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Contributions from
the Column
Focus
The EU’s performance-driven aid
There is no substitute for ownership
Reviewing conditionality
“We will not accept aid at any terms”
Relationships matter, procedures do not
07/2005
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Reviewing conditionality
Development will only succeed if poor country governments act on their own behalf. And yet, in terms of their fiduciary obligation, donor agencies must insist on certain standards with regard to the utilisation of “their” money. The challenge is to reconcile donor’s and partner country’s interests and objectives.
[ By Jürgen Zattler ]
Ownership is a crucial issue in the international development debate. The term stands for donors designing their action around the national development programmes of the recipient countries. To the extent possible, monitoring and evaluation should to be undertaken through national processes and with national instruments. The underlying assumption is that reforms will only work if the recipient government drafts, promotes, and enforces them on its own account.
In the past few years, both the International Monetary Fund (IMF) and the World Bank have reviewed their policies on conditionality. IMF reforms now aim to delimit the number of conditions and focus them on the core areas of the IMF mandate. Last year, the World Bank revised its guidelines for structural adjustment loans. The new strategy of development policy lending (DPL) does not contain a set of pre-specified prescriptions, thus respecting the principle of ownership.
Admittedly, though, not everything is well in spite of these efforts. After all, the World Bank’s Operations Evaluation Department (OED) has highlighted shortcomings of country ownership in the Poverty Reduction Strategy Papers (PRSP), a concept launched in the context of the debt relief initiative in 1999. For example, alternative economic policy options have not been properly taken into consideration. The OED experts also complained because conditions imposed did not consider specific national situations sufficiently. Consequently, the governors of the World Bank last October called on the Bank to review the current concept and practice and to present a report by the Annual Meetings this year.
In future, the annual PRSP progress reports – abbreviated as APRs – could serve as a basis for better coordination between donor countries and target countries. APRs would then assess current practice and serve as reports to parliaments and donors on past activities; at the same time, they would also look towards the future in terms of priorities and budgetary applications. In addition, tranches could be disbursed in tune with the partner countries’ budget cycles. Of course, such goals are objectives for the distant future. They are far from common practice in almost all countries concerned, as most PRSPs and similar programmes do not constitute a useful basis so far. These documents usually specify general targets without indicating how they are to be reached. PRSPs will have to become much more specific – including in terms of mid-term fiscal planning –, if they are to serve as guidelines for donors.
Predictability
Internationally, a growing share of development aid is provided as (conditioned) budget support. Such funding of national budgets results from the call for ownership. A special challenge in this context is to enable the recipient governments to plan a sound budget by allowing them to predict, at least roughly, the volume of aid. Again and again, this has proven to be problematic. In some cases, financial transfers fluctuated greatly over the years, partly because donors withheld budgetary funds when they felt that not enough progress was made on the way to reform.
While it is only consistent to refuse budget support if reforms come to a standstill, deferring aid creates a vicious circle because it undermines governmental planning and thus makes the reform process even more difficult. As a result, donors have often come under pressure to disburse overdue instalments even if previously specified conditions had not been met. Generally speaking, donor organisations lose credibility in this manner. One convincing way to mitigate the problem is to divide the instalments into variable, performance-based sums, a practice that has been pursued for some time now by the EU (see the article by Petra Schmidt, p. 276).
Outcome orientation
As a general rule, the conditions specified by donors are policy measures, e.g. amendments of certain laws and ordinances or the formulation of a sectoral strategy. The EU has developed an approach of its own in this context. It largely refrains from formulating policy measures and directly bases its programs on "outcome indicators". Outcome indicators have the big advantage of promoting partner government ownership: all that is defined are the outcomes required; the policy measures needed to attain them are left to the discretion of the governments. Apart from that, all efforts of governments as well as donors are better geared to achieving concrete results.
To be sure, the EU’s approach entails a number of problems:
– Often, the results of policy measures only become apparent after a relatively long time. For instance, training programs normally advance slowly. Governments thus cannot easily influence such indicators in order to come up with the figures that donors want.
– On the other hand, the widespread argument that result indicators are not available for some reform fields is weak. One can imagine defining outcome indicators for other sectors than only health and education – for instance, for trade policy. No one today disputes that open trade regimes are advantageous for economic development. But there are different ways of creating them. Many countries in the past "opened up” their national economies by liberalising imports across the board – often under intense pressure from the international community. Attention has been drawn to the possible negative consequences of such a policy and it has been emphatically pointed out that there are other options available, e.g. selective liberalisation for certain sectors or liberalisation of imports only in export sectors. Where outcome indicators are used, it could be left to governments themselves to decide how they open up trade; the only specification being target indicators defining the result (for example the percentage of national product accounted for by exports and imports).
In addition, some critics say that governments can only be partly held responsible for the results of political measures. Sometimes targets are missed because of factors beyond a government’s influence (such as commodity prices, natural disasters, and other external shocks). However, the effect such factors have on outcome indicators can generally be isolated, as the EU does when reviewing its outcome-based conditions.
What matters is that result indicators should not be used in isolation. Rather, they should become agenda items in the intimate policy dialogue of donors and recipients. This way, one might discover actual problems in specific cases and could identify whether they stem from a lack of reform will or a lack of administrative capacity. In the latter case, donors should consider providing additional support instead of cutting funds.
The content of conditionality
The need for country-specific solutions and national ownership does not, however, mean that there are no generally applicable recommendations for formulating conditions. Indeed, we have to keep in mind a few crucial insights (BMZ, 2004):
– Opportunity costs should be taken into account when imposing conditions. The implementation of reform generally requires administrative capacity and costs political capital (as well as cash). Therefore, conditions should focus on removing the greatest obstacles for development (“binding constraints”). Accordingly, responsible donors will have to delve into the specific situation of the country in question.
– Development programmes should take better account of institutional aspects. On the one hand, this goes for stabilisation measures (consolidating state budgets, fighting inflation, and improving trade deficits). Normally, such measures only have long-term effects if combined with programmes strengthening the public sector (budgetary management, tax revenue administration, financial market supervision, et cetera.). On the other hand, institutional issues also matter for the success of liberalisation and privatisation. For instance, it should be possible to postpone steps towards liberalisation until the institutional prerequisites have been met.
– More attention should be paid to growth strategies. In most countries, programmes to fight poverty focus on improving basic social services by investing in the sectors of health and education. However, it is just as necessary to increase private investment and to raise productivity. If budget support is designed as credit, it must help to increase income and the inflow of foreign currency for otherwise loans cannot be repaid.
– Also, in the macroeconomic field, e.g. with regard to fiscal policy, more attention should be paid to the specificities of country circumstances. Global budget deficits are only very limited indicators of fiscal sustainability. It makes sense to take a close look at the structure of expenditures (social expenditures, investments, current expenditures versus investment expenditures). Besides, in defining the goals of fiscal policy, the reaction of the private sector should be assessed more realistically. There is reason to believe that the potential of private investment was assessed too positively in many countries, resulting in a restrictive slant for fiscal policy targets.
Prospects for donor cooperation
It is important that donor institutions agree on a common approach and a practicable division of labour. In some countries, the recipient governments have cooperated with donors defining a list of priority measures called “policy matrix” summing up the core areas of government action. Such a joint basis should be strived for in all countries.
However, agreeing to such a basic framework does not necessarily mean that all donors will impose the same conditions and assess the progress of the programmes with the same indicators. Individual donors can still come to different conclusions in reviewing progress, e.g. if they attribute different weight to the various reform areas. This practice is not necessarily detrimental to partner countries and their reform process. After all, such an approach could prevent donors from all turning the flow of funds on or off at the same time. However, the number of conditions and indicators should not be exaggerated. Donors are called upon to proceed with caution. Otherwise they risk undermining one of the aspired goal of harmonisation – achieving goals agreed on by all parties involved.
Up to now, the Federal Government of Germany does not have an explicit policy on conditionality for general budget support as it has not granted budget support to a large extend. At present, German macro-economic budget support mostly comes in the form of adding to World Bank loans to low-income countries (Poverty Reduction Support Credits, PRSCs). In these cases, German development cooperation largely does without drafting own priorities, basically following the decisions of the World Bank instead. World Bank decisions to disburse loans, in this context, normally trigger the disbursement of the German funds as well.
Many other donors make sure they have more of a say. They apply their own indicators in order to influence the relevant reform dialogue. German development policy has only recently begun to make itself heard in the context of multi-donor budget support programmes, emphasising German priorities for the policy matrix. This is a path worth being pursued further. Indeed, particularly those sceptical of budget support should agree to this suggestion. After all, their main concern is that governance shortcomings in developing countries lead to leakages from and abuses of public funds with the implication that aid is not used efficiently. This concern could even be turned into the focal point of the German budget support.
Dr. Jürgen Zattler
directs the Department for the World Bank, the IMF and, International Financial Architecture in Germany’s Ministry for Economic Cooperation and Development (BMZ).
zattler@bmz.bund.de
Further information:
BMZ, 2004: Post-Washington-Konsensus – Einige Überlegungen, Berlin 2004.
BMZ-Diskurs 003/2004. Abridged English version in D+C/E+Z, August, 2004, p. 336f
The World Bank, 2005: Economic Growth in the 1990s:
Learning from a Decade of Reform, Washington
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