By Carsten Staur, Chair of the OECD Development Assistance Committee
The OECD Development Assistance Committee (DAC) has defined a set of criteria for including countries on its list of Official Development Assistance (ODA) recipients and, similarly, for them to graduate from the list, primarily because their economic growth has made them high income countries.
How can the DAC help facilitate a smooth transition for countries approaching the ODA graduation point? This blog looks at the criteria for ODA eligible countries and the challenges these may present.
Since 2005, the sole criterion for inclusion of countries on the DAC list of ODA eligible countries is their status as “low- and middle-income” countries in accordance with GNI per capita as defined in the World Bank’s income classification. The threshold for graduation – i.e. exiting the list – is therefore classification by the World Bank (WB) as a high-income country for three consecutive years.
Graduation reflects a country’s consistent and successful economic growth. It is a positive development – as status as a high-income country is currently defined by a GNI per capita above 13,845 USD, which is more than twelve times the threshold for moving from low-income to lower middle-income country classification (at USD 1,135 GNI per capita). High-income countries are not what comes to mind, when we normally talk about ‘developing countries’.
It is obvious that also high-income countries may benefit from external financial and technical assistance, especially in the first years following their graduation from the ODA list.
This can be met in various ways. Most importantly, by making sure that a country’s graduation from the list is well-prepared and based on the notion of ‘smooth transition strategies’ – a concept that for years has applied to graduation from the list of Least Developed Countries.
Recently, the DAC decided that in the future countries anticipated to transition to the higher income category will be informed by the OECD Secretariat about the ODA criterion and timeframes in the first year they reach the high-income threshold, rather than only a year in advance as previously practiced. Countries will thus be alerted earlier, giving them more time to prepare for ODA resources being phased out as a form of external financing.
The DAC members further confirmed their commitment to contribute to smooth transitions and sustained development progress in the post-graduation phase, including through partnerships beyond ODA, e.g., through debt sustainability, use of regional financing channels, economic diversification, resilience to climate and other shocks. This message was reaffirmed in the recent Communique from the DAC high level meeting on 14-15 November 2023, which stated: “We will anticipate countries’ transition to other sources of domestic, and where applicable, external finance, and explore options together with partner countries to continue co-operation through other avenues”.
The challenge of preparing countries whose GNI per capita trajectory indicates their upcoming graduation from the ODA list is one that DAC members will need to address before the next triennial review of this list in 2026. At present, Guyana and Panama are on a trajectory to graduate following this review. Net ODA to these two countries was USD 139 million and USD 91 million in 2021, respectively.
In this context it is clearly a constraint that most donors do not have funding streams beyond ODA, which can be activated to, so to speak, replace ODA as countries transition to the high-income category. A recent report from a Norwegian expert group has offered some ideas in this direction, suggesting that countries could make available non-ODA funds for this purpose – at the same time stressing that such funding streams should not be at the expense of ODA within the 0.7% target, but additional to it.
Another issue of concern to the DAC has been managing situations where a country graduates from the list, but afterwards falls below the threshold, in some cases due to sudden onset crises (e.g., Covid-19, natural disasters).
That risk prompted the DAC in 2020 to simplify and expedite the process of reinstatement, so that if in July of a given year, WB income data for the previous year reveal that a graduated country has fallen below the high-income threshold, that country can be re-instated immediately, retroactively effective to the first of January of that same calendar year. This happened recently for Palau which graduated in 2021 but was reinstated on the list in 2022.
A final note on EU enlargement
The DAC rules established in 2005 make it clear that a country cannot be eligible for ODA – no matter its GNI per capita – if it is a member of the EU, or a prospective EU member with a firm date of accession.
That decision in 2005 was specifically made with Bulgaria and Romania in mind. Both countries were middle-income countries and would thus normally qualify to be included in the ODA list, but both were explicitly left out as they were to join the EU in 2007.
This is an important point to be mindful of in relation to the ongoing discussion of a further EU-enlargement, covering the Western Balkans and other prospective members from among neighboring countries, including Ukraine.