THE NET OFFICIAL DEVELOPMENT ASSISTANCE (ODA)

AND ADULT LITERACY RATE:

RELATIONSHIPS AND IMPLICATIONS

A Research Paper

Presented to the School of International and Social Sciences

University of Tsukuba

In partial fulfilment

Of the requirements of the Course

Contemporary Issues in Developing Countries

Richard Mel CAPLIS

Thi Minh Thu DO

Oybek IMOMSAIDOV

Mariia MUKHAMETOVA

Loshin ONO

Mio SAITO

Keitaro SHIGEMOTO

Sae SHIMADA

Shun TAKAKURA

December, 2015

Abstract

Some believe that aid is the golden ticket out of poverty. However despite aid being provided

some find that usage of the aid is not sufficient. Thus many seek to find what factor improves

through aid that leads to poverty reduction. One factor which the research undertook is

education, in particular adult literacy rate. It became apparent that age groups within the

definition of adult literacy were the “productive sector”. In hope, the researchers presumed

that if productive sector advanced through aid, in particular Net ODA, their economy would

raise leading to poverty reduction. In order to see the correlation between adult literacy and

aid, the research first focused on finding who, why and how aid was provided and used after

received. After using World Bank data, the research used regression statistics and scatter

diagram to visual conceptualize the data. Furthermore in order to get depth understanding of

this trend the researchers took into account of historic data. While the research found that aid

was provided by developed countries due to historic, political or economic interest, it also

pointed out that one factor which determines poverty reduction was political environment of

the receiving country. In consideration to this the statistical data showed little correlation

between Net ODA and adult literacy. This study concludes that net ODA per capita changes

may not have any significant effect the adult literacy rate of a country. The research indicates

that in spite of aid being provided, key factors such as adult literacy may not change, thus

implying the failure to reduce poverty.

Keywords: Foreign Aid, Net Official Development Assistance, Adult Literacy Rate

Introduction

This paper studies foreign aid and its effect to adult literacy rate. In line with that, this

inquires on what countries gives the biggest amount of foreign aid and what motivates them

to do so. The study is of relevance since the values and analysis derived herein can be used to

check if foreign aid does really uplift the plight of the poor- that which is highly subjected to

debate in the academe.

Background of the Study and Definition of Terms

Economists and policymakers alike debate highly in the matter as to whether foreign aid does

really or doe not assist the countries and its citizens to whom it is directed. To add, Todaro

and Smith (2011) also highlight the problems in defining the concept of foreign aid in itself.

According to them, in general, foreign aid includes the transfer of resources by public entities

and private individuals and groups from one country to another either directly (referred to as

“bilateral aid”) or indirectly (referred to as “multilateral aid”). The same work claims that

this is problematic as resource transfer can take “disguised” forms just like lower tariffs. As

such, economists defined as transfer of capital to a developing country that is non-

commercial in nature and is given in concessional terms (i.e. cheaper or less stringent terms

vis-a-vis than those available in the market (Bhagwati, 1972 as cited in Todaro and Smith,

2011). The most measured form of this is the Official Development Assistance or ODA

which has been historically provided for by members of the Organization for Economic

Cooperation and Development (OECD). ODA is consisted of disbursements of loans made

on concessional terms and grants by official agencies of the members of the Development

Assistance Committee (DAC)1, by multilateral institutions, and by non-DAC countries

(Todaro and Smith, 2011). These disbursements must meet the criteria provided for below

(DAC-OECD, 2015):

i. provided by official agencies, including state and local governments, or by their

executive agencies; and

ii. each transaction of which

a) is administered with the promotion of the economic development and welfare of

developing countries as its main objective; and

b) is concessional in character and conveys a grant element of at least 25 per cent

(calculated at a rate of discount of 10 per cent).

Net ODA is ODA less payment on the principal of concessional loans received (World Bank

1, 2015). The researchers opted for this measure as this is readily available in the World

Bank- International Monetary Fund online database. Furthermore, it is a more fitting measure

of the aid received by the country as it takes into consideration the outflow of capital from the

aid receiving country to the aid giving country or entity as this affect the overall resources

available in the receiving country that can be used for its purposes.

As indicated above, ODA is meant for “is administered with the promotion of the economic

development and welfare of developing countries.” As mentioned, as to how far ODA has

1 According to its website, DAC is a “unique international forum of many of the largest funders of aid,

including 29 DAC Members. The World Bank, IMF and UNDP participate as observers.” Please visit http://www.oecd.org/dac/developmentassistancecommitteedac.htm.

reached its objective is fraught with disagreements (e.g. World Bank 3, 1998, and Boone,

1996). These studies, however, focused in directly correlating foreign aid with economic

development. There are also studies reviewed by Riddell (2012) on foreign aid and education

but such studies focused in the primary education (elementary and high school). The

researchers contend that the adult literacy rate defined by the World Bank (2- 2015) as “the

percentage of the population age 15 and above who can, with understanding, read and write a

short, simple statement on their everyday life... ‘literacy’ also encompasses ‘numeracy’, the

ability to make simple arithmetic calculations” as the more valid measure to use in studying

the effect of ODA and foreign aid in general to education. It is because the labor force or the

“productive sector” of the country which is commonly defined as those who are 15 years old

to those below 65 years old that directly contribute to the economic output of the country is a

subset of the adult population.

Research Questions and Methodology

It has been more than 50 years since the DAC was established in 1961, and there is a plenty

of contradictory opinions on whether foreign aid helps or not. This makes the question as to

whether what is the effect of Net ODA to adult literacy rate of critical importance, making it

the general question in this paper.

Specifically, the following questions are posed for inquiry:

1. Who gives and who receives foreign aid?

2. Why do they give foreign aid?

3. What are the impacts of the foreign aid on adult literacy rate?

To do such, this paper conducted a review of the empirical literatures available. Further,

using numerical data from the World Bank- International Monetary Fund database, statistical

analysis were also conducted through analysis of variances (ANOVA) and simple linear

regression using Microsoft Excel.

Objectives

This study would like to contribute to the available literature that will make the relationship

between foreign aid and education clear. More specifically, this study seeks to study the

relationship between Net ODA and the Adult Literacy Rate by reviewing available empirical

literature on the subject and by conducting analysis of available numerical data. The question

that will be answered in this essay is whether adult literacy rate will be affected or not,

especially in the least developed countries as defined by the United Nations (UN), by the net

ODA. This will in turn help to answer the highly debated issue as to whether foreign aid does

really reduce the incidence of poverty in the countries that receive such. It is because there is

a relationship between poverty and education it is useful to find whether net ODA has impact

on literacy rate, which means more investment in education would directly be helpful for

countries who are suffering from poverty and eager to improve the condition by increasing

adult literacy rate.

Significance of the Study

This study is of importance since literacy rate is perceived to be one of the key factors for the

development of a country. This study is unique as it singles out the adult literacy rate, and not

the literacy rate in general as a variable for development affected by the foreign aid. It has

been theorized that a good point of high literacy rate is that people with higher educational

attainment move from agricultural sector to manufacturing and industrial sectors. In these

sectors, they can earn more wage vis-a-vis than working in the farm. Thus, they can spend

more money on purchasing lots of things needed for their daily lives in order to live in a

better life. In addition, they can grow their children up with better environment. Furthermore,

increased spending could stimulate creation of other jobs and other positive spill over effects

leading to better economic conditions. As per the working paper prepared by Masud and

Yontcheva (2005), there is a positive correlation between adult illiteracy and poverty. By

looking into the relationship between net ODA and adult literacy rate more profoundly this

study is of value for the countries giving aid to evaluate if aid is the proper way to provide

help in upgrading the adult literacy rate. This study is also important for countries in the

receiving end to guide their spending plans with regards to aid.

Review of Related Literature

Who gives foreign aid?

Figure 1: The Top Aid Giving Countries in 2013 as measured in the total Net ODA given in USD

Billion (Current Prices). Image from the OECD.

31.55

17.88

14.06

11.79 11.38

5.83 5.58 5.44 4.91 4.85

3.25 3.20 2.93 2.28 2.20 1.74 1.44 1.17 0.82 0.48 0.47 0.46 0.43 0.31 0.21 0.09 0.06 0.04

0

5

10

15

20

25

30

35

USD billion Net ODA in 2013 - amounts

134.8

As indicated in the figure above, the United States of America gave the highest aid in the

entire world. From the study of Alesina and Dollar (2000), the following facts were noted:

1. U.S. donates one-third of its foreign aid to Egypt and Israel. This is because of

the assumption that these two are essential in advancing the American interests in

the region.

2. Japan gives aid to countries which vote in tandem with Japan receives more

assistance. Japan tends to give aid disproportionately to countries which have

close investment and trade ties with Japan.

3. France gives overwhelmingly to its former colonies.

These findings may not come as a surprise. However, if the performance of the aid giving

nations is benchmarked against the UN target that calls for high income countries to give at

least .7% of their Gross National Income (GNI) in form of aid, only Norway, Sweden,

Luxembourg, Denmark and the United Kingdom were able to do so as of 2013 data.

Figure 2: Net ODA as percentage of GNI by top aid- giving countries as of 2013. From OECD.

Why do they give foreign aid?

As shown in the data above mentioned, 70% of total aid accounted for by four countries;

U.S., Japan, France, and Germany. There are many reasons why the countries give foreign

aid. According to the paper of Alesina and Dollar (2000), theorized the reasons why countries

give aid as follows:

1. Promote growth and reduce poverty

To measure as to whether poverty reduction and growth promotion is the reason why

countries give aid, the study measured the elasticity of aid per capita and noted to the

1.07 1.02 1.00

0.85

0.72 0.67

0.55

0.47 0.45 0.45 0.41 0.38

0.34 0.28 0.27 0.26 0.26

0.23 0.23 0.19

0.16 0.16 0.13 0.13 0.13 0.11 0.10 0.09

0.30

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2 As % of GNI

Net ODA in 2013 - as a percentage of GNI

UN Target 0.7

Average country effort 0.40

initial income levels of the receiving country. It was noted that there is a weak

correlation with the coefficient of correlation measured at .12.

2. To facilitate trade openness

As for Japanese trade, many raw materials are imported from developing countries.

So, it is very important to support trade partner, such as providing environment of

trade and investment, to ensure a sustainable source. As per the result, there is also a

weak correlation between the openness (i.e. lower tariff for imports and preferential

trade agreements as measured through Sachs and Warner index (1995)) of a country

and the aid it receives at .13.

3. To facilitate democratization

U.S. has strong desire to improve democracy in developing countries and has touted

the use of foreign aid to have the countries democratize in exchange for bigger aid. As

such, the more democratic the country is, the more aid it should receive. Though the

correlation of coefficient calculated is weak at .19, this is higher than that of the

reason to promote growth and reduce poverty. This thus affirms the view that aid is

not a neutral, ideal thing but rather aid is a tool within political-economic arsenal of a

country.

4. Colonial status

Portugal and U.K. have big share to donate past colonies, on the other hand, Canada

and Sweden have no past colony. As per the results of the regression, the correlation

of aid per capita to the length (in years) of being a colony of an aid giving country is

.21, which is the highest among the variables studied.

In addition, Todaro and Smith (2011) stipulated that ODA is:

…allocated in some strange and arbitrary ways. South Asia, where nearly 50% of the

world’s poorest people live, receives $8 per person in aid. The Middle East and North

Africa, with well over triple South Asia’s per capita income, receives nine times per

capita aid!... India, with by far the largest population of extremely poor people in the

world, received just $2 per person in aid. And while Jordan, a middle- income

country, received $126 per person, Niger, considered the poorest country in the

world, received just $41 per person….

What are the impacts of the foreign aid?

The effectiveness of aid is always a heated topic. A substantial amount of research has been

conducted by economists and specialists from international organizations such the World

Bank Group and the International Monetary Fund to find answers. At micro level, most

evidence suggests a highly positive impact of aid on economic development (World Bank 3,

1998), in which 70% to 90% of the projects carried out by donor agencies were successful.

On the other hand, evidence at macro level shows a much less positive link between aid and

economic development. Boone (1996) convincingly proves a rather negative relationship.

Critics argue that foreign aid can result in more government corruption by crowding out

innovation and investment from private sector (Easterley, 2003). It discourages developing

countries from saving at domestic level (CBO, 1997). Griffin and Enos (1970) find out that

countries receiving aid seems to have less propensity to save, leading to less investment.

Weisskopf (1972) reaches a similar conclusion that aid negatively affects domestic savings

from the sample of 44 developing countries. At the same time, aid is used more for

consumption rather than for investment (CBO, 1997). Boone (1996) concludes that there is

no significant correlation between aid and economic growth due to the fact that most of the

aid is spent for consumption.

On the other hand, evidence from studies also shows a positive correlation between aid and

development. Dalgaard, Hansen, and Tarp (2004) suggest that aid indeed is effective. Heller

(1975) even finds a significantly positive link between aid and investment. Rogerson (2005)

concludes that as long as aid is used effectively, it can produce substantial outcome on

growth.

With a different viewpoint, some development economists argue that aid itself does not have

any effect on growth the outcome is more determined by policy environment in the receiving

countries. Using a panel of 56 countries, Burnside and Dollar (2000) concludes that under the

environment of good fiscal, monetary, and trade policies, aid can lead to positive impact on

growth. On contrary, aid has little effect in the presence of poor policies (Burnside and

Dollar, 2000). Wrong policies formulated by policymakers make aid seem to be negative to

growth (Pronk, 2003).

There has been a limited amount of literature on the effectiveness of aid on education sector.

It seems to be far more difficult to show the impact of aid on education than that one health

as “improvements in mortality rates are more visible than increased learning” (Riddell, 2012).

Roberts (2003) concludes that aid for education may have more effective in raising enrolment

rates than government expenditure on education. Aid provides fund for building new schools,

supplying teaching and learning material and reforming curricula in order to improve the

quality of education, which encourages children to attend school more, while at least two-

thirds of government expenditure is spent on salary for teachers (Michaelowa and Weber,

2006). Bennell (2002) finds out that government expenditure on education might not spend

on the poor but for people of higher socio-economic status.

Foreign aid helps to increase gross primary enrolment (Michaelowa, 2004). In her paper,

Michaelowa indicates that 25 million US$ in absolute terms, which is around 0.15% of

national GDP of the recipient, is required in order to raise enrolment rate by 1%. Aid should

be spent much more effectively in order to achieve universal primary education. Riddell

(2012) also concludes that there is a big gap between what aid does and what it could

potentially do to improve education. The presence of this gap in the literatures reviewed

motivated the researchers to make statistical review.

Statistical Review: Framework and Results

With the mentioned assumptions and literatures reviewed, the researchers propose the

conceptual framework, as provided in the proceeding page. The foreign aid is measured

through the Net ODA (totals and per capita per country) values and the adult literacy rates

available in the World Bank database. It is theorized that these two got positive relationship.

With the limitation on data, time and skill of the researchers, only Analysis of Variance (two

way) and linear regression were made.

Figure 3: Conceptual Framework of the study.

Prior to conducting statistical modeling, the group reviewed empirical studies data and

results. Focusing in the research made by Masud and Yontcheva (2005) in addition to those

reviewed above, the study claims strong relationship between the foreign aid and in reducing

adult illiteracy. However, they have subcategorized the foreign aid to Non-Government

Organizations or NGOs from other bilateral aid, they did so to show that NGOs have more

effective impact on the humanitarian concerns because they are advocates of the poor and the

most vulnerable populations and their motivations are believed to be altruistic.

However, since this study is concerned in the relationship of foreign aid, specifically of per

capita net ODA in current US Dollars to adult literacy rate, the researchers made linear

statistical correlation. The researchers made use of two way Student’s t-test to determine if

the t- values calculated in the regression process are significant or not. The researchers

propose the following linear model:

AveAdLiti,t->t+14=β1+AvePCNetODAi,t->t+14 β2±e Equation 1

Where:

AveAdLiti,t is the Average Adult Literacy Rate in country i in year t to year

t+14 or fifteen years from the base year

β1 is the constant term

β2 is the coefficient of PCNetODA

AvePCNetODA is the average per capita net ODA in country i in year t to

year t+14 or fifteen years from the base year

e is the error term

The group made use of the data on the 214 countries and territories listed by the United

Nations. However, not all of the 214 countries and territories have complete data, thereby not

allowing the group to linearly regress all of the countries. As such, the group only focused in

the 142 countries out of the 214 countries with the complete set of data. The result of the

linear regression, together with its corresponding scatter plot diagram is provided for in the

next page. The base year used is 1999 as it is said to be relatively peaceful and economically

stable year. The data used is the 15 year averages including the 1999, thus the averages for

the years 1999 through 2013, because a person becomes part of the “productive sector” at age

Scope and delimitation of this study

Foreign

Country

Foreign Aid Given

minus payments on

loan principals (Net

ODA)

Adult Literacy

Rate (+)

Increase

of per

capita

income

Poverty

Reduction

15 and to take into consideration the fact that an aid given takes time for its effect to make

manifest. Further, the group decided not to use the data on education aid given by the OECD

as it only factors in its members that gives aid and not the aid given by non-OECD members

as the usage of such may lead to underestimation of net ODA per capita received by the

country.

Regression Statistics Multiple R 0.115663373 R Square 0.013378016 Adjusted R Square 0.006330716 Standard Error 20.4490935 Observations 142

Coefficients Standard Error t Stat

Intercept 78.56625092 1.787706365 43.94807

X Variable 1 0.008058977 0.005849186 1.377795*

Table 1: The regression parameters.

(* means significant at 20% alpha level at df=120)

Figure 4: The Scatter Plot Diagram of the Net ODA per Capita and Adult Literacy rate of 142

countries with trendline.

The linear regression displayed above depicts that the net ODA per capita received by the

countries has a weak relationship with the value of multiple r (coefficient of correlation) set

as 0.115663373 However, as measured using the coefficient of determination (r2), the model

and the variable employed (i.e. net ODA per capita) is very low at 0.013378016 which is

roughly equal to .0134, which means that the influence of net ODA per capita to adult

literacy rate is only around 1.34%. Furthermore, the t-stat value of the net ODA per capita is

only significant at an alpha level of 20%. This implies that net ODA per capita changes

may not have any significant effect the adult literacy rate of a country.

0

20

40

60

80

100

120

-500 0 500 1000 1500 2000 2500 3000 3500

Adult Literacy Rate (%)

Net ODA per Capita (in current USD)

Another statistical tool that the researchers employed is two way analysis of variance or

ANOVA. Through this test, it can be indicated if the adult literacy rate significantly increased

with the intervention of foreign aid through time. The average adult literacy rates of the 98

out of the 214 countries and territories listed by the United Nations that have data on their

average adult literacy rates for the years 1984 to 1998 and 1999 to 2013 were selected. The

results are provided below.

Source of Variation SS Df MS F P-value F crit

Between Groups 3184.345 1 3184.345 6.285251 0.013004 3.890347745

Within Groups 97274.45 192 506.6378

Total 100458.8 193

Table 2: Result of the Analysis of Variance

In the line of the ANOVA results, it can be noted that the F value is higher than the F crit or

F critical value calculated (F > F crit). In statistics, this implies that there is a significant

change through time in the adult literacy rates of the sample countries. This is

notwithstanding the fact of the presence of foreign aid inflows to the countries through the

years spanned by this ANOVA. With the results of the linear regression withstanding, it can

be stated that through time, there is a change in the adult literacy rates of the countries but

this is not attributable to the aid they received.

Conclusion

The concept of this research was to see if poverty reduction is achievable through education

as measured by the adult literacy rate that is influenced by foreign aid, to be specific Net

ODA, given by developed countries. In order to investigate this trend the researchers first

looked into the question who, why and how foreign aid effected developing countries. In the

literature review it had became apparent that developed countries, such as US, the UK and

Sweden, were the main providers. In most case the reason for the distribution of aid was

down to state interest; whether it be self representation within the international sphere, trade

openness or facilitating democratization and colonial attributes. In the statistical review,

based on data collected by World Bank of 14 countries, showed that influence of Net ODA

per capita to adult literacy was around 1.34% and that t-stat value was only significant at

alpha level of 20% thus suggesting that Net ODA per capita changes may not have any

significant effect on adult literacy rate of a country. In order to see in-depth the trend of net

ODA and adult literacy, this research looked in to historical time line. The ANOVA results

imply that there is a significant change through time in the adult literacy rates of the sample

countries. With the results of the linear regression withstanding, it can be stated that through

time, there is a change in the adult literacy rates of the countries but this is not attributable to

the aid they received. The hope of this research was to prove that changes in Net ODA

towards improvement education, in particular adult literacy, would develop developing

countries thus reducing poverty. Contradictory to what the researchers hoped, the findings

showed that despite Net ODA being given to developing countries, its impact to their

education is negligible, thus may imply failure in reducing poverty. Indeed, the researchers

acknowledge the rudimentary statistical analysis employed. Nevertheless this research has

demonstrated that relationship between net ODA and adult literacy rate is minimal and

implications of this is that aid does not necessarily improve education and therefore does not

ultimately lead to poverty reduction. This then imply that foreign aid as measured through

Net ODA, if it aims to improve quality of life by educating the labor force to make them

productive, is perceived to be unfeasible. The researchers acknowledge the limitations of the

data used, model developed and statistical method employed and thus subjects this paper to

scrutiny.

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