ODA is debt, use it efficiently

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Aid donors "pledge" more money than they can actually spend.

 Usually they spend about half as much as they pledge. The money they are unable to spend in one year generally gets carried over to the next year, which is one of the reasons that pledges seem to grow over time. The other reason they are so high this year is that the US dollar is weak relative to the yen and the euro, and ODA is denominated in US dollars.

Most of this ODA is loans, not grants. The largest donors are usually the World Bank, JBIC (Japan), and ADB. The terms of these loans are much softer than commercial loans, but they are indeed loans. Vietnam must use this money efficiently to avoid building up public debt faster than the capacity to pay it back.

ODA does not increase the size of the economy. The economy grows when more goods and services are produced in the country, and ODA does not produce more goods and services. So the effect of ODA is mainly to reduce the size of the fiscal deficit and the current account deficit through the import of foreign exchange. ODA is just a demand side adjustment: there is no adjustment on the supply side. If ODA finances good projects, then this increase in demand is useful. If it finances bad projects, it is a net loss for society because it draws supply away from good activities and leads them towards bad ones.

The end result of all this is that positive impact of ODA depends entirely on the quality of the projects financed.

By Jonathan Pincus*

* The writer is Dean of the Fulbright Economics Teaching Program

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