors to the agricultural sector in developing countries -—
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   —-. This corresponds to sector code 311 of the DAC classification, including sub-sectors such as agricultural development, agricultural policy, agricultural water and land resources, food crop production, livestock, industrial/exports crops, rural co-operatives, agricultural inputs, and agrarian reforms, among others -—
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9. In order to reflect current practices in terms of ODA to the primary sector, a broader definition could also include other relevant sectors, such as rural livelihoods, rural development and food security, and take into account multi-sector ODA-financed projects -—
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   —-. However, even with this definition, ODA directed to agricultural projects still shows a decline in relative terms, although at a slower rate.
10. The primary sector is broader than agriculture (it also includes hunting, forestry and fishing). It is used in map 1 as a denominator since data on value added for agriculture is not available for all countries.

References

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