Forecasting Aid: Demand, Supply, Quality, and Institutions

International finance is under considerable pressure: originally prioritized toward economic growth in poorer countries, it is now meant to deliver broad-based sustainable development including global public goods such as climate and pandemic response—to say nothing of refugee hosting costs. In a future of slower growth for richer countries, will there be sufficient finance to support these goals, and where will it be directed? Based on a paper published today, I discussed this question at CGD’s Development Leaders Conference in Oslo last week.

Zack Gehan and I use growth scenarios from our earlier work along with some upper and lower bounds for the proportion of donor country gross national income (GNI) that we think it is plausible to imagine going to aid. We also look at what would happen if new donors joined the party. And we ask, if donors allocate aid on the basis of country characteristics as they have in the past, where will it end up going in 2030, and in 2050? Suffice it to say there is considerable uncertainty attached to all of this—around growth rates, donor generosity, new donors, where the money will go—and it should come as little surprise that the range of potential outcomes we outline is very large. Nonetheless, the forecasts suggest good reason to worry—there is a real potential for stagnant overall flows increasingly directed to richer countries that leave the world’s poorest countries and people behind.

Demand

Our central forecast is for continued economic growth in the developing world. Poverty at the $2.15/day line drops to about 2 percent by 2050 in our central estimate (though note this is optimistic because it does assume all low-income countries will post faster-than-historical-average growth rates). $10/day poverty falls from 58 percent of the world’s population to 37 percent. This growth also implies that a shrinking number of countries will be under the current graduation threshold for borrowing from the World Bank’s concessional lending arm, IDA. Our mid-range growth estimate suggests the combined GDP of IDA-eligible countries may rise from $1,505 billion to $1,862 billion in 2030 but then fall to $300 billion in 2050 as many of the better-off countries graduate and the number of countries in the group shrinks (though again, presenting this as ‘mid-range’ is optimistic for the same reasons that apply to our mid-range poverty estimates). The combined GDP of developing countries above the IDA cutoff rises from about $63 trillion to about $77 trillion by 2050 (note a number of big countries including China and Brazil graduate to high-income status by that time).

Supply

In 2019, total official development assistance (ODA) was reported as $162 billion. Our midpoint estimate for 2030 is $264 billion. That’s (also) optimistic, driven by a forecast that US ODA will climb from $33 billion to $98 billion over that time. In turn that is an artefact of the underlying regression analysis which suggests current US flows are considerably below what would be expected given income and the US’ past ODA contributions. While US ODA did increase to $52 billion in 2021, it would be a surprise if it kept on climbing so fast. Our mid-growth estimate for 2050 is $323 billion, or an approximate doubling, but it is worth noting that the slow-growth estimate places aid flows in 2050 below their level of today.

Finance for International Development, produced by CGD’s Ian Mitchell, Euan Ritchie and Andrew Rogerson, is a better measure of development finance flows than ODA. It measures the grant-equivalent cross-border flows of official finance provided by 40 major economies. An issue is that it is only available for one year, making forecasts perhaps even more an exercise in dart throwing. With that caveat, finance for international development was $150 billion in 2017. There is a risk under a low growth scenario that this number declines by 2030, and a greater risk by 2050. The mid-growth estimate is for a modest increase of about $100 billion by 2050.

What about where flows will go? Using a regression that predicts future recipient allocable ODA flows based on the past relationship between flows, income ranking, share of global recipient population, and a recipient county dummy, the picture regarding the poverty focus of aid is concerning. While the number of low-income countries declines, aid as a percentage of GNI for those countries falls from 9 percent in 2019 to 5 percent in 2040, and further by 2050, driven by the fact that aid is driven more by ‘donor darling’ status than income or population changes. This may be too negative: hopefully donors will reallocate more than past history suggests they would toward the world’s poorest countries as their darlings become richer—but perhaps not. If so, ODA flows will be increasingly concentrated in richer countries, and perhaps in particular upper-middle-income countries, where the share of ODA as a percentage of GNI might rise from 0.06 percent to 0.5 percent of GNI.

Even if donors refocus aid on poorer countries, the overall volume forecasts are a concern. Looking at the GDP of the group of countries likely to be eligible for World Bank IDA or IBRD lending, it is about $28 trillion today, expected to rise to $38 trillion by 2030 and $52 trillion by 2050. An 86 percent increase in the size of recipient countries will be matched by a 69 percent rise in financing for international development—suggesting financing as a percentage of recipient GDP will fall. Somewhat more positively, the same financing for international development may be convertible into a larger quantity of closer-to-market-rate financing that the growing pool of richer (non-IDA) recipient countries may be able to sustain.

Quality

But there are additional reasons to worry whether aid flows will be focused on the core mission of poverty reduction. More and more ODA is being spent at home. Sixty-nine percent of ODA was “country programmable” in 2000, which meant it was spent on non-emergency relief actually in developing countries. By 2019 that had dropped to 56 percent. If the long-term trend continues it could be 33 percent by 2030 and just 27 percent by 2050. And of that finance which makes it to developing countries, more is spent on climate mitigation in middle-income economies. That jibes with our forecasts of declining aid volumes for low-income countries. This suggests that we need a shift from business-as-usual to ensure the poorest countries (which are also those most likely to suffer the worst from climate change) are not left behind.

Institutions

Finally, a note about institutions. While our forecasts don’t suggest a huge surge in financing for international development from new donors, the shape of the global economy is going to change in ways that are going to affect international institutions like the IMF and the World Bank. Our central forecast for the vote share of DAC countries (the traditional major aid donors that are part of the OECD’s Development Assistance Committee) in the IBRD, the World Bank’s non-concessional arm, falls from 57 to 32 percent 2020-2050, for example. Now would be a good time for DAC countries to back governance changes in those institutions that protect smaller shareholders, because a lot of DAC donors are going to become smaller shareholders in the future.

There is real hope for continued progress against global poverty over the next thirty years, then. How rapid the progress, especially in the poorest countries, depends in part on donors. There are sufficient resources to considerably accelerate progress toward ending the most extreme poverty around the world, especially if new and old donors work together through multilateral institutions like IDA that deliver quality assistance focused on the poorest countries. But that would take reversing worrying trends toward lower quality aid spent in richer developing countries and at home.