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Aid effectiveness

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Aid effectiveness is the effectiveness of development aid in achieving economic development (or development targets).

Aid agencies are always looking for new ways to improve aid effectiveness, including conditionality, capacity building and support for improved governance.

Historical background

The international aid system was born out of the ruins of the Second World War and came of age during the Cold War era from the 1960s to the 1980s. During this time, foreign aid was often used to support client states in the developing world. After the end of the Cold War, the declared focus of official aid began to move further towards the alleviation of poverty and the promotion of development. It is against this background that the international aid effectiveness movement began taking shape in the late 1990s. Donor governments and aid agencies began to realize that their many different approaches and requirements were imposing huge costs on developing countries and making aid less effective. They began working with each other, and with developing countries, to harmonize their work in order to improve its impact.

The aid effectiveness movement picked up steam in 2002 at the International Conference on Financing for Development in Monterrey, Mexico. There, the international community agreed to increase its funding for development—but acknowledged that more money alone was not enough. Donors and developing countries alike wanted to know that aid would be used as effectively as possible. They wanted it to play its optimum role in helping poor countries achieve the Millennium Development Goals, the set of targets agreed by 192 countries in 2000 which aimed to halve world poverty by 2015. A new paradigm of aid as a partnership, rather than a one-way relationship between donor and recipient, was evolving.

In 2003, aid officials and representatives of donor and recipient countries gathered in Rome for the High Level Forum on Harmonization. At this meeting, convened by the Organisation for Economic Co-operation and Development (OECD), donor agencies committed to work with developing countries to better coordinate and streamline their activities at country level. They agreed to take stock of concrete progress before meeting again in Paris in early 2005. In Paris, countries from around the world endorsed the Paris Declaration on Aid Effectiveness, a more comprehensive attempt to change the way donor and developing countries do business together, based on principles of partnership. Three years on, in 2008, the Third High Level Forumin Accra, Ghana will take stock of progress and build on the Paris Declaration to accelerate the pace of change.

Critiques of the impact of aid have become more vociferous as the global campaigns to increase aid have gained momentum, particularly since 2000. There are those who argue that aid is never effective. Most aid practitioners agree that aid has not always worked to its maximum potential, but that it has achieved significant impact when it has been properly directed and managed, particularly in areas such as health and basic education. There is broad agreement that aid is only one factor in the complex process needed for poor countries to develop, and that economic growth and good governance are prerequisites. The OECD has explored—through peer reviews and other work by the Development Assistance Committee (DAC)—the reasons why aid has and has not worked in the past. This has resulted in a body of best practices and principles that can be applied globally to make aid work better. The ultimate aim of aid effectiveness efforts today is to help developing countries build well functioning local structures and systems so that they are able to manage their own development and reduce their dependency on aid.


Micro-Macro Paradox

The major findings by Paul Moseley and others concludes that it is impossible to establish any significant correlation between aid and growth rate of GNP in developing countries. One reason for this is the fungibility and the leakage of the aid into unproductive expenditure in the public sector.

However, at a micro level, all donor agencies regularly report the success of most of their projects and programs. This contrast is known as the micro-macro paradox.

Moseley’s result was further confirmed by Peter Boone who argued that aid is ineffective because it tends to finance consumption rather than investments. Boone also affirmed the micro-macro paradox.

Research by Burnside and Dollar

Burnside and Dollar recently found that the impact of aid on growth is positive in countries with a good political environment for making policy. This is indicated by a significant and positive coefficient on the ‘aid’ policy interaction in the growth regression.

Burnside & Dollar advocated selectivity in aid allocation. This means that aid should be allocated in countries where it works best, then that would exclude countries that are less fortunate in terms of policies and require help most.

Burnside & Dollar’s findings have been placed under heavy scrutiny since their publication. Easterly and his colleagues re-estimated the Burnside & Dollar model with an updated and extended dataset but they could not find any significant aid-policy interaction term. New evidence seems to suggest that Burnside & Dollar’s results are not statistically robust.

Studies and Literature on Aid Effectiveness

One problem of the studies on aid is that there is a lack of differentiation between the different types of aid. Some type of aids such as short term aid do not have an impact on economic growth while other aids used for infrastructure and investments will result in a positive economic growth.

The emerging stories from aid-growth literature are that aid is effective under a wide variety of circumstances and that nonlinearities in the impact of aid reduce the significance of the aid-growth relationship. However, returns to aid show diminishing returns due to absorption capacity and other constraints. Also, geographically challenged countries would display lower effectiveness with respect to aid and that should be taken into account in allocation.

Therefore, the challenge to aid allocation is to identify and eliminate the overriding institutional and policy constraints that will reduce the impact of aid on growth. The real challenge is thus to develop a framework of ‘growth and development’ diagnostics to help identify the constraints.

Politics of development aid

Some politicians in donor countries are expressing concern over what they perceive as the failure of aid to achieve economic growth, reduce poverty, or reduce inequality. In the United States, a very prominent donor of development aid, the Bush administration appears to be moving towards a position of reducing aid to corrupt countries, and concentrating aid on less corrupt countries. This approach is under discussion in other donor countries, particularly European countries and Japan, but is not yet applied.

A similar though distinct hypothetical concern is that unless aid is either very project-specific or disaster-specific, economies may become counter-productively dependent on aid. The relative abundance of aid in comparison to the profits of work might lead to a confusion of fundamental economic signals (profit, supply, demand, etc.) and thus a weakened economic system.

As an example of aid programmes' mixed results one could outline the performance of Phare programme. This European Union-designed programme to support the transition of post-socialist countries has been evaluated externally and these assessments broadly illustrate its successes and failures. For example, the Phare core activity - institution building has received critical assements due to the lack of project ownership [1][1]. Furthermore, the success of aid in support of EU integration seems to be determined by good policy environment where the recipient has determination for long-term structural policy reforms like in the Baltic states [2][2]. It appears that the integration might create domestic interests to adopt new EU norms as policy objective for the Accession,i.e. Enlargement of the European Union. These incentives might be more significant stimulus factors than donor's coercive conditionality as imbedded the need for recipient's emulation of the new norms, legislation like adoption of acquis communautaire. The domestic institutions as channel for aid inflow has a decisive role for sustainability of aid programmes as supports the external experts' efforts financed by the donor agency. Thus, the aid programme like technical assistance could only be effective once tailor-made to support the demand-driven structural long-term reforms in sound institutional environment.

Paris Declaration on Aid Effectiveness

In February 2005, the international community came together at the Paris High Level Forum on Aid Effectiveness, hosted by the French government and organised by the OECD. The role of aid in promoting development was attracting increasing public scrutiny in the run-up to the G8 Summitin Gleneagles, Scotland, and the global campaigns such as Make Poverty History.

While some progress had been made in harmonizing the work of the different international aid donors in developing countries, it was acknowledged that much more needed to be done. The aid process was still too strongly led by donor priorities and administered through donor channels, making it hard for developing countries to take the lead. Aid was still too uncoordinated, unpredictable and un-transparent. Deeper reform was felt to be essential if aid was to demonstrate its true potential in the effort to overcome poverty.

At the Paris meeting, more than 100 signatories—from donor and developing-country governments, multilateral donor agencies, regional development banks and international agencies—endorsed the Paris Declaration on Aid Effectiveness. The Paris Declaration went much further than previous agreements; it represented a broader consensus among the international community about how to make aid more effective. At its heart was the commitment to help developing-country governments formulate and implement their own national development plans, according to their own national priorities, using, wherever possible, their own planning and implementation systems.

The Paris Declaration contains 56 partnership commitments aimed at improving the effectiveness of aid. It lays out 12 indicators to provide a measurable and evidence-based way to track progress, and sets targets for 11 of the indicators to be met by 2010.

The Declaration is focused on five mutually reinforcing principles:

• Ownership: Developing countries must lead their own development policies and strategies, and manage their own development work on the ground. This is essential if aid is to contribute to truly sustainable development. Donors must support developing countries in building up their capacity to exercise this kind of leadership by strengthening local expertise, institutions and management systems. The target set by the Paris Declaration is for three-quarters of developing countries to have their own national development strategies by 2010.

• Alignment: Donors must line up their aid firmly behind the priorities outlined in developing countries’ national development strategies. Wherever possible, they must use local institutions and procedures for managing aid in order to build sustainable structures. In Paris, donors committed to make more use of developing countries’ procedures for public financial management, accounting, auditing, procurement and monitoring. Where these systems are not strong enough to manage aid effectively, donors promised to help strengthen them. They also promised to improve the predictability of aid, to halve the amount of aid that is not disbursed in the year for which it is scheduled, and to continue to “untie” their aid from any obligation that it be spent on donor-country goods and services.

• Harmonization: Donors must coordinate their development work better amongst themselves to avoid duplication and high transaction costs for poor countries. In the Paris Declaration, they committed to coordinate better at the country level to ease the strain on recipient governments, for example by reducing the large numbers of duplicative field missions. They agreed on a target of providing two-thirds of all their aid via so-called “programme-based approaches” by 2010. This means aid is pooled in support of a particular strategy led by a recipient country—a national health plan for example—rather than fragmented into multiple individual projects.

• Managing for results: All parties in the aid relationship must place more focus on the end result of aid, the tangible difference it makes in poor people’s lives. They must develop better tools and systems to measure this impact. The target set by the Paris Declaration is for a one-third reduction by 2010 in the proportion of developing countries without solid performance assessment frameworks to measure the impact of aid.

• Mutual accountability: Donors and developing countries must account more transparently to each other for their use of aid funds, and to their citizens and parliaments for the impact of their aid. The Paris Declaration says all countries must have procedures in place by 2010 to report back openly on their development results.

A first round of monitoring of the 12 Paris Declaration indicators was conducted in 2006 based on activities undertaken in 2005 in 34 countries. A second survey was organised in early 2008 in which 54 developing countries examined progress against the targets at country level. This 2008 Survey covers more than half all the official development assistance delivered in 2007—nearly USD 45 billion. It will be presented at the Third High Level Forum on Aid Effectiveness in Accra in September 2008. The evidence so far suggests that progress has been made. For example, more than one third of developing countries surveyed had improved their systems for managing public funds; almost 90% of donor countries had untied their aid; and technical cooperation is more in line with developing countries’ own development programmes. Despite these improvements, however, the results of the Survey show that the pace of progress remains too slow to reach the targets set in 2010. In particular, although many countries have made significant efforts to strengthen their national systems (for instance by improving how they manage their public funds), in many cases donors are still reluctant to use them. The predictability of aid flows also remains low (with just over a third of aid disbursed on schedule), thereby making it hard—or impossible—for governments to plan ahead. In summary, whilst some progress has been made there are still many areas where the pace of change must be accelerated if the targets set for 2010 are to be reached.

In some quarters, the Paris Declaration is almost synonymous with aid effectiveness; it is expected that aid will be effective and achieve development outcomes when the principles are observed for government sector aid. However, there continue to be criticisms and alternative views, particularly from non-government aid organisations. Implementation of the Paris Declaration still needs to be significantly stepped up, according to the results of the 2008 Monitoring Survey. Concrete targets set for 2010 (such as an increased proportion of aid to be untied; establishment of "mutual accountability" mechanisms in aid recipient countries; and for two-thirds of aid to be delivered in the context of so-called programme approaches rather than projects) mjay be difficult to meet. Independent NGOs, such as Eurodad, also release their own evaluations, showing that the Declaration is not being implemented as planned. Measures for stepping up implementation will be agreed at the Third High Level Forum.

Corruption and Justice

Some observers suggest that aid can only be effective if corruption is suppressed and a fair and credible justice system is in place. Without these preconditions, large amounts of development aid are lost to corruption. Investment projects can be debilitated and halted by corrupt bureaucracy. Furthermore economic progress is held back because, for all but a wealthy minority of the population, the link between personal enterprise and profit is broken by the loss of increased earnings to crime and corruption.

References

  1. ^ Thematic report on public administration, 2001
  2. ^ Interim Evaluation report, 2004
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