Why This Matters
In setting out flaws in “discount rates”, “grant equivalent methodology”, “mezzanine finance” etc. one can almost see eyes glazing over and barely stifled yawns slipping out. This just sounds like an argument over bean-counting. Unfortunately, what the DAC is doing has serious real-world ramifications!
Here is a preliminary list of some of the consequences of the DAC’s wilful miscounting of ODA:
Donor country taxpayers are being seriously misled about their governments’ generosity in tackling global poverty, inequality and climate change. They think that official ODA figures truly reflect the “donor effort” of their countries, whereas this is often being massively exaggerated.
The closed-door collusion among donor governments to doctor ODA rules and deceive their taxpayers is deeply undemocratic and undermines faith in official information – when this is already under attack.
Official Development Assistance is being destroyed as a meaningful measure of anything. The United Nations in particular should care about this as they established the 0.7% of GNI international target, not the OECD. But the distortions also impede research on all aspects of aid – its true cost, its regional and sectoral distribution, and its effectiveness, economic impact, value for money, trends over time etc.
The DAC is trashing its brand with the global development community and acting contrary to its own core mission to promote the quantity, quality and effectiveness of its members’ aid. Its flawed accounting methodologies weaken the force of its Recommendations on Terms and Untying and belie its claims to be upholding standards or applying disciplines to development cooperation.
The OECD is putting its reputation for sound statistics at risk by laundering the DAC’s deeply flawed ODA figures through its regular statistical machinery and data portals. The DAC’s self-serving rule making also reinforces the negative stereotype of the OECD as "rich man's club" and is generating more and more bad publicity for the Organisation.
The apparent inability or unwillingness of the OECD’s Secretariat or Council to enforce its own statistical principles and face down a rogue policy committee calls into question the effectiveness of the Organisation’s internal leadership and governance and does not augur well for its global standing or efforts to expand its membership among emerging economies (who, incidentally, will not be able to benefit from the DAC’s overcounting of ODA to the same extent as many traditional OECD members).
Statistical fraud is being perpetrated on developing countries. ODA expenditure is often presented as increasing when in fact it is shrinking. And donors are exploiting the exaggerations in ODA accounting to cut their real aid effort.
The new accounting system disincentivises grants. The massive overcounting of ODA in loans, and proposals to start counting ODA for so-called "private sector instruments" that involve no concessionality at all (in contradiction to the original definition of ODA), encourage donors to turn to these instruments, which risks starving developing countries of the grants they so desperately need. Soon, Finance Ministries will be pressuring governments to switch to instruments that can meet ODA targets while spending little or no money at all! And grant-giving will dwindle.
As global interest rates rise and debt stress increases among many developing and transition economies, donors should be working to avoid another crisis, but instead the DAC is making the situation worse by incentivising them to lend even more.
Impact on Climate Change:
Lastly, but by no means least, DAC members’ determination to exaggerate their own largesse has direct and indirect impacts on the global fight to tackle climate change.
Of course, this is the most pressing priority for the entire planet, and an equitable settlement for meeting the costs of climate change is essential if we are to forge an effective international consensus to tackle this urgent and existential threat.
However, as donors take advantage of the incentives inherent in the DAC methodology, ODA for climate finance is being extended overwhelmingly in the form of loans rather than grants, even to the poorest countries. This is despite the near-universal calls for more climate finance to be given as grants.
Moreover, the preponderance of ODA loans (instead of grants) being extended as climate finance makes blended finance and the involvement of the private sector more difficult, as developing countries are becoming “over-extended” and suffering from debt stress through the ODA loans they are having to service.
Instead, these loans saddle the developing world with debts to meet the costs of adapting to the climate crisis and for cleaning up the damage it brings.
In effect, the DAC is allowing OECD countries to claim credit for aid that they have not given while developing countries are being made to pay the costs of a climate change they have not caused.
At odds with the “polluter pays principle”,
Grossly inequitable, and
The very antithesis of climate justice.
Moreover, the Global South must be wondering just how much trust they can have in rich countries to meet their commitments with respect to the new “loss and damage” fund (what former UK Prime Minister Gordon Brown has dubbed “another fund without funders”) agreed at COP28 in Egypt.
Following OECD countries’ failure to meet the US$ 100 million a year climate finance target (despite considerable double-counting and “green-washing”), the DAC’s increasingly blatant cheating on ODA statistics further undermines trust in donor pledges just when it is most needed.