Historic Donor Agreement: More Money Where It Is Needed Most

In Barisal Sadar, Bangladesh, Ayub Ali serves his community by producing quality fingerlings (young fish). As part of the USAID-Aquaculture project, he learns about modern method of aquaculture through training. / World Fish, A. W. M. Anisuzzaman

This year, 2015, will be seminal in setting not only bold new goals – like ending extreme poverty – but also in making bold reforms that change the way things get done.

As donors, one of our primary concerns is to use our taxpayers dollars as effectively and efficiently as possible in order to leverage significant change. That means attracting other forms of capital (public, private, social, multilateral – you name it) and directing those resources to where they can best have the sort of transformative development impact that we all want.

At December’s High-Level Meeting of the Organization for Economic Cooperation and Development’s Development Assistance Committee (OECD-DAC) in Paris, we advocated for and achieved important policy and structural changes to how donors allocate resources and report those numbers. These changes will impact the future of Official Development Assistance (ODA) — the international definition of foreign aid that is used to track donors’ foreign aid commitments.

First, 29 DAC members agreed to “allocate more of total ODA to countries most in need,” including low-income countries, the least-developed countries (LDCs), small island developing states, landlocked developing countries, and fragile and conflict-affected states.

We believe this policy is critical. The countries that can least afford to self-finance are the same ones lagging behind on the eradication of extreme poverty and the basic human development needs that form the foundation of the Millennium Development Goals.

Second, we created a fairer, more transparent, and better targeted system for development-focused lending. Three integral changes include:

• Creating a fairer accounting system. Previously, donors got equal credit for grants and qualifying loans¹ – even though the loans needed to be repaid.  Under the new rules, only the grants and a portion of loans (known as the “Grant Element”) will count as Official Development Assistance (ODA). The United States only provides assistance in the form of grants.
• Directing money to the most needy. The formula for deciding what counts as ODA now rewards donors who lend money to least-developed countries – i.e., those who can least afford commercial terms or self-financing.
• Increasing transparency. During the meeting, members agreed to publish all ODA statistics more regularly, with frequent reviews and updates.

A worker at Muya Ethiopia weaves fabric that will become clothing and accessories sold on store shelves thousands of miles away. From 2005 to 2014, with support from USAID, Muya expanded from seven to 400 full-time employees and now sells 90 percent of its products overseas. / IESC, Steve Dorst

In order to unlock more development funding for the least-developed countries, the changes also endorse focusing on work with the private sector in support of the New Model of Development. These changes will also bring transparency to development transactions and encourage donors to send money to the neediest countries. They could not come at a more perfect time.

This year, the Millennium Development Goals will expire and the world will come together to decide on a new set of post-2015 sustainable development goals. These new benchmarks are likely to redefine USAID’s target of ending extreme poverty–a mission that will rely heavily on effective financial policies. Thanks to the lending reforms and support from other donor countries, USAID is in a strong position to move forward in tackling the development of countries most in need.

We can provide support to boost the economies of low-income countries to minimize poverty, but this renewed emphasis on countries most in need, including LDCs, small island developing states, landlocked developing countries, and fragile and conflict-affected states, stands to make an even greater difference.

This summer, donor countries and recipients will have a chance to further refine their approach to these issues at the third International Conference on Financing for Development in Addis Ababa, Ethiopia in order to achieve the next set of global development goals.

Currently, we are poised to bring significant changes to global development. With this early success in agreeing to changes in the recording of ODA loans and a renewed focus on countries most in need, large steps have been taken to help us realize an end to extreme poverty.

¹To be counted, loans had to be concessional in character and convey a grant element of at least 25 percent (calculated at a rate of discount of 10 per cent), a formula that has grown very out of date. Click here for more information.