Official Development Assistance (ODA) delivers economic aid to developing countries worldwide, amounting to over $204 billion in 2022. These funds are delivered in several forms, including concessional loans and debt relief, and hold significant importance in global poverty alleviation, aid during national crises, and, more recently, sustainable development.
Official Development Assistance was designed to create a more balanced and accountable system of global poverty assistance in 1969. Its basic funding structure can be seen below, where there are three classifications the Development Assistance Committee (DAC) places developing countries into. These three classifications are determined by a country’s gross national income (GNI) per capita, a measure of the incomes of residents of an economy in a given period. The DAC recommends that the amount of ODA a country receives depends on its development classification. When a nation increases its GNI per capita enough to be reclassified, it is known as graduation.
A clear example of a country progressing through the development classifications can be seen in Albania in the last thirty years (see below). Albania, a country on Southeastern Europe’s Balkan Peninsula, has grown relatively steadily, graduating from two classifications in 12 years. It first graduated from the Low Income Country classification in 2000 due to its steady increase in GNI per capita, resulting in a 34% decrease in its ODA following graduation. In 2012, it graduated from the Lower Middle Income Country classification, resulting in a 23% decrease in its ODA in the year following graduation.
The structure of ODA closely aligns with US welfare programs, which have been found to cause “benefits cliffs,” or the sudden and often unexpected decrease in benefits that can occur with a slight increase in earnings. This subsequently causes a disincentive to progress, dependency cycles, development deceleration, and reduced economic mobility. In the context of ODA, a benefits cliff is a sudden decrease in ODA that can occur with a slight increase in GNI per capita.
Drawing upon studies from welfare policy scholars, I used the concept of a benefits cliff to test if the structure of ODA was causing any undesirable outcomes in economic development. Specifically, I asked, “Is the structure of Official Development Assistance associated with a cliff effect?” To do this, I identified when graduations took place since 1997 using annually published reports by the Development Assistance Committee. In total, there were 92 graduations from 1997 to 2021. Graduations were then coded into a dataset provided by the WorldBank’s DataBank. To test for the existence of a benefits cliff, I examined how the growth rate in economic development indicators changed before and after a country’s graduation, giving us an idea of how graduation affects economic development across all nations.
This research unveiled a concerning and statistically significant trend: graduating from Official Development Assistance (ODA) classifications is associated with a benefits cliff, or a significant decline in economic growth rates across several key indicators. Notably, this phenomenon occurred regardless of the specific ODA classification achieved by the graduating country. The results revealed post-graduation declines in:
- Gross Domestic Product per capita (-0.83%)
- Gross National Income per capita (-0.56%)
- Final Consumption Expenditure (-1.68%)
- Household Final Consumption Expenditure (-1.61%)
- Industry Value Added (-0.52%)
The findings extend beyond numbers, carrying profound implications for human well-being and livelihoods. The reduced aid post-graduation impacts basic needs and quality of life, risking cutbacks in essential services like healthcare and education. Economic downturns associated with the benefits cliff deepen inequalities, exacerbate poverty, and limit job opportunities. Notably, the most significant decreases are in Final Consumption Expenditure (FCE) and Household Final Consumption Expenditure, which measure how much money a country spends. This measurement represents a direct link between the amount of ODA a country receives and how much a country spends yearly.
Recognizing the human side of these economic shifts is crucial. Every percentage point in FCE growth rates represents real people’s aspirations, challenges, and resilience. This research advocates for policies prioritizing economic indicators and the well-being of individuals and communities. The findings propose potential strategies for mitigating benefits cliffs, such as gradually reducing funds or innovative finance mechanisms. Researchers should aim to guide policymakers in crafting effective interventions for sustainable economic development as countries transition from aid dependence.
Jakob Miller is a senior majoring in Policy Analysis at the Paul H. O’Neill School of Public & Environmental Affairs at Indiana University.
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