How Donor Countries Cook Their Books and Let Down the Developing World
.As the world enters a new era of great-power competition, the United States and other high-income Western countries insist that they offer a more honest, open partnership with developing countries than do their rivals—especially China. They argue that freedom and democracy are the best pathways to development for low-income countries. They decry, for instance, Chinese investments and projects in sub-Saharan Africa as opaque, exploitative, and guilty of stoking corruption. And they trumpet the merits of the aid that many Western countries deliver to poorer ones.
But in truth, wealthy Western donor countries are not always honest about the assistance they provide. They find ways to exaggerate their real commitments through creative and dubious accounting practices meant to expand the definition of development-aid spending. And when it comes to the other category of assistance that wealthy countries owe to developing ones—finance to help the global South mitigate and adapt to climate change—rich countries fall egregiously short of what they have pledged, which is in turn tragically short of what poorer ones need.
These shortcomings on development aid and climate finance undermine the credibility of Western donors and hurt the United States and its allies in their competition with China for influence around the world. Moreover, they disguise meaningful deficits in the resources that developing countries need to make progress and address the climate crisis. To live up to its values and promises—and to not cede the field to China—the West must be honest and serious about its development-aid and climate-finance commitments.
COOKING THE BOOKS
Since 1960, Western donors under the aegis of the Development Assistance Committee of the Organization for Economic Cooperation and Development (OECD) have agreed to a common definition of what counts as development aid. The committee now boasts 30 members, mostly wealthy Western states, but also including Japan and South Korea. In the interest of openness and learning from one another, these donors publish aid data to common standards and sponsor ongoing peer reviews of each other’s contributions. The committee works to support “the economic development and welfare of developing countries” and bases its rules on political consensus.
But new pressures are eroding the integrity of this approach. For one, many European countries have inflated their supposed development-assistance totals by including the funds they have spent domestically on receiving Ukrainian refugees. Under current definitions, that kind of accounting is allowed, but it makes aid budgets look far more generous than they actually are. The costs of hosting Ukrainian refugees will add an estimated $30 billion to apparent aid spending this year. If this were merely overreporting, it would be relatively benign. But several donors have chosen to cut real aid programs to fund refugees, in effect leading to a situation in which low-income countries are footing the bill for the hosting of Ukrainian refugees. As Western donors skimp on development aid, China, which is not a member of the OECD, has become a major provider of loans for public infrastructure in poor countries. In some developing countries, Chinese loans have eclipsed traditional Western aid and given China a political and diplomatic advantage.
Western donors have also agreed to other accounting schemes: counting unused vaccine donations (sometimes recorded above their actual cost); overstating the grant (or aid) element of subsidized loans to low-income countries; and counting the full cost of any debt relief when much of that total had already been reflected in higher borrowing costs paid by high-risk borrowers when the loan was issued. In addition, the donors are currently considering adding to their aid totals the value of any reallocation to developing countries of their recently acquired additional Special Drawing Rights; Special Drawing Rights are a reserve asset issued by the International Monetary Fund from time to time to bolster central banks’ foreign currency reserves. Advanced economies have no need of these additional reserves, and are considering reallocating some of them to developing countries or to special funds that could be set up at the IMF or at the multilateral development banks. Yes, such reallocations make eminent sense and would shore up market confidence in countries suffering pandemic-related debt distress and coping with the high import costs of food and energy because of the war in Ukraine. But counting such reallocations as aid is disingenuous since they carry no real fiscal cost.
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