Rapid implementation of the agreed increases in Official Development Aid (ODA) could go a long way towards drastically reducing global poverty and achieving the UN Millennium Development Goals. However, it has been pointed out in various quarters that a significant increase in ODA is also associated with considerable risks. There are, on the one hand, microeconomic risks, arising in particular from the recipients’ limited absorptive capacity (as a result of weak administrative capacities, for instance) and the danger of misuse of funds. There are also macroeconomic risks, attributable particularly to the threat of debt accumulation and loss of economic competitiveness. Given the opportunities for global poverty reduction arising from increased ODA, the task we face is to redesign development cooperation in such a way as to minimize or avoid these risks.

This essay identifies several possible ways of tackling microeconomic and macroeconomic absorption problems. Better absorption can be attained, for example, by sequencing increased ODA flows and coupling them with efforts to promote institutional capacities based on a long-term view. But this would require redefining the criteria for allocating ODA. Another way is to focus on measures likely to increase productivity and investment in the recipient country. An additional step could be to provide more grant funding for measures whose impact will be felt only in the long term. Another important step can be to increase financing for measures aimed at safeguarding the world’s future, funding the production of global public goods. Particularly in middle-income countries there are many areas where such funding is required, for example, for the promotion of environmentally friendly production techniques and renewable energies. Ensuring the additionality of debt relief can also be a way of tackling absorption problems. Apart from that, many of the microeconomic risks of increased ODA could be avoided if aid were channeled on the basis of program-oriented approaches or given in the form of general or sectoral budget support.