Policy Reforms and Aid Effectiveness

The discussion of this item was led by a panel composed of H.E. Eveline Herfkens, Minister for Development Cooperation of the Netherlands; Ms. Carol Lancaster, former Deputy Administrator of the United States Agency for International Development and a current member of faculty of the School of Foreign Service at Georgetown University; and Professor Paul Collier, Director of the Development Research Group of the World Bank. The panel discussion was moderated by Mr. Y. Seyyid Abdulai, Director-General of the OPEC Fund..

The panelists in their presentations emphasized a number of important issues, including the impact of debt burden on Africa’s development; the elements of new aid relationship; improving coordination among donors; transferring the responsibility of aid management to African governments; the fallacy of "aid dependency" argument; and the politics of aid allocation.

Ms. Herfkens observed that Africa’s external debt remained a very significant impediment to the region’s orderly growth, as such resolving the debt problem was fundamental to providing adequate financing for development. While some of the recent initiatives on debt reduction were a welcome step in the right direction, the current mechanisms to resolve the debt problem, particularly the HIPC initiative, were far too slow, too late and often little, selective in coverage, and too highly-laden with conditionalities. While most donor countries agree on the need to increase debt relief to developing countries, especially the poorest, they are yet to agree on modalities of funding such additional debt relief. The open debate on "capital flight" out of Africa was most welcome development, as it was more difficult to convince constituencies in developed countries about the need for aid for Africa in the face of huge capital flight out of the continent. Moreover, to satisfy aid constituencies in developed countries, it was imperative that aid had to be seen to be effective and productive.

Ms. Herfkens also emphasized the importance of a "new aid relationship" based on shared values and mutual appreciation of each other's role in making aid effective. The tendency for some donors in by-passing key Ministries to implement programmes and projects in African countries, created conflicts rather than partnership. The need for cooperation between donor countries and recipient countries was therefore imperative for improving aid effectiveness. Donors had quite often imposed projects on African countries. Moreover, recipient countries have had to contend with numerous missions from donor countries as well as with numerous agencies. In such an environment, duplication of efforts was unavoidable. Improving aid effectiveness in Africa would entail shared responsibilities. Aid donors needed to improve ownership of aid-funded programmes and projects by Africans and ensure that aid was "demand-driven" and not "donor-driven". The need for donors to improve the reliability of aid flows and make them more dependable was emphasized.

Ms. Herfkens indicated that the Netherlands' Government intended to limit its ODA support in Africa to twenty (20) countries based on selected criteria. The key criteria will include: the degree to which a country's development programmes made "poverty reduction" as a key element; and the extent to which a country was pursuing good policies and good governance. The Government of Netherlands was committed to the principle of African ownership of aid-funded projects and programmes; provision of aid within a holistic approach by focusing on the overall fiscal position of a country; and decentralization of implementation of programmes and projects and strengthening local participation. Aid allocation will increasingly be given to recipient countries on multi-year basis and as budget subventions. For aid resources to be used efficiently, it was stressed that recipient countries needed a transparent fiscal framework; a focal co-ordinating point in recipient countries; and effective public sector management.

Mr. Collier observed that many of the arguments that have been used to question aid effectiveness in Africa, based on the "aid dependency syndrome", were flawed in many important respects. The underlying assumption of the "aid dependency syndrome" is that there was too much aid resources. The arguments against high levels of aid flows have included that high levels of aid flows may contribute to slow growth; that there are diminishing returns to aid flows to a country; and that countries become aid dependent just like "households on welfare" become dependent on such payments. The negative consequences of the aid dependency principle often becomes self-fulfilling as donors reduce aid. The analogy of the "aid dependency syndrome" is "trade dependency" of some years past which has been rendered obsolete by increasing process of globalization.

Mr. Collier said that the argument that "high aid has been the cause of slow growth" in Africa is not true. Subject to a satisfactory policy environment, aid raises growth, until remarkably high levels of aid are reached, and the more aid that is provided the more growth occurred. The argument that aid has a disincentive analogous to "welfare dependency" is also flawed as any disincentive effects of aid on national work effort are negligible and that indeed there might be positive incentive effects arising from the reduced distortionary effects of the tax system. As regards the argument that aid detracts from private investment, the evidence shows that in economies in which policy had recently been reformed, aid plays a vital role, both in sustaining growth until private investment increases, and in leading private investment. Contrary to popular view about the fickleness and riskiness of aid as a core component of the budget, aid has actually been less volatile. Far from needing to emerge from aid dependence, Africa is entering a phase during which "big aid" will make its most vital contribution. The next decade in Africa will be opportunity for aid to be vindicated. African countries were urged to learn from each others, "best practices" not only in terms of effective utilization of aid, but also in other areas such as attracting private investment and promoting labour intensive manufacturing.

Ms. Lancaster noted that aid policy of donors and aid allocations were not always based on considerations of promoting economic and social development in African countries. Indeed, in a number of cases in Africa, aid was provided for purely "political reasons", the need for donor countries to be visible in certain regions. There were also pressures from lobbyist in developed countries, and pressures from legislators. In this situation, aid had supported corrupt governments in the past. Among the factors that explain poor allocative choice of aid and faulty implementation are the facts that most aid agencies are "political entities" and hence subject to all types of pressures; the aid agencies lacked the capacity in view of the expanded missions and mandates; political entities did not have the leverage to implement programmes and projects which would have yielded higher returns to human development in Africa. Moreover, it was noted that aid agencies were always under pressure to spend available resources as quickly as possible for political reasons; under pressure to support their governments' non-economic agendas and at times to play favours of leaders; and under pressure from legislators, ministries of foreign affairs and non-governmental organizations as well as public opinion. Consequently donors policies and practices were partly responsible for the problem of aid effectiveness in Africa.

Ms. Lancaster also argued that the bureaucratic procedures of agencies had been a major contributory factor to their observed inefficiencies. Moreover, duplication of effort by various agencies and non-governmental organizations was not uncommon in Africa. Furthermore, in the face of expanded missions, bilateral aid agencies had proven weak in political influence within their own countries. They are often at a level below Cabinet level, have limited constituencies, and often are asked to work on non-priority issues. Expanded portfolios often stretch staff expertise and make it difficult to be effective. While the current shift towards "managing for results" is intended to improve aid effectiveness, this could also lead to greater control of aid-funded programmes and projects.She stressed the importance of donors and aid recipients to evaluate the institutional framework for aid delivery and the need to review "aid targets" as well as "aid counterparts funds". There was, therefore, the need for redesigning the aid relationship.

The presentations by the panelists was followed by participants’ discussion. Some delegates noted that large increases in the volume of aid were unlikely in the near future, even as the prospects of aid effectiveness were improving, as past experience in the utilization of aid resources led to aid-fatigue in donor countries. It was observed that the ineffectiveness of aid was attributable to a host of factors, including the lack of a stable macroeconomic environment, lack of good governance, lack of recipient ownership, ineffective management of aid resources by donors and prevalence of donor-driven programmes.

Other delegates observed that aid had been effective in the right policy environment, and conversely had been ineffective in a poor policy environment. Although most African countries have pursued macroeconomic reforms, these reforms have been inadequate to achieve aid effectiveness. Some delegates noted that corrective measures would need to include the sustenance of a stable macroeconomic environment. The participants also emphasized the need for good governance, transparency, a good institutional framework and capacity building in order to enhance the effectiveness of aid. Some participants noted that more efficient allocation of aid resources among countries on the basis of their relative poverty levels, and on the quality of their economic performance could enhance the impact of aid.

Some participants noted that there was a correlation between reduction in aid flows and increasing debt stock, as a significant proportion of aid flows were being used to finance debt service. The participants also noted that Africa’s debt burden could be a disincentive for attracting private investment. Consequently, participants emphasized the need for debt relief arrangements to support ODA objectives and not divert ODA intended to promote economic development. This is particularly important in view of the catalytic role of aid in attracting FDI flows.

Other participants observed that past experience with aid on the part of donors and beneficiary countries suggests an urgent need to reexamine current aid modalities with the aim of increasing aid effectiveness. Both donors and recipients seem to diverge on this issue. However, participants generally emphasized the need for reforms that will break the spiral of the weakness in the recipient’s capacity (for programming, monitoring and evaluation), which has led to escalating donor intrusiveness in public expenditure decisions (motivated by the urge to disburse funds), which has in turn further weakened recipient-country capacity. The key is to put in place a mechanism for consensus building among key African development stakeholders (including donors) around an African-led agenda and to return spending authority, control and accountability to the beneficiary countries. This underscores the need for a partnership approach in ensuring aid-effectiveness.

Some participants emphasized the need for enhanced partnerships to achieve aid effectiveness and reduce aid dependency in the long run, through the development of new aid instruments; performance monitoring; selectivity and more effective follow- through; within agencies and on the ground. The emphasis of the new thinking is the integration at the national and global levels, of macroeconomic aspects of development with fundamental long-term issues of structure, scope and substance of societal development. They imply open sharing of information among all players and clear leadership by developing countries’ governments in the programming and implementation of development programmes. In particular, participants stressed the need for transferring responsibilities for aid programming and implementation to the recipients to foster a sense of ownership, similar to UNDP’s new approach. Other participants also emphasized the need to target aid at such high impact areas as health, education, training for capacity building and agriculture for food security.

Some delegates noted the importance of aid coordination. They observed that there were too many aid agencies with divergent policies targeted at recipients. There was therefore need for coordination in the disbursement of aid to ensure effectiveness. They also noted that the policy of channeling aid through NGOs needed to be reviewed and coordinated as there were too many NGOs operating in any given country. It was the general consensus among participants that if these measures were implemented, they are likely to improve the quality of management of aid resources by donors and recipients and to enhance coordination, cohesion, focus and impact of donor-supported programmes and development-assistance in general.

There was a second panel presentation on A review of the African Debt Situation and Domestic Resource Mobilization in Africa. The panel was composed of Mr. Rubens Ricupero, Secretary-General of UNCTAD; Mr. Ernesto Hernandez-Catta, Associate Director of the Africa Department of the IMF; and Mr. Jeffrey Katz, Principal Economist, Africa Regional Office for Economic Management and Social Policy of the World Bank. The panel discussion was moderated by Mr. Ahmedou Ould Abdallah, Executive Secretary of the Global Coalition for Africa.