June 2011 SITE, Stockholm
Development Day 2011 – Challenges for Aid Effectiveness
On May 30, the Stockholm Institute of Transition Economics (SITE) and the Ministry for Foreign Affairs held the first of what is to become an annual Development Day. This year’s conference was devoted to aid effectiveness, a topic which has received increased attention in international discussions of foreign aid. With an increasing number of actors, aid in its traditional form, from rich governments in the North to poor governments in the South, have come to represent a smaller and smaller share of the total financial flows to developing countries. This raises the question of what role traditional aid should play in this changing financial landscape and how foreign aid should be organized and prioritized to ensure that aid serves as an effective facilitator of economic development. With these questions in mind, scholars and practitioners were invited to discuss recent findings and remaining challenges for aid effectiveness.
Aid Effectiveness and the Paris Declaration
The first half of the conference mainly focused on the commitments in the Paris declaration, a joint declaration from 2005 in which western donors and several recipient countries agreed on a number of commitments aiming to reform the way aid is delivered and managed. In particular, the focus of the discussion was on three of the commitments; ownership, alignment and results.
The aim of the commitments in the Paris declaration is to make aid more effective by increasing recipient countries’ ownership of the development process and to avoid situations where donors run parallel projects and use project implementation units (PIU) outside the recipient’s aid management systems. Another objective behind these commitments is to improve the measurement of outcomes so that impact evaluations and audits can provide a better understanding of what works and what does not. The importance of results, accountability, transparency and learning in the aid process was also stressed by the Swedish Minister for International Cooperation, Gunilla Carlsson, in her opening remarks.1
The first presentation was given by Stephan Knack (World Bank) who talked about “Aid and Trust in Country Systems”. This paper examines what factors determine to what extent donors use recipients’ country systems, general budget support, and program-based aid, i.e. the extent to which they live up to the commitments of ownership and alignment. His results suggest that the trustworthiness of a recipient’s country systems, the domestic support for foreign aid within the donor country, and the donor’s share of the recipient’s total aid ‘market’ are the three most important determinants of a donor’s commitment. For instance, donors with a more aid-skeptical public opinion are more reluctant and more frequent users of PIUs as this allows them to more easily identify their contributions and report visible results to their constituents, as well as avoid problems of corruption.
Another suggested reason why donors are reluctant to use country systems is that donors will not fully internalize the long-term benefits associated with the learning and capacity building that comes with ownership and alignment, since these benefits constitute a public good. Knack argued that the
1 Minister Carlsson’s full speech can be found on the following page:
http://www.regeringen.se/sb/d/14187/a/169762
decision whether to allocate aid through country systems or not, could be thought of as classical Prisoner’s dilemma. Even though a donor would benefit from a better recipient country system, it may choose not to invest in it because of its public good character and the short-term risks it entails.
Allocating aid through multilateral organizations or vertical funds was offered as ways to possibly overcome this problem. On the other hand, since the use of recipient country systems also depends on the donors’ domestic perception of aid’s effectiveness, Knack said that we should not expect to see an increase in the usage of country systems until this perception has turned more favorable in large donor countries as the US and Japan.
Eric Werker (Harvard Business School) was next out to present his paper on “the Political Economy of Bilateral Foreign Aid” in which he discusses some recent findings on bilateral aid allocations and how they tend to be driven by political objectives. Even though both bilateral and, to some extent, multilateral aid allocations have been found to be politically motivated, Werker emphasized that there are no current findings suggesting that politically motivated aid is less effective from a development perspective. Instead, he argued that we should be much more concerned with the distortions that come from the way aid is received and spent.
Maria Perrotta (SITE) highlighted in her comments of the two presentations that there are big challenges in the way aid is allocated and how recipient countries choose to use the aid they receive.
There is a strong inter-temporal trade-off in the donors’ choice of using country systems or not. The use of PIUs could surely contribute to minimize donors’ short-term risk, but it will at the same time undermine recipient governments and their aid management systems and thereby counteract the donors’ long-term goal of capacity building.
Many would agree that the increased focus on results has already contributed to new important insights on aid effectiveness. However, there are also concerns that this focus on results will involve an increased burden and administrative costs on recipient countries, as well as lead to a diversion of funds to projects and outcomes that can be more easily measured. These concerns were discussed by Owen Barder (Centre for Global Development) in his presentation “Simplification: how a focus on results could increase rather than reduce country ownership”.
Barder said that there is an excessive focus on measuring inputs and partial outcomes among aid agencies and that this is because impact evaluation of final outcomes has been considered imperfect and very costly. The common micromanagement of aid, sometimes referred to as “obsessive measurement disorder”, is thus not necessary for a results agenda. If we develop good measurements of outcomes, we could let recipient countries experiment and develop their own solutions and let micromanagement come to an end.
Nevertheless, Barder also stressed that it is extremely important that the focus on results is not just added on top of the current administrative work. Instead, he urged the development industry to take the opportunity to simplify the process and enable the developing countries to come up with their own strategies. Barder concluded his presentation by saying that the increased focus on results will certainly contribute to making aid more effective, but that it will not be sufficient to bring it about.
Barder’s presentation was followed by a panel debate on the theme “Ownership and Measureable Results: Is There a Conflict?”. During this debate, most panelists agreed that the focus on results and
the usage of randomized field experiments could indeed provide hard evidence of what works and what does not. However, it was also pointed out that there are several areas for which outcomes are not as easily measured. There is a need within the international donor community to sit down and come up with a common and good way of measuring different outcomes. Jakob Svensson (IIES) argued that it is better to come up with a few really good measures, than to have many not so good.
Werker stressed that measuring results is not a mean in itself and that donors must also provide incentives for recipient governments to govern. Moreover, Barder argued along the same line when saying that the Paris declaration on its own will not be sufficient to bring about the change needed.
Another concern which was raised by Kenneth Hermele (Forum Syd) concerned the external validity of randomized field experiments. Hermele said that there is risk that the results of these studies are believed to hold true universally, even in cases when context specific factors may have explained the results. This could be problematic if it leads all donors to invest in the same type of projects, if in reality there is no one size fits all strategy that always yields the best results.
Aid Effectiveness on a Macro Level
The second half of the conference was devoted to aid effectiveness on a macro level beginning with a presentation by Emmanuel Frot (Microeconomix and SITE) on the effect of aid on economic growth. Despite a vast amount of macroeconomic research devoted to this topic, there are no robust conclusions. Frot explained that this is due to the difficulty in determining a causal relationship between aid and growth, and that most previous studies have used the same (and not particularly good) instrumental variables to solve this methodological problem. However, in the paper “Aid Effectiveness: New Instruments, New Results?”, Frot and Perrotta suggest a new instrumental variable that can isolate the effect running from aid to growth. Their results indicate that even though aid has a positive and statistically significant effect, the impact is quite small. Thus, this result suggests that even if aid does have a positive effect, unless aid is reformed it is likely to be small also in the future.
Another concern at the macro level was discussed by Raj Desai (Georgetown University and the Brookings Institution). His paper “The Determinants of Aid Volatility”, is motivated by the fact that even though previous findings show a strong negative effect of aid volatility (it has been estimated that aid volatility can generate losses equivalent to the value of 15-20 percent of the total aid disbursed during a year), nobody has really looked at what determines that volatility. Looking at factors at both the donor’s and the recipient’s end, he finds that recipient-related factors such as civil wars and adverse regime changes do impact aid volatility, but that larger unexpected swings tend to be due to donor concentration and the prevalence of donor herding.
Homi Kharas (the Brookings Institution) then moved on to present an index called the Quality of Official Development Assistance (QuODA) which he has developed together with Nancy Birdsall.
QuODA offers an assessment of the Quality of aid from 23 donor countries and more than 150 aid agencies. Quality is assessed using 30 indicators grouped in the following four dimensions;
maximizing efficiency, fostering institutions, reducing burden, and transparency and learning. Kharas said that the idea with this index is not to rank donors but to identify their strengths and weaknesses. Furthermore, the hope is that QuODA will put pressure on donors to improve the way in which they deliver their aid, by allowing them see how they perform in relation to other donors and over time.
The last session of the conference was a round-table discussion on the changing financial landscape of development. During this session, it was argued that physical distance is losing its importance and that the increasing number of actors performing complimentary functions, will require aid agencies to rethink the way in which they disburse their foreign aid. It was also mentioned that there has been a significant proliferation of instruments other than foreign aid that are just as important for development, and that it is important to think about which instruments are suitable for which issues.
Per Knutsson (Sida) emphasized that the aim with foreign aid is still the same, namely capacity building, but as Desai pointed out only 10 percent of the world’s poor live in stable low income countries which the current aid models are based on, so this may become increasingly challenging.
The conclusion of the panel was that it is high time for aid agencies to adapt to the new realities and design alternative ways in which development assistance can be made available to the developing countries.
