Spending Wisely: Making New Aid Resources Work
Alan Whaites
Director, World Vision Partnership Policy and Advocacy
April 2002
Alan Whaites
Director, World Vision Partnership Policy and Advocacy
April 2002
World Vision welcomes the announcements from both the United States and the European Union of increased resources to be devoted to development assistance. After decades of decline, major Organization for Economic Cooperation and Development (OECD) donors have shown a vision for development that must be applauded. World Vision views this development with the hope that arises from our own experience that development works. Last year, World Vision programs benefited over 75 million people in communities across the developing world and over the last 50 years we have seen that investment in development can transform the lives of children and families.
The announcement that overseas development assistance (ODA) levels will rise significantly creates a historic opportunity for progress and change. It is a potential that World Vision wants to see realized. All those involved in development must be acutely aware that the failure to deliver real impact from the new resources will undermine the long term future of ODA. World Vision believes that much has been learned in the last decade regarding the effectiveness of aid and that the new resources can lead to dramatic steps forward in poverty reduction.
Achieving significant levels of poverty reduction will, however, require a willingness on the part of donors to address problems with their own past aid policies. It will also entail a commitment to new approaches to aid that ensure both good planning and effective monitoring and evaluation. World Vision believes that appropriate frameworks do exist and that new aid funds can produce dramatic impacts if five essential principles are followed. The five principles for new aid funding are:
1. Aid Effectiveness: Learn the Lessons of the Past
The last decade has seen a series of important studies examining issues central to the effectiveness of aid. Some of these have emerged from the World Bank and have been summarised in their recent publication: The Role and Effectiveness of Development Assistance. The Bank studies underline the importance of using aid to support positive socio-economic policies and the need to de-link aid from geo- political priorities. (1) Dollar and Pritchert in one study stated that:
“Overall, aid is more effective at promoting growth and reducing poverty when it is channelled to poor countries with sound management.” (2)
These studies have been complemented by academic work that has pointed to the critical importance of consistency in aid flows and co-ordination between donors. Work that suggests the stability of aid flows may even be more crucial than aspects of the local policy environment in relation to attracting investment.(3) Lack of consistency leaves developing countries unable to plan programs with confidence and poor co-ordination can result in a myriad of competing modalities, conditionalities and expectations.
The net result of past problems in aid policy has been the continued funding of problematic programs for purely political reasons and also the overloading of constrained developing country governments with uncoordinated programs. Increasing aid effectiveness will therefore require a commitment to reduce the transaction costs for recipient states, most importantly through much greater efforts to ensure effective co-ordination between donors. Aid must also flow to countries based on the preparation of realistic and costed plans for poverty reduction that are complemented by systems to ensure local and international accountability and scrutiny.
World Vision strongly believes that Poverty Reduction Strategy Papers (PRSPs) have the potential to provide a framework for aid that would address the effectiveness of aid issues. This potential can be realized if bilateral donors commit to adopt PRSPs as their own framework for assistance and also work with the World Bank and IMF to address initial problems encountered with the approach. The strength of PRSPs is the use of a single national plan for poverty reduction within each country, enabling streamlined conditionalities. The PRSP framework also allows for the development of strong scrutiny and accountability systems, particularly through the capacity building of local civil society in this field.(4)
The adoption of PRSPs as a framework for development assistance would act as a guide to donors rather than a straightjacket. Donors should seek those projects and sectoral programs that directly support the national strategy. This support, through project funding, sector support or budget support, should be complemented by initiatives to directly enhance the ability of local civil society to monitor implementation and to survey the experiences of the ultimate beneficiaries – the poor.
This need for a commitment to civil society as part of the process of making national poverty reduction strategies effective also underlines the importance of PRSPs as mechanism to improve governance. The commitment of PRSPs to improve rule of law and judicial reform must also include an explicit commitment to human rights. There has to date already been evidence that PRSPs do expand the scope for participation and transparency in government, although the quality of participatory processes has been uneven. World Vision has provided a guide to the strengths, weaknesses and routes to improve PRSPs in its recent report: Masters of Their Own Development? PRSPs and the Prospects for the Poor (5)
2. The Criteria for Aid
In their pursuit of apparently successful aid programs, there is an inevitable temptation for some donors to devote aid to those countries that are already well on their way to success. Extensive criteria that effectively confines aid to countries that have already completed programs of economic, political and social reform limits assistance to a small number of countries that often receive substantial inward investment and existing aid flows. The low capacity to absorb further aid flows can act as an additional constraint that particularly impacts Africa – the continent most urgently in need of development assistance.
World Vision believes that for many states front-loading conditionality in the form of extensive eligibility criteria does not offer a goal to which states can aspire, but rather denies them the additional resources they need to continue to progress in the task of reform. World Vision believes that eligibility criteria should not be so wide as to open the door to the problems of the past – with aid channelled to corrupt and oppressive governments.
But neither should it be so strict as to exclude states making progress in the economic, political and social spheres. Instead a framework for outlining continued progress should be agreed and then rigorously monitored and assessed. Failure to continue with positive change should then reduce eligibility for government-to-government aid (while safeguarding assistance to the poor through NGOs).
Failure to prioritize poverty as a factor in aid criteria, coupled with the lack of measures to increase absorption capacity has seen aid to the world’s poorest region, Sub-Saharan Africa, steadily decline over the last decade. Indeed, of all of the Least Developed Countries, only Bangladesh has regularly featured in the list of the top ten aid recipients for OECD countries. It is a past sin of aid policy that middle-income countries (particularly trade partners or allies) have consistently received higher funding than the least developed countries.
New aid resources should be focused on the poorest of the poor and that entails a commitment to development in Africa. Criteria that open the door to African development will mean looking at frameworks for progress rather than past practice. As a result, donors determining the point of the spectrum (between already reformed states and those intractably unwilling to reform) where their own criteria will fall should examine the potential of PRSPs to enable a broader range of states to qualify. PRSPs do allow for an agreed framework for progress to which donors and governments can commit, with the former then ensuring sufficient monitoring to enable accurate assessments of impact. Where PRSPs are not seriously implemented by governments, difficult decisions can be made by donors regarding future funding.
To impose overly restrictive criteria is to lose sight of the constructive role that can be played by aid. Development is a form of investment, it is an investment in the future prosperity and sustainability of our global society, and investment does inevitably entail a degree of risk, but ultimately the poor deserve to be given a chance for progress. The level of risk for donors should therefore err towards supporting those states that are pursuing the often difficult and precarious path towards reform.
3. How to Help: Project or Budget Support
World Vision believes that the issue of project versus budget support has become an unhelpful distraction in the task of planning new aid. Ideally recipients should have a track record and capacity that gives donors the confidence to provide assistance through budget support, but realistically this is often not the case. The poor quality of Public Expenditure Management (PEM) systems within many developing contexts also mitigates against an automatic emphasis on this kind of help.(6)
World Vision believes that through frameworks such as PRSPs, significant progress can be made in public scrutiny of government expenditures. A clear framework for aid also enables donors to assist more effectively in the enhancement of local capacity for PEM. Through progress in transparency and internal capacity building donors should encourage all aid recipients in a direction in which budget support will ultimately be possible over time.
The issue of project versus budget support does, however, point to the underlying problem of poorly planned conditionalities, which only serve to absorb governmental capacity, diverting scarce human resources from the effective implementation of programs. World Vision believes that the current international approach to conditionality is fundamentally ill considered, driven by the desire to micro-manage local policy and often relying on indicators that create false priorities and have little practical relevance.(7)
World Vision believes that approaches to the conditionality reform pursued by bodies such as the International Monetary Fund (IMF) through its conditionality review fail to tackle central problems. Although the IMF sought to streamline conditionality, it did not examine the quality (and past results) of the conditionality being set. Respected US economist (and Nobel prize winner) Joe Stiglitz has suggested that IMF conditionality runs contrary to known market best practice and hence is frequently counterproductive.(8) Just as worrisome is new research that demonstrates a high correlation between IMF conditionality and political instability, (9) poor IMF contextual analysis and overly optimistic timelines for reform can lead to everything from food riots to unrest by unpaid soldiers.
Conditionality should certainly be streamlined and co-ordinated through processes such as PRSPs, but it must also be refocused on agreeing final targets and results rather than stipulating policy processes to be followed. Second guessing the most appropriate way of micro-managing economic reform in wildly diverse developing contexts leads inevitably to problems like those encountered with the Mozambique Cashew industry. Mozambique had a thriving cashew processing industry until poorly thought through World Bank requirements for restructuring led to collapse of the sector.
Several bilateral donors not only use IMF conditionality as a key guide for their own programming but also add to these requirements further prescriptions, these can often be based on domestic pressure rather than proven best practice. For example punitive conditionality designed to stamp out child labor has in the past led to children being driven into the informal economy in search of income, with consequent increases in child prostitution. Conditionality must therefore be evaluated to assess the success and failure of the approaches being demanded – for example the continued failure of IMF advice to produce healthy rates of economic growth should be a warning sign that the conditionality is flawed.
The issue of project versus budget support should also not distract from the issue of how new aid resources will relate to assistance provided by multilateral institutions. World Vision believes that new aid flows should not be used to meet donor commitments to multilateral bodies (such as the replenishment of The International Development Association). These commitments must be met from existing or other new resources. Wherever possible the new resources from IDA should be made available in the form of grants rather than loans, providing that the overall financial position of IDA is protected. The US Government Accounting Office (GAO) has estimated that 50% of IDA could be provided as grants at a cost of 1.2% extra per year in donor payments, or an up front payment of some $15 billion.
4. Policy Coherence
Development Finance is critically important to the task of poverty eradication, but investment by rich countries in the future of the poor cannot succeed in isolation from the wider policy context. The proposed increases in ODA will raise the total global level of aid to something in the region of $75 billion per annum, a figure still dwarfed by the $350 billion spent each year by rich countries on agricultural subsidies. It is estimated that the closure of developed country markets to poor farmers costs the developing world some $150 billion per year.
The resources required for creating a favorable trade and investment environment must also be made available. Attracting and training competent officials, improving the rule of law, fighting corruption, building institutions and infrastructure, and raising technical, sanitary and phytosanitary standards all require major investments of time and money. Calculations by World Bank economists show that implementing just three of the World Trade Organization Uruguay Round agreements would cost many of the poorest developing countries about US$130 million – more than the total annual development budget for many of the Least Developed Countries. (10)
Trade is an essential tool through which poor countries can exit poverty, but the protectionism and market-distorting practices of rich countries effectively deny this tool to the poor. World Vision recently co-signed a statement with several large corporations, the World Bank and UN agencies stating that:
`Trade is a means to an end, not an end in itself, and putting an end to hunger and poverty is perhaps the greatest challenge of the 21st century. A fair trading system, coherent international and national policies and targeted investment are all required if the world is to feed all its people. Trade reform which furthers this goal is both possible and of the utmost priority.’(11)
The lack of commitment to trade liberalization by rich countries is also exacerbated by protectionist policies applied directly to aid funds. The practice of aid-tying is believed to reduce the efficiency of aid by around 30%, a colossal cost in terms of lost potential for reduced child mortality or increased literacy.(12)
Developed countries must also encourage responsible practices by their private corporations in relation to the developing world. Investment by transnational corporations in poor countries can bring beneficial results, spurring economic growth, raising labor standards and transferring technology. But inward investment can also produce environmental asset stripping and the exploitation of vulnerable communities and poor labour conditions. World Vision recommends that companies adhere to the OECD Guidelines on Multinational Enterprises that national governments should incorporate into their own national legislation.
5. Invest in People: Put Children First
Development experience shows that investing in the human capital of poor countries is a key determinant of development progress. Sadly, however, the role of human development is too often limited to a few high profile sectors, such as primary education and immunization/primary health. Education and Health are indeed essential areas for investment if human development, and with it economic progress, are to take place, yet these are not sufficient to ensure that the needs of children are properly addressed.
World Vision believes that a more comprehensive approach must be taken to children in development that assesses not just their access to basic services but also whether their rights are being addressed. World Vision is conscious that over 250 million children work each day. World Vision believes that programs to reduce child labor through income replacement and flexible schooling must be a priority alongside measures.
The Asian crisis of 1997 underlined the speed with which economic problems could translate into child exploitation. The rapid movement of hundreds of thousands of children out of school was accompanied by a rise in children entering the informal workforce. At its worst the crisis also led to a sharp increase in child trafficking and prostitution. Children are acutely vulnerable to the fluctuations of their economic context. Poverty and also the process of development can create their own dilemmas as a recent World Vision/Royal Government of Cambodia report on Sex Tourism has shown.(13)
Building a safer world for children means taking deliberate steps to address issues of violence against children, child abuse and child exploitation. Yet outside the realms of education and obvious areas of healthcare (e.g. immunization) PRSPs often discuss children without policy prescriptions being defined. Previous experience has shown that safety nets for families must be built during times of economic growth to avoid problems during crises and investments must be made in social provision, law enforcement and awareness raising among children.
World Vision does not wish to see further conditionality added to ODA, but, it must be asked whether the advice offered by the bilateral donors have included sufficient reference to this issue. OECD states have a weak track record on child protection, they have been slow both to act during economic crises and also slow to appreciate the need for government capacity building on protection issues. One issue that can be addressed is the fact that children forced into prostitution or the informal economy are often criminalized by the legal system (instead of receiving the care and support that is due to victims). Bilateral assistance for reform of the police and judiciary should therefore specifically include improved responsiveness of legal systems to the needs of children.
In a new report, A Safer World for Children: Ending Violence, Abuse and Exploitation, World Vision has highlighted a series of practical steps that can be taken within developing countries, and internationally. Where children are concerned increased ODA initiatives risk becoming stereotyped as simply new strategies for health and education if it does not embrace such steps to take a more comprehensive view.
Conclusion
The announcement of future increases in budgets for Overseas Development Assistance by OECD states on both sides of the Atlantic presents a dramatic opportunity for reduction in poverty. A consistent flow of aid targeted on the poorest could be instrumental in accelerating the economic growth and progress in good-governance that will make poverty reduction sustainable. Much, however, will depend on the quality of the policies adopted by donors and their own ability to accept change and reform.
If new aid money is to be spent wisely donors will need to recommit themselves to freeing aid from the geo-political priorities of the past in favour of sober assessments of potential and need. New aid will also need to be targeted on the poorest of the poor based on realistic and measurable frameworks for progress. World Vision’s five principles for aid policy point to policy changes that would better enable these new funds to have the impact that all donors state they seek.
World Vision
World Vision is a Christian relief and development partnership that serves more than 75 million people in nearly 90 countries. World Vision seeks to follow Christ’s example by working with the poor and oppressed in the pursuit of justice and human transformation.
Children are often most vulnerable to the effects of poverty. World Vision works with each partner community to ensure that children are able to enjoy improved nutrition, health and education. Where children live in especially difficult circumstances, surviving on the streets, suffering in exploitative labor, or exposed to the abuse and trauma of conflict, World Vision works to restore hope and bring justice.
World Vision recognizes that poverty is not inevitable. Our Mission Statement calls us to challenge those unjust structures, which constrain the poor in a world of false priorities, gross inequalities and distorted values. World Vision desires that all people are able to reach their God-given potential, and thus works for a world that no longer tolerates poverty.
1. See World Bank, “Reforming Development Cooperation to Attack Poverty,” Chapter 11 in the World Development Report: Attacking Poverty, 2000-2001 (NY: Oxford University Press, 2001)
3. Lensink, Robet and Oliver Morrissey, “Aid Instability as a Measure of Uncertainty and the Positive Impact of Aid on Growth,“ Journal of Development Studies, Vol. 36, No. 3, Feb 2000, pp. 31-49. (Reference is on p. 3 of the pre-publication draft.)
4. an area in which donors need to ensure effective action by the World Bank and IMF.
5. Alan Whaites, et al, Masters of their own Development?, World Vision Publications, Monrovia, 2002.
6. see Alan Whaites, Masters of their own Development, op cit, p30
7. `from hands-free to hands-off conditionality’ in Global Future magazine, first quarter 2002
8. see Joseph Stiglitz, An Agenda for the New Development Economics, paper for the UNRISD meeting on `The Need to Rethink Development Economics,’ 7-8 September 2001, Cape Town, South Africa, particularly p2 and p5
9. `States of Unrest II’ WDM, London, April 2002
10. Finger, J.M. and Schuler, P., (1999) "Implementation of Uruguay Round Commitments: The Development Challenge", World Bank Working Paper No. 2215, Washington DC, World Bank, 1 October, 53 pp. http://econ.worldbank.org/view.php?type=5&id=941
11. Communiqué of Recommendations by the Agricultural Trade Task Force, World Economic Forum, Geneva, January 2001
12. see, delivering on debt relief, Nancy Birdsall and John Williamson, IIE, Washington 2002
13. Children’s Work, Adult’s Play: Child Sex Tourism The Problem in Cambodia, World Vision, Monrovia 2001
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