Sign Up

“PDA” and Global Development

How will PDA affect economic development in poor countries in the coming years?

January 7, 2004

How will PDA affect economic development in poor countries in the coming years?

This PDA — meaning not Palm Pilots, but Private Development Assistance — is big. It exceeds ODA flows in most countries, and even foreign direct investment in many.

The reason PDA gets little notice is that much of it happens behind the scenes.

It is often just a quiet self-help program in the form of remittances to families from workers who have been given a chance to migrate abroad.

PDA is an important complement to ODA and private investment. Future immigration policies of rich countries will determine whether PDA grows or languishes.

The future of PDA is all the more important because, realistically, Official Development Assistance does not have bright prospects.

Two decades ago, the Brandt Commission called for rich countries to contribute 0.7% of their national incomes to development assistance, rising to 1% by the year 2000. In fact, in 2000, the combined contribution of rich countries was less than half the original goal of 0.7%.

ODA — Boom or Bust?
Data and calculations by the Author. Copyright © 2004 by The Globalist.

Over the past decade, ODA has fluctuated in the $50-$60 billion range per year, without a significant trend. Most countries gave less aid relative to their incomes in 2000 than in 1990. French aid fell from 0.6% to 0.32% of national income, German aid from 0.42% to 0.27%, and American aid from 0.21% to 0.10%.

No matter how it is packaged — as traditional bilateral aid, as debt relief, or as an emergency package to fight AIDS — total ODA seems unlikely to start growing robustly.

Private foreign direct investment flows (FDI) are bigger than ODA and they are usually packaged with engineering and marketing expertise — as well as prospects of further inflows.

They are also less volatile than private lending and portfolio flows (investments in stock and bond markets).

The problem with FDI is that most developing countries get little of it. In 2001, total FDI was nearly $750 billion.

Not surprisingly, most of that was among rich countries. At $131 billion, the United States received the most foreign direct investment, with Belgium second at $74 billion.

Developing countries (including Hong Kong) together received $198 billion. But more than three quarters of this total went to only a dozen countries: China, Mexico, Hong Kong, Brazil, South Africa, Chile, Poland, Czech Republic, Thailand, Venezuela, India and Turkey. China, Hong Kong and Mexico alone received nearly half of the total.

Outside this group of countries, the rest of the developing world together received $48 billion in FDI in 2001. Private Development Assistance (PDA) complements ODA and FDI.

Remittances — to folks back home from workers overseas — are a surprisingly important source of foreign capital in many parts of the world.

Migrants to the petroleum-rich countries of the Middle East, from neighboring countries as well as from South Asia, join migrants to Western Europe, from Southern Europe, the Maghreb and the Balkans, in sending home billions of dollars a year.

Migrants to the United States and Canada (and Great Britain) from Latin America, the Caribbean and the Indian subcontinent also send back remittances.

A total of 68 countries with populations of a million or more reported to the World Bank that they received private remittances in 2001. Total remittances exceeded 1% of GDP in 41 of these countries.

Some of the 41 countries have relatively large economies — India, Mexico, Turkey — but most are small. Still, citizens of these 41 countries living and working abroad sent home nearly $58 billion in 2001.

Globally, the 68 countries received $66 billion in remittances. This figure exceeded global ODA in 2001, and it dwarfs ODA to these 68 countries, which received only $26 billion.

In the 41 "high-remittance" countries, private remittances exceeded official aid by a ratio of more than three to one. PDA also exceeded FDI in 24 of these 41 countries, including all of South Asia and the Middle East. Total PDA was about equal to total FDI in the 41 countries.

Among the 41 high-PDA countries, the biggest recipients are big countries. India received $11 billion in 2001, Mexico $8 billion. But some much smaller countries also receive substantial transfers. After India and Mexico, Morocco received the next largest flow of remittances to a developing country, at $3.3 billion.

Scaled against the size of the economy, the flows of remittances to India and Mexico are more modest. India's remittances amounted to 2.4% of its GDP, while Mexico's was 1.4%. Some smaller countries are much more heavily dependent on private aid.

Remittances to Eritrea and Jordan exceeded 20% of GDP, while Yemen, Yugoslavia (Serbia and Montenegro), Albania, El Salvador and Jamaica all depended on remittance inflows between 10% and 20% of their GDPs.

Trends in remittances differ across regions. The countries most dependent on remittances every year have been Middle Eastern and North African states that do not export petroleum.

Those include Egypt, Jordan, Morocco, Tunisia, Yemen and (in my classification) Sudan. Private remittances to these countries totaled more than $10 billion in 2001, fully 6% of GDP.

Still, remittances have been falling fairly steadily for this group since the mid-1980s, when they exceeded 10% of GDP.

Private remittances have not kept up with GDP in Southern Europe, either, with transfers to Greece, Portugal and Turkey falling from about 4% to 2% of GDP between 1980 and 2000.

As the Southern European latecomers to the EU — Spain, Portugal and Greece — have developed, their dependence on remittances has diminished, but remittances remain important, especially for Portugal and Greece. In 2001, workers from Portugal, Greece and Turkey sent home nearly $8 billion.

In other parts of the world, the importance of remittances has been growing. In South Asia remittances have risen since the early 1990s to reach about 2.6% of GDP.

Citizens of India, Pakistan, Bangladesh, Sri Lanka and Nepal sent home nearly $16 billion in 2001.

A large number of countries in Latin America and the Caribbean also receive a growing stream of remittances: Mexico, Colombia, Peru, Ecuador, Bolivia, Paraguay, Dominican Republic, Guatemala, El Salvador, Jamaica, Honduras, Costa Rica and Nicaragua. By 2001, the total — $19 billion — exceeded 2% of their combined GDP.

In Africa, data are poor. Only a few countries register substantial flows of remittances relative to GDP. In 2001, the total — $0.7 billion — reached about 4% of the combined GDP in Senegal, Burkina Faso, Mozambique, Mali, Benin, Eritrea and Togo.

PDA — By the Numbers
Data Source: World Bank World Development Indicators 2003. Copyright © 2004 by The Globalist.

Data for the former socialist countries are poor as well. Component states of the former Yugoslavia, Albania, Latvia, Mongolia and a couple of Turkic republics of Central Asia together reported about $3 billion in remittances in 2001, nearly 6% of their combined GDP.

In general, only Africa and the former USSR depend more heavily on official aid flows than on remittances, while the more dynamic economies of East Asia and Latin America depend more on FDI than on remittances.

Private Development Assistance fills an important gap among countries in South and West Asia, North Africa and Central America — countries that receive relatively little official aid and little private direct investment.

International migration is almost always seen as a problem of absorption and control by the host country. The potential benefits to the home country of the migrant are hardly ever mentioned.

Yet PDA, the result of international migration, is more important than official aid and private direct investment in much of the developing world.

Unlike official aid, PDA is not dependent on the charitable impulses of the rich, but only on the establishment of opportunities for citizens of developing countries to find jobs abroad.

Better yet, migrant workers contribute economically to the host country as well, adding value and paying taxes.

Like international trade, international migration can benefit everyone involved: It generates employment opportunities for citizens of poor countries, giving them income that they share with their families, while providing host countries with productive workers.