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Contributions from
the Column
Tribune
The itinerary of an idea
Policies need clear focus
The World Bank’s use of country systems
10/2004
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[ Millennium Development Goals ]
Policies need clear focus
The latest data from the World Bank and the International Monetary Fund show that, in the fight against poverty, 50 to 60 developing countries are not on track to reach the Millennium Development Goals by 2015. More effort is needed. The countries concerned face challenges – and so do donor countries.
[ By Peter Wolff ]
Innovative characteristics of the UN’s Millennium Compact are the partnership approach and mutual responsibility. Developing countries are to increase their own efforts, work out credible development strategies and ensure that funds are used properly. In return, industrialised countries are to drop unfair trade policies, increase their official development assistance (ODA) and improve its quality. As a result, poverty should be halved worldwide by the year 2015.
Since 2000, nearly all of the poorest countries have drawn up Poverty Reduction Strategy Papers (PRSP) as a prerequisite for debt relief. These documents provide the base for reaching the Millennium Development Goals (MDG) which were defined by the UN in 2000. So far, these papers are often fairly superficial. They were drafted under considerable time pressure. After all, the countries urgently needed debt relief and additional IMF and World Bank money.
In general, the strategies do not apply conclusive macro-economic and sectoral concepts for fighting poverty. Instead, they list goals and measures, particularly concerning the social sectors of education and health. The papers promise increased public expenditure in these fields. This has frequently given PRSPs the reputation of being about raising funds, which donors want to see used for additional social-political measures. In fact, donors do make this requirement for funds released through debt relief.
Conceptual weaknesses in the partner countries
Overall, PRSPs are not seen as comprehensive development plans. This has far-reaching consequences. Goals are treated as equivalent to areas of intervention. However it is not at all logical that universal primary education (MDG 2) can be achieved by making the building of schools a top priority, nor that the reduction of child mortality (MDG 4) and combating AIDS and malaria (MDG 6) can be achieved primarily by higher health expenditure. What is overlooked is that, to achieve each individual goal, a whole cluster of instruments must be used and that the instruments depend on one another for effectiveness. For example, setting up infrastructure and increasing productivity are relevant for every single goal.
Effective strategies to combat poverty must take into account such interrelatedness. The Chinese example shows that improvements in health care have contributed significantly to the demographic transition, which in turn was an important prerequisite for the strong growth in productivity.
First generation PRSPs did not show much concern for such interdependent effects. For documents of the second generation, which are being drafted over the next two years, the partner governments should consider social sectors in the context of productivity in general. Growth orientation is necessary, because strategies, which rest on outside subsidies for social spending in the long run, will hardly be sustainable unless the borrowers mobilise complementary spending themselves.
There will also have to be a clearer emphasis on MDG-orientation in the next PRSPs. That means:
1. Sector strategies should relate their contributions to MDG achievement and derive a roadmap for the next three to five years.
2. Building and consolidating institutional capacities must be part of the strategy. Surprisingly, this central aspect is hardly dealt with in most PRSPs even though institutional shortcomings are generally known to cause severe problems in poor countries.
3. PRSPs should set out clearly which MDGs can probably not be attained in the remaining ten years and elaborate on the reasons. This should then become the subject of public discussion.
Donor duties
It is largely undisputed that the contributions of donor countries should follow the national strategies of the recipients. Donors should jointly make sure that their contributions serve PRS targets and, consequently, the MDG agenda. As the popular buzzwords alignment (conformity with the PRS) and harmonisation (co-ordination of fragmented donor contributions) show, donors have made considerable headway in this respect in recent years.
However, initial experiences show that harmonisation efforts at sector level are often out of proportion with the results achieved. Many donors want to be involved in several sectors, even with small amounts, hoping to influence the partner’s policies. But their resources are generally insufficient to achieve significant effects. Given that donors fund a large part of the development expenditure in the poorest countries, they should, together with the partners, assume responsibility for the outcomes. Coordinated PRS-roadmaps at sector level would be useful. This approach, however, will only work if there is a clearer division of labour. One or two donors per sector should assume a leadership role. They should also provide the partner with long-term support in the implementation of sector policies.
For German development cooperation (DC), this means becoming involved in those areas where it can make a significant contribution. It should then also assume full responsibility for achieving the sectoral goals. In sectors with two dozen active donors, it is nonsensical to make a small additional contribution and to set in motion the (already overstretched) German DC apparatus. Where, however, a significant contribution is possible, Germany needs to invest more in terms of funds and personnel. Bearing in mind budgetary restraints, this will not be possible in more than a dozen of the 60 poorest countries, and even then in only one sector each.
The Millennium Compact and the Monterrey Consensus promise an increase in ODA. In the international debate, an annual increase to the order of 50 billion dollars has been agreed on. That would double ODA compared to the 2001 level. The USA, Britain and France have made the highest pledges to increase ODA. France intends to raise its ODA to 0.5 percent of GDP (gross domestic product) by 2007. German DC will content itself with 0.33 percent by 2006. Should these pledges be met, ODA would rise to 75 billion dollars in 2006.
The increases in ODA rest, to a large part, on debt relief which is recognised fully as ODA in the year the debt is forgiven. It is true that it only becomes effective later in the countries concerned. They benefit once they no longer have to pay for debt servicing. This delay, however, is harmless. After all, countries which have embarked on a credible policy of reform must still establish capacities to absorb additional money.
A whole range of suggestions for mobilising additional funds has been discussed – from international taxes (on which agreement is unlikely, at least in the short run) to the increased mobilisation of funds through capital markets. The most interesting proposal is the International Finance Facility (IFF) made by the British government: Donors are meant to pledge future increases in their ODA to the IFF. On this basis, the IFF cold raise many times more on the international bond markets. Such funds would then be channelled to the poorest countries as budget support by the established DC institutions.
Budget financing (the direct financial support of national budgets by the donors) is controversial in Germany. German policy is traditionally based on investments which should lead to additional income and, in the next step, raise tax revenues. Sadly, this has obviously not worked in the poorest nations. They are not, on their own, in a position to cover costs for personnel, material and financing. These countries need help to cope with current costs.
Many donors – the World Bank, the EU and countless bilateral donors – have therefore given up the principle of investments in hardware a long time ago. They now define their budget financing as investment in the countries’ development. The countries in question cannot improve their human capital without such funds. In this context, German DC must still resort to exceptions approved by the Federal Ministry of Finance. It is high time to revise this out-dated procedure.
Conclusion
An MDG-interim assessment is expected to be made at the summit planned for the UN General Assembly in September 2005. German DC will hardly be able to make its mark with financing commitments. It should therefore present a range of sector-related partnership agreements with acceptance of joint responsibility for achieving the objectives by 2015. Reallocating funds for this purpose would be tougher on the German DC-apparatus than on the affected partner countries. After all, where performance is good, partner countries will receive more funds in total, in particular from the World Bank and EU, which also make use of German contributions.
References:
IMF/World Bank (2004): Global Monitoring Report,
Policies and Actions for Achieving the MDGs and Related
Outcomes. Washington
Website:
International Finance Facility:
http://www.hm-treasury.gov.uk/documents/international_issues/int_gnd_intfinance.cfm
Dr. Peter Wolff
is head of the Department “Globalisation: trade, direct investment, monetary policy, development financing” at the German Development Institute (DIE).
Peter.Wolff@die-gdi.de
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