Budget support – a double-edged sword

Development Policy04 Feb 2008Anders Danielson

Please find below a number of general comments on the summary of the IOB evaluation. It is difficult to be more specific as I have seen neither the full evaluation nor the documents that were evaluated. However, judging from what I know of Swedish evaluations (and often policy documents) a lot can probably be said be said about the quality and reliability of the conclusions and recommendations in these documents.

The data issue, for instance, is usually not taken seriously and is not discussed in the evaluation (and, yes, I know these are very unsexy issues, but important nonetheless). These matters are not accounted for in my comments.

1 The most striking aspect is the similarity in the weaknesses of the Dutch Africa policy and those of other small, generous donors such as Sweden and Norway. The inability to formulate a limited number of priorities (and sticking to them); the fragmentation of aid; the discrepancy between rhetoric and policy; the desire to be everywhere, always; and the tendency to follow the rest of the gang are just some of the things that characterize these donors. In my view, the evaluation brings this out very well.

2. It would have been interesting to have a fuller discussion on the rise of general budget support (GBS). For sure, GBS is often a balancing item given its flexibility. It is also true that this flexibility is a double-edged sword, particularly (a) since many donors are using similar criteria to assess whether a country is eligible, and (b) since GBS became an important modality in tandem with a general increase in aid volumes and a shift in eligibility criteria towards governance factors. This means that the fluctuations in the amount of aid a country receives are potentially very large.

3 This problem is made worse since the Netherlands – together with many other donors – very often disburse much less than what it committed. This is pointed out in the summary, but it is not tied together in a general discussion of disbursement pressure and the incentive structure for the aid business.

4. In view of the disbursement targets that I suppose exist in the Netherlands (explicitly or built into the incentive structure), one can ask a number of critical questions that are not discussed in the summary. For instance, Tanzania went from being regarded as a bad guy with rampant corruption and virtually non-existent control mechanisms for public funds, to an aid darling to which large amounts of GBS could be disbursed in just a couple of years. This assessment was apparently shared by many donors. What exactly had happened in Tanzania’s public finance management system over these five or six years that motivated such a changed attitude among donors? I have followed Tanzania for some years, and in my view the public finance management system in the early 2000s – when the country received large amounts of GBS – was not much different from the system five or six years earlier, when there was no or very little direct budget support. I would have welcomed a more thorough discussion of how eligibility criteria for GBS are formed and used.

5. I am not sure the point that the sectoral approach has worked against policy coherence is correct. As I see it, policy coherence relates to how the effects of policies in different areas relate to each other, not to the fact that donors choose to earmark aid for specific sectors. However, the point that agriculture has been neglected is very valid and possibly one of the most important in the entire summary. The trend from the late 1980s and onwards has been for most donors to shift to social sectors instead. Whether this is because recipients ask for it (despite what is said in the PRSPs), or because it is easier to rationalize education aid than agriculture aid to donor country taxpayers, or because of concern for domestic donor country activities, is difficult to say. But I do hope that the full report is emphatic on the point that (i) investment in ‘rural development’ (particularly infrastructure and agricultural extension) yields the highest return of all measurable aid activities (and this is shown over and over again), and (ii) that this share has been declining over the past 20 years (even though there may now be a change, given the WDR2008 and the World Bank’s monopoly on formulating the questions). It is said that this decline is correlated with shrinking expertise on rural development within the Dutch aid industry. I would add that it is difficult here to distinguish the chicken from the egg.

6. One nice point (at last! says this economist) is that debt relief is theoretically equivalent to GBS. It is important to know how much of the debts that were relieved under the Paris Club were actually being serviced before relief, which is not mentioned in the evaluation. If they were not, then the ‘aid’ was not really a real inflow of resources.

7. Another very good point is that old debts (relieved through the Paris Club and the Highly Indebted Poor Countries (HIPC) initiative) have been replaced by new loans (from China) – this may show that the debt per se is not a major concern; the problem is rather the short-term inflow of real resources. And that says something about the myopia of political leaders in the countries concerned. Here is a conflict that the evaluation does not bring out: stricter conditions on how, when and where recipients take up new loans after debt relief should be weighed against the issue of ownership and the recipients’ right to their own development vision.

8. Other good points are that budget support may increase donor dependency, and that exit strategies seldom exist (or are applied).