Development Cooperation in Asia Pacific: Trends and Challenges

Development Cooperation in Asia Pacific: Trends and Challenges Jinhwan Oh, Ph.D. joh@ewha.ac.kr Graduate School of International Studies Ewha Womans University, Seoul, Korea 17 October, 217 Phnom Penh, Cambodia 12 Countries in Asia Pacific Afghanistan Bangladesh Bhutan Cambodia Lao PDR Myanmar Nepal Timor-Leste Kiribati, Solomon Is. Tuvalu Vanuatu Smoothhound.co.uk Lonely Planet 1

Overall Trends Overall, has tripled from $3.84 bill to $11.14 bill Driven by OECD DAC members ODA from non-dac members, (South-South cooperation), is growing yet still a small share Influenced by inflow surge to a few countries. An increasing trend in the early 2s, due to soaring humanitarian assistance to Afghanistan. Increasing trend in 213, caused by increasing inflow to Myanmar, fueled by the country s economic liberalization. Source: OECD Query Wizard for International Development Statistics (217) available at https://stats.oecd.org/qwids/ Trends by Country Afghanistan, Bangladesh, and Nepal, as the top 3 recipients of ODA resources in 215 Myanmar is rising to be a major recipient Cambodia and Lao PDR show stable patterns. ODA to Small Island Developing Countries (SIDS) are very small in volume but ODA as a percent of GNI to these countries are much higher than others 25 27 29 211 213 215 Afghanistan Mill$ 3159,7 526,9 623,6 6377,3 4741,6 4239,2 % GNI 45.2 51.4 49.7 38.1 24. 21.4 Bangladesh Mill$ 143,6 1418,8 1194,2 1342,2 2379,3 257,2 % GNI 1.8 1.8 1.1 1.1 1.6 1.2 Bhutan Mill$ 93,6 99,1 115,2 116,2 119,9 97,3 % GNI 11.2 8.7 1.5 8.3 8.1 5.3 Cambodia Mill$ 564,9 665,8 659,2 672,5 713,3 677,1 % GNI 9. 8.3 7.1 6.5 5.5 4. Kiribati Mill$ 29,2 26,8 25,3 5,7 53,6 65, % GNI 17.5 15.1 14.1 26.7 22.1 2.1 Lao PDR Mill$ 38,6 38,5 384,3 336,6 371, 471,1 % GNI 11.1 9.8 7.4 5.2 4. 4. Myanmar Mill$ 151,3 186,1 332,7 323,6 3351,3 1168,5 % GNI 1.2 1. 1..6 6.8 2. Nepal Mill$ 445, 588,7 812,7 78,5 795,3 1215,8 % GNI 5.2 5.9 6.6 4.7 4.5 5.7 Solomon Mill$ 239,1 258,5 22,5 257,2 233,5 19, Islands % GNI 47.7 51.3 47.3 5.4 27.6 16.5 Timor-Les Mill$ 198,5 27,4 29, 228, 217,2 212,3 te % GNI 22.2 14.6 8.5 6.4 5.9 8.9 Tuvalu Mill$ 1,3 11,8 16,1 29,3 23, 49,7 % GNI 24.7 24.6 37.7 67.1 5.2 Vanuatu Mill$ 46,5 56,8 14,2 7,3 74,3 186,6 % GNI 1.8 11.4 17. 11.9 11.5 Source: OECD (217) https://stats.oecd.org/qwids/ 2

Trends by Country (Million US$) 7 14 6 623.6 628.4 6377.3 6172.8 12 1215.8 5 4 3 2 3159.7 3194.8 143.6 1256.4 1418.8 526.9 4736.6 1882.3 1334 1342.2 1194.2 1912.6 4741.6 4573 1 4239.2 3351.3 2379.3 2191.5 257.2 1216.8 1168.5 8 6 4 812.7 761.6 78.5 795.3 797.9 665.8 682 659.2 666.1 672.5 688.3 694.3 713.3 715.3 677.1 64.7 564.9 546.3 547.3 588.7 448.2 471.1 445 372.4 38.5 384.3 365 336.6 346.9 371 42.9 38.6 1 151.3 148.6 186.1 489.7 332.7 323.1 323.6 429 2 25 26 27 28 29 21 211 212 213 214 215 25 26 27 28 29 21 211 212 213 214 215 Afghanistan Bangladesh Myanmar Cambodia Lao PDR Nepal Trends by Sector While actual numbers have risen, its sectoral composition has gradually evolved, except for a peak of the programme assistance and action relating to debt sector in 213 (due to Myanmar) Social infrastructure and services is the most receiving sector (4%) Next is economic infrastructure and services sector (2%) Humanitarian aid fluctuates and varies by country Cambodia, Laos, Timor-L: decreasing Afghanistan, Myanmar: consistent Programme assistance takes up the least portion, Although UN SG s report (216) has emphasized the role of PBA (budget support, basket/pooled funding) as effective modalities for country ownership and harmonization. Social infrastructure and services Economic infrastructure and services 25 27 29 211 213 215 235,9 3269, 4353,3 5522,1 5464,1 4329,4 1186,9 1588,6 1772,9 1927,8 3546,3 3313,5 Production sectors 462,3 535,9 626,3 93,4 97,5 927,4 Programme assistance 254,5 227,5 277,2 633,3 2165,3 5,5 Action relating to debt 87,1 86,5 4,7,8 2622,8,4 Humanitarian aid 469,8 471,5 865,8 768,4 674,7 124,4 Unspecified 53,4 622, 973,8 74,4 1253,3 95,5 Source: OECD(217) https://stats.oecd.org/qwids/ 3

Grant/Loan The amount of grant aid has been always larger than loan amount for all countries Grant aid has been growing faster (e.g. tripled from $ 3 billion to $ 9 billion, as opposed to loan amount, which doubled from $ 1.5 billion to $ 3 billion) 25 27 29 211 213 215 Afghanistan Grant 337.7 488.7 6112.6 6321.8 4745.8 4289.8 Loan 125.9 219.4 119.6 63.5 31.8 1.8 Bangladesh Grant 899.3 195.3 164.3 12.4 1418.7 1159.4 Loan 996.2 929.5 741.2 817. 1682.6 229.1 Bhutan Grant 73. 84.9 76.2 78.2 95.1 81.6 Loan 23.5 18.3 45.2 44.4 32.3 26.1 Grant 433.8 545.5 556.2 58.6 569.6 53.8 Cambodia Loan 149.4 136.5 127.4 164.3 21.6 225.7 Kiribati Grant 27.3 27.1 25.6 5.7 51.8 57.2 Loan 2.2.7 2.8 8.2 Lao PDR Grant 215.6 263.4 337.2 345.2 38.1 384. Loan 127.6 15.3 98.5 56.6 66.9 154.4 Myanmar Grant 15.2 193.3 336. 343.3 3943.9 175.3 Loan 8.7.3 4.3 5.3 2562.2 147.5 Nepal Grant 455.6 526.4 831.2 778.1 749.4 923. Loan 89.9 165.7 97.7 138.4 197.7 432.8 Solomon Grant 238. 26.5 225. 252.8 237.6 192. Islands Loan 3.9 3.5. 8.7.2 4.3 Timor- Grant 198.5 27.4 29.2 228.1 216. 199.9 Leste Loan 2. 12.6 Tuvalu Grant 9.3 1.8 15.9 29.7 23.5 48. Loan.9 1.1.4 2.1 Grant 48.3 58.9 16.7 73.9 77.2 161.7 Vanuatu Source: LoanOECD (217) https://stats.oecd.org/qwids/.6 28.3 Grants (Million US$) Loans (Million US$) 7 3 6 25 5 4 3 2 2 15 1 1 5 25 26 27 28 29 21 211 212 213 214 215 25 26 27 28 29 21 211 212 213 214 215 Afghanistan Bangladesh Myanmar Afghanistan Bangladesh Myanmar 1 5 8 4 6 4 2 25 26 27 28 29 21 211 212 213 214 215 Axis Title 3 2 1 25 26 27 28 29 21 211 212 213 214 215 Cambodia Lao PDR Nepal Cambodia Lao PDR Nepal Solomon Islands Timor-Leste Solomon Islands Timor-Leste 4

Key Challenges: Aid Fragmentation Harmonization is one of the core factors of the Paris Declaration (25), whose main rationale is a reduction in transaction costs and overburden of recipients administrative capacities caused by aid fragmentation from too many stakeholders. Paris Declaration: pursues harmonization as one of five partnership commitments by encouraging donors and recipients work together to reduce the number of separate and duplicative missions to the field and diagnostic reviews; and promote joint training to share lessons learnt and build a community of practice (OECD 28). Having many stakeholders itself does not necessarily harm aid effectiveness and having only a few of them does not guarantee higher aid effectiveness, either. However, what matters is the degree of fragmentation. Relevant studies Morss (1984): The most important feature distinguishing foreign aid in the 197s from earlier program was the proliferation of donors and projects. This has a negative impact on developing nations. Further, efforts to implement a large number of discrete, donor-financed projects, each with its own specific objectives and reporting requirements, use up far more time and effort than is appropriate. Project consolidation is needed to align with comprehensive and consistent national development goals, but this is unlikely to occur because of the competitive nature of donor interactions Acharya et al. (26): Having many aid donors and aid channels significantly reduced value of aid by increasing direct and indirect transaction costs Knack (27): In a recipient country with many donors, each responsible for only a small part of development assistance, responsibility for success or failure is diffused. Oh and Kim (215): Growth rates may increase up to a certain level of fragmentation due to increasing returns to scale among donors or between donors and recipients (learning by aiding), but will eventually decrease after exceeding the threshold (uphill struggle). 5

Fragmentation, It s Coming from Donors! Acharya et al. (26), Oh and Kim (215): Fragmented aid in LDCs are originally resulted by donor countries proliferated aid flows. The soaring aid budget in a donor country is spread to many different organizations within the country, all of which have different targets, goals, and regulations. The rising aid budget is also spread to many recipient countries, which exacerbate aid fragmentation problems and eventually harm their economic growth. Rising budget Donors Proliferation Recipients Fragmentation Recipients Growth Source: Oh and Kim (215) Journal of Development Effectiveness 6

South Korea, for example As an aid recipients in the 196s and the 197s, U.S. and Japan used to be Korea s major donor & Korea used to be their major recipient as well (mutual priority, mutual accountability) Source: Oh (214) Pacific Focus South Korea, for example As an emerging donor, Korea s ODA budget has been soaring more than 5 times for the past two decades. However, its ODA disbursement pattern has been criticized as thinly spread to many developing countries (OECD, 212), with bifurcated disbursement system between grant and loan, and budget for grant aid has been spread-out to many different ministries. Aid Budget (Millions US$) Number of Recipients of Korean Aid (Average number for every 5 years) Source: Oh (214) Pacific Focus 7

List of Korea s Major Partner Countries Source: Oh (214) Pacific Focus Inbound Scholarship Distribution Korea All but zero Upper 75% Upper 5% (1) (2) (3) (4) (5) (6) (7) (8) (9) (1) Log -.69*** -.412*** -.559*** -.67** -.286* -.144 -.38**.19.293.12 distance (.139) (.146) (.145) (.251) (.165) (.17) (.173) (.234) (.26) (.229) Lag. Log.129**.154***.143**.132.44.13*.91 -.4 -.23 -.17 population (.55) (.57) (.57) (.98) (.56) (.62) (.63) (.73) (.73) (.72) Lag.log -.242*** -.14*** -.164** -.267*** -.2*** -.21*** -.128* trade (.55) (.51) (.78) (.63) (.63) (.72) (.73) Lag.log.326***.311***.255*** oda (.5) (.66) (.96) Priority 1.126*** 1.56*** 1.64***.793***.648***.75***.582** country (.175) (.171) (.295) (.28) (.29) (.256) (.268) Constant 5.57*** 2.541 4.453*** 4.999 4.582*** 1.671 4.598** 2.377.713 2.699 (1.543) (1.635) (1.697) (3.138) (1.74) (1.837) (1.949) (2.232) (2.44) (2.354) Observation 33 337 335 335 236 237 236 158 159 158 Japan Log distance Lag. Log pop Lag Log trade Lag Log oda Constant All but zero Upper75% Upper5% (1) (2) (3) (4) (5) -5.1*** -4.918*** -5.69*** -2.83* -3.457* (.632) (.769) (1.232) (1.618) (1.887).87***.62***.448.757***.934*** (.149) (.19) (.357) (.232) (.38) -.41 -.872-1.29-1.952** (.493) (.62) (.653) (.763) 1.211** 1.326** 1.469** 1.52* (.586) (.571) (.731) (.8) 37.378*** 37.846*** 5.329*** 22.585 33.193 (6.7) (9.128) (12.95) (16.386) (2.58) Observation 144 13 13 95 63 Source: Oh (217) Review of Urban and Regional Development Studies 8

Fragmentation in Asia Pacific and where s i is the ODA share of recipient country i and n is the number of donor countries. This index ranges from 1/n to 1, where 1/n is the perfectly equal distribution, and 1 is the perfect concentration to only one donor country. Hershman-Herfindahl Index (HHI) is widely used in the field of economic geography and regional economics when measuring the degree of urbanization, agglomeration, etc. Among more than 5 bilateral donors in AP-LDCs, this study selects the top 3 (29 of them are DAC members). If disbursements on average (between 2 and 215) are less than $ 1 million ($.1 million for small island countries), this study discards them to remove temporary supports. 5-year averages (21-25, 26-21, and 211-215), plus average for all years (2-215). Only bilateral aid is examined (Multilateral supports are difficult to measure) Fragmentation in Asia Pacific The numbers in HHI itself do not contain important meanings. However, it becomes more meaningful when it is compared over years and with other countries Bangladesh, Cambodia, and Nepal show a stable pattern with the index at around.14. Lao PDR (.21.12), Myanmar, and Timor-Leste (.37.22) shows a decreasing trend (more fragmentation) Afghanistan and Bhutan shows inverted-u pattern. SIDCs have less donors and less fragmentation, with higher HHI. Being small may not be always adverse; by having a few donor countries, these small countries and their aid donors can build up mutual accountability in various aspects. Not a single country has upward trend; all the aid recipient countries are having more and more donors, which may increase recipients burden for transaction costs and decrease donors responsibility for a given project. Avg 1-5 Avg6-1 Avg11-15 Avg -15 Afghanistan.237193.32698.2812.2883 Bangladesh.138179.1593.163914.14393 Bhutan Cambodia Kiribati Lao PDR Myanmar Nepal.222167.282212.24668.214358.145621.13652.152131.138759.37411.337899.36962.312996.164844.133635.12846.128185.2178.112339.28174.222338.12268.127974.137865.122113 Solomon Islands.754851.719454.611378.65247 Timor-Leste.189331.2751.248445.197626 Tuvalu Vanuatu.314471.316137.254829.226888.376749.272149.356991.272187 9

Challenges: Volatility in Aid Modalities Aid is provided through a variety of modalities and choosing right delivery methods are big challenges. Project based funding is still dominant in AP-LDCs, with more than half of the ODA is in social and economic infrastructure and services, while its sectoral composition shows only a gradual change. Although program-based approaches (e.g. general or earmarked budget support to recipients national treasury) are known to be effective tools for aligning and harmonizing development cooperation with national priorities and reducing transaction costs and thus adopted by the UN SG s report (216) as an effective institutional framework, program assistance in AP-LDCs takes up the least portion and highly volatile. Afghanistan: peaked in 211 and decreasing since then Myanmar: peaked in 213 but decreased drastically in the following year Cambodia, peaked in 211 (15% of the total ODA) but decreased drastically since then Laos: peaked in 29 but dropped since then to reach another peak in 215 Nepal: peaked in 211 before drastically dropping back the following year. Bangladesh and Bhutan: program assistance had been in continuous decreasing trends. UN SG (216) s report has pointed the trend of decreasing general budget support which exacerbates fragmentation. and findings in this study are consistent with the report. Key Recommendation: Harmonization Extra attention has to be paid to harmonization and coordination among donor countries to reduce duplication of similar projects and volatile aid flows UNESCAP could play a role as a control tower, a concept like OECD s Total Official Support for Sustainable Development (TOSSD) As the aid fragmentation is largely due to donor countries proliferated budget, effort for harmonization should be made within a donor country before asserting partnership between countries. E.g. Japan s launch of New JICA system in 28, which reformed the Japanese bifurcated ODA disbursement system between loan and grant Shed light to emerging donors with soaring aid budget, like South Korea, whose aid disbursement structure is still bifurcated between loan and grant, and fragmented with over 4 implementing agencies Effort should be made within recipient countries, as well. E.g. Cambodian government (Council for Development of Cambodia) provides a web database that contains a variety of aid activities in Cambodia, by donor, sector, duration, type, term, etc (odacambodia.com). E.g. The Cambodia Development Institute (CDI), established by a partnership between Korea s Ewha Womans University and Cambodia s Royal University of Phnom Penh provides a similar database (cdicambodia.org). 1

Key Recommendation: Ownership and Alignment Key factors for effective development cooperation for achieving the 23 SDG agenda and its commitment to leave no one behind are country ownership and alignment with development partners. Sound and clear national development plans by recipient countries will strengthen 1) its ownership by linking ODAs to their growth and 2) the alignment by defining their priorities and requesting the development partners what is mostly needed. In this regard, program-based approaches could be good recommendations for AP-LDCs. In particular, budget support is known to reduce transaction costs and improve the allocation of funds in recipient countries public spending such that the country ownership can be improved (UN, 216; OECD 26). Although the budget support has potential disadvantages for partner countries, including increasing volatility in aid flows, risks from suspended or delayed disbursement, misuse and corruption, etc (OECD, 26), Asia Pacific region has relatively bigger and sound economies, so benefit should exceed the cost. UN Voluntary National Report (217) states that Afghanistan and Bangladesh are in the process of finalizing (or localizing) its nationalization of its own SDG targets and indicators, which is a positive sign for enhancing ownership. What is needed at current stage is to reduce the volatility and enhance sustainability of the program-based approach. 11