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Responsible aid in a time of crisis

Shanta Devarajan's picture

My friend, former colleague and one-time co-author Bill Easterly, in his inaugural blog post, takes issue with Bob Zoellick’s Op-Eds in the New York Times and the Financial Times  on the need for more aid to poor countries in the wake of the global financial and economic crisis. Bill’s argument is that Bob is calling for more aid without specifying what results that additional aid will achieve, so that the World Bank is not being held accountable for anything. 

I agree with Bill that, in normal times, aid and, more generally, public spending is insufficiently linked to outcomes. When people are not accountable for outcomes, much of the aid or spending is wasted. We have made this point separately (see here and here) and jointly.

But these are not normal times we are living in. Poor countries, especially those in Sub-Saharan Africa, are facing an unprecedented crisis. Private capital flows, which had been rising faster in Africa than any other region, are drying up or reversing. Remittances, estimated at $20 billion a year to the continent, are also slowing because, for the first time, the crisis started in the sending countries (77 percent of remittances to Africa come from the U.S. and Western Europe). And the fall in commodity prices is sending many commodity exporters into a recession. Previous growth decelerations in Africa have been associated with increases in poverty, infant and child mortality and out-of-school children. Worst of all, just when economic reforms were beginning to take effect in Africa (growth had been sustained for ten years and accelerating over the last three), people are being asked to tighten their belts—for a crisis that is not even remotely their fault.

In these circumstances, the role of foreign aid is different from its usual role. It is to substitute for the private capital and transfers that had been flowing into the continent, but are slowing because of the financial crisis in the U.S. and Europe. It is analogous to President Obama’s fiscal stimulus in the U.S., which will use public spending to replace the shortfall in private consumption and investment to keep output from falling too fast. The purpose of aid is to reduce the size of the growth deceleration that African countries will experience. This is the result we are seeking to achieve with additional aid. Such results are hard to measure precisely—we would need to know the size of the growth deceleration in the absence of additional aid—which is why Bob Zoellick suggested possible activities that the money could be spent on. Of course, each country will have to tailor its spending according to its particular needs and circumstances. When they do, we will, as we increasingly do now, develop monitorable indicators of performance to hold them and us accountable.

Comments

Submitted by Anonymous on
Nicely put! Bill Easterly's logic that just becoz RBZ did not mention the Bank's accountabilities means the Bank is planning to abscond on its responsibilities is non-sequitur, and makes no sense. Secondly, it is not true that "the more actions you list, the less serious you are about each action." The Bank is a big, complex organization, and given the appropriate resources, can go to work on several "actions" or priorities at a time. This is also known as "multi-tasking" in human terms. Get with it, Mr. Easterly!!!

"The purpose of aid is to reduce the size of the growth deceleration that African countries will experience. This is the result we are seeking to achieve with additional aid. Such results are hard to measure precisely—we would need to know the size of the growth deceleration in the absence of additional aid—which is why Bob Zoellick suggested possible activities that the money could be spent on. Of course, each country will have to tailor its spending according to its particular needs and circumstances. When they do, we will, as we increasingly do now, develop monitorable indicators of performance to hold them and us accountable." This seems like a sensible proposal. Where do you expect the money to come from? Simply the World Bank? Other ideas?

The money can be generated by govt. institutions which provide grants to small NGOs working in various projects in Africa, precisely to reduce the deceleration. But looking at various political and economic factors in African countries, its not easy for aid to have the longlasting impact, that the providers of aid hope for. With the present global economic conditions its very important for African countries themselves to seek self sufficiency in some of the projects which require foreign financial aid, so that even if the aid coming in reduces, it doesn't have a great impact. This seems to be an option to tailor their spendings, as you have indicated. Its an equivilateral effect in my view. If the foreign aid is to reduce or slow down, some kind of self sufficiency is needed in the African countries to bear the brunt of this slowdown. This might also help in increasing accountability in measuring performance too.

Submitted by Patricia Laverley on
My questions to Shanta are the following: (i) if under normal conditions development outcomes--both positive and negative--derived from public spending are difficult to measure, how can the development community given the unprecedented global financial crises, now come up with the means to asssess the effectiveness of such programs? (ii) if sufficient budgetary resources are not channeled to finance the development of effective performance measurement systems, how do you expect the development outcomes from the proposed stimulus package to be adequately monitored?

Patricia: Thank you for your question. There are two separate issues here. Specific development outcomes, such as the number of children immunized or finishing primary school, are not difficult to measure, and we have methods of measuring the counterfactual--how many children would have been immunized without the aid or the government program. The problem here is not that it's technically difficult to measure, but that it's sometimes politically difficult to get governments and aid donors to use this information and adjust their programs accordingly. Few people want to know that their favorite aid program was not productive after all. This is also why not enough resources are channeled to measuring the impact of development programs. This is a separate issue from the one I was referring to in my post, which is that if aid is aimed at preventing a growth collapse, it's difficult to measure what the actual effect of that aid was (because we cannot measure the growth deceleration in the absence of aid). Such broad questions such as aid and growth don't lend themselves to randomized impact evaluations, which is one of the techniques used to answer the narrower question of the relationship between an aid or government program and the number of children immunized.

Submitted by Patrick Mwangi on
As infrastructure continues to be one of the main inhibitors of economic growth in Africa, governments are being forced to become more innovative in raising the required funds. This is also exacerbated by the political and civil society pressure for urgent solutions to the challenges in rehabilitation and expansion of the Water, Transportation and Electricity infrastructure amongst others. The latest approaches by Uganda, Kenya and others have involved the issuing of high yield bonds in the financial markets targeting the domestic arena. In the case of Kenya the Infrastructure (Treasury) Bonds are currently at offer with a 12.5 % annual yield. The effect on the Kenyan fledgling local financial markets and overall access to credit will inevitably be negative. Why? The local credit will increasingly be expensive given the pressure of the global financial crisis in addition to this competition for funds through the bonds. As mentioned the weak financial markets (e.g. stock markets) will also continue to further weaken as investors opt for the ‘guaranteed high yield’ bonds. In Kenya interest rates are now pushing 21%. If the Infrastructure bonds do attract local investors then we will see 25% - 30% commercial bank interest rates sooner than later. This will be a return to the 90s when credit was in accessible in Kenya and hence stunted growth. One of the ways in which this unfortunate and unfolding scenario can be mitigated is through alerting the multilateral and bilateral partners of African economies that infrastructure finance needs a high financing priority. Use of IBRD/IDA resources in expanding the limited IDA grants for low income African countries MUST BE rethought (Grants for the World’s Poorest, Steve Radelet, 2005). It is no longer sufficient to push the policy and economics arguments of IDA grant vs IBRD/IDA loans resources. If IBRD /IDA loans can stem-off the eminent financial collapse of African financial markets then we may want to consider availing them to low income countries. Infrastructure in Africa urgently needs more IBRD/IDA investments if their local economies are to survive the global financial crisis and political turmoil. The World Bank group needs to act now!

Submitted by Anonymous on
Also see recent blog on the ODI website 'Beyond the Numbers: using aid to combat the crisis in poor countries requires more than just cash'. This blog highlights some key principles needed to guide any additional aid spending during the crisis. http://blogs.odi.org.uk/blogs/main/archive/2009/02/26/7085.aspx

Submitted by Patricia Laverley on
Shanta, I do agree with the second point that if aid is aimed at preventing the collapse of economic growth, then indeed it would be difficult to measure the actual effect of that aid. For the obvious reason which you rightly indicated, that we cannot measure growth deceleration in the absence of aid. Patricia Laverley

Submitted by Zanda on
A friend once joked that the most perplexing question you can ask an African president is "how he wants to be remembered". The joke being that he thinks he will live for ever and continue to be president. This joke would be funnier if it were not the reality. The one certain intervention that I know could change the economies of developing countries overnight is not advocated nearly enough by the Bank and the international community. The Bank turns to "studies" too often when the issue is often one of common sense. For instance, why all the studies of poverty? People need jobs. When people have jobs, they can buy food, pay bills and feel empowered. But you have irresponsible governements in place that do nothing to attract foreign private investment. So there are no private sector jobs. Do we need so many poverty studies for this? As long as develping country governments know that there is no real accountability and that they can continue to stay in power (inspite of attrocious policies), I cannot foresee any longterm economic change. The greatest gift the World Bank and donor agencies can give to the developing world is to concentrate all their resources on strengthening the in-country governance. As long as these governnements know that they cannot be voted out, there is no way they can invest in any real longterm changes. Based on this "theory", I am certain Ghana's growth will dwarf all its neighbers in the years to come.

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