Blog 6

Exit from aid in resource-rich countries

Degol Hailu, Senior Advisor, UNDP

Chinpihoi Kipgen, Research Associate, UNDP

November 2015

You would expect dependence on Official Development Assistance (ODA) to fall as countries increase their export of oil, gas and minerals. Intuitively, the additional foreign exchange and taxes earned from the sale of commodities would reduce the relative importance of ODA.

However, the facts speak differently. Over the past three decades, reliance on ODA among high oil, gas and mineral exporting countries has not changed significantly. In the 1980s, average net ODA (%GNI) in the 50 highest oil, gas and mineral exporting countries stood at 7.9%. By the 2000s, the figure fell slightly to 6.2%.*

Taking 5% as a threshold for aid-dependence, 19 of the 50 resource dependent countries had ODA at 5% or higher during both the 1980s and 2000s. In fact, 4 countries increased their ODA levels from below 5% in the 1980s to 5% and higher by the 2000s. Another 19 countries maintained ODA at the same level, below 4% in both the 1980s and 2000s. Only 8 of the resource-rich countries reduced their ODA levels to below 5% between the two time periods.

Thus, for half of the resource-rich countries, foreign aid continues to be an important source of development finance. For instance, high oil, gas and mineral exporting countries with higher ODA dependence (over 5% of GNI) received 13% of the total disbursements in the last decade. For the same period, the countries with relatively lower dependence on ODA received approximately 8% of the total disbursements.

But, despite manufacturing growth being the critical factor that enables countries to exit from aid dependence, ODA earmarked for industrial development makes up only 2% of the total disbursed between 2000 and 2013. For the resource-rich countries with ODA levels greater than 5%, average per capita manufacturing value added remained less than US$60 over the past three decades. There have been some improvements in manufacturing growth rates in countries that are both high resource dependent and high ODA recipients ― increasing from less than 1% in the 1980s to 3.6% in the 2000s. However, the average manufacturing share of GDP was higher in the 1980s than it was in the 2000s. Meanwhile, the share of mining in GDP in these countries increased from an average of 6% to 13% over the past decade.

The other 19 resource-rich countries that have consistently maintained ODA below 4% are mostly upper middle-income countries. However, they include some of the highest extractive dependent countries. In 6 of them, the share of manufacturing value added has contracted since the 1980s and remains below 10% of GDP today.

Although the 8 resource-rich countries decreased their dependence on ODA from an average of 16% of GNI to 2% of GNI, 6 of them are among the 70th percentile of countries most dependent on the extractive sector. The manufacturing sector for these countries makes up 8% of GDP and has increased by an average of only 1 percentage point over the past decade.

The volatility associated with both aid flows and commodity prices pose serious challenges to the aspirations of developing countries to structurally change their economies. Refocusing ODA to support industrial development may help to decrease the chances of chronic dependence on either ODA or the extractive sector, or worse, both.

* We use the Extractive Dependence Index (EDI) to measure resource dependence.