The Unkept Promises of Western Aid

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.

Cooking the books in these ways has allowed wealthy countries in recent years to inflate their claims about how much aid they provide without increasing the amount of money they actually disburse. This year, the effect of this clever accounting is more pronounced than ever. Countries that are traditionally among the top aid donors as a proportion of their GDP, including Norway, Sweden, and the United Kingdom, have cut back aid for poor countries to fund the costs of hosting refugees; but they can still report to the Development Assistance Committee and to voters at home that their overall aid spending has not declined at all.  Samantha Power, the head of USAID, drew attention to this problem in July in a speech at the Center for Strategic and International Studies: “Unfortunately, today, when the needs are greatest, assistance budgets are either stagnating or they are being cut,” she said. “And some countries are rewriting the rules on what counts as development spending, to shield themselves from criticism as they cut funding.”  

Donor countries exaggerate their real commitments through dubious accounting practices.

The G-7 group of countries has similarly stumbled with its recent promise of $600 billion for a Partnership for Global Infrastructure. The partnership is meant to support investment in roads, energy, and other public infrastructure fundamental to long-term growth in low-income countries, seeking to rival China’s Belt and Road Initiative. Unfortunately for this partnership, the pledged funds have yet to materialize. None of the initiative’s scant documentation provides any clues as to how the G-7 countries will raise $600 billion, merely suggesting that much of it will be “mobilized” from private sources. This language echoes the failed ambitions of a decade ago that development finance would go from “billions to trillions” with small amounts of public money somehow leveraging big doses of private finance. The G-7 may tout its munificence, but it has little to show for it.

This is not how the G-7 and OECD countries should want the rest of the world to see their generosity. The reputational damage of overcounting exceeds the benefit of tallying extra billions in aid. (After all, there is no real domestic political cost to falling short in reaching aid targets: only five countries have met the long-standing UN target of providing 0.7 percent of gross national income in aid.) In fact, the major Western donors have a reasonably positive story to tell. Their spending has doubled in real terms since 2000, rising from a historic low of 0.21 percent of gross national income in 2001 to around 0.3 percent for most of the 2010s, amounting to a reported $179 billion in 2021. Exaggerating at the margin only undermines trust in the donors and in the system over which they preside. 

At home, the G-7 countries have rigorous independent statistical agencies, such as the United Kingdom’s Office for National Statistics, that define and measure economic quantities. They should apply the same independence to definitions of their international spending. The OECD’s Development Assistance Committee could establish a new, independent statistical body that would review the current approach to measuring aid. Such an official body could also set up new measures of development-relevant spending on global public goods such as hosting refugees, peacekeeping and sea-lane security, public health research, and action on climate change. The 30 donor countries that are members of the committee could also invite independent experts from recipient countries to join the independent body; a sound starting point would be to include at least five recipient countries and the African Union, given that the greatest needs are in Africa.

U.S. leadership can make a difference in this area. Although the United States ranks poorly among donors in the quantity of development aid as a proportion of its GNI, it is the largest absolute provider of aid. The United States, with Power heading USAID, could persuade fellow Western donors of the importance of measuring aid with statistical integrity.  

SERVICING THE CLIMATE DEBT

Western countries are not just inflating their development-aid commitments; they are also actively falling short in many areas. The unfulfilled promise Western countries made in 2009 to provide at least $100 billion per year in climate finance to developing countries is further undermining their credibility. The failure of donors, especially of the United States and the U.S.-led World Bank, to contribute sufficiently to this effort has become an embarrassment. And as with development aid, a range of third-party assessments have found that the funding claims of donors have widely exaggerated the transfers that have taken place.

Climate change is the biggest risk to the future of humanity. Industrialized nations have and are causing climate change with their emissions, while lower income countries are the most vulnerable and will suffer most of the damages, even though they have barely contributed to the crisis.

Since the Rio Earth summit in 1992, many governments have accepted the need for “climate transfers,” grants and loans from high-income countries to developing ones to help weather the effects of climate change and to hasten green investments in agriculture and energy—investments that are in everybody’s long-term interests. Traditional donor states first formally recognized this obligation in 2009, precipitating the current internationally agreed commitment on climate finance to ensure at least $100 billion of public and private transfers every year to developing countries. The $100 billion is meant to include both investments in efficient, long-term green technologies (that would curb greenhouse gas emissions, a policy emphasis known as “mitigation”) and support to help developing countries minimize and deal with the damage of climate change (otherwise known as “adaptation”). It is also meant to be on top of existing flows of long-term development aid.

Such was the promise that wealthy countries made over a decade ago. But again, these donors have taken the most generous possible approach to measuring their contributions: treating loans as equivalent to grants; almost certainly exaggerating the climate-related content of reported multilateral bank loans; counting commitments rather than actual disbursements; rebranding and redirecting existing aid to climate finance; and with recent estimates suggesting that only about half of the climate finance raised by donor countries went beyond traditional aid in 2018, ignoring the principle that climate finance should be raised in addition to—not instead of—development-aid funding.

The Indian government, commenting on a 2015 OECD report that assessed the progress donor countries had made in raising climate finance, famously argued that the $50 billion reported was in fact closer to $2 billion in cross-border flows. Oxfam currently estimates public climate financing is less than a third of the OECD’s reported number.

Even with generous accounting, the OECD has indicated that total climate finance delivered by 2020 amounted to $83.3 billion, well short of the $100 billion target. Assessments show the United States is by far the biggest laggard in its provision of climate finance, mustering just $2.3 billion toward the $100 billion target in 2019. A recent independent assessment concluded that, using “fair share” calculations based on the size of its economy and its current and cumulative emissions, the United States should be contributing between $40 billion and $47 billion per year.

Developing countries have consistently called for the donor community to address this glaring shortfall, but even that would not be enough. Compared with the scale of the need today and to the role industrialized economies have played in creating the climate crisis, $100 billion per year is much less than the damage that the emissions of OECD countries have caused and will cause mainly for developing countries—estimated at least $15 trillion so far. In the Paris agreement of 2015, wealthy donors committed to a new climate finance target that would rise from a floor of $100 billion per year, starting in 2025. The process to agree on that new target, which begins in earnest at the annual UN climate conference in Egypt this autumn, offers an opportunity to design a commitment that genuinely brings in new, additional finance to deal with climate change, clearly stipulates how donors must measure that finance and aid, and lays out which countries will be committing to those new targets. More fundamentally, it is also an opportunity for wealthy countries to finally accept and explain to their publics that they are accountable and, to use legal language, liable for the mounting “climate debt” owed to low-emission countries, embracing the likelihood of new material financial contributions in the coming decades to help developing countries weather the impacts of climate change.   

The United States, the EU, G-7, and other developed countries face a fight for hearts and minds in the developing countries whose choices will dictate whether the world tilts in favor of authoritarian powers or democratic ones. For lower income countries, development finance is crucial in meeting their basic needs, responding to crises such as the ongoing global food price spike, and dealing with the long-term effects of climate change. If rich countries really believe in transparency, honesty, and fulfilling international obligations, as they claim to, they need to stop their petty accounting practices and make good on their promises.