Reversing the trends that leave LDCs behind: How ODA can be targeted to the needs of people living in greatest poverty post-pandemic

The impacts of the crisis caused by the Covid-19 pandemic will be felt for many years. The global economy shrank by 4.3% in 2020. The expected recovery in 2021 will only marginally offset the downturn at the global level and recovery will not be even. The pandemic has had a starker impact for people who were already facing challenging circumstances, insecurity and low incomes, pushing an estimated 76 million people into extreme poverty in 2020.^[1] Richer countries have countered some of the worst effects through unprecedented stimulus packages, estimated at over US$12 trillion globally,^[2] but in least developed countries (LDCs) stimulus per capita (person) is 580 times less than in developed countries. This means less to invest in social safety nets and lifelines, supporting jobs and businesses – all vital to economic stability, tackling the health crisis and protecting lives and livelihoods. This significant difference in capacity to respond puts countries on very different paths, sparking growing consensus that Covid-19 is deepening a ‘great divergence’,^[3] leaving the poorest countries, and people in the deepest poverty, further behind.

This is a fundamental and long-running challenge that puts the Sustainable Development Goals (SDGs) and the promise to leave no one behind at risk. Extreme poverty is already increasingly concentrated in LDCs. These countries have also seen a disproportionate share of the recent increase in extreme poverty incidence caused by the pandemic, contributing to wider concerns of a divergence in recovery between rich and poor countries. LDCs are expected to see a slower economic recovery. LDCs have lower domestic resources and less capacity to mobilise more at sufficient rates. They capture less of international flows while official development assistance (ODA) plays a greater role in supporting provision of basic goods and services than in other countries.

This divide existed before the pandemic and, despite commitments to bridge it, the world was already off track in meeting those ambitions. While important improvements have been made in some areas, progress in ending poverty had tapered off and was rising in sub-Saharan Africa, hunger was on the rise again after falling for years and progress on tackling malaria had stalled amid many other challenges that were increasingly concentrated in poorer, more fragile countries.^[4] Financing was also off track with persistent shortfalls in spending needed to meet SDG financing gaps,^[5] which were larger in lower income countries, with some estimating they would remain as much as 10% of gross domestic product (GDP) for key SDG targets by 2025.^[6] The longer term impacts of the pandemic risk exacerbating many of these challenges.

For a number of countries ODA will be a key factor in overcoming these barriers, and yet ODA has not been appropriately targeted to LDCs when compared with the levels of poverty and the challenges they face. Evidence on the latest trends in ODA suggests that this picture has changed little during and in response to the pandemic.

Continued divergence for LDCs, where barriers to progress are already high, will undermine a sustainable, equitable and fair recovery. This paper explores how this divergence is playing out, looking at the poverty landscape and the broad financing picture then focusing on how ODA can be better deployed to genuinely build back better.

Key findings

The Covid-19 pandemic has impacted LDCs disproportionately; people in greater poverty have seen more severe effects on their incomes, health, education and nutrition, and progress out of poverty will be slower compared with other countries.

LDCs account for just 14% of the global population and yet a quarter of the increase in extreme poverty (living on less than $1.90 a day per capita) during the pandemic. Furthermore, an estimated 20 million people were pushed below the $1-a-day income level (2011 PPP) in 2020 with more than half (55%) of these people in LDCs. Projections indicate that LDCs will continue to represent around 90% of the countries with poverty rates over 40% in 2021. While there has been a relatively small increase in the absolute numbers of people in poverty in LDCs, recovery from the pandemic is expected to be slower. A further 5 million people are being pushed into extreme poverty in 2021, while poverty rates start to fall again in other developing countries. People already living in poverty in LDCs were much more likely to report falling incomes alongside growing struggles to access healthcare and education and concerns about food security.

Low domestic resources in LDCs leave significant funding shortfalls to respond to the poverty challenge and support critical SDGs.

Domestic resources in LDCs were just US$150 per capita in 2019, much lower than both upper-middle-income countries (US$2,326) and lower-middle-income countries (LMICs) (US$435). The absolute gap in per capita revenues is projected to grow as poorer countries start their recovery from the pandemic’s effects from a much lower baseline. Hence, critical areas such as health are underfunded – spending in LDCs from all sources on health was just US$42 per capita in 2019. In LICs and lower-middle-income countries the minimum per capita spending needed to meet essential universal health coverage was US$79 and US$130, respectively. No LDC has met the targets for combined spending on education and health as a proportion of total government expenditure.

LDCs receive less from key international financial flows, so falls drive greater relative impact on financing capacity.

Foreign direct investment (FDI), remittances and tourism are important flows for LDCs, but they are projected to see a significant downturn. Projected falls in FDI would see a loss of US$4.7 billion in investment over 2019–2021. For LDCs, remittances are equivalent to a higher proportion of GDP (4.6% compared with 2.6% in other developing countries) so the projected 10% contraction of US$5.5 billion from 2019 to 2021 represents an important loss of income to many households. Revenue from tourism has fallen dramatically with expected losses of 60–70% in tourism-dependent LDCs. Across FDI, remittances and tourism flows there has been a cumulative fall of US$51 billion to LDCs over 2019–2021.

Despite rising needs, targeting of ODA to LDCs remains weak and has not improved during the pandemic.

The fall in other international resources highlights the significance of the counter-cyclical role of ODA to LDCs. However, over the last decade ODA to LDCs has grown at a similar rate to other developing countries and at less than half the rate of ODA that is not allocated to specific countries. Disbursements to LDCs, however, have been more volatile than those to other countries over the period. Organisation for Economic Co-operation and Development (OECD) Development Assistance Committee (DAC) donors responded to the pandemic by increasing total ODA by 3.5% in 2020, effectively ending a 4-year period of stagnation. ODA to LDCs, however, increased by half this rate – 1.8%. The upshot is that ODA has not responded to shifting distributions of poverty. By 2025 57% of the world’s people living in extreme poverty is estimated to live in LDCs, up from 31% in 2010 and 50% in 2020. This is not in line with proportions of ODA to LDCs, which have actually fallen over the period from 32% in 2010 to 29% in 2019. Only five donors meet the UN target for ODA to LDCs; if all had met it in 2019 an additional US$35 billion to US$60 billion would have been mobilised.

Concessional^[7] lending continues to rise, while ODA to support the most vital sectors to end poverty and develop human capital can be better targeted to LDCs.

In 2020 total ODA grew by 3.5%, while ODA in the form of loans and equity grew by 28%. The proportion of ODA loans to LDCs in 2020 will not be confirmed until early 2022. However, between 2010 and 2019 bilateral ODA loans to LDCs grew five-fold, while grants fell by 9%. It is thus likely that this trend will continue and possibly accelerate.

ODA to critical sectors to develop human capital and poverty alleviation – health, education, social services, agriculture, digitalisation, and water, sanitation and hygiene – has remained a relatively small proportion of total ODA to LDCs: less than half. In health and education, countries with the lowest government resources receive less ODA per capita in poverty than other countries, and LDCs make up most of these. Around three quarters of LDCs received below the developing country median of education ODA (US$36) and health ODA (US$40) per capita in poverty in 2019, the latest year for which sectoral ODA data is available.

Recommendations

Tackling poverty and deepening inequality for LDCs, and redressing the growing divergence to the rest of the world, requires action. There are growing challenges to the poverty focus of ODA, strengthened in many cases by Covid-19. These range from greater domestic self-interest in donor countries to the need to finance global public goods such as the pandemic and climate resilience – all of which put pressure on the limited amount of ODA available. Designing these global investments to better support LDCs is vital, but this analysis clearly supports a case for better targeting of ODA.

• ODA should be much more targeted, based on analysis of poverty and needs at country, household and individual levels, and in the shorter term must respond directly to the needs and challenges created by the pandemic.
• Donors need to prioritise LDCs and allocate ODA in line with the proportion of people living in extreme poverty, meeting the UN target of 0.15–0.20% of gross national income (GNI) as ODA to LDCs. Only five donors met this in 2019. Some LDCs are particularly poorly supported with ODA relative to poverty and domestic resource capacity. Increasing ODA to LDCs in line with the target would mobilise an additional US$35–60 billion, enough to both raise ODA to all LDCs and equalise funding to the countries furthest behind.
• A higher proportion of ODA needs to be allocated to LDCs to sectors that have the greatest impact for people living in extreme poverty.^[8]

At the end of 2020, an estimated 737 million people were living in extreme poverty as the pandemic reversed years of progress, pushing more than 76 million people back into poverty in 2020 alone. Least developed countries (LDCs) were already disproportionately affected by poverty and its consequences, and this has worsened with the current crisis.

Disproportionate impact of the pandemic on the people living in greatest poverty

The global crisis caused by the Covid-19 pandemic has pushed back progress on ending extreme poverty, wiping out seven years of progress. It has been argued that recovery is also likely to be slowest among people living in poverty as developing countries fall further behind richer countries and emerging economies, driving a growing gap between the people in greatest poverty and the rest.^[9] This will likely have a disproportionate impact in LDCs where poverty is more concentrated.

Extreme poverty has become increasingly concentrated in LDCs over the last decade. In 2020, LDCs accounted for an estimated 48% of people in extreme poverty, while in 2010 this was 29%.

This trend risks being exacerbated further as LDCs accounted for a disproportionate share of increases in poverty driven by the pandemic. Whilst LDCs constitute 14% of the global population, they accounted for 25% of increased extreme poverty incidence (living on less than $1.90 a day per capita in 2011 PPP) in 2020 (Figure 1). They account for an even greater proportion of increases in $1-a-day poverty (2011 PPP), pushing large numbers of people into even deeper poverty. It is estimated that another 20 million people may have fallen below this line in 2020 globally, of whom around 55% were in LDCs. This level accounted for approximately 12% of LDCs’ populations in 2019, rising to 13% in 2020, and it is expected to remain at that level in 2021. By contrast, this accounts for less than 1% of the total population of other developing countries.

The proportion of people living in extreme poverty in LDCs thus increased from 33% in 2019 (23 million people) to 35% in 2020 (362 million people) (Figure 2). And while some recovery is expected for LDCs in 2021, this is only likely to drop one percentage point, which nonetheless represents an additional 5 million people falling into poverty due to population growth. The countries facing the most extreme levels of poverty will remain largely the same in 2021 – they include South Sudan, where extreme poverty will grow only 1% but reach 87% in 2021, Burundi (81%) and Madagascar (77%).

Similarly, countries experiencing protracted crises and fragile and extremely fragile countries – of which four-fifths are LDCs – have all seen increases in the proportion of their populations living in extreme poverty, with little recovery expected in 2021.

LDCs will still make up the vast majority of countries with extremely high poverty rates in 2021: approximately nine in ten of countries with more than 40% of their population in extreme poverty. LDCs make up approximately two-thirds of the countries that saw more than a 2% increase in poverty in 2020 and just over half of those expected to see an increase in 2021.

Distributional effects of poverty trends since Covid-19 in LDCs

The previous section has considered effects at an aggregate national level, with projections assuming that people across income distributions will be equally impacted by changes in gross domestic product (GDP). The impact is however likely to be unevenly distributed, with those at the bottom of the income distribution feeling the worst effects and having the least resilience to shocks. The International Monetary Fund (IMF) has already estimated that the pandemic will have seen incomes fall globally by 13% from pre-pandemic levels – but this will be more acute in poorer countries, with an 18% fall in low-income countries (LICs) and a 22% fall in emerging and developing economies (excluding China).^[10]

During the pandemic, the World Bank has conducted pulse surveys in dozens of countries^[11] to better understand effects at the household level. These have given a timely, nuanced and detailed picture of the real effects on people’s lives and a better understanding of the impacts for people living in poverty, showing the distribution of negative effects. These surveys cover some LDCs and data from Burkina Faso, Ethiopia, Malawi and Uganda provides critical insights into how people’s lives and incomes have been affected.

Across the countries analysed, most households reported falls in income, and this continued to worsen through the year. In Burkina Faso, the first survey in May 2020 saw 73% of households’ (non-farm) incomes fall. For many people already in extreme poverty, this situation worsened with almost a quarter of households reporting continued falls in business income between August and September. Over three quarters (77%) of households in Ethiopia and Uganda reported that their incomes fell between March and the first round of surveys (in late spring or early summer).^[12]

The impact on incomes is worse for people already at the bottom of the income distribution. In each of six surveys conducted in Ethiopia, the poorest 20% of people were more likely to report seeing incomes decrease. While the scale of the loss of income is not reported, for people with very low incomes pre-pandemic (i.e. those in the poorest quintile), even a small loss represents a serious impact and makes precarious living even more so.

In Burkina Faso, people already living in poverty were more likely to report difficulties and greater challenges across indicators on education, health and food security – highlighting the scale and breadth of impact and relative lack of resilience to major shocks. For households already in extreme poverty, access to adequate nutrition was also a serious concern for nearly 75%. In many countries there have been efforts to target people in poverty with new social protection resources,^[13] but in Burkina Faso 74% of people receiving government assistance since the beginning of the pandemic were not classified as being in poverty.

It has been well documented that the pandemic has had a disproportionate effect on women, exposing and exacerbating existing inequalities.^[14] A September 2020 forecast^[15] estimated that 36% of women in LDCs would be in extreme poverty in 2021 compared with 35% of men. The gender gap is widest in the 25–34 age range, in which 31% of women are estimated to be in extreme poverty in 2020 compared with 26% of men. These estimates likely underestimate the magnitude of differences in extreme poverty by gender as the data used for these calculations is collected at the household level.^[16] Without individual level data that can be fully disaggregated by gender, it is not possible to identify women living in non-poor households that have no or limited access to their own income and have no say on how household resources may be used or spent. Other impacts of COVID-19, such as increased childcare burdens, reduced public and private spending on services such as education or childcare, have a disproportionate impact on women, but are not accounted for in the income poverty statistics.

The impact of the pandemic – in lost income, access to education, healthcare and adequate nutrition – on the people living in greatest poverty in LDCs has been particularly acute and will mean longer term challenges to recovery. The disproportionate impact on people already in challenging circumstances and more vulnerable to the shocks of such a crisis may have far-reaching consequences on quality of life, human development and future economic potential. Support to weather these shocks and accelerate progress is vital.

LDCs face a long road to recovery, more so than other developing countries, including in financing that recovery. LDCs themselves highlighted at the start of the Covid-19 pandemic that there was already a “liquidity crisis in their own public spending and [they were] facing difficulties in borrowing from the international market”.^[17] Official development assistance (ODA) is a vital source of funding – up to two thirds of external financing in LDCs^[18] – but also a finite one, therefore seeing it in the context of other resources is critical. This section analyses other important sources of finance including domestic finance and other international flows, and how that picture has evolved during Covid-19.

Constrained domestic resources in LDCs mean critical needs and sectors are poorly supported

Domestic resources are the most important to support long-term development in all developing countries and will be vital to supporting recovery. However, there is a significant gap in scale across developing countries, as evident in the vast difference in stimulus packages and social protection during the crisis. Non-grant government revenue in LDCs was US$150 per capita in 2019, compared with US$14,820 in high-income countries. The difference between these levels and upper-middle-income countries (US$2,326) and lower-middle-income countries (LMICs) (US$435) is smaller but remains notable. Furthermore, even before the pandemic, the gap between LDCs and other developing countries was already growing as non-grant government revenue in LDCs shrank in the decade to 2019 as a proportion of GDP^[19] and growth was relatively flat (Figure 3).

Growth projections (see Appendix: Methodology) suggest that while revenues in all countries were impacted in 2020, and more significant in absolute terms in other developing countries, they are expected to recover fairly quickly, with their growth predicted to accelerate back past pre-pandemic levels. In LDCs, domestic revenues are also expected to recover over the coming years but starting from such a low base that, despite higher growth rates, divergence in absolute per capita terms will continue.

The pandemic is also expected to exacerbate already-rising levels of debt. Just over a decade ago, almost a quarter of LICs were in or at risk of debt distress, which had grown to half by 2019. Covid-19 is likely to have increased this further.^[20] As of June 2021, four LDCs were already in debt distress with sixteen more at high risk,^[21] and this is likely to worsen as the debt burden increases. 2020 saw considerable growth in bilateral aid in the form of loans and equity investments, increasing by 28% compared with a 3.5% growth in ODA overall (see below). It is not yet known what proportion of ODA loans have gone to LDCs in 2020. However, between 2010 and 2019 bilateral ODA loans to LDCs grew five-fold, while grants fell by 9%. It is thus likely that this trend will continue and possibly accelerate. Analysis of real-time (but unverified^[22]) International Aid Transparency Initiative (IATI) data from key international financial institutions (IFIs) showed that ODA to LDCs grew at least US$8 billion in 2020, with the vast majority in the form of loans. A key question is how this might constrain the domestic resources available to governments. Debt service, which has grown rapidly in recent years (Figure 4), is a critical and growing pressure, limiting the domestic government revenue available for sustainable development.

LDCs have increasingly accessed non-traditional and non-concessional sources of credit, such as bond issuance. As such, their debt service ratios had risen sharply even before the pandemic: from 1.4% of gross national income (GNI) in 2008 to almost 3% in 2019. Debt service as a proportion of non-grant revenues in LDCs has more than doubled over the last decade, from 7.4% of government revenues in 2010 to just over 20% in 2019.

This means LDCs now have a lower capacity to finance investments in sectors critical to human capital and development. This is not simply down to poor allocation decisions – on average LDCs spend only slightly less on debt service than they do on health and education combined. While debt service climbed to US$31.4 billion in 2019 – over 20% of government revenue – combined government spending on health and education was US$36.4 billion: US$9.8 billion for health in 2018 and US$26.6 billion for education in the latest year for which there is data.^[23]

The World Health Organization (WHO) emphasises that Covid-19 has had a devastating effect on health systems globally but that LIC health budgets have been disproportionately affected. The long-term economic crisis, higher debt servicing and depressive effect on other flows could see domestic and other spending on critical sectors constrained further.^[24] Even before the crisis almost all LDCs were unable to meet internationally recognised targets for spending on health and education (Figure 5).

None of the 41 LDCs (those of the 47 LDCs with data available) meets both targets, only seven meet the education target and none meets the health target. Average combined spend on health and education in LDCs falls well below the combined target of 35% of total government expenditure at just under 20%.^[25]

This gap between need and potential finance highlights a persistent challenge that is likely to be exacerbated by the pandemic and the impact it will have on all sources of finance. There is substantial distance to be covered to meet targets for allocation of government spending (Figure 5), ones that remain largely out of reach for LDCs and have been pushed further out of reach by Covid-19.

LDCs are much further than other developing countries from being able to cover the costs of essential universal health coverage even when external sources of finance such as ODA are included (Figure 6).

As a result of limited resources, being able to access services such as health and education too often depends on having the capacity to pay, particularly in poorer countries (Figure 7).^[27] Combined with falling incomes this paints a concerning picture, particularly for the people living in greatest poverty.

In 2018, the latest year for which there is reliable data, out-of-pocket health expenditure was a much more important part of spending on health (49%) in LDCs than in other developing countries (36%). Over half of health expenditure in the latter was government expenditure (52%) compared with under a quarter in LDCs (24%). ODA, which makes up most external health expenditure, was also a much larger part of total health spending in LDCs, at 21% compared with 0.4% in other developing countries. There is also a sizable difference of scale in out-of-pocket expenditure in other developing countries at US$107 per capita compared with just US$21 in LDCs.

Falls in international financial flows in LDCs will further constrain the ability to finance sustainable development

In this context of constrained domestic finance with significant and growing demands and needs, external sources of resources are critical. Whilst LDCs capture less of all major international financial flows compared with other developing countries (Figure 8), all such flows have been negatively impacted by the pandemic.

LDCs struggle comparatively to access markets and investment due to a range of factors such as capacity, investable projects and perceptions of risk.^[28] Whilst LDCs receive only a small proportion of global foreign direct investment (FDI), it is one of the most important international inflows, making up over 12.7% of international inflows going to this group of countries and equivalent to 17% of total LDC non-grant revenues in 2019. Such flows are pro-cyclical, and Covid-19 is expected to drive substantial capital outflows and falls in FDI.

FDI is estimated to have fallen by 0.5% of GDP in LDCs between 2019 and 2021 (Figure 9). While this drop may sound small, it equates to a loss of US$4.8 billion in investment. Such falls are also expected to last longer in poorer countries due to increased uncertainty, unpredictability in their markets and reduced risk tolerance of private investment.^[29] In the short term at least, divergence in access to international private capital may be further exacerbated by inequitable access to Covid-19 vaccinations, where countries with low vaccination rates overlap with those that attract comparatively small volumes of FDI.

Remittances are also an important source of finance in LDCs – particularly at the household level – and equalled almost 5% of GDP in 2019.^[30] But these too have seen a substantial decline, with the World Bank estimating a 7.2% (US$40 billion) fall to LICs and middle-income-countries (MICs) in 2020, and a further fall of US$38 billion expected in 2021.^[31] Remittances to sub-Saharan Africa fell 9% in 2020. By applying regional average projections to LDCs, remittances to these countries would fall an estimated US$5.5 billion – over 10% – during 2019–2021.While other developing countries have seen a sharper contraction than LDCs (Figure 10), they are starting from a higher base. But remittances also represent a high proportion of GDP in LDCs – 4.6% compared with 2.6% in other developing countries in 2019. Thus proportional impacts to LDCs can be substantial.

Tourism is another major source of international financing in LDCs severely impacted by the pandemic. For economies that rely on one form of economic activity and income, such as tourism, this will have a harsh impact, with jobs and livelihoods lost as well as critical domestic revenue. Tourism receipts are projected to have plummeted from 60% to 70% for many countries. In Vanuatu, for example, where tourism represents around two thirds of GDP,^[32] receipts per capita are estimated to have fallen from just over US$1,100 to less than US$350. The likelihood of a rapid recovery in 2021 given ongoing travel and other restrictions is small.

LDCs are under-resourced and rely on a relatively small number of sources of financing that are being adversely affected by the pandemic – exacerbating the existing divergence between LDCs and the rest of the world.

The pandemic has pushed the Sustainable Development Goals (SDGs), already off-track for many LDCs, even further out of reach.^[33] A shift in prioritisation is required if leaving no one behind is a genuine ambition. ODA (characterised by a comparative advantage of being able to directly target drivers of poverty and be counter-cyclical to crises, and thus partly counteract falls in other source of finance) has a critical role to play.^[34] ODA remains a more important source of finance for many LDCs, so understanding key trends in its allocation and the emerging effects of the pandemic inform ODA’s unique role in LDCs and what a future agenda of action needs to address.

There has not been a change in the prioritisation of ODA to LDCs over the last decade despite long-standing calls to do so and commitments to deliver 0.15–0.20% of GNI as ODA to LDCs.^[35] Since 2010, gross ODA disbursements from bilateral and multilateral agencies) to LDCs has grown by 16%, with much of that momentum coming since 2016. That is the same rate of growth as ODA to other developing countries and substantially below the 49% increase in ODA that doesn’t target specific countries (Figure 11). ODA growth has also been more inconsistent for LDCs, with negative growth or stagnation for several years prior to 2016.

Over this period ODA allocations have not adapted to reflect changing distributions of poverty (Figure 12). LDCs represent an increasing proportion of the world’s poorest people, rising from 31% to 50% of global poverty over the last decade. Yet the share of total ODA has fallen from 32% to 29%. Recognition of the imbalance between needs and assistance has led to calls for increased allocations to LDCs on both equity and efficiency grounds.^[36] A failure to address this trend will further exacerbate the imbalance in targeting versus need as poverty continues to be concentrated in such countries.

Volumes of aid to LDCs increased in 2019 to reach US$53.9 billion (the latest year for which complete and verified ODA data with geographic allocation detail is available), up 6% or US$2.9 billion on 2018. This growth, however, was largely driven by humanitarian assistance, which represented close to half of the 2018–2019 increase. Overall growth was driven by multilateral organisations, including the International Development Association, the Asian Development Bank and Gavi, the Vaccine Alliance.^[37] Bilateral aid, in comparison, remained relatively unchanged.

Since the onset of the pandemic, ODA to LDCs has continued to fall behind. ODA provided by Organisation for Economic Co-operation and Development (OECD) Development Assistance Committee (DAC) country donors (i.e. not including assistance disbursed by multilateral agencies, data for which will be published early 2022) increased by 3.5%, interrupting four years of relative stagnation, to reach US$161 billion. Support to LDCs, however, grew by half this rate – 1.8% (Figure 13).^[38]

Concessional loans are becoming an increasingly significant modality of ODA. 2020 saw considerable growth in bilateral aid in the form of loans and equity investments, increasing by 28% to US$26.2 billion just as concerns grow about a new debt crisis. It is not yet known what proportion of ODA loans have gone to LDCs in 2020. However, between 2010 and 2019 bilateral ODA loans to LDCs grew five-fold, while grants actually fell by 9%. It is thus likely that this trend will continue and possibly accelerate.

Some of the countries with the highest needs – most of which are LDCs – receive relatively low ODA per capita and low volumes of ODA overall (Figure 14). ODA allocations have been found to be regressive when considering aid per capita living in poverty: countries with government revenues above US$4,000 per capita receive more than three times the ODA per person living in poverty than countries with less than US$400 per capita.^[39] Of the 38 LDCs with available data, 31 received below the developing country median estimate of US$331 of ODA per person living in poverty in 2019. A number of LDCs, such as Angola, Madagascar and Burundi also receive relatively little per person living in poverty and in total aggregate terms.

An equally important consideration is which donors prioritise LDCs in allocating their ODA, as this has important implications for where future action should be taken and is possible. The overall financing situation in all LDCs could be substantially improved if all OECD DAC donors met the UN target of 0.15–0.20% of GNI as ODA to LDCs, which only five DAC donors currently do (Luxembourg, Sweden, Norway, Denmark and the UK). If all donors had met this target in 2019 an additional US$35–60 billion would have been mobilised – the top end of that range is roughly equivalent to all ODA to LDCs in the same year.

Looking at how ODA has been targeted to key sectors provides important context for understanding the overall impact of ODA in supporting the people living in greatest poverty in LDCs. Some sectors (and critical components of those sectors) are broadly accepted, based on an existing body of evidence, as being critical foundations for human capital and development.^[40] While many types of investment and sectors can all play important and supportive roles in development and poverty reduction, some sectors are particularly critical to the people living in greatest poverty in that their impact disproportionately accrues to those living in extreme poverty. These include health, education, agriculture, digitalisation, water and sanitation, social protection and cross-cutting issues such as climate resilience and gender. While these clearly form a large part of ODA to LDCs, both before and during the pandemic, they do not form the majority and, given the transformative role they can play in poverty eradication and human capital development, greater investment may be needed (Figure 15).

Many of the largest IFIs have prioritised these sectors during the pandemic, however their commitments have come primarily as loans which, considering the growing debt distress in LDCs and very high and growing levels of debt service, will have long-term costs.

But the targeting of ODA to the places in greatest need of financing in these sectors remains problematic. For neither education (Figure 16) nor health (Figure 17) is there a strong correlation between low capacity to finance domestically and ODA allocation. Rather the opposite is true, and as LDCs make up most of the countries with low financing capacity, they also see a disproportionately low allocation of ODA to support these priorities.

Per person living in poverty, the current distribution to education sees most LDCs receiving low levels of ODA, particularly those with the lowest government spending on education. Of the 38 LDCs shown on the chart, 31 receive below the developing country median estimate of US$36.1 of education ODA per person living in poverty in 2019. The same is true for health where, of the 38 LDCs shown, 26 receive below the estimate of US$39.8 of health ODA per person living in poverty in 2019.

ODA is a vital resource in LDCs and, with falls in other important sources of finance, it will be a key part of a sustainable recovery from the pandemic. But there are serious challenges and gaps in how ODA is allocated and used, notably in targeting scarce ODA resources to the countries facing the biggest challenges both before and after Covid-19.

The consequences of the pandemic for the poorest countries will be longer and deeper, even if the more immediate effects have not seemed as large in an absolute sense.

Poverty will fall more slowly and remain much higher in LDCs, resulting in increased concentrations of poverty incidence in many of these countries. For people already barely getting by, even a small hit is significant. Lost education and reduced access to healthcare and income are among the many impacts on people’s lives and livelihoods that have made an already fragile existence even less sustainable.

Finance to meet these growing needs has taken a serious hit – and again LDCs are disproportionately affected. The decline in domestic resources, so vital to development, and the other resources on which LDCs rely paints a bleak financing picture. This will not only have immediate effects as countries are less able to finance stimulus or lifeline programmes but also have long-term effects on sustainable development as they lack the capacity to support vital sectors and interventions, such as healthcare and education.

If all donors met the UN target for ODA to LDCs, substantial additional resources could be mobilised, equal to that provided in 2019. ODA has the potential to act as a counter to these negative forces but is also facing challenges and concerning trends. In aggregate, ODA to LDCs has historically been larger than other international private flows such as FDI, remittances and tourism flows, and has a comparative advantage in its ability to target poverty directly. ODA to LDCs had been growing before the pandemic but at the same rate as to other developing countries. Effective targeting of this scarce resource to the places of greatest need can be significantly improved; currently less than a quarter of ODA goes to the countries with the highest poverty rates, mostly LDCs. The same is true when looking at the sectors most critical to people living in poverty – where targeting to support access to health or education, for example, is poorly aligned to need and low capacity to self-finance.

By any measure, this leaves LDCs on average well off-track to meet the SDGs, with large numbers of people still living in extreme poverty and a growing divergence between LDCs and the rest of the world. This is the exact opposite of what was promised in the SDGs and before the Covid-19 pandemic.

As the international community prepares for the fifth LDC conference in the wake of this most acute and severe crisis, there is an opportunity to shift this trajectory.

Poverty forecasting is conducted by drawing on the World Bank’s PovcalNet distribution data for each country. The distributions are forecasted by taking the IMF’s World Economic Outlook GDP growth numbers multiplied by 87%, which the World Bank has identified as the average rate at which GDP growth has translated to income/consumption growth. The PovcalNet data was taken from the March 2021 update and the World Economic Outlook was updated in April 2021.

Data on FDI is downloaded from UNCTADStat for years up to 2019. Data for 2020 is then estimated using data on the percentage change between 2019 and 2020. For certain countries, this growth rate is scraped from UNCTAD’s Investment Trends Monitor. This report also gives growth rate projections for a number of country groupings. Using these grouping projections, DI estimates the growth rate data for the countries that are not named in the report.

Data on remittances is downloaded from the World Bank for years up to 2020, as is data on the transaction fees associated with sending remittances. The latter is subtracted from the former, giving net remittance data. Data for 2021 is estimated using growth rates for country groupings, which are scraped from the KNOMAD report Phase II: COVID-19 Crisis through a Migration Lens, and are applied to individual countries within each grouping.

Data on tourism is downloaded from the World Bank’s World Development Indicators for years up to 2019. Data for 2020 and 2021 is estimated using scraped data on certain countries from UNWTOon the changes in tourism receipts and arrivals.