May 2006, No. 40

Global Economy

Donors need to show taxpayers that their money has delivered results. And they are under public pressure to make progress in achieving tangible development goals, as opposed to making progress in the long, slow business of state-building.

Many developing countries, particularly in Africa, will need substantially more foreign aid to achieve the Millennium Development Goals (MDGs) by 2015. But capacity constraints can make it difficult for them to absorb all the extra aid. In 1999, only 50% of Tanzania’s children went to primary school. Now the figure is over 90%. There are similar stories in Uganda, Ethiopia, Mozambique, and other African countries. How has this happened? Because an elected government in Tanzania chose to expand educational opportunities and was able to use aid money flowing through its own budget, rather than into separate donor projects, to abolish school fees.

The UN Millennium Summit in 2000 articulated a new consensus about the urgency of poverty reduction and the importance of more and better aid to support it. For Britain, the change began in 1997, when poverty reduction became the sole aim of its international development policy. Over the past eight years, Britain has more than doubled its aid, to £4 billion a year, and committed itself to raise it much further, reaching the UN target of 0.7% of gross national income by 2013. During 2005, Britain has been pressing other countries to increase their aid substantially (including through debt relief and the U.K.’s proposed International Finance Facility). Britain gives 90% of its bilateral aid to low-income countries and urges others to do likewise.

But the Summit, and its follow-up meeting in Monterrey, Mexico, recognized that more aid is not enough. Too much aid in the past was badly used, often because it was driven by the priorities and preferences of donors rather than of poor people and poor countries. Like many other donors, the U.K. has been convinced by past experience that the most promising path to better aid is a "country-led" approach, in which the governments of developing countries themselves define and lead the poverty reduction agenda.

The country-led approach was first put into action on a large scale under the Heavily Indebted Poor Countries debt relief initiative, in which recipient countries were asked to formulate national poverty reduction plans to show how they would use the money saved on debt service. But the approach has since been extended by many—though not all—donors to other sorts of aid. It is now central to the U.K.’s aid program. Development is a very long-term business, so it is still early to evaluate the success of the new approach. But we have already learned much about how to apply it, and about the challenges that it faces.

Guiding Principles: Experience suggests five key principles for making the country-led approach work.

First, support country strategies: Donors should base their country strategies on their partner countries’ plans, rather than on their own analysis of priorities. The U.K. Department for International Development (DFID) tries not to tell countries what to do. This means ensuring that aid strengthens a country’s systems for planning, budgeting, and accounting, rather than undermining them by parallel donor-run structures. Not least, as much aid as possible should flow through governments’ budgets, so that finance ministries can accurately assess resources and plan spending. It also means moving away from traditional conditions on aid. The U.K. recently published a new policy on conditionality, stating that it would not impose specific policies on partner countries.

Second, match aid instruments to country needs: Donors must listen to partner countries’ priorities for aid delivery, which vary widely. The country-led approach has been developed from the experience of countries in the middle segment of the theater: low-income countries that are dependent on aid and able to develop poverty reduction strategies. Their main need is for untied, long-term, predictable finance to spend through their budgets, including meeting the recurrent costs of scaled-up access to services. To qualify for this type of aid, countries also need robust and reliable administrative, technical, and financial systems.

Third, harmonize aid: Donors should not try to do everything everywhere. If the priority is to strengthen countries’ own policies and systems, they should attempt to avoid multiple donor strategies and disbursement mechanisms, which waste the scarce capacity of partners. DFID now gives priority to working jointly with other donors. It also tries to pay attention to partners’ circumstances and preferences. In aid-dependent countries where there are many donors, the gains from harmonization may be high, but in countries with fewer donors working in unrelated sectors, the government may prefer to deal with donors separately. Harmonization is not an end in itself, but a means to improve the alignment of aid with government priorities and systems.

Fourth, make aid flows more predictable: Without predictable aid, it is risky for recipient governments to make long-term spending commitments (for example, to employ more teachers, or to put people on antiretroviral drugs). So far, donors have been prepared to run their own multiyear projects, but have usually provided budget support to governments only on an annual, or occasionally a three-year, basis. The need for donors to be accountable to their taxpayers and parliaments makes it hard to promise funding far into the future, regardless of circumstances. But DFID has made 10-year funding commitments in Ethiopia, Sierra Leone, and Rwanda that it will seek to replicate in other countries. Our new conditionality policy also includes a more transparent process for deciding when and how we will reduce or withdraw aid when problems arise, and commits us to publish and monitor our aid conditions.

Fifth, insist on mutual accountability: Donors should be accountable to developing countries for how aid is given, just as developing countries should be accountable to their own people and to donors for how aid is used. Initiatives to strengthen accountability are in progress at the country level (for example, the Independent Monitoring Group in Tanzania), at the regional level (for example, the UN Economic Commission for Africa/OECD process in Africa), and at the international level (for example, the OECD High Level Forum on Aid Effectiveness in Paris earlier this year, at which donors committed themselves to track their delivery of support for country-led development).

Challenges to Face: Five years into this new approach, the proportion of donors’ overall aid provided as budget support is rising. European Union donors have committed to providing 50% of their total aid in this way by 2010. But progress is slow. Even in Tanzania, which has led the way, only 35% of total aid is budget support. Five main challenges must be confronted in seeking faster progress.

Interest in sectoral spending and outcome: Donors need to show taxpayers that their money has delivered results. And they are under public pressure to make progress in achieving tangible development goals, as opposed to making progress in the long, slow business of state-building. There are also strong political constituencies for spending in particular sectors. The U.K., for example, has agreed to a spending target for HIV/AIDS and has announced sectoral spending plans for water and education. Progress in these areas is vital. But a proliferation of "vertical" aid programs in particular sectors would conflict with countries’ own choices and plans about how best to allocate resources to accelerate poverty reduction.

This challenge has been amplified in 2005, with the recommendations in the reports of the Commission for Africa and the UN Millennium Project for a wide range of "quick wins" to achieve the MDGs. DFID believes that countries should strive for these goals within their national planning processes—but donors must resist the temptation to set up new earmarked financing mechanisms.

Weakness of countries’ poverty reduction strategies: Some strategies have been insufficiently prioritized. Others have focused on expanding government services with too little attention to growth, social exclusion, or the environment. Consultation with poor people has often been limited, and achieving the MDGs may not be a top priority in a developing country’s budgetary process. DFID accepts that the poverty reduction strategy process has been stronger in some countries than others and is working to promote improvements; but, despite weaknesses, we believe these strategies hold more promise than other approaches.

Risk of putting aid through public financial systems: Concerns about the weaknesses in government systems for budgeting and accounting, including the risk of corruption, have led some donors to resist providing aid as budget support. DFID believes that donors must strengthen, rather than bypass, government systems.

Inapplicability of the approach in some countries: It is often argued that country-led development is applicable in aid-dependent countries with relatively good governance frameworks, but not in fragile states or countries that receive little aid. DFID believes that the fundamental principles of this approach apply across the full spectrum of developing countries, but that they need to be applied in different ways to fit local circumstances and preferences.

Overemphasis on the state: Some donors worry that the country-led approach focuses too much on the role of the state and of government planning. They believe that greater attention should be paid to the roles of the private and voluntary sectors in growth and in service delivery. DFID agrees about the importance of the private and voluntary sectors, but believes that strengthening the governments of developing countries is essential for faster and more sustained progress.

In Sum: In 2005, the UN Millennium Project recommended a doubling of aid flows worldwide from their recent levels of $60 billion per year. The Commission for Africa called for a doubling of aid to Africa over the next three to five years, and the Gleneagles G8 summit committed the major donors to achieving this target. But the impact of such increases in aid on world poverty will depend crucially on how they are spent. If a doubling of aid leads to a doubling of donor projects, missions, and bureaucracy, developing country administrations will collapse under the strain. But if it leads to a doubling of partner governments’ own spending on infrastructure, education, health, HIV/AIDS, and social safety nets, we can be optimistic about achieving the MDGs.