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Contributions from
the Column
Focus
Ownership and donor harmonisation: a brief introduction
Harmonisation: Donor pledges are steps in the right direction
How KfW Entwicklungsbank assesses budget support
Bangladesh’s PRSP and civil society
African opposition to neoliberalism
Political instability and programme-based approaches
07/2006
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Budget support revisited
Budget support helps to increase the transparency and efficiency of budget processes in developing countries. Nonetheless, this instrument does not serve to reform a country’s entire political and societal system. As far as poverty reduction is concerned, more attention must be paid to economic factors. Current practice should be improved in focussed and incremental steps.
[ By Nassir Djafari ]
Since the mid-1990s, more and more donors have been turning to budget support to assist poor countries. This instrument consists of grants to national budgets (for key terminology, see page 276). The disbursement of these funds depends on the implementation of reforms agreed on by all partners. Germany, through the KfW Entwicklungsbank, is providing budget support to nine countries, with a total sum of roughly ¤ 100 million, and has earmarked ¤ 235 million for similar programmes in five more countries. A related instrument is basket funding, in which several donors contribute to financing sector programmes, such as education or health. Germany is following the international trend and taking part in such programmes.
This article examines whether the expectations placed on budget support are being met in terms of poverty reduction, harmonisation, alignment and enhancing governance – and, if so, to what extent. Analysing all aspects of this complex issue is beyond the scope of this essay, but it does include some tangible suggestions on how to improve current practice.
Poverty reduction
In recent years, many of the poorest countries have increased public spending on social services such as education, health care and water provision. The Heavily Indebted Poor Countries (HIPC) Initiative and the associated Poverty Reduction Strategy Papers (PRSPs) have contributed to this development. The share of government expenditure on social sectors has also grown – not least because budget support contributes to funding recurring expenses.
In many cases, the range of basic services for the poor has increased in number and availability. Unfortunately, however, the quality and efficiency of these services often leave something to be desired. This, at any rate, was the finding of the “Evaluation of General Budget Support” by IDD and Associates (2006), based on case studies of Burkina Faso, Malawi, Mozambique, Nicaragua, Rwanda, Uganda and Vietnam. The study found rather limited success in terms of poverty reduction.
The latest Global Monitoring Report by the World Bank and IMF (2006) confirms that view. According to the report, on average, only five out of six teachers were present in schools, when unannounced visits were made in various countries – and, at one in three, the absentee ratio for health facilities was even higher. Local agencies were receiving either none or only part of the funds allotted to them. IDD and Associates point to weak institutions in the recipient countries, emphasising distorted incentives and lack of accountability.
Such findings also explain why, in many poor countries, the rapid rise in school-enrolment levels in recent decades has not led to faster economic growth. In the East Asian countries, increased expenditure on education went along with rapid growth, but that was not so in sub-Saharan Africa (Easterly, 2002). Where businesses do not see any investment incentives, education expenditure cannot bear fruit. According to an IMF working paper (Baldacci et al.), the positive impact of spending on health care and education was undermined in countries with poor governance.
It is not enough, therefore, to invest more money in social sectors. Efficient and effective planning and implementation are also necessary. Accordingly, the “Evaluation of General Budget Support” did not find proof of budget support having had a positive impact on the economic situation of the poor. Apparently, budget-support programmes still pay too little attention to issues of economic growth – in that respect reflecting the PRSPs, on which they are based. The generation of growth, employment and income is not in the spotlight. Similarly, the significance of infrastructure has often been overlooked in the past. Unfortunately, many developing countries have been under such pressure to reduce budget deficits that they neglected investment in – and maintenance of – infrastructures since the 1980s. It was easier politically to slash capital expenditure than to cut civil-service salaries and related recurring expenses (World Bank and IMF, 2006). Infrastructure bottlenecks, however, impede growth.
To reduce poverty by boosting incomes, more needs to be done to improve infrastructures for transport, energy supply, the financial sector and agriculture. German aid institutions are particularly well-versed in these fields. Accordingly, German involvement in specific programmes makes sense, provided that they are not primarily about funding investment, as they were in the past. The main focus should be on changing the sector environment, which is more likely to succeed in joint action with other donors. Moreover, that will also benefit individual projects in related areas. On a bilateral basis, for example, innovative operating schemes and fee structures become achievable. However, given typical institutional weaknesses in developing countries, budget support must also be supplemented by more capacity building.
Strong institutions
According to the IMF, there are 33 countries in which international assistance makes up more than 50 % of public expenditure (Clemens et al., 2004). The total aid Mozambique receives is more than twice its national tax revenue. Accordingly, it seems appropriate to consider whether budget support might encourage recipient countries to generate even fewer funds domestically. Fortunately, the “Evaluation of General Budget Support” did not reach this conclusion.
Nonetheless, there are no incentives for a country to increase its ability to generate domestic revenue and become less dependent on external assistance. For a long time, Germany’s policy has been that partners must contribute appropriate funds themselves. That demand becomes even more relevant in the context of budget support, an instrument which cofinances recurrent expenditure. So far, however, international debate has shown little interest in this matter, even though chances to enforce such claims would improve, if several donors acted in a coordinated manner.
Dependency on aid is certainly no base for sustainable development. Taxes, of course, are not the only means of generating revenue. Another option is to introduce user fees for public infrastructure or services, including electric power, water, public transport, education and health care. Opportunities to reduce costs through greater efficiency and transparency also deserve consideration. It should be carefully examined whether a country can afford additional debt.
German aid institutions, given their specific experience, can meaningfully contribute to the dialogue on the sectors mentioned, particularly in the areas of user fees and boosting efficiency. Furthermore, they can support fiscal policy reform by advising the institutions in charge.
Donor coordination
Budget support has done much to harmonise donor practices. Contrary to what was expected, however, the governments of developing countries have not assumed leading roles in the dialogue on policy, nor in donor coordination. Obviously, some expectations linked to budget support were too high. This fact is reflected in the vast number of ambitious goals and conditionalities. Moreover, all donors seem anxious to stress their particular focus in the shared consensus. No doubt, this is so because they are themselves accountable to constitutional bodies at home, such as parliaments and audit offices. The result, however, is a multitude of demands and conditions which, as a whole, overburden target countries.
A major argument in favour of budget support is that donor harmonisation and programme-based funding can reduce target countries’ transaction costs. However, these costs have not in fact decreased as much as was originally expected. It would probably make sense for donors to agree on a division of labour, with specific donors focussing on specific partners. So far, all donors tend to claim to coordinate among themselves all efforts in all target countries, which results in high transaction costs.
Excessive optimism and overly ambitious goals can become obstacles, if they lead to overburdening administrations and to disappointment. It would therefore make sense to focus on fewer goals, which should be as realistic and specific as possible. It seems advisable to further build on cases of success, rather than to add many new items to the agenda. Comprehensive reform programmes often make only slow progress. Instead, one should strive for focussed and gradual solutions.
There is no doubt that civil service reform is necessary. However, this issue has often proved particularly difficult, because it affects various vested interests. In this setting, a gradual approach would certainly make sense. Sequenced measures could aim at improving the effectiveness of public expenditure and the quality of services, for instance, by introducing quality standards and efficiency criteria in sector agencies and improving the monitoring of procurement and construction measures. Users/clients could also be involved, wherever doing so makes sense. Tangible steps of this kind can make significant – though perhaps not spectacular – contributions to combating corruption.
With the benefit of hindsight, we know that donors originally formed an overly optimistic opinion of developing countries’ governance. Consequently, they overestimated the policy impact of budget support. According to the “Evaluation of General Budget Support”, it is unrealistic to expect this instrument to bring about radical institutional change or a fundamental political reorientation of governments or even countries.
In any event, it is right to restrict budget support to countries that are seen to be “on the right track” with a proven willingness to reform. Accordingly, reviewable entrance and exit criteria should be established. We should aim for country-specific mixes of projects, basket-funded sector programmes and budget support, depending on the willingness and ability to reform. Experience shows that the impact of aid is greatest whenever recipient and donor governments cooperate in fields, over which they have no fundamental differences. Only in such cases have conditionalities been useful, by strengthening the reform-minded forces in government, parliament and civil society.
Too often, donors are nevertheless still insisting on unsustainable conditions in recipient countries. De facto, these conditions remain ineffective. Often donors do not adequately understand the politics of the target countries, and yet they insist on pre-meditated approaches. At the same time, donor action often undermines conditionalities. That is the case when, as has occasionally happened, some donors make payments even though conditions have not been met, just because they are under pressure to disburse funds.
Transparent budgets
The most important impact of budget support to date was to strengthen national budgetary systems. Donor funds are allocated in national budgets and channelled through finance ministries. There are fewer auxiliary budgets and the respective ministries are in charge of the budget process. As a result, the competence of the finance ministries has grown. Planning procedures and accountability were improved in the context of budget support, with positive consequences in terms of coherent and transparent allocation of funds. Nevertheless public-finance management is still prone to huge shortcomings.
Donors’ perception of risk has led to increased efforts to expose and stem corruption. Imposing conditions helps to do so, as do studies and analyses as well as the establishment and support of anti-corruption units. All this is highly visible, but it remains to be seen whether it will really be effective. Laws have on occasion been passed, only to be thwarted by an absence of governmental determination – or by sheer inability – to enforce them. Corruption is deeply rooted in many societies. It cannot be overcome quickly, but only in the long run.
Hence, there is much to be said for gearing policy dialogue even more towards the improvement of public finance. Reforms in this area are of fundamental importance for efficient state action, and governmental accountability towards citizens. Furthermore, these reforms reduce donors’ fiduciary risks. Finally, past examples of successes in strengthening national budget systems also hint towards intensifying dialogue in this area.
Accountability, however, cannot be achieved simply by increasing the efficiency and transparency of government agencies. Rather, the relevant demands must come from outside the government. What is needed is a strong parliament, well-organised civil society associations and independent media. Development cooperation can give scope to such forces – but they themselves must make use of their breathing space.
Nassir Djafari
is a senior economist at the KfW Entwicklungsbank’s Competence Centre “Developing Economies”.
Nassir.Djafari@kfw.de
References:
Clemens, Michael A., Charles J. Kenny and Todd J. Moss, 2004:
The Trouble with the MDGs: Confronting Expectations of Aid and Development Success, CGD Working Paper No. 40 May
Baldacci, Emanuele, Benedict Clements, Sanjeev Gupta and Qiang Cui:
Social Spending, Human Capital, and Growth in Developing Countries: Implications for Achieving the MDGs. IMF Working Paper WP/04/217
Easterly, William, 2002:
The Elusive Quest for Growth, MIT
IDD and Associates, 2006:
Evaluation of General Budget Support: Synthesis Report, May Lawson, Gerster, Hoole, “Learning from Experience with Performance Assessment Frameworks for General Budget Support”, September 2005
World Bank and IMF, 2006:
Global Monitoring Report
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