International institutions and conditionality

1
International institutions and conditionality

• Arne Bigsten
• University of Gothenburg
• February 2009

2
Outline

• 1. Geographical and political separation between
  financiers and beneficiaries
• 2. Multiple principals the problem of donor
  coordination
• 3. International organisations the case of the
  EU
• 4. External agents of restraint in a globalized
  world

3
1. The geographical and political separation
between tax payers and beneficiaries

• 1.1 Who is accountable?
• Standard model of accountability individuals or
  households have dual roles, as citizens and
  clinets.
• When individuals are well-informed and have
  mechanisms to sanction politicians the
  politicians have incentives to monitor and
  pressure institutions to do what the individuals
  want.
• Aid geographical and political separation limit
  these mechanisms.
• Tax payers are poorly informed.
• Clients have no political leverage.
• So noone is really held accountable.

4

• The disproportionate focus on input activities at
  the expense of performance
• Staff focus on easily measurable tasks input
  activities such as budget, procurement, hiring of
  consultants.
• Clients dont expect to be able to influence the
  donor.
• Politicians/officials in the recipient country
  likewise more focus on maintaining the flow
  than to listening to the population.

5

• The disproportionate focus on volume
• Since voters in donor countries cannot observe
  outcomes, politicians focus on budgets.
• Donor agencies focus on disbursement irrespetive
  on recipient performance.
• Allocation decisions separated from disbursement
  decisions not scope for relalocation.

6

• The disproportionate interest of suppliers and
  consultants
• Lack of general information gives these groups
  large influence.
• Media bias
• The media impact here larger than in other policy
  areas, since so little information is available
  via other channels
• CNN-effect only focuses on noteworthy events
  steers allocation.

7

• 1.2 How to make donors more accountable?
• Insert an evaluation function!
• How?
• If handled by donors it may be biased.
• No mechanism to distribute the results.
• Moreover, hard to exert influence without
  undermining the local accountability
  relationships.

8

• 1.3 Case study Educational spending in Uganda
• PETS public expenditure tracking surveys
• Follow money flows through different strata to
  check on
• - political/bureaucratic capture
• - leakage fo funds
• - problems in deployment of resources
• Uganda Capitation grant to cover non-wage
  expenditures in primary schools.
• 1991-1995 13 got through.
• Donor community did not know.
• The clients did not know
• Then government put information on allocations in
  the newspapers 80 got through.

9
2. Multiple principals the problem of donor
coordination

• 2.1 Introduction
• Emphasis of aid programmes has shifted.
• Increased resource-transfers to Africa suggested
  by the UN (2005) and the Commission for Africa
  (2005) requires better coordination.
• Rome Declaration on Harmonization 2003
• Paris Declaration on Aid Effectiveness 2005
• The purpose here is to discuss donor coordination
  and its implications for the uses of aid.

10
2.2 The issues A framework for our discussion

• What is donor coordination?
• (a) the development of common arrangements for
  planning, managing, and delivering aid
• (b) the gradual simplification of procedures and
  specific requirements in order to reduce their
  burden on partner governments,
• (c) the sharing of information to promote
  transparency and improved coordination.
• (d) coordination may also relate to objectives
  and policies.

11
Figure 1 Analytical framework
12

• Donor-recipient alignment
• (a) Donor actions
• (b) Partner country actions
• - The ultimate question we would like to answer
  is what impact donor coordination can have on aid
  effectiveness in terms of development outcomes.
• - Since this link is hard to identify we confine
  our discussion to the impact of coordination on
  public policy formulation and implementation.
• (a) Transaction costs
• (b) Incentive effects

13
2.3. Literature review Theoretical effects of
donor coordination

• Collective action problems
• Coordination failures
  projects are complementary donors
  utility depends on projects funded by other
  donors donor
  can claim only a small share of the the total
  benefits of a project excessive donor
  recruitment of staff.

14

• Torsvik (2005) analyses how alignment is affected
  by the presence of several donors and the extent
  of coordination among them.
• He considers a group of rich countries that
  independently provide aid to a poor country with
  a large share of the population in extreme
  poverty. He assumes that the donors are all
  poverty averse and want to improve the living
  standards of the poor in the recipient country.
• With altruistic donors, poverty alleviation is a
  public good among them. If one donor then
  provides aid, it has a positive effect on the
  welfare of all donors. Non-cooperation in such a
  situation leads to an undersupply of aid (the
  common goods problem), and cooperation is thus
  desirable.

15

• How does foreign aid affects policy in the
  recipient country?
• Does foreign aid reduce the incentive of the
  recipient government to use domestic resources to
  help its poor population? If the recipient does
  not have the same priorities as the donors, and
  if contracts cannot be used effectively to align
  their interests, then this is a problem. Torsvik
  shows that, if they can use enforceable
  conditional aid contracts to influence the
  recipients policy, the donors are always better
  off with coordination.

16

• However, Torsvik does not believe that the
  principal-agent model captures the
  donor-recipient relationship fully, and instead
  models it as a non-contractible relationship.
• The key question in such a setting is whether the
  recipient can exploit the altruism of the donors
  and extract a rent.
• Assuming that the recipient regards both
  consumption of the poor and of the rich as normal
  goods, the recipient has an incentive to reduce
  domestic transfers from the rich to the poor when
  aid for the poor comes in (the crowding-out
  problem).

17

• Torsvik investigates two different interaction
  regimes when enforceable contracts are not
  available.
• First, if the donors do not face a Samaritans
  dilemma and all parties involved move
  simultaneously in a non-cooperative game,
  donor-cooperation increases foreign support but
  also increases crowding-out.
• Donor cooperation is here only beneficial from
  the donors point of view if the recipient
  government is sufficiently poverty averse.

18

• Alternatively, in a Samaritans dilemma case the
  recipient government could reduce its support for
  its poor population, which would generate more
  foreign aid. Cooperation among donors would again
  lead to increased aid flows, but not necessarily
  to more crowding-out. So it might be beneficial
  for donors to cooperate when facing a Samaritans
  dilemma, even if the recipient government put
  priority on the rich rather than the poor.
• Given that donors have the welfare of the
  recipient country at heart, is it then always
  desirable for them to coordinate? If the
  recipient shares the goals of the donors,
  cooperation is clearly beneficial. If the
  recipient government does not share the goals of
  the donors and if contracts cannot effectively be
  used to align the recipient with the donors, then
  coordination is not necessarily beneficial,
  though it might be.

19
2.4. The evolution of donor coordination2.4.1
Donor coordination at the international level

• UNDP, IMF, World Bank, IDA
• Paris Club on debt issues
• Regional bodies
• Large International meetings such as the
  Millennium Summit in 2000
• Common targets such as the MDGs

20
2.4.2 Donor coordination at the country level

• Government coordinating bodies
• UNDP or World Bank meetings
• SWAPs
• Budget support
• Structural adjustment and policy conditionality

21
2.4.3 Partnership, millennium development goals,
poverty reduction strategies, and donor
coordination

• MDGs and PRSs
• PRGFs
• Reform overload and absorption problems
• Alignment needs to be improved further

22
2.4.4. Changes in the structure of international
aid flows

• No aggregate data on aid flows by type of
  coordination
• The share of multilaterals in total aid unchanged
  since the 1970s
• Among bilaterals the share of programme
  assistance has fallen but somewhat compensated by
  increased debt relief.
• But bilaterals rather seem to have shifted back
  towards project aid.
• Donor proliferation.

23
Table 1 Bilateral ODA commitments by purpose
24
2.5. The impact of donor coordination on
transaction costs

• Costs arising from preparation, negotiation,
  monitoring, and enforcement of agreements for the
  delivery of ODA.
• A lot of anecdotal evidence but little systematic
  empirical work.
• Some monitoring bodies set up by the donors.
• Evaluations of prgramme aid

25
2.6. The impact of donor coordination on public
sector management and governance

• Even less empirical evidence
• But donors may undermine recipient governments
  policy making efforts by distorting incentives
  and overburdening government administrative
  structures.
• Conflicting conditionalities
• Project survival once they are handed over is a
  problem

26

• Donors pay extra to counterparts in the local
  government and distorts incentives.
• Knack and Rahman (2004) did an empirical
  cross-country analysis of the impact of donors on
  recipient administrative quality. The econometric
  results support their hypothesis that aid
  undermined the quality of government bureaucracy
  more severely in recipient countries, where aid
  was fragmented among many donors.

27

• Donor coordination is important also at the
  micro-level. Platteau (2004) analysed how aid was
  handled in community-driven development projects.
  He found a high risk of elite-capture, and that
  methods to reduce the risk of fraud were needed.
• Marshall Plan for Europe
• EU and Eastern Europe
• WTO and China
• Single donors in Korea, Taiwan, and Botswana

28
2.7. Policy discussion and conclusions

• Donor coordination makes it easier for donors to
  impose conditions
• Easier to agree on policies than on procedures
  and practices
• Budget support modality helps
• Donors should avoid poaching but contribute to
  institution building
• Impact on owenrship and independence uncertain

29

• Kanbur et al. (1999) suggested coordinating via a
  common pool
• Commission for Africa (2005) proposed that donors
  should mutually recognize each others procedures.
• But how to aggregate donor preferences and aid
  doctrines?
• Free rider problem lead donor with enhanced
  reputational stake.
• Country concentration
• Publish indices of donor perfomance
• True partnerships?

30
3. EU development policy

• 3.1. The structure of EU development policyThe
  development policy of the EC has gradually
  changed from a focus on aid to former colonies to
  include issues relating to global trade as well
  as efforts to promote peace and stability.
• Bilateral development policy
• Policy coherence
• Coordination

31

• The Maastricht Treaty spells out that
• the community policy shall foster the sustainable
  economic and social development of the developing
  countries, and more particularly the most
  disadvantaged among them
• the smooth and gradual integration of the
  developing countries into the world economy and
  campaign against poverty in the developing
  countries.
• The Community shall promote democracy and the
  rule of law and respect for human rights and
  fundamental freedoms.

32

• The main areas of intervention for the EC should
  be those where the community has a comparative
  advantage in acting relative to the member
  states.
• The areas selected are
• the link between trade and development,
• support for regional integration and cooperation,
  
• support for macroeconomic policies,
• transport,
• food security and sustainable rural development,
• institutional capacity building, particularly in
  the areas of good governance and the rule of law.
  
• EU interventions have in practice not been
  limited to the six focal areas, though. The
  European Commission is also committed to assist
  developing countries to achieve the Millennium
  Development Goals.

33

• Two mechanisms for Commission aid.
• 1. The EDF used for aid to the African,
  Caribbean, and Pacific (ACP) countries. It is
  governed by the Cotonou agreement of 2000 which
  covers 20 years and is guiding EUs collaboration
  with the ACP countries. The main aim is to help
  these countries reduce poverty. The agreement
  also covers trade and economic partnership
  agreements (EPAs).
• 2. The general Commission budget that allocates
  money for development assistance to all other
  regions.
• EU agreements with developing countries generally
  cover development cooperation, political
  dialogue, and trade.
• Broader than typical aid programmes of bilateral
  institutions.

34
3.2. Country allocation of aid

• Donor aid allocation may be influenced by their
  self-interest, recipient needs, and recipient
  merit
• Berthélemys (2006) analysis of country
  allocation of aid - neither recipient needs nor
  recipient merits play any significant role in the
  allocation of EC aid
• Special relation with the ACP-countries
• France and Italy are the most selfish and let aid
  allocation be governed by trade-links, while the
  least selfish are Scandinavian countries,
  Ireland, Austria and the Netherlands.
• The countries that make up the World Bank are
  able to impose the same values there as at home,
  while the members of the EU does not seem to do
  be able to do so on the EC.

35
3.3. Donor coordination

• Coordination of donor activities may be required
  to manage the inter-country allocation of aid,
  but the main debate has been about how to
  coordinate aid to individual countries .
• One advantage of multilateralism is that it may
  help reduce the influence of vested interest in
  the various donor countries.
• The issue of coordination, within the EC
  activities, between those and the activities of
  the bilaterals EU members, as well as with the
  non-EU development community.
• Is the EU just one more donor making coordination
  even more difficult, or is it a force for better
  coordination?
• The aim is that EU aid should be complementary to
  that of bilateral donors and focus on different
  aspects.

36

• The donors are aware of the importance of donor
  coordination and have recently issued two
  declarations on the issue.
• The EU should be able to act as a coordinating
  agency but the evidence available does not
  suggest that the EU is so far able to fulfil this
  role. It is rather functioning as just another
  aid agency, but one with more complicated
  decision making and bureaucratic procedures.
• There does not seem to be any evidence suggesting
  that it is more efficient than bilateral aid.

37

• One solution would be to phase out EC aid
  altogether and thereby reduce the number of
  players.
• On the other hand, if one is optimistic about the
  ability of the EC to reform, one could move in
  the other direction and try to strengthen the
  role of the EC as a coordinator of overall EU aid
  policies. The EC could then increase its scale of
  activities and really coordinate EU actions. It
  has a broader range of instruments at hand that
  can be used to pursue more comprehensive
  approaches covering also for example trade and
  security issues that the bilateral donors do not
  normally cover.
• Full scale coordination does not seem to be a
  likely outcome of the current reform process. Nor
  is the likely outcome a complete abandonment of
  EC aid. Therefore we will here discuss ways of
  gradually improving the current system.

38
3.4. Aid modalities

• The Paris Declaration (OECD, 2005) provided a
  comprehensive agenda for aid processes.
• 1. Ownership
• 2. Alignment
• 3. Harmonisation
• 4. Managing for results
• 5. Mutual accountability.
• PRGF - facility

39

• The quality and effectiveness of community
  development collaboration has been questioned
  (slow disbursements, bureaucratic procedures,
  lack of poverty focus etc).
• Some reforms have been undertaken in recent years
  to improve it.
• The reforms from 2000 and the adoption of the
  MDGs have partly been a response to the critique
  for lack of poverty focus, but at the same time
  the share of aid going to countries in the
  neighbourhood has increased at the expense of aid
  going to poor countries.

40

• The programming methodology for Commission aid
  has changed since 2000.
• When it comes to budget support there is
  extensive use of performance indicators (ex post
  conditionality)
• The European Commission pioneered this type of
  aid allocation, and since 1999 financing
  conventions with ACP countries include a
  variable financing tranche, where aid transfers
  are based on the outcomes of certain social and
  economic variables
• The idea is here that performance-based
  contracts, will lead to better ownership which in
  turns is considered essential for good
  performance. It will make it possible for the
  recipient country to define its own policy
  packages, reduce the problem of donor
  coordination, and increase predictability of
  resource flows.
• Limited effects so far.

41

• The results of policy reforms in Africa have been
  limited, and poor institutions remain a major
  growth constraint in Africa.
• An important question in this context is
  therefore whether the international community
  including the EU through aid and conditionality
  can change institutions.
• When it comes to the analysis of aid impacts it
  is therefore important to consider how the
  donor-recipient relationship is organised and
  affects institutions and implementation.
• EU was successful in influencing institutions in
  the East European countries by setting up reforms
  as conditions for accession to the EU. Since
  African and other developing countries are not
  candidate countries, EU cannot be as effective as
  an external agent of change here.

42
3.5. Types of aid

• Collier (2006) argues that if we want scaled up
  aid to have an effect we need to find new areas
  where aid can be effectively used and that aid
  packages must be adapted to the different
  recipient environments. This is clearly a
  sensible approach. As far as Africa is concerned
  he identifies three different types of countries
  that need different strategies.

43

• 1. Resource-rich countries that have large and
  often corrupt government sectors, since they earn
  sizeable resource rents which accrue to the
  government.
• 2. Resource-scarce coastal economies that can
  develop by diversifying exports. The engine of
  growth here will be private exporting firms.
• 3. Resource-scarce and landlocked countries and
  these have the most serious problem. They are
  likely to remain poor for a long time and will
  therefore need aid to their poor populations.

44
3.6. Debt reduction

• HIPC-programme 1996
• Extended HIPC 1999
• The Paris Club
• Multilateral Debt Relief Initiative (MDRI) (2005)
  will cancel 100 of the debt that heavily
  indebted poor countries (HIPC) owe to the African
  Development fund (AfDF), International
  Development Association (IDA), and the
  International Monetary Fund (IMF). The complete
  debt reduction will occur when they have reached
  the completion point under the HIPC arrangement.
  This initiative will give a further reduction of
  50billion.
• The cancellation is contingent on sound
  macroeconomic performance, implementation of a
  Poverty Reduction Strategy, and public
  expenditure management systems.

45

• Debt relief extra money?
• Replenish IDA.
• Not self-evident that resource flows to LDCs will
  increase because of MDRI.
• Money shifted from countries that have managed
  their debt service to those that havent.
• Policy conditionality.
• The EC has contributed to HIPC and other debt
  relief initiatives. The policy of the EU in this
  area should be to continue to support the
  international initiatives and to make sure that
  it in its other activities does not undermine the
  ambitions to achieve sustainable debt situations
  for the poorest countries.

46
3.7 Trade, the Common Agricultural Policy, and
development

• Europe still has considerable trade protection of
  certain types of production.
• Trade policy vis-á-vis developing economies is a
  very important component of EUs development
  policy. Cline (2004) estimated what the impact
  would be of a complete removal of tariffs would
  be on developing countries, and he found that the
  long-run impact would be an income gain of about
  200 billion per year. Half of this would be due
  to removal of developed countries import tariffs
  against developing countries.
• A good outcome of the Doha round would almost
  certainly have been more important than the
  decisions we can foresee with regard to aid.

47

• The sector that has been in focus in the Doha
  Round is agriculture, and this is a politically
  sensitive sector although it is no longer very
  important economically in the richer regions
  including the EU. The protectionist measures
  applied within the EU are reducing the welfare of
  EU citizens at the same time as it hold down
  incomes in for example Africa.
• It should be noted as well that the countries
  that are eligible to the EUs Everything but
  arms duty free entry account for a very small
  part of EU imports..

48
3.8. The future development policy of the EU

• Coordination of aid between the EC and member
  countries It is hard to see what the value added
  of EC aid in its current form is relative to
  bilateral aid. If that is the case the sensible
  thing to do seems to be to leave the issue of aid
  to the member states.
• An alternative option would be to go in the
  opposite direction and let future Development
  Policy Statements cover also the aid programmes
  of member states. One might even go so far as to
  let the bilaterals could pool their resources in
  the EC coffer. This would be a huge political
  challenge, and it is hard to see that this will
  be realized in the near future.
• To provide more general forms of aid such as
  balance of payments support would lessen the
  coordination problem and increase ownership. To
  the extent that different donors finance the same
  project of programme one could let one donor
  (bilateral or EC) be the coordinating agent that
  is responsible for government contacts and follow
  up.

49

• Governance conditionality We have argued that
  institutions and governance are crucial
  development constraints and that the impact of
  aid on those is very important.
• Collier (2006) proposed that there should be a
  shift from policy conditionality to governance
  conditionality. The former undermined
  accountability to citizens, while the latter
  would reinforce it.
• A good system would be common to all donors,
  predictable and agreed. The EC could have a
  comparative advantage relative to the bilaterals
  as well as the IFIs in this area. This would both
  be pushing the European value of democracy, while
  it at the same time can improve efficiency. If
  the EC is to be able to perform a role here, it
  is probably not a viable option to abandon EC aid
  altogether. Activity here would be more
  consistent with the more activist stance
  suggested as a more ambitious strategy.

50
4. External agents of restraint in a globalized
world

• Before structural adjustment the scope for
  domestic policymakers was wider, since the
  existence of controls made prices, and hence
  production and consumption, react slowly to
  changes in policy. However, since liberalisation
  prices react quickly to policy changes. Good
  policymaking is thus more important in a
  liberalised environment than in one with many
  controls, because bad policies have stronger and
  more immediate negative effects on economic
  growth.
• Hence, we argue that one important explanation
  for the dismal performance of many African
  countries, in spite of all the measures taken
  towards market liberalisation, is the combination
  of this magnification of the effects of economic
  policy with a lack of willingness or ability on
  the part of politicians to respect the
  restrictions imposed on their behaviour and
  policy choices by the liberalised markets.

51

• Successful market economies must have an
  underpinning of sound institutions. They require
  secure property rights agencies that regulate
  the conduct in goods, services, labour, asset,
  and financial markets fiscal and monetary
  institutions to maintain macroeconomic stability
  institutions for social insurance and
  institutions for conflict management.
• Why are there no effective forces that can
  guarantee good governance? There is a lack of
  effective democratic control even in the
  countries that have been (partially)
  democratised. The government in power often tends
  to look to the interests of its core supporters,
  rather than to the welfare of the country as a
  whole.

52

• External pressure for democratic change has also
  been weak until recently, but it is possible that
  the economic-reform programmes have contributed
  to greater political openness. What is lacking is
  agents of restraint that can force governments to
  behave responsibly, to introduce sensible
  economic policies and then to stay on track.
• Integration into the world market could serve as
  a disciplining device, forcing policy makers to
  exercise caution so that policies do not depart
  far from the new market economy path. This could
  push countries towards increased macroeconomic
  stability, and thus towards better growth
  performance. On the other hand, if policy-makers
  stray from the narrow path, punishment from the
  market would be more severe than under the old
  control regime.

53

• The implementation of structural-adjustment
  programmes has been the most important step taken
  by African economies towards integration into the
  world economy.
• The standard package has included trade
  liberalisation and the creation of a
  foreign-exchange market de-regulation of
  domestic markets, including the financial sector
  privatisation of public enterprises reduced
  budget imbalances tax reforms and public sector
  reform.
• These measures have been intended to make the
  countries allocation of resources more
  economically rational. But at the same time as
  the reforms have got the prices right, they
  have also implied that the countries have become
  more sensitive to the actions of economic agents,
  both domestic and foreign.

54

• A simple way to capture international economic
  exposure empirically is to study two economic
  equilibrium relations that are expected to hold
  in well-integrated markets the law of one price
  (LOP), and uncovered interest parity (UIP). LOP
  implies that similar goods should have similar
  prices, even if they are produced and sold in
  different countries, because in an integrated
  market, divergences make it profitable to move
  goods from the low-price to the high-price
  country. When LOP holds for every good, or on
  average for all goods, then purchasing-power
  parity (PPP) holds.
• Similarly, UIP states that the expected return on
  a financial asset should be approximately the
  same across borders. The mechanism is the same as
  for LOP People will move their assets to the
  place with the highest expected return, and this
  will lead to convergence of the returns.

55

• Before structural adjustment, there were very
  weak or no forces maintaining LOP and UIP in most
  Sub-Saharan African countries.
• Domestic prices could differ considerably from
  international prices of similar goods because of
  restrictions on international trade, in the form
  of import quotas and tariffs, bans on exports,
  and limited access to foreign currency.
• Interest rates could differ across borders
  because domestic interest rates were set
  administratively at low levels, the domestic
  currency was not convertible, and the authorities
  controlled capital flows in and out of the
  country.

56

• Substantial deviations from LOP and UIP where
  common, and likely had negative effects on
  economic performance.
• But in controlled economies the effects were
  often not obvious to policymakers or to people in
  general, because they appeared slowly over time.
  Hence, policymakers did not bother much about LOP
  and UIP.
• After opening up LOP and UIP restrict policy
  choices considerably. Government must maintain
  stability and be ready for action when there are
  economic shocks.

57
(No Transcript)
58
(No Transcript)
59
(No Transcript)
60
(No Transcript)