Concentration and Fragmentation: A Clarification
A statistical measure that is based on the number of development partners providing support to a country and the relative size of their shares in the overall profile of aid7.
Concentration is measured by what is known as the Herfandahl Index (H), calculated by summing the squares of each partner's percentage share (P) of the total aid disbursed (by h number of development partners):
The Herfandahl Index (H) is most commonly used in microeconomics to analyse the structure of an industry for relative degrees of monopoly or competition.
The resulting number (which can range from anything greater than 0 to 10,000) is then indexed so that the median observation is equal to 100. It therefore reflects both the number of partners providing support as well as their relative shares and distribution.
If all aid was provided by a single development partner:
Share = 100%. H = 1002 = 10,000. If this were a market, it would be a perfect monopoly.
Imagine a world with five donors and four partner countries:
has four donors, providing 60%, 20%, 10% and 10% respectively.
has three donors, providing 33.3% each.
has five donors, providing 40%, 30%, 10%, 10% and 10% respectively.
After calculations are complete, the series can then be indexed (median observation = 100) so that a higher index ranking indicates a more concentrated 'market' for aid.
Based on globally comparable OECD/DAC data, Cambodia has one of the worlds lowest index figures. It must also be noted that, given that many of Cambodia's development partners do not report to the DAC, the figure in the AER 2007 is under-estimated, possibly by quite a significant margin.
Fragmentation uses a similar analysis (combined with average project disbursement across 2005 and 2006) to form a composite indices for each development partner. Sector analysis uses a similar approach.
The point of this analysis is not to prescribe any particular direct action to address concentration but to consider what practices might best address the symptoms of relative concentration/competition