Development Assistance Funds

Rafael Pampillón. Director of the Economic Environment Area. Instituto de Empresa

26 July 2004

Spain grants soft loans to other States under favorable, or concessional, conditions to finance projects for social and economic development. Called Spanish Development Assistance Funds (FADs), they are the nation’s most important political instrument for cooperation and development.

FAD loans are characterized by long repayment periods (up to 30 years), exemption or grace periods (up to 10 years without having to repay principal or interest) and low interest rates (1 percent annually), together with their elements of concessionality (degree of implicit subsidy). However, FAD subsidies are also tools of cooperation, and instruments for commercially promoting Spanish exports.

It should come as no surprise then that discussion is ongoing in Spain about their generous nature as a system for development assistance. Supporters argue that thanks to FAD loans, interests of donors and recipients converge, while exports of Spanish goods and services get an incentive on third-world markets. In other words, international cooperation becomes part of aid for Spanish export groups, and consequently for Spain’s penetration of foreign markets, greater economic growth and employment. The same supporters also say there are other ways of cooperating with development, such as NGOs and multilateral development organizations.

Detractors on the other hand criticize FAD loans because they are aimed more at providing incentives for export of Spanish goods and services to the third world than at helping poor countries climb up from underdevelopment. They also point out that although the subsidy is part of a policy for economic promotion, it is not the ideal way to fight poverty and meet the development objectives set for this millennium.

New directions

José María Larrú has studied the extent to which Spanish trade relations benefit by this associated assistance. Measuring the effects on countries receiving goods and services through FADs, he concludes that loans will more significantly reduce poverty in recipient nations only if consideration is first given to their sectorial orientation. This means more toward the building of hospitals and schools, and their fitting out with necessary materials, than toward sectors where impact on living conditions of the poor is lower - such as military aeronautics, traffic control systems or airports. Directing FAD loans toward poverty should concentrate on services that have a significant positive impact on the standard of living of poor citizens (basic health service, education, drains).

Poor countries need a different kind of assistance. They want aid which is more in line with their requirements, and which gives them greater autonomy in satisfying their development priorities. In keeping with OECD philosophy, two types of funds should be made available: one for promoting the presence of Spanish enterprises in developing nations; and another which would be composed of FAD loans, aimed at favoring economic development (including protection of the environment) of third-world countries. This would gradually turn FAD loans away from promoting exports toward cooperation for development. In short, FAD loans should be aimed at investments that directly generate development and jobs in poorer countries, while profits reaped by Spanish businesses should play a secondary role.

Over the years, activity of the FAD development assistance fund has adapted to the evolution of multilateral standards governing the financing of development – and in particular to changes resulting from Spain’s membership on the OECD’s Development Assistance Committee. Application of the OECD consensus and its subsequent modifications have placed restrictions on the sectors and countries that can be underwritten through the FAD development assistance fund. Other factors, such as the Heavily Indebted Poor Countries initiative (HIPC), and the need for separating assistance, imply that the borrower is not obliged to acquire financed goods from the country granting the loan.

Fulfilment of the OECD’s recommendation to grant assistance without binding conditions to countries with low development is a significant step forward, one donor countries should be taking.


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