A Framework for Understanding Roles of Official Development Assistance in Development – General Review and Experiences of Cambodia

Nhean Tola and Chea Sophak

19/October/2016, Commentaries

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Nhean Tola and Chea Sophak[1]

 

1)  The ODA Situation in Cambodia

Since The Paris Peace Accords in 1991, Cambodia has received a substantial amount of official development assistance (ODA) to finance its development needs. The total annual ODA disbursement increased from around USD 205 million in 1992 to USD 1,343 million in 2015. Several key development sectors such as transport, health, governance and administration, education, agriculture and rural development have been the major recipients of such flows. In these sectors, ODA has been in both the form of support to physical infrastructure projects or programs and technical cooperation for capacity development of  civil servants and the public of Cambodia. On a budgetary basis, ODA has contributed more than 60 per cent of the annual average of the national Public Investment Program (PIP) financing and this will remain the same in the next five to ten years. Not only has the quantity of ODA increased, the management and structure of development cooperation in Cambodia has also been improved. The reform of aid architecture and several policy instruments developed since early 2004 by the concerted effort of the Royal Government of Cambodia and the development partners has made a significant impact on the quality of dialogue, ODA resource management and work arrangement. This has contributed toward increasing the absorptive capacity of Cambodia and strengthening mutual understanding towards a mature partnership. Civil society later also participated in this mechanism and structure of development cooperation. Moreover, ODA has been a key catalyst in transforming Cambodia from a stage of rehabilitation to its current stage of growth promotion and poverty reduction.

In this paper, we attempt to introduce a framework for considering the relationship between ODA and development. We will study the correlation between ODA and Gross Domestic Product (GDP) from the available data and posit a loose hypothesis on the roles of ODA in GDP expansion. We hope that the outputs of this paper will be useful for providing a convenient framework for understanding ODA in Cambodia as well as in other places for further research, relevant policy dialogues and general understanding. Moreover, we believe that such understanding will help current practitioners of development cooperation reflect on their operations in Cambodia.    

2)   How Strong is the Relationship between ODA and Development in Cambodia?

The explicit relationship between ODA and development is still in short supply in explanatory literature. In fact, the need to understand the role of ODA in development has become increasingly important for the public in both Cambodia and the proprietors of ODA, though the need for this understanding varies. So far, the existing technical reports[2] prepared by the Cambodia Rehabilitation and Development Board of the Council for the Development of Cambodia (CRDB/CDC), a leading governmental aid-coordinating agency, provide information on the disbursement amounts and distributions of ODA together with other parallel policy-level analysis. There still isn’t any evidence-based explanation of the important relationship between ODA and development. The opportunity to address this is possible due to extensive aid data accumulated by a thorough system of data collection such as the Cambodia ODA Database. The availability of aid data in the form of annual disbursement significantly contributes to understanding the relationship between ODA and development in Cambodia. However, we need to choose the indicator for depicting the development.

The World Bank has picked different themes in its annual World Development Report since its publication in 1978; Development can therefore be understood as multi-faced. Thus, it is a challenge to have a combined indicator of development for us to explain the ODA-development relationship. Amid data challenges, we chose GDP as a proxy for development measurement in this paper, as it is a common indicator available in the National Accounts of nations. Despite of the limitations of GDP in covering the distributional effect of ODA in development, the indicator can be used as a proxy to understand the quantitative relationship of ODA and development. This is because ODA is also part of the economic resources that flows and interacts in the system of GDP. The next section will explain these flows and interactions and we will focus on demonstrating the relationship of GDP and ODA.

Using available data between 1993 to 2015 on GDP (current value) provided by The World Bank, as well as data on the annual disbursements of the ODA from CRDC/CDC’s several technical reports[3], we constructed a simple graph below. The graph indicates the strong ODA-GDP relationship in Cambodia and that ODA has increased positively in parallel with GDP expansion. 

This finding corresponds to the general belief of correlation between ODA and development, except here we can demonstrate this relationship with quantitative evidence. It should be noted that according to the World Bank, Cambodia recently graduated from the category of least developed country to lower-middle income country. Other development agency such as the Asian Development Bank (ADB) rewarded the country with the title of Tiger Economy. This changing status of development will surely impact the ODA provided to Cambodia five to ten years into the future. The relationship between ODA and GDP, particularly the strength of correlation will change at that time, but as of now, the data available from 1993 to 2015 shows the relationship to be very strong. Nevertheless, it is worth to note in the graph below the small annual drop of the disbursements since 2013.  

It is important to bear in mind that other factors also contribute to the expansion of GDP and ODA does not monopolize but contributes to the strong relationship. In this regard, it increases the need to better understand how ODA functions in GDP expansion. We will address this in the following section.

3)   Hypothetical Roles of ODA for GDP Expansion

Michael P. Todaro and Stephen C. Smith explained the role of ODA as the filling of the savings gap and exchange gap and called these the two-gap model[4]. However, experiences help build more theories. This seems to be true in the process to seek a framework that will help better understand the roles of ODA in the expansion of GDP. Here we will stress the hypothetical explanation on the flows and effects of ODA in the common equation of GDP. For the ease of understanding the framework, we will ignore the coefficients or assume that the coefficients for every component of the GDP equation are equally one (1)[5]. On these grounds, the following dissertations should be regarded as loose model statements on the roles of ODA and GDP expansion.

The common equation of GDP is  where  represents the domestic consumption of the households,  national investment,  consumption of the government and  net national export. ODA usually supports public expenditure, either investment or recurrent expenditure. In this regard, by breaking down the  we can introduce ODA into this equation.

 is the combination of public and private investments. Thus, . With the further breakdown of both and  into national resources and external resources (ODA or foreign investment), we have:

If we break  into two possible sourcess of own and external resources, we have:

As observed, the share of ODA in government recurrent spending is not high and usually possible through budget support, a modality that allows the government more freedom to use ODA for recurrent expenditure. In the following section we will focus more on the public investment aspect of ODA.

To sum up, we now have the equation of GDP in terms of the breakdowns and can observe it from the perspective of public investment as following:

When ODA finances projects or programs in social development like education and health, benefits will be more direct to the targeted households. These social development investments will possibly help accelerate public service deliveries either by infrastructure support or capacity development, which later contributes to easing the expenditure burden of households for other spending or additional saving.

ODA can attract more direct private investment, create jobs and enhance the productivity of the economy when it supports projects that develop economic infrastructures and business development environment, such as logistics networks, electricity, irrigation, Small and Medium Enterprise (SME) financing facilities, and human resources for industrial development. In this regard, the effect of the increase of ODA on GDP will be greater than the net increase of the ODA itself. To put it another way, the GDP output in this case is not only the infrastructure outputs or human resources but consists of other outputs such as more direct investment and jobs.

Though it will have no explicit or immediate effect in terms of social or economic development, ODA that supports the governance and administration sectors tends to impact institutional foundations for better-organized developing countries or societies. This should be considered as contributing to an environment favorable to GDP expansion as well as other factors in the equation.

The following summarizes these flows and effects:

4)   Conclusion: Some Observations

We can identify the roles of ODA in development by using GDP and breaking down the  Moreover, for the particular context of Cambodia there is a close relationship between ODA and development through public investment projects or programs. Cambodia consolidated a three-year rolling Public Investment Program that assembles both physical infrastructure projects and programs, and projects or programs on capacity development. This makes it more convenient and conforms to the above-mentioned explanation of the flows and effects of  ODA in GDP expansion. There is still discussion about whether capacity development should be considered as public investment projects or programs. In this context the above-mentioned concept should be carefully considered since public investments in GDP do not account for capacity development projects or programs.  

Given the above, we can conclude that better quality public investment projects or programs and good practices in ODA project/program formulation based on such investments will be very helpful in increasing development results and the impact of ODA resources. Three observations about ODA and development can be made from the framework above: ODA for economic physical infrastructures and human resource development will promote investment, employment and productivity of the economy; ODA provided for  social sector development will help reduce poverty and promote household consumption or additional saving for GDP; and ODA for governance and administration will help build the foundation for a well-governed society and state that is favorable to all factors of GDP including ODA management. Thus, to enhance or maintain the ODA-GDP relationship, it is imperative to improve ODA management through the strengthening of the quality of public investment projects or programs and the project formulation practices of ODA-supported projects or programs.      

5)   References:

Cambodia Rehabilitation and Development Board of the Council for Development of Cambodia, Cambodia Rehabilitation and Development Board of the Council for the Development of Cambodia Home Page, September 2016, The Royal Government of Cambodia. Available from: www.odacambodia.com . [03 September 2016].

  

Cambodia Rehabilitation and Development Board of the Council for Development of Cambodia, Cambodia Rehabilitation and Development Board of the Council for the Development of Cambodia Home Page, September 2016, The Royal Government of Cambodia. Available from: http://www.cdc-crdb.gov.kh/cdc/aid-management-cambodia.html. [03 September 2016].

 

Cambodia Rehabilitation and Development Board of the Council for Development of Cambodia, Cambodia Rehabilitation and Development Board of the Council for the Development of Cambodia Home Page, September 2016, The Royal Government of Cambodia. Available from: www.cdc-crdb.gov.kh [click on Aid Coordination & Meetings, CDCF and CG for Development Cooperation Report 2001, 2002, 2004, 2005,2006, and Cambodia Aid Effectiveness 2007, 2008, 2010]. [03 September 2016].

 

Cambodia Rehabilitation and Development Board of the Council for Development of Cambodia, 2011, Cambodia Development Effectiveness Report, The Royal Government of Cambodia.

 

Michael P. Todaro, Stephen C. Smith, Economic Development 11th ed., (p. 697-p.708),2012, Addison Wesley.

 

Ministry of Economy and Finance, Budget Law,  several financial years from 2004, Library of the Ministry of Economy and Finance, The Royal Government of Cambodia.

 

Ministry of Planning, Ministry of Planning Homepage 2006, The Royal Government of Cambodia. Available from www.mop.gov.kh [click on PIP]. [September 3, 2016].

 

6)   Data

Table 1: Actual Disbursements of ODA and Current GDP (1992-2015)                             (in million USD)

Year

1992

1993

1994

1995

1996

1997

1998

1999

ODA

        205.28

        317.28

        356.47

        508.79

        518.10

        383.20

        433.30

        399.70

GDP

 -

     2,533.73

     2,791.44

     3,441.21

     3,506.70

     3,443.41

     3,120.43

     3,517.24

Year

2000

2001

2002

2003

2004

2005

2006

2007

ODA

        466.80

        471.80

        530.90

        539.50

        555.40

        610.00

        713.20

        777.50

GDP

     3,654.03

     3,979.81

     4,284.03

     4,658.25

     5,337.83

     6,293.05

     7,274.60

     8,639.24

Year

2008

2009

2010

2011

2012

2013

2014

2015

ODA

        978.50

     1,000.20

     1,105.80

     1,422.60

     1,499.20

     1,478.90

     1,444.10

     1,343.00

GDP

   10,351.91

   10,401.85

   11,242.28

   12,829.54

   14,038.38

   15,449.63

   16,777.82

   18,049.95

Sources: (a) Actual ODA disbursement figures were collected from several reports of CRDB/CDC with advise and support of Doung Sivutha and Seak Eng, officers at CRDB/CDC. The disbursements included the ODA through NGOs as well. (b) Current GDP figures were derived from Database of World Development Indicators of World Bank.

 

Table 2: ODA Actual Disbursements 1992-2015 by Sectors                                              (in million USD)

Sector

Transportation

Health

Governance & Administration

Education

Agriculture

ODA

2,894.68

2,426.15

1,906.09

1,803.66

1,639.00

Share

17%

15%

11%

11%

10%

Sector

Rural Development

Community & Social Welfare

Energy, Power & Electricity

HIV/AIDS

Water & Sanitation

ODA

1,254.93

1,231.86

601.78

474.11

426.92

Share

8%

7%

4%

3%

3%

Sector

Culture & Arts

Banking and Business

Environment & Conservation

Other

Industry & Trade

ODA

311.01

296.46

279.68

329.13

166.66

Share

2%

2%

2%

2%

1%

Sector

Emergency & Food Aid

Tech, Information & Communication

Budget Support & Balance of Payment

Urban Planning & Management

Gender

ODA

156.46

142.58

104.91

77

67.43

Share

1%

1%

1%

0%

0%

Sector

Climate Change

Tourism

     

ODA

50.32

30.89

     

Share

0%

0%

     

Source: CRDB/CDC.

 

 

Table 3: Budgetary Total Capital Expenditure (A) and External Public Investment Needs (B)  

(in million Riel)

Year

2004

2005

2006

2007

2008

2009

2010

A

     1,025,000

     1,095,000

     1,303,780

     1,685,133

     2,111,467

     2,758,500

     3,121,000

B

        700,000

        750,000

        857,800

     1,110,000

     1,400,000

     1,700,000

     2,000,000

B/A

68%

68%

66%

66%

66%

62%

64%

Year

2011

2012

2013

2014

2015

2016

 

A

     4,165,000

     4,187,325

     4,602,500

     4,996,000

     5,323,500

     5,796,350

 

B

     2,600,000

     2,860,000

     3,146,000

     3,460,000

     3,687,000

     3,871,350

 

B/A

62%

68%

68%

69%

69%

67%

 

Source: Data from Cambodian Annual Budget Law and Management in several fiscal years compiled by Tea Saorithy. Shares were calculated by the authors.

 


[1] Nhean Tola is currently Freelance Consultant on ODA and Development Management. He has served in the positions of the program officer and senior program officer for over a decade at the Japan International Cooperation Agency, Cambodia Office where he helped to manage the agency’s portfolio and assistance policy, and the strategic operational relationship of Japan’s ODA in Cambodia. He experienced several of Japan’s ODA turning points at its home country and in Cambodia and he was part of its transformation in practice through his jobs in Cambodia.

Chea Sophak is currently the Economist of the Ministry of Economy and Finance of Cambodia and former program officer in charge of infrastructure and loan operation at Japan International Cooperation Agency, Cambodia Office. He has comprehensive experience in the loan operation of Japan’s ODA to the developing world and in Cambodia he held the responsibility of the infrastructure projects like roads and sea ports.

All the analysis in this paper is solely the authors’ responsibility and will not necessarily reflect the opinions or ideas of their current or former institutions.   

[2] Development Cooperation Report (period before 2007), Aid Effectiveness Report (period of 2007-2010), Development Effectiveness Report (2011), Aid Trend (2013- n/a), and Development Cooperation and Partnership Report (2016).

[3] Such disbursement also includes the ODA disbursement of NGO (own source). CRDB/CDC has one department to coordinate the NGO cooperation in addition to its Government-DP coordination. NGO database of CDC has been strengthened through such NGO relations making the annual total ODA disbursement reported by CRDB/CDC more inclusive of the ODA resources provided to Cambodia.

[4] Michael P. Todaro, Stephen C. Smith, Economic Development 11th ed., (p. 697-p.708),2012, Addison Wesley.

 

 

[5] With the availability of the series of data on the components of GDP (e.g. data on ADB Statistical System) and the annual disbursement ODA data we can regress the GDP equation for the particular economy, such as Cambodia, and can obtain the coefficients of each component including the coefficient of ODA as well. Such regression can provide more practical insight on the role of ODA in GDP expansion amid other factors in the GDP equation. However, the purpose of this paper is to set a convenient framework or concept rather than to empirically test it.