Monday, March 20, 2006

The risks of big increases in aid flows to poor countries

The latest IDS Policy Briefing (Issue 25) is titled "Increased Aid: Minimising Problems, Maximising Gains", and contains a summary of papers in a recent IDS Bulletin on the same theme. Many of the concerns raised in this Briefing relate to my own experience and echo my pre-existing concerns. In particular:
- Donors will be pre-occupied with issues of quantity, and their attention will be diverted away from the more crucial question of the quality and effectiveness of aid.

- Absorptive capacity - the ability to put aid to effective use - is already in doubt as a result of poor governance, rigid and unresponsive administrative systems, and above all, the shortage of human resources.

- Governance reforms, that might help with absorption problems, take time. Speeding them up to enable bigger aid flows, is unlikely to work

- Increased aid flows will weaken incentives for recipient government to reprioritise their existing expenditures and to improve governance

- Aid coordination efforts will not keep up with increased aid flows from multiple directions, and the burden on the host government of managing its aid will increase.

- If much of the increased aid comes in the form of loans rather than grants (from WB and others) then this will impede recipient governments' efforts to break out of indebtedness and dependence on aid.

- In smaller countries the increased volume of aid might drive up the value of the national currency making exports more expensive and undermining efforts to base growth on rising exports
In one of the (summarised) IDS papers, Ros Eyben argues that a surge in aid could magnify certain donors practices that disempower recipient governments and civil society. She is especially concerned about the potentially damaging impact of "results-based management" endorsed by donors at Monterey in 2002 as the optimal approach. Apparently because it enables donors to define what is happening, and undermines the ability of recipient governments to do so.

I am a little skeptical about the ability of any M&E method or approach to have much of an impact, but I do share her concern about the impact of large increases of foreign aid on national sovereignty and the accountability of governments to their people. Some time ago I sat in on a meeting held to discuss the findings of a report on the cost of achieving the MDGs in country x. The focus of the discussion was almost wholly on the accuracy of the calculations. What was ignored was the massive scale of the required increases and how (if delivered) they would effectively dwarf the country's own revenue sources. And even more importantly, the political implications of such a situation. What sensible government would pay much attention to its own population's expressed needs, when the bulk of its revenue was coming from external aid? No amount of "governance reform" would seem to be able to redress the effects of these perverse incentives.

I was reminded of the slogan of the American revolution "No taxation without representation", and wondered whether the truth of the reverse also needs some publicity: "No (effective) representation without taxation"

I suspect that the use of results-based management may be more a symptom, rather than a cause; a too-simple response to the perverse accountability effects of large aid flows: governments becoming less accountable to their people. RBM might be more useful if it more directly addressed the causes of this quandary: the imbalance of aid revenue versus tax revenue. It could do this by including as a key performance measure the ability of the recipient government to increase its tax revenues. Achievement could be associated with increased aid revenues, but not otherwise. The target ratio between tax and aid revenues would of course have to be identified country by country, because tax raising capacity will vary widely. Ironically this is one performance measure that the people in the recipient countries would probably not be very happy with, but which could in the longer term empower them more in relation to their governments, than any large increase in aid.

I am sure there are already many cases where increased taxation is an objective of concern to donors and host governments. But how often, if ever, have donors been willing to limit their aid flows to any percentage or multiple of recipient countries tax revenues? Here there is another set of perverse incentives at work, to do with the nature of the "aid business". That to do so would be to undermine the resource base on which aid bureacrats earn their living and where they cand find future promotion opportunities. Some will be able to create career opportunities out of a well argued need to cut aid or to limit aid growth, but not all - by definition.

Further dis-incentives would probably lay ahead, should maximum levels of aid per country ever be agreed. Donor countries would have to agree who would contribute how much to a limited pot, when in fact many were seeking to maximise their influence. This would be the ultimate "hamonisation" challenge!

Late Note (23/03/06) From "Business in Africa"

"...Taking a look at the country’s national budget, virtually all spend is draft estimates and not accounted for cent by cent. An example of this lack of budget control is highlighted in the SAIIA report, where the director of monitoring and evaluation in the ministry of economic development and planning is quoted as saying, “What we are saying is that out of the 60 billion kwacha in the 2002/2003 budget, we only know of 37 billion kwacha that was used. We don’t know what happened to the rest because of lack of data.”

Foreign support makes up close to half of Malawi’s budget, which means that it is difficult to implement policies when the budget is dependent largely on sources from outside the country. In 2000, International Monetary Fund (IMF) aid and other donor funding was suspended following high-level corruption, archaic fiscal discipline and poor governance under the Bakili Muluzi administration. The IMF and World Bank resumed aid in 2004 when the economic minister in Muluzi’s cabinet, Bingu wa Mutharika, was named president."

Okay, so running a close second is the need for a performance indicator on the availability of adequate government accounts. This would be in the interests of citizens and supporting donors. No conlfict of interest here, unless donors have privileged access to government accounts that citizens do not. Unfortunately this is not an unknown occurence.

Another part of this latest story is the stop-go nature of aid flows. In highly aid dependent countries that cannot be a good way to proceed. What sort of performance monitoring system would generate such clumsy responses? Either one that was only barely working, or being ignored by its own proponents (or both).

1 comment:

  1. ricardo.wilson-grau@inter.nl.netWednesday, March 22, 2006 7:16:00 PM

    These are important issues and I find your proposed solution as interesting as it is bold.

    As you say, tying aid to improved tax collection is not new. I am not an expert but I do know that throughout the history of bilateral aid, improved taxation has often been part of a package of good governance conditions laid down by donor governments. When successful, usually the result is an increase in sales or valued-added taxes, which are paid by all consumers across the board, proportionately hitting lower income earners the hardest.

    Therefore, I can see potential in your proposal…if the additional revenue will come from direct taxes on wealth. The basic principle would have to be that wealthier individuals and corporations should pay a progressively higher portion (in relative not simply absolute numbers) of their income and profit in taxes than do the poorer segments of society. That, of course, would confront the economic and political elites, and not just the bureaucrats, head-on.

    I suspect, however, that the singular lack of success of radically progressive tax reform in most countries of the South has to do with resistance from the powers-that-be, who once again would find new ways around yet another external donor condition. And, there is of course the more fundamental question about whether development can be imposed from the outside. I think not. But then I may be a terribly old fashioned social democrat. Frankly, I really do not see an alternative to civil societies demanding tax reform of their duly elected governments, perhaps in partnership with foreign donor governments.

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