02 June 2008
The Changing Face of Aid
By Paul Collier
Paul Collier is a professor of economics and the director of the Centre for the Study of African Economies at Oxford University and the author most recently of The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It (Oxford University Press, 2007).
Aid used to be simple. Thirty years ago it was very largely provided through projects, and most of these were for infrastructure. Things changed partly because aid agencies became aware of fungibility: The aid was not, in reality, financing the projects to which it was ostensibly linked because often the recipient government would have done the project anyway, using its own tax resources. So, what the project really financed was whatever the government decided that it could now afford to do with the money released as a result of the donor financing the project instead. With project aid the donor had no influence over this government decision.
Donors also came to realize that whether their projects worked or not depended to a considerable extent upon the larger policy context: how the government chose to run the economy. The next phase in aid thus was policy based: Aid would be provided in return for an undertaking by the government to change some specified policies. This was not very successful. It confused the key issue that a government should be clearly responsible to its own citizens. If policy was being set by donors, a government could not reasonably be held accountable by its citizens if things went wrong. The conditions were also readily gamed by recipient governments: The Kenyan government “sold” the same reform to the World Bank five times in 15 years! Donors simply had little incentive to enforce conditions because staff were subject to strong pressures to disburse.
New Approaches to Aid
Such policy conditionality has not entirely disappeared, but during the past decade there have been major changes. One is toward “budget support” conditioned upon the attained level of policies rather than promises to change them. This is how the International Development Association, the part of the World Bank that helps the world’s poorest countries, allocates its aid flow. Budget support is money that can be used by the recipient government for any purpose — it simply counts as a source of revenue for the budget. Budget support presupposes that the government and the donor are closely aligned in their preferences: This is why it is best conditioned upon a judgment that policies are already satisfactory.
A related major shift has been to “country ownership” and “citizen participation.” The Poverty Reduction Strategy Paper (PRSP) mode of aid requires the government to engage with its citizens in some participatory process that helps to shape a document (the PRSP), that sets out what the government proposes to do. Donors then decide whether to provide aid based on this document rather than negotiating specific policies. The Millennium Challenge Corporation (MCC) of the U.S. government works in a somewhat similar way, with the donor evaluating proposed expenditures based upon attained levels of governance.
This is edging toward governance conditionality instead of policy conditionality. Whereas policy conditionality tells the government what policies it should adopt, governance conditionality tries to incentivize government accountability to its own citizens: For example, it might require that the budget be transparent so that citizens can see not only how aid money is spent, but how tax receipts are spent. This approach may have some weak incentive effect toward improved governance, but mainly its purpose is to select between governments, channelling aid to those that for whatever reason, already have reasonable governance.
While budget support, the MCC, and country ownership are good approaches where donor and government preferences are closely aligned, they are manifestly inappropriate where they diverge. For example, if the donor believes that a government’s spending priorities favor narrow elites or public-sector workers over ordinary people, it would be foolish to hand over money for the government to use as it liked. At present there is no satisfactory architecture for delivering large amounts of aid in these difficult circumstances. Typically, where policies and governance are very poor, the needs of ordinary citizens are greatest, so there is an acute tension between what is needed and what can realistically be achieved by channelling large aid flows through the government. This dilemma is often at its most acute in post-conflict situations, where the civil service has collapsed leaving corrupt and ineffective public delivery systems.
One recent approach has been to earmark specialized funds for specific purposes, usually health, and to use the money to finance ad hoc programs on these issues designed by recipient governments. The donor hopes to enforce effective use of the money by threatening not to renew financing if targets are not met. Hence, the enforcement is designed around specified outcomes rather than policies. One problem with this approach is that the weaker recipient governments lack the strong public delivery systems to attain the desired outcomes, and short bursts of money do nothing to build them. A second problem is that governments or civil servants in weak governance environments may be so used to snatching short-term opportunities as they arise that the threat of future loss of funding is ineffective. Hence, the specialized funds approach may face similar obstacles as the budget support approach — being excellent for the stronger environments but not for some of the most needy.
Reaching the Neediest
An alternative approach that is about to be piloted by the Organization for Economic Cooperation and Development (OECD) is tailored specifically for the most challenging environments. It proposes to use aid to fund alternate, extra-governmental delivery mechanisms for key services. For example, aid for education might be channelled to the churches that already run successful mission schools so that these can be scaled up. To an extent this is already done through the World Bank’s Social Funds program. However, the social funds usually only finance the capital cost of a project — the building of a school but not its running costs. They are also typically quite small.
The key idea here is that many nongovernment suppliers should become eligible for aid finance, including local and international NGOs, not-for-profit companies such as the Citizen Development Corps and the Crown Agents, and for-profit companies. I have proposed a version of this approach called Independent Service Authorities (ISAs). An ISA would be a government agency outside the civil service, a little analogous to an independent revenue authority. It would contract with service providing NGOs and firms, but would not itself directly provide the services. Instead, it would monitor performance. Although the ISA would be a part of government, it would be participatory, including some representation from civil society and donors. Hence, both citizens — including the local media — and donors would see the evaluations of service performance. Government would thus be more accountable to citizens, and donors would be able to channel large financial flows into needy environments with some confidence that money was being used as intended.
There have also been changing fashions in sector priorities. Thirty years ago the priority was seen to be infrastructure. In the past decade the fashion has shifted massively toward social sectors like health and education, and within these to the primary delivery systems — rural clinics and primary schools. This was partly because of a misplaced belief that infrastructure would be funded by the private sector, and partly because NGOs, dependent on their own fund-raising efforts, adopted a more emotional approach that promoted popular awareness among the citizens of developed countries. Thus, the more photogenic aspects of development, especially anything directly related to young children, came into relatively greater prominence. Inadvertently, as a result of these pressures, aid probably became less focused on a strategic growth agenda: There were more primary schools but fewer power stations. As fashions move on, there is now a shift from basic health and education to agriculture, generally linked to concerns about food supply. While the recent rise in world food prices adds to the rationale for this shift, it, too, may prove more effective in meeting short-term humanitarian rather than long-term strategic objectives.
Beyond the Photogenic
A final set of issues concerns donor coordination. As more countries become developed, the number of national aid programs is proliferating. Even within countries there are often many different agencies delivering aid: The U.S. government alone has some 19 distinct agencies providing aid in some shape or form. There has been an even greater proliferation of international NGOs, often channelling large amounts of government money as well as private donations, but with very weak systems of accountability.
Periodically, all these different donors get concerned to coordinate or at least harmonize their efforts. Recipient governments are often ambivalent. They object to the burden of dealing with many different donor agencies but resist solutions that would enable the many agencies to “gang up” against the government. Part of the problem is that each of the government donors is accountable to its own national systems of public scrutiny and so must conform to different standards. Partly, it is that no donor agency is willing to take leadership from any other. Partly, it is that governments are often genuinely undecided about their own priorities, or they keep their true priorities opaque because they know that donors would not agree with them.
The most sensible solution would probably be to channel more aid through a few multilateral agencies: The best of these agencies have more competence than the bilateral agencies and NGOs and are more detached from political pressures. However, the trend in aid finance is pretty strongly in the opposite direction: more bilateral programs and more NGOs. Hence, the best hope is that the citizens of the developed countries get themselves up to speed on the real priorities and so enable the NGOs and government agencies to move beyond the photogenic. That is why I wrote The Bottom Billion.
The opinions expressed in this article do not necessarily reflect the views or policies of the U.S. government.
