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Foreign Aid Can Promote Enduring Growth and Reduce Poverty When Countries 'Drive' Their Own Development Strategies
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| News Release No:2001/263/S |
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Contact Person:
Phil Hay (202) 473-1796
Phay@worldbank.org
Ivar Slengesol (202) 458-4897
Islengesol@worldbank.org
Cynthia Case McMahon (TV/Radio) (202) 473-2243
Ccase@worldbank.org
WASHINGTON, March 27, 2001--Foreign aid can help key economic reforms take root in developing countries, but only if recipient governments and their people broadly support the need for change, says a new World Bank report that investigates how development aid has influenced economic policy in Africa. Without such "country ownership," external cajoling or donor-imposed "conditionality" is unlikely to make poor countries adopt reforms which they oppose.
The new report, Aid and Reform in Africa: Lessons from Ten Case Studies, says where political leaders are committed to reform, and capable civil servants and community groups can implement change, aid increases public confidence in the reform process and attracts greater private investment in national economies. In this way, foreign aid can help deepen reform commitments and support high growth rates.
As a result, the World Bank believes that rich countries should honor their UN commitment to devote 0.7 percent of their annual GDP to overseas aid and open their markets to developing country exports. Development assistance to Africa has fallen drastically from $32 per head in 1990 to just $19 in 1998, despite clear evidence of aid's effectiveness in countries with effective economic and social policies.
" It is painfully ironic that just at the time when many African governments are putting in place effective social and economic policies, and committing to reform, development aid is being cut. This is exactly the wrong message for donors to send," says World Bank President James Wolfensohn, who returned recently from meeting with 22 African heads of state. "African leaders are determined as never before to lead their own renaissance, but what they also need is increased development assistance to support those reforms and access to developed country markets. Rich countries need reminding that their current levels of foreign aid, at some 0.24 percent of yearly GDP, fall far short of the 0.7 percent target they promised to meet. The difference between these figures is worth a hundred billion dollars a year - for millions, this is the difference between life and death."
The new report, which examines ten national case studies during the 1980s and 1990s--comprising Côte d'Ivoire, Democratic Republic of Congo (formerly Zaire), Ethiopia, Ghana, Kenya, Mali, Nigeria, Tanzania, Uganda, and Zambia--reconfirms that development assistance has little or no positive influence in poor countries that avoid economic reforms which could spur economic growth and reduce their incidence of poverty. While aid donors have absorbed this conclusion and increasingly favor developing countries which can use their foreign aid effectively, the report warns that donors must continue to be selective. Where bilateral donors in particular give aid to national recipients regardless of their poor economic track record, they may be insulating developing countries from the need to adopt reforms which would greatly benefit the social and economic well-being of their people.
The report concludes that using "conditionality" to coerce developing countries into reforms such as stabilizing their exchange rates or fostering an independent judicial system are largely ineffective. Countries that have successfully reformed have had clear political movements leading to these changes. Countries that have made less progress typically have had powerful vested interests blocking change. Either way, economic policies are primarily domestically grown.
"This report shows that aid cannot 'buy' reform in poor countries that are flatly opposed to it," says Shanta Devarajan, a co-author of the new report and Chief Economist of the World Bank's Human Development Network. "Without 'country-ownership' of a national development strategy, even the most generous and well-intentioned aid packages will have little or no impact in improving the quality of people's lives. This is why country ownership is at the heart of the Poverty Reduction Strategy Papers or PRSP process where poor countries devise their own social and economic priorities, with the World Bank, the IMF, and international donors playing a supporting role."
As the report shows, African countries have received large amounts of aid since the early 1980s, aimed at stimulating policy reform, but the results have varied enormously. Ghana and Uganda were successful reformers that grew rapidly and reduced poverty. Côte d'Ivoire and Ethiopia have shown significant reform in recent years, but unsettled political conditions and the stress of conflict (respectively) leave open the question of whether the reforms will be sustained. In other countries policies changed very little or even became worse.
Aid can help once the reform process is underway
The report argues that while foreign aid cannot be used to impose reforms on national recipients, the right composition of aid finance together with policy advice and technical assistance can play an extremely useful role in supporting the reform process.
Both the Ghana and Uganda case studies are emphatic that aid finance played an important supporting role. In the case of Ghana, balance of payments support,
"provided the government with the breathing space it required. [It] allowed imports that helped fill the shelves of supermarkets and other traders. The filled shelves provided a psychologically-induced breather for the government because… people saw this as a sign of better things to come" (see Ghana Case Study).
The report shows how in the successful case studies, aid flows rose in lockstep with policy improvements. When countries actually reform, finance increases the benefits of those changes. That is, the growth impact of a particular improvement in policy is enhanced by the flow of aid. There are two reasons for this. Aid increases confidence in the reform program and calls forth greater private investment. Also, it enables the government to provide public services that are complementary to private investment. By increasing the benefits of reform, aid enhances the likelihood that it will be sustained. As the Ghana study notes,
"Coming back to politics, economic reform proved politically sustainable in the end only because some results emerged quickly."
While Ethiopia has not made as much progress with reform, its case nevertheless reveals the importance of aid in consolidating reform once it has started:
"Aid had a minimal impact on growth or poverty in the 1980s since Ethiopia was embroiled in a protracted civil war along with a bold program of building a socialist economy. Market-oriented reforms were initiated in 1990 in response to profound economic and political crises. The reform program initially attracted a sizeable increase in external assistance in support of liberalization, stabilization, and rehabilitation. Subsequent aid helped to deepen reform commitments and supported high growth rates" (see Ethiopia case study).
Consultation matters
Perhaps the most important lesson emerging from the ten case studies is that successful reformers have consultative processes that result in a broad consensus for reform.
For example, the Ugandan reform program was broadly consultative at every step of the way. President Museveni established the Presidential National Forum to debate reform issues in 1987. The Ugandan Manufacturers Association sponsored seminars and discussion papers in the 1987–89 period. The Presidential Economic Council had open debates on reform and sponsored a December 1989 conference on trade liberalization that has been described as a turning point in public opinion. In Tanzania, when economists at the University of Dar es Salaam in 1984 began holding public meetings on economic liberalization, party leaders and policymakers had to start listening to the reformist elements in government. That same year, the government allowed own-funded imports, devalued the currency, and increased agricultural prices by about 30 percent.
By contrast, policymaking in Kenya appears to be restricted to a small circle. As a result, the reforms are not always "owned" by even the line ministries, and other stakeholders are not consulted. The establishment of the Export Promotion Council in 1992 was a step toward involving the business community in policy decisions.
Zambia's reforms were pushed through during the "honeymoon period" following multiparty elections.
As Finance Minister Kasonde put it, "Necessary but unpopular decisions had to be quick. I was very interested in using the political status of the MMD government to make economic advancements." Yet, by moving quickly before opposition to the reforms could mobilize, the Zambian government may in fact have contributed to the slow implementation of some of the reforms. Interest groups, none of which were consulted before the reforms, blocked certain reforms. Overall, support for the Zambian reforms outside of a few cabinet ministers has been shallow.
"The research is very clear that those developing countries that have successfully reformed and consolidated popular support for change, have consultative processes that helped to build the national commitment to embrace the occasionally painful but ultimately rewarding process of reform," says David Dollar, head of the macroeconomics and growth team in the Bank's Development Research Group, and a co-author of the report.
What aid donors can do in poor countries with weak policies
The report concludes that since development finance cannot jumpstart reforms in countries with poor social and economic policies and no coherent political movement to change the situation, donors should instead offer only technical assistance and policy dialogue until such times as countries forge their own commitment for change.
When Ghana was dealing with macroeconomic crisis in the early 1980s, for example, it had well-trained economists to develop policy proposals, and these technocrats found the policy dialogue with the international financial institutions to be helpful in working out plans. A few years later, when Uganda's leaders were looking for new policies, one thing that helped was donor-financed study tours to Ghana.
In the successful cases, political leaders learn from other countries and from their own mistakes. Low-key assistance can help with this policy learning, which generally has to take place at a country's own pace. Even in countries that remain in the pre-reform phase for a long time, technical assistance can lay the foundation for policy learning. In Kenya, for example, donors are supporting the Kenyan Institute for Policy Research and Analysis to help develop local capacity for policy analysis and formulation. This kind of capacity building is not going to have a large payoff as long as vested interests block serious reform, but it is an essential foundation if a political movement for change develops.
On the other hand, where donors fail to heed this advice and to differentiate between effective and weak national performers, large amounts of foreign aid can sustain poor policies, and delay key social and economic reforms. Attaching conditions to the aid in these cases has not successfully led to policy change, nor has it delayed the disbursement of funds.
In general, donors have not discriminated effectively among different countries and different phases of the reform process. Donors tend to provide the same package of assistance everywhere and at all times. The lessons from the Ghana and Uganda cases are that donors should concentrate on technical assistance and other soft support without large-scale budget or balance of payments support in the phase before governments are serious about reform. If a reform movement develops, finance can be increased as policies actually improve. In the early stage of serious reform, political leaders and technocrats actually welcome conditionality in order to bind themselves to policy change. Once the reform movement is well entrenched, however, "conditionality" becomes less useful because it limits participation and disguises ownership, both of which are essential for the difficult, "second-generation" changes such as civil-service reform and public management reform.
"The positive news is that foreign aid can make a very significant contribution in countries in which there is a serious movement for change," adds the World Bank's Dollar. "In both Ghana and Uganda, the World Bank and other donors played an important role in the early period of reform, first with advice and evidence of what policies have worked in other countries, and then with finance. These case studies show in more detail what we have found in cross-country examinations: the combination of good policies and foreign aid leads to good results and hence more popular support for the reform program."
Foreign aid going forward
Co-financed by European aid donors, France, Germany, the Netherlands, Norway, and Sweden, and widely discussed in regional forums in Africa, Europe, and the United States, the World Bank's new report, Aid and Reform in Africa: Lessons from Ten Case Studies, seeks to help the international development community direct foreign aid to poor countries most likely to use it effectively to achieve broad-based economic growth and reduce poverty.
For those countries that cannot yet marshal popular support and political motivation to adopt a national reform process, the report can help both donors and aid recipients take the necessary first steps, with technical assistance and policy advice, to start the process towards national change.
Dutch Minister for Development Cooperation Eveline Herfkens says foreign aid donors should embrace the report's findings in making sure that their development assistance has the greatest possible impact in reducing poverty in poor countries that are broadly committed to reform:
"[It is] a wake-up call to the donor community: aid can contribute to policy reform, but stop trying to buy policy change with large amounts of aid. Instead, more aid should go to poor countries that are firmly committed to pro-poor reforms. The case studies in this book provide a solid basis for the reorientation of aid policy I have been working at for years."
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Measuring Economic Policy
The measure of policy used throughout this report is a broad one. Conceptually, it measures the extent to which government policy creates a good environment for broad-based growth and poverty reduction. In practice, it has four components:
· Macroeconomic policies: whether fiscal, monetary, and exchange rate policies provide a stable environment for economic activity;
· Structural policies: the extent to which trade, tax, and other policies create good incentives for households and firms to prosper;
· Public sector management: the extent to which public sector institutions effectively provide services complementary to private initiative, such as the rule of law (functioning of the judiciary, police), infrastructure, and social services;
· Social inclusion: the extent to which policy ensures the full participation of the society through social services that reach the poor and disadvantaged, including women and ethnic minorities.
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