Using the LDC criteria to allocate ODA: is it possible?

Source: Own calculations, based on 2015 triennial review data and ADB Annual report on the 2014 Country Performance exercise

Frequently, LDCs express concerns that graduation from the LDC category would lead to a sudden decline in ODA. While currently graduated countries have not experienced an ODA decline, the concerns are still real. If LDC status confers benefits, graduation implies a loss. Development progress is gradual, whereas change in status is abrupt. However, revising ODA allocation mechanisms could alleviate such concerns. The United Nations General Assembly agreed already to “invite development partners to consider [LDC indicators and criteria] as part of their criteria for allocation [ODA]”.  This proposal is based on a suggestion made by the CDP, which noted that this would better align ODA with needs and avoid abrupt changes when countries graduate from the LDC category.

Using LDC criteria for ODA allocation would be possible by modifying formula-based ODA allocation mechanisms. Formulas are used by many multilateral ODA providers, such as the World Bank’s International Development Association or the ADB’s Asian Development Fund (ADF).   These formulas typically include indicators on population (larger countries receive more), country performance (better ‘performers’ receive more) and needs (poorer countries receive more). By adding human asset index and economic vulnerability index to the formula, these institutions could honour the invitation by the General Assembly rather easily. The figure below shows the impact of such modification for the case of ADF.

The figure shows that a reform would indeed moderately increase the share of almost all LDCs (and a few non-LDCs), though the exact amount obviously depends on the specific way how HAI and EVI would be introduced. More importantly, the inclusion of HAI and EVI in the formula would better reflect the needs of countries than the current formula that uses only income for that purpose. And as allocations would be adjusted over time in line with progress towards all three LDC criteria, the impact of LDC graduation would be mitigated. This in turn, would make the transition from the category smoother.

There are many solutions available to improve support to LDCs. In the case of concerns on abrupt changes to ODA, United Nations States Members have already agreed on a feasible approach. It just needs to be implemented.

by Matthias Bruckner
The content, findings, interpretations, and conclusions as expressed in this article reflect the views of its author and do not necessarily represent the views of the United Nations.