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Aid Innovation: Motivating Reforms from the Outside?

septembre 9, 2012

RACHAEL CALLEJA and ANIKET BHUSHAN

The North-South Institute

Disillusionment with the effectiveness of foreign aid has led donors to seek new and innovative modalities of aid spending. At the heart of new models is a general commitment to providing aid to countries with ‘good policy environments’. By targeting aid to development-minded recipients – including in ‘fragile states’ as the examples below demonstrate – donors have sought to limit policy intervention, in favor of domestic ownership. Innovative modalities offer an approach to aid allocation that replaces general efforts towards ‘development’ and ‘growth’ with targeted, incremental and measureable policy goals. But do they work? In recent years, several examples of new aid modalities have begun to emerge: The Millennium Challenge Corporation (MCC): The MCC is a big-budget, target-oriented aid agency that adopts a selective approach to aid allocation. Since 2004 it has allocated over $8.4 billion across 39 developing countries. Using a series of 24 indicators, which measure economic, social and policy performance, the MCC allocates funds exclusively to countries that demonstrate a clear commitment to ‘good governance’. The MCC promises to break from traditional USAID-type programs by untying aid from US interests. Large MCC aid grants are used to reward development-minded governments in the hopes of sparking further policy reforms. Cash-On-Delivery (COD): The COD model uses aid to reward specific development outcomes, transferring aid to recipient governments based on the ‘delivery’ of specified target goals. Underlying the COD method is an attempt to build local capacity while limiting donor interference in domestic policy via a ‘hands off’ approach to aid allocation, where recipient governments are tasked with program design, implementation, and maintain unconditional control over aid ‘rewards’ from program achievement. While COD remains a fairly new avenue of aid allocation, it was put into practice this year when the UK’s Department for International Development launched a COD program in Ethiopia that promises to provide a cash reward for each grade-10 student that sits for or passes standardized national exams up to a total amount of £30 million over three years. Fixed Amount Reimbursement Agreement (FARA): FARA is a pre-financing aid contract that commits to reimburse governments for the successful completion of specified outcomes up to a pre-determined amount. In 2011, USAID signed a FARA contract with the Government of Liberia for $42 million over four years, for the implementation of specific performance based activities listed in the National Health Plan. The FARA program acts as a form of indirect budget support (for a country which otherwise may not be eligible for the same) and since it more fully utilizes Liberia’s national financial and payments architecture than project assistance, it also rewards achievements the country has made in this area. GAVI Alliance’s AMC: In pursuit of a common goal of universal immunization, the GAVI Advance Market Commitment (AMC) program pools development resources from donor governments and agencies in efforts to speed up the development, cost-effectiveness, and availability of pneumococcal vaccines for low-income countries. Once vaccines have been developed, donors use aid commitments to determine a set price for the sale of vaccines, promising manufactures a pre-determined price for vaccines produced over a 10-year period. Limits of results-based allocation and outside incentives These new modalities are not without problems. Such approaches operate under the assumption that the countries targeted possess both the willingness and capacity to implement reforms in key policy areas. However the degree to which result-based programming is an appropriate mechanism in countries that tend to suffer from generally unaccountable and weakly transparent governments is questionable at best. In the absence of accountable government and evidence-based programming, the concern becomes one of whether such outside approaches can be fundamentally sustainable if new programs are not typically valued by recipient governments. Methodological difficulties arising from the reliance on indicators to measure policy performance requires careful analysis, as potential biases and time lags may threaten results and the ability for future funding to provide an adequate incentive for reform. The results emphasis clearly raises the measurement burden and deepens the attribution problem. Measuring the ‘right indicator’ is yet another problem. Take the case of Tanzania. Just as Tanzania won the MDG award for achievements in primary education one of the largest surveys of Tanzanian children found that more than half of grade-4 students could not read at the grade-2 level. Official statistics, which place Tanzania close to achieving universal primary education, are far from believable. The pressure with respect to time-lags associated with results, pitted against the less patient annual congressional approval cycle, is evident in the case of the MCC which has a longer track record, and yet has produced mixed results at best as far as incentivizing reforms is concerned. Addionality is another concern. As new modalities emerge there is a temptation to simply move money around or ‘rebrand’ existing initiatives under the new name. If they are not ‘additional’ it is hard to see how new modalities would affect recipient incentives. Size matters The scale of innovative modality driven policy reforms differs greatly between the approaches. In the case of the MCC, large disbursements of aid are granted to eligible recipients in the hopes of generating substantial reforms to domestically identified developmental concerns. Alternatively, COD approaches appear to target smaller reforms, where COD programs attempt to encourage ownership and accountability over development results by providing aid as general budget support. The bottom line As Nancy Birdsall (President, Center for Global Development) put it recently, the essence of COD and indeed innovative modalities more generally, is to stop worrying about getting what we pay for and start paying for what we get. As aid budgets decline in the wake of the global financial crisis, movement towards results-based programming is increasingly being viewed as the prudent way forward – in Canada for example, the group Engineers Without Borders has been promoting COD to Parliamentarians as a possible model for Canadian aid. The actual effectiveness of such approaches is hard to judge given both their relative newness and experimental nature; however the possibilities offered warrant further consideration. Ultimately innovations in financing modalities will be judged by the outcomes and impacts they generate, and the sustainability of the same. At least part of the test lies in whether such innovations reduce the high (and increasing) transactions costs associated with aid. This is as yet far from proven. Are these innovations here to replace old ways? Yes and no. There is some evidence that they help move procurement for instance in the right direction, away from donor-tied to recipient chosen. But they remain on the fringes and are unlikely to affect traditional aid motivations (rewarding geopolitical allies and other strategic considerations). Do they help build local capacity? There is little evidence so far. What is more evident is that there is competition even within innovation. Donors are keen to be associated with success and keen to be seen as innovative. So it is not just recipient incentives being affected; in the case of FARA there is evidence that donors are unwilling to ‘underwrite’ each other’s innovation (existing health sector pool-fund donors didn’t want to spend money on ‘inputs’ when USAID would only spend on ‘results’). Perhaps the elephant in the room is that everyone has an incentive to cheat: recipients can easily game performance, just as much as donor’s need to showoff success (whether to congress, parliament, or taxpayers). In the end results-driven innovations may have less to do with the effectiveness and sustainability of results and more to do with looking innovative. Rachael Calleja is a PhD candidate at the Norman Patterson School of International Affairs at Carleton University, and has been pursuing an internship at The North-South Institute. Aniket Bhushan is a Senior Research at The North-South Institute.