Donor harmonisation, Ownership and Aid Effectiveness
A critical analysis of the Multi Donor Budget Support in Ghana
Master's Thesis 2010 45 Pages
Table of Contents
2. Literature Review
2.1 The international context
2.2 The rise of budget support
2.3 The actual debate
3. The Multi Donor Budget Support in Ghana - An analysis
3.1 Operational structure
3.2 Achievements and challenges
3.2.1 Budget support, project aid and public financial management
3.2.2 Donor harmonisation, bilateral bypassing and the flexibility of the instrument
3.2.3 Conditionality, ownership and domestic accountability
3.2.4 Other challenges and risks
c) List of references
d) List of tables and figures
Since the late 1990s, the debate about aid and its effectiveness has continuously intensified, mainly because of the missing success of existing strategies and half a century of rather disappointing development outcomes. Therefore, the international donor community agreed during several international conferences that the concept of development aid and how it is organized, structured and disbursed needed to change. After a series of international summits1, the negotiated results of this debate have been summarised in the Paris Declaration on Aid Effectiveness in 2005 and the follow up document, the Accra Agenda for Action (AAA) in 2008. At the heart of these agreements lies the idea that development aid needs to be more effective and donor action has to be more harmonised and aligned with developing countries’ own development strategies in order to strengthen ownership on the recipient’s side.
The rise of program-based approaches (PBA), such as for example General Budget Support (GBS), took place in this context of programmatic change. They conceptually challenge the idea of classic project aid and are the focal point of this paper. In the beginning of the 21st century donors started to use more and more PBA and with it more GBS to disburse their aid and thus it is of major interest how these newly emerging development strategies and instruments perform and if they are able to fulfil the high expectations generated by their supporters.
During my previous work on GBS, I found that there are several possible negative side effects of the instrument that could arise depending on various factors. Thus, this paper will first take a look at the international context in which the rise of budget support took place before presenting the idea of how the instrument is designed as well as the current state of the actual debate on GBS. In a second step, it will provide an in depth analysis of the operational structure, achievements as well as challenges of the Multi Donor Budget Support (MDBS) in Ghana as the empirical focal point to test the previously presented hypothesises.
The central argument of this paper shall be that budget support can be one of the most effective aid instruments available at the time, as long as probable and mostly known problems inherent to the instrument are addressed and tackled to prevent negative side effects and improve the instrument as a whole. This is, at least to some degree, the case in the MDBS in Ghana. Hence, its analysis will be the core section of this paper.
Despite the fact that budget support found many supporters and much praise throughout recent years, the instrument has some conceptual and practical flaws, mostly situated in the political dimension, which have to be addressed and solved politically between equal partners in an adequate and country-specific framework. Budget support is of course not the solution to every problem and there are some variables necessary to its success and also areas that need to be improved within the instrumental framework itself. But development aid is an evolving system and so is budget support as an instrument within it. Thus, possible flaws and points of critique shouldn’t lead to the assumption that the whole idea doesn’t work but that there is an ongoing need for improvement in critical areas in order to acknowledge the evolving challenges given and in consequence improve the overall performance of the instrument. This paper will try to contribute to this valuable process.
2. The Literature Review
This section will deal with the international context, the operational structure and logic of the instrument as well as the actual debate about budget support and its implications for this paper. The main focus will be a brief summary giving an overview of current discussions within the academic field, areas of dispute and the main questions and implications that arise from this debate as well as their role in this paper. The first part will present the international context before taking a look at the instrument itself, trying to explain how it works and what it is supposed to achieve. The second part will present the actual debate which will be structured along specific areas of academic interest whilst taking into account the different prevalent theoretical perspectives that play a role in the context of this paper. In sum, this section will provide a set of hypothesises in terms of what budget support can or cannot achieve and what the current academic discourse considers as its main strengths and weaknesses.
2.1 The international context
In order to understand the intention and function of budget support, it is first necessary to take a look at the underlying development principles who justify its growing application. The foundation of this rising importance lies, as already mentioned, in the reorientation of the international development agenda incorporated in the Paris Declaration on Aid Effectiveness and the AAA, which have been agreed upon within the Organisation of Economic Cooperation and Development (OECD) and have been signed by its member states as well as more than 100 other countries and donor agencies. At the heart of the Paris Declaration are five key principles in order to increase the effectiveness of aid.2
First, development has to strengthen developing countries’ ownership and leadership in development practice. This means that the programmatic basis of poverty reduction strategies has to be formulated and finally implemented as much as possible by the recipient countries themselves. Second, donors have to align their aid to existing country strategies, like i.e. existing Poverty Reduction Strategy Papers (PRSP), and should use developing country systems whenever possible. Third, donors should harmonise and coordinate their actions, instruments, strategies and disbursement methods in order to relieve developing countries’ administrative systems, avoid the creation of parallel structures and thus, reduce transaction costs by simplifying and harmonising the overall delivery of aid. Fourth, the importance of results-oriented development practice is underlined in order to improve evaluation and monitoring procedures which is necessary to make it measurable. Fifth, mutual accountability between recipients and donors as well as towards parliaments and civil society needs to be a key feature of development practice.3 Furthermore, it defined 12 targets to meet by 2010. However, progress is slow and it seems unlikely that all 12 targets will be fulfilled.4
In 2008, the AAA reiterated these principles and targets and underlined the importance of predictable and untied aid using partner country systems. In this context of programmatic change, the debate about how to achieve this intensified among donors and recipients alike and a majority of actors opted for the use of PBA and especially budget support to realise the Paris Declaration and the AAA.
2.2 The rise of budget support
The rising importance of PBA is illustrated by the fact that ~43% of OECD member states’ Official Development Aid (ODA) is spent on PBA. However, as we can see from figure 1 (see next page), the support varies among donor agencies. Whereas donors like the World Bank, the United Kingdom or the European Commission spent more than 50% of their ODA on PBA, others like Germany or France are less fond about the instrument and still focus on other channels to disburse their funds. But still the use of budget support increased rapidly in the beginning of the 21st century, which is further underlined by the amount of recipient countries.5
Figure 1: Facts and Figures of program-based aid and budget support
illustration not visible in this excerpt
As already mentioned, budget support is an instrument within PBA and is defined “as a method of financing a developing country’s budget through a transfer of unearmarked resources from a donor agency to the recipient government’s treasury.”6
However, this rather simplistic definition doesn’t fully grasp the idea of the instrument and its intended effects, which have been the main reason why a lot of donors decided to use budget support to different degrees in a variety of countries. In fact, the list of expected outcomes is impressive and raises the question, if one instrument will really be capable of achieving such a variety of positive goals? Following its supporters budget support is supposed to strengthen the macroeconomic stability of a country and thus generate sustainable growth. It reduces transaction costs by using the recipient country’s own systems as well as harmonising donor actions by aligning them with developing countries’ own poverty reduction strategies and joint disbursement, evaluation and monitoring systems. It shall positively influence budgetary decision-making in order to strengthen public services and key social sectors such as education and health. Furthermore, the overall harmonisation and alignment of involved actors based on national development strategies and the use of the developing country systems is supposed to strengthen ownership and national state structures as well as overall accountability. Increased predictability of funds because of long term commitment on donor side, overall transparency as well as more effective public spending and with it a more effective public sector are also among its intended outcomes.7
In order to fully understand the instrument, it is necessary to take a closer look at its operational structure (figure 2) which underlines the above mentioned ideas about its effects.
Figure 2: A simplified logical framework of Budget Support
illustration not visible in this excerpt
First, what catches the eye is the fact that a lot of the principles of the Paris Declaration and the AAA have been incorporated in the logic of budget support. Second, the variety of effects and outcomes is presented along multiple levels which reflect the idea that budget support has immediate, medium- and long-term effects. Third and most importantly, the input level is a key factor for possible outcomes, influencing all levels of the instrument. In consequence, it is very important to take the scale of GBS funding compared to the overall national budget, which reflects the financial leverage and importance of GBS to the receiving country, as well as the character of the agreed conditionality, the capacity and quality of the country system as well as existing policies into account. Furthermore, it is often underlined that the quality of the accompanying policy dialogue as well as the supporting capacity building and technical assistance programs can be decisive factors for the success of the whole instrument.8
Thus, it is quite obvious and logical that GBS is not given to every developing country and that there are certain criteria based on the country specific circumstances on the input level which are decisive for the decision to provide GBS. Especially these different criteria are one of the main debatable areas of the instrument and in consequence one of the main factors for the decision to which extent different donor agencies provide GBS. Finally, external factors and the verification of underlying assumptions can affect the outcomes at all levels of the logical framework.
2.3 The actual debate
After having presented the international context and the operational structure of the instrument, the following section will summarize the actual debate about budget support. First, there is an ongoing debate about the efficiency of PBA and GBS compared to classic project aid. The main questions are how an effective development assistance strategy should look like and which of the two main approaches promises better results? Furthermore, it is of major concern how the two approaches could be balanced and how they could supplement each other in order to achieve the ideas of the Paris Declaration and the AAA.
In the field of Development Economics, the discussion centers on the question of the effectiveness of budget support compared to project aid and if budget support would be the better choice to achieve growth, pro-poor policies and the implementation of the ideas of the Paris Declaration on Aid Effectiveness in general. Several Papers written by economists come to the conclusion that from an economic stance, budget support is preferable to project aid because of a variety of positive effects on macro-economic stability, growth and the principles of Paris and Accra.9 However, all of these papers point out several necessary conditions in order to use the instrument successfully and show which variables can constrain its possible positive outcomes. Arimoto and Kono point out that project aid can only be successful when enough recurrent costs are disbursed. Thus, budget support needs to supplement the recipient’s recurrent costs in order to make project aid effective. This argument underlines the importance of a balanced development strategy and makes clear that both approaches on aid need to supplement each other. Furthermore, they point out, that vested interests of donors in competition to each other usually result in insufficient budget support and ineffective project aid. This leads to what they call aid proliferation and is usually worsened the more donors are involved in a country.10 Complementary to these findings, Cordella and Dell’Ariccia found that budget support is preferable to project aid if the mutual interests and preferences of donors and recipients are aligned.11 I agree to this overall assessment and think that a balanced development assistance strategy based on the specific country context and the involved actors is necessary to fulfill the demands agreed on in the Paris Declaration. However, GBS has some practical advantages which are repeatedly underlined by various authors. These include the fact that GBS is disbursed within the national budget, using country systems and having long term positive systemic effects instead of creating possibly intransparent parallel structures and thus, decreasing the risk of corruption. Furthermore, it lowers transaction costs compared to project aid by relieving country administrations.12 But in sum, neither PBA, including budget support, nor project aid alone can tackle the highly complex problems that arise around the economic, political and social issues of development in modern societies. Therefore, most donor strategies as well as existing GBS frameworks acknowledge the fact that GBS tends to be more successful if it is supplemented by capacity building projects and technical assistance targeting especially the financial management systems of the recipient countries.13
The second major area of debate centers on the strengths and weaknesses of budget support itself. What can be expected in terms of outcomes? What are possible flaws and weaknesses and what can be done to improve the instrument to fulfill the high expectations it generated among donors, recipients and academics alike? Supporters claim that budget support, in theory, is capable to achieve a wide array of previously mentioned positive outcomes but there are also various critical voices underlining that GBS is also subject to several risks.
One key question in this context is under which circumstances GBS can be provided and what are the decisive factors underlying this decision? In general, there are three main focal points that all donors take into account when deciding if it is possible to provide GBS to a certain country. First, the quality of good governance practice prevalent in the recipient country. Second, the transparency and quality of the Public Financial Management (PFM). And finally, the existence of a realistic and sustainable national poverty reduction or development strategy. However, there is an ongoing debate about the thresholds of these general criteria and the question to which extent good governance and sound PFM are a precondition or an effect of GBS? Personally, I agree to Leiderer’s assessment that GBS fulfills a double function in this context, meaning that there needs to be a certain degree of existing good governance and functioning PFM whilst at the same time these areas will improve and be strengthened as a result of the instrument in use. These findings are also supported by various studies analyzing GBS in practice.14
As for example Richard Gerster nicely put it:
“Budget support does not presuppose a development Eldorado in order to be fruitful. But - depending on the local context - certain conditions are required in order for reforms at the service of poverty reduction to stand a real(istic) chance.”15
The qualities of PFM as well as the prevalence of good governance are also, to some degree, measurable factors, so that possible risks can be partially minimized. An example can be the Public Expenditure and Financial Accountability Program (PEFA) initiated by the IMF and the World Bank to assess these factors. Another positive effect of these assessments is that donors are able to specifically design possible capacity building and technical assistance programs based on these results to supplement GBS. However, the decision if or if not to provide GBS is a political one and highly dependent on national donor strategies and the specific risk aversion of a donor agency, which define these thresholds. Finally, the specific recipient country context cannot be underestimated in this context. With this in mind, it gets easier to understand why certain donor countries like Germany or Switzerland are focusing their GBS programs on so called good performers like Ghana or Tanzania, whereas the European Commission or the World Bank also provide GBS to rather bad performers like i.e. Malawi.16
Another interrelated question is to which extent there is a field of tension between the concept of ownership and conditionality? As a DAC/OECD study put it:
“There is a tension between a philosophy of ‘partner government autonomy’ and the reality that, in many cases, poverty reduction is a higher priority to donors than for partner governments.”17
1 i.e. Rio 1992, Cairo 1994, Copenhagen 1995 and especially New York 2000 and Monterrey 2002
2 OECD: 2006 Survey on Monitoring the Paris Declaration: Overview of the results, Paris 2007: p. 9
3 Bericht des Bundesrechnungshofes an den Haushaltsausschuss des Deutschen Bundestages 2008: Budgethilfen im Rahmen der bilateralen Entwicklungszusammenarbeit, Potsdam 2008: p.13ff (Report about Budget Support by the German Audit Court for the german parliament)
OECD: 2006 Survey on Monitoring the Paris Declaration: Overview of the results, Paris 2007: p. 9 and 30/31
4 OECD: Accra Agenda for Action, Accra 2008 OECD: Progress on implementing the Paris Declaration http://www.oecd.org/document/44/0,3343,en_2649_3236398_43385196_1_1_1_1,00.html (date of access: 30.08.2010)
5 OECD: 2006 Survey on Monitoring the Paris Declaration: Overview of the results, Paris 2007: p. 9 and 30/31
6 Killick, Tony/Lawson, Andrew: Budget Support to Ghana: A risk worth taking? (Briefing Paper), Overseas Development Institute (ODI), London 2007: p.2
7 OECD/DAC: Evaluation of general budget support: Synthesis Report , IDD and Associates, Birmingham 2006: Executive summary, p. S1 Martens, Jens/ Schilder, Klaus: Die Wirklichkeit der Entwicklungshilfe: Eine kritische Bestandsaufnahme, Vierzehnter Bericht, Deutsche Welthungerhilfe e.V., Bonn 2005/2006 (A critical analysis of Budget Support; NGO working paper)
8 See i.e. DFID: Poverty Reduction and Budget Support, DFID Policy Paper, London 2004 African Forum and Network on Debt and Development (Afrodad): A critical assessment of aid management and donor harmonisation in Ghana - A case study, Harare 2007 Leiderer, Stefan: Schriftliche Stellungnahme zur öffentlichen Anhörung des deutschen Bundestages: Chancen, Risiken und Perspektiven von Budgethilfe in der EZ, Bonn 2007
9 See i.e. Arimoto, Yutaka/ Kono, Hisaki: Foreign Aid and recurrent cost: Donor Competition, Aid Proliferation and Budget Support, Review of Development Economics 2009, 13 (2): 276 - 287 Cordella, Tito/ Dell’Ariccia, Giovanni: Budget Support Versus Project Aid: A theoretical Appraisal, The Economic Journal 2007, 117: 1260 - 1279 Jain, Sanjay: Project Assistance Versus Budget Support: An Incentive-Theoretic Analysis of Aid Conditionality, Review of World Economics 2007, 143 (4): 694 - 719
10 Arimoto, Yutaka/ Kono, Hisaki: Foreign Aid and recurrent cost: Donor Competition, Aid Proliferation and Budget Support, Review of Development Economics 2009, 13 (2): 276 - 287
11 Cordella, Tito/ Dell’Ariccia, Giovanni: Budget Support Versus Project Aid: A theoretical Appraisal, The Economic Journal 2007, 117: 1260 - 1279
12 See i.e. Leiderer, Stefan: Schriftliche Stellungnahme zur öffentlichen Anhörung des deutschen Bundestages: Chancen, Risiken und Perspektiven von Budgethilfe in der EZ, Bonn 2007: p.1 Bericht des Bundesrechnungshofes an den Haushaltsausschuss des Deutschen Bundestages 2008: Budgethilfen im Rahmen der bilateralen Entwicklungszusammenarbeit, Potsdam 2008: p.13ff (Report about Budget Support by the German Audit Court for the german parliament)
13 See i.e. BMZ (German Ministry of Development): Konzept zur Budgetfinanzierung im Rahmen der Programmorientierten Gemeinschaftsfinanzierung (GBS Policy Paper), Berlin 2008 State Secretariat for Economic Affairs (SECO): Economic Cooperation and Development - Ghana, Embassy of Switzerland, Accra
14 Leiderer, Stefan: Schriftliche Stellungnahme zur öffentlichen Anhörung des deutschen Bundestages: Chancen: Risiken und Perspektiven von Budgethilfe in der EZ, Bonn 2007 OECD/DAC: Evaluation of general budget support: Synthesis Report , IDD and Associates, Birmingham 2006 African Forum and Network on debt and Development (Afrodad): A critical assessment of aid management and donor harmonisation in Ghana - A case study, Harare 2007 Lawson, Andrew et al.: Does General Budget Support Work - Evidence from Tanzania, Overseas Development Institute (ODI), London 2005
15 Gerster, Richard: Risks of general budget support: a tale of experience, SECO 2006: p.3
16 Martens, Jens/ Schilder, Klaus: Die Wirklichkeit der Entwicklungshilfe: Eine kritische Bestandsaufnahme, Vierzehnter Bericht, Deutsche Welthungerhilfe e.V., Bonn 2005/2006 (A critical analysis of Budget Support; NGO working paper): p. 49 Leiderer, Stefan: Schriftliche Stellungnahme zur öffentlichen Anhörung des deutschen Bundestages: Chancen, Risiken und Perspektiven von Budgethilfe in der EZ, Bonn 2007: p. 2-5
17 OECD/DAC: Evaluation of general budget support: Synthesis Report , IDD and Associates, Birmingham 2006: p. S11
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- Institution / College
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- Master; dissertation entwicklung Development Politik Politics International Political Economy Budget Support; Multi Donor MDBS Ghana Ökonomie Aid effectiveness harmonisation ownership budgethilfe