The OECD watch list: combining needs- and performance-based approaches

The OECD recently made important steps forward in bringing some clarity to the debate on under-aided countries. The methodology it proposes works towards establishing a common understanding of countries that might be considered under-aided (OECD 2011c; 2013). First presented in a paper by Utz (2010), this methodology compares actual aid allocations to low- income countries against four different aid-allocation approaches. Two of the approaches are needs-based (the equal aid per capita and the UNDP TRAC1 allocation formulas); two are performance-based (the Collier- Dollar (2001) poverty-efficient allocation and IDA’s performance-based allocation)¹⁸; two are purely theoretical (the equal aid per capita and the Collier-Dollar poverty-efficient allocation formulas); two are currently used in practice (the UNDP TRAC1 formula and IDA’s performance-based allo-cation). Actual allocations to low-income countries are assessed against all four of these allocation models. For each allocation model, a country is identified as under-aided if actual aid receipts are below the benchmark allo-cation by at least one percentage point of GDP.

The models used for compiling the list do not represent all the possible approaches to aid allocation. For example, approaches that suggest allo-cating larger shares of aid to countries affected by structural vulnerability or that find themselves in a post-conflict phase are not included, whereas

18 These performance-based allocation approaches are not “pure”, since besides the recipi-ents’ institutional quality, they also take needs into account, measured as GDP per capita and population size.

the evidence suggests that aid is particularly effective in countries with these characteristics (Collier / Hoeffler 2002, 8–9; Elbadawi / Kaltani / Schmidt-Hebbel 2007; Demukaj 2011; Guillaumont 2008, 16; Collier / Dehn 2001, 10; Gunning 2008).

By combining needs-based and performance-based approaches, the OECD started regularly compiling a “watch list” of potentially under-aided countries. Countries that can be considered under-under-aided according to both needs-based and performance-based approaches to aid allocation are highlighted as requiring special attention by the international com-munity, but some attention is also recommended for countries identified as under-aided according to two allocation models derived from the same approach.

The latest list of potentially under-aided countries (OECD 2013a) was compiled on the basis of Country Programmable Aid (CPA)¹⁹ flows, plus humanitarian assistance and food aid for 2011. The following countries were identified as under-aided:

19 The OECD defines CPA as a subset of ODA reflecting the volume of aid that consti-tutes a cross-border flow and is subject to multi-year planning at the country or regional level. CPA is calculated by excluding from ODA the following categories of resource flows: unpredictable aid flows (such as humanitarian aid and debt relief); aid that entails no cross-border flows (such as administrative costs; scholarships for foreign students in donor countries; initiatives to promote development awareness; research; and costs related to refugees in donor countries); aid that is not included in inter-governmental co-operation agreements (such as food aid; aid from local governments; core funding to NGOs; equity investments; aid that flows through secondary agencies; and aid that is not allocated to a specific country or region) (OECD 2011c, 18). Using CPA instead of ODA volumes to identify “under-aided” countries means that the phenomenon is discussed more from the recipient than from the donor perspective.

Table 1: List of potentially under-aided countries

Tanzania X X 2 315 2,406

Uganda X X 2 733 1,533 X

11 countries

*** 3 4 4 0 1 - 6

Total:

31 countries 18 17 16 9 - - 22

* Countries in bold are considered under-aided according to both performance- and needs-based approaches.

** The funding gap is an average of the four different funding gaps (actual aid received minus the aid volume a country should receive according to each different allocation formula).

*** These countries are: Benin, Burundi, Djibouti, Kenya, Laos, Myanmar, Sierra Leone, Somalia, Tajikistan, Yemen, and Zambia (underlined countries are also fragile states).

Source: Author’s own table based on augmented OECD (2013a, 10)

Countries are ranked according to the number of criteria under which they can be considered under-aided, not according to the size of their estimated funding gaps.²⁰ Under-aided countries figuring in the list can be divided into three main groups: those identified as under-aided by both performance- and needs-based approaches to aid allocation, those that can be considered to be receiving insufficient aid according to only needs-based approaches and those defined as under-aided only according to performance-based models.

Important differences between these groups of countries are discussed in the last part of this chapter. For the moment, however, it is more relevant to con-centrate on the common characteristics among countries in the watch list.

Indeed, one of the advantages of the OECD methodology is that, by grouping together countries considered to be receiving disproportionately small shares of aid, some common traits emerge: first, 22 out of the 31 countries in the watch list are fragile states. Of the eight countries flagged as requiring special attention from the international community, seven are fragile states and all are LDCs. Secondly, almost all potentially under-aided countries are located in SSA, which might be surprising given that SSA is the region receiving the largest share of ODA (35 per cent) (Development Initiatives 2013, 57).

Awareness of the watch list still seems to be limited. In general, the issue of under-aided countries does not appear to be a particularly pressing concern for donors, and those who do show interest in the topic generally understand under-aided countries to be mostly fragile states that receive low absolute volumes of aid, such as the CAR or Chad, rather than as countries that are thought to be able to use larger volumes of aid efficiently. The presence in the OECD watch list of recipients such as Bangladesh, which count many active donors and receive large absolute volumes of aid, is perceived by many as going too far from the original concept of an “aid orphan”.

However, by showing that it is possible to identify recipients that can be considered under-aided from different perspectives, the OECD watch list provides a helpful basis for discussing the phenomenon of under-aided countries. The four models used by the OECD to compile the list do not reflect all the possible approaches to aid allocation, but they represent the main ideas underlying needs- and performance-based perspectives.

There-20 Even among the countries identified as “requiring special attention”, the order of coun-tries changes significantly if they are ranked according to the average funding gap per capita. For the first nine countries, the order would be: 1. Guinea; 2. Madagascar; 3. Togo;

4. Bangladesh; 5. Niger; 6. Gambia; 7. Malawi; 8. Nepal; 9. Burkina Faso.

fore, this chapter bases the analysis of under-aided countries on the list of