Making aid RANDy

By Simon Scott, Counsellor, OECD Statistics Directorate

It was the go-to think tank for the US Department of Defense during the Cold War. It was where Nathan Leites deciphered The Operational Code of the Politburo and Paul Baran conceived the “hot potato routing” system that would lead to the Internet.

But the RAND Corporation, spun off from an Air Force project with the Douglas Aircraft company to do Research ANd Development on intercontinental warfare, was active across the whole field of international relations. And at the height of East-West tensions during the 1962 Cuban missile crisis, DoD contract number ARPA/SD-79 had it investigating … a better way to measure foreign aid.

Up until that time, all official flows from rich to poor countries had been summed up indiscriminately, whether they were grants or loans, and whether or not they targeted development. John Pincus of RAND came up with a new idea – get rid of the non-developmental aspects and “reformulate the definition of aid [so that] all forms of aid are reduced to their value as grant or subsidy.”

The subsidy element could be worked out mathematically. Pincus showed that any loan at soft terms could be re-expressed as a loan at commercial terms plus an upfront grant. He recommended that the OECD’s Development Assistance Committee (DAC) switch to counting the grant portion only, to provide a fairer measure of donors’ real financial effort.

An abridged, declassified version of Pincus’ paper was published in 1963 and attracted some academic interest. But serious debate on his proposal only started after his friend from Harvard days, Göran Ohlin, produced a thorough mathematical account of grant elements for the OECD Development Centre in 1966.

Even then the DAC was sceptical, describing the grant element of loans as “a purely notional figure” that “does not correspond to an actual flow of funds or of goods and services nor is it in any way related to the net benefit of aid to the recipients.”

In 1969, the DAC relented to the extent of using the grant element to assess the softness of members’ overall aid programmes and narrowed the definition of aid slightly to exclude commercial credits. This was the origin of “official development assistance” or ODA, which has been the standard measure of foreign aid ever since.

In 1972, the grant element method was again wheeled in to distinguish which loans were soft enough to be counted as ODA. But once a loan had a sufficiently high grant element, it was counted in full. The DAC steadfastly refused to count the grant portion only, as Pincus had recommended.

This situation continued for over 40 years, with the DAC turning down one opportunity after another to move to a grant equivalent method of counting ODA. As late as December 2012, a year after Pincus’ death, a DAC High Level Meeting (HLM) at Marlborough House in London resolved to “maintain the definition of ODA, and only attempt to clarify the interpretation of loans that qualify as ODA.”

But behind the scenes, donors were changing their minds. Four of them had already proposed a specific system for counting loans’ grant equivalents as ODA, and in 2013 my colleague William Hynes and I showed that this could actually increase the reportable amount (we recommended calling this measure Official Development Effort since it would relate to a new statistical quantity).

By 2014, DAC members were ready to adopt the grant equivalent measure as Pincus had originally proposed. Reversing their stand of only two years earlier, they declared: “We therefore agree to modernise the reporting of concessional loans to make it easier to compare the effort involved with that in providing grants, by introducing a grant equivalent system for the purpose of calculating ODA figures.”

The word “modernise” might have seemed ironic, given that the method they were adopting had been proposed more than half a century earlier, and was older than the concept of ODA itself. Were the DAC HLM participants being serious, or indulging in a spot of levity?

At any rate, the DAC was embarking on a bold new venture. Moving to grant equivalents meant re-examining not just loans, but debt relief, equity investments, guarantees and other instruments to try to assess their grant portions. This is not going to be easy, especially for instruments where, as the DAC put it in 1966, “one has no set of future payments to serve as a basis for calculation.”

The clock is ticking on this work,1 as the new grant equivalent measure of ODA will come into force from 2019 reporting on 2018 ODA flows. Foreign aid researchers around the world should be following progress and suggesting solutions where possible. If they all get RANDy enough, everything should come together in 2019.

1. Explore this topic further in a new Working Paper.

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