The ‘right’ choice of instruments and modalities to provide aid to developing countries in suppor... more The ‘right’ choice of instruments and modalities to provide aid to developing countries in support of poverty reduction and economic development is arguably the most contested issue in the current international debate on aid effectiveness. A particular controversy exists around the provision of aid in the form of budget support to avoid high transaction costs and other shortcomings of traditional project-based aid. Critics argue that this kind of ‘programme aid’ involves unacceptably high fiduciary risks due to the fungibility of budgetary funds. A more recently proposed form of aid is in the form of results-based aid or aid on delivery. Proponents argue that this provides donors with better control over the use of aid resources.
This paper demonstrates in a simple principal-agent framework with asymmetric information that in the absence of transaction costs, for a wide range of combinations of
aid dependency and recipient government commitment to reduce poverty, all three forms of aid are equivalent with regard to fungibility and fiduciary risks. The paper proceeds to demonstrate that as long as donors can rely on the recipient government to be at least minimally committed to poverty reduction, a well co-ordinated modality mix of general budget support and aid on delivery does not bear higher fiduciary risks than project aid. It concludes that if project aid does indeed involve higher transaction costs than budget support, donors should provide aid in the form of such a modality mix, albeit only if they are able (and willing) to closely co-ordinate their support.
"This study - commissioned by the German Ministry for Economic Cooperation and Development (BMZ) ... more "This study - commissioned by the German Ministry for Economic Cooperation and Development (BMZ) – evaluates the direct effects (i.e. the direct and induced outputs) of budget support in Zambia. It forms part of a joint international evaluation of budget support in Zambia.
The report focuses on strategies of the cooperating partners in providing budget support, the processes and structure of donor harmonization and alignment with government policies and systems, and the effects of budget support on induced outputs such as institutional performance, public financial management, and allocative and operational efficiency. The overall assessment of budget support in Zambia is positive: The evaluation concludes that budget support has helped to realize a number of objectives in Zambia, especially as a financing instrument supporting the national development strategy. At the same time, the evaluation also concludes that budget support could have been even more effective in Zambia, in particular as an instrument to promote good governance and effective state institutions. Weaknesses on the part of Zambian government as well as a lack of harmonization and coordination on the donor side have weakened the potential of the instrument in this respect."
Many approaches to supporting democracy in developing countries have been affected by recent inte... more Many approaches to supporting democracy in developing countries have been affected by recent international reforms geared towards improving aid effectiveness through better harmonizing interventions and greater alignment to recipient countries’ strategies. The paradigmatic instrument for these attempts has been direct budget support, whereby donors attempt not only to promote poverty reduction but also to achieve the institutional modernization conducive to public sector reforms and democratic accountability. However, based on empirical evidence from a recent evaluation of budget support in Zambia, this article argues that attempts at harmonization among donors can
be easily hampered by varying interpretations of the goal hierarchy of budget
support. In the course of the Multi-Donor Budget Support process in Zambia,
some donors have prioritized the financing function of the instrument, while others have emphasized its potential influence on institutional reforms. While some harmonization efforts proved successful at fostering a number of public-sector reforms, the remaining harmonization deficiencies hampered the realization of the instrument’s full potential to craft a coherent incentive system for facilitating improvements in democratic accountability.
ABSTRACT An analysis of statistical cross-country research shows that there is no robust evidence... more ABSTRACT An analysis of statistical cross-country research shows that there is no robust evidence with regard to a positive impact of development assistance on economic growth or poverty reduction. Since most individual aid projects have nevertheless been evaluated positively, the resulting micro-macro paradox can be explained with unintended externalities of growing aid dependence. Additionally, an increasing amount of research shows that development assistance confronts serious organizational challenges. Beyond diverging interests of foreign policy actors, special interests within the policy field of development assistance can also obstruct aid effectiveness. Thus, as with domestic social policies, international development cooperation too needs an adequate regulatory framework to be effective in promoting overall economic development in partner countries.
The ‘right’ choice of instruments and modalities to provide aid to developing countries in suppor... more The ‘right’ choice of instruments and modalities to provide aid to developing countries in support of poverty reduction and economic development is arguably the most contested issue in the current international debate on aid effectiveness. A particular controversy exists around the provision of aid in the form of budget support to avoid high transaction costs and other shortcomings of traditional project-based aid. Critics argue that this kind of ‘programme aid’ involves unacceptably high fiduciary risks due to the fungibility of budgetary funds. A more recently proposed form of aid is in the form of results-based aid or aid on delivery. Proponents argue that this provides donors with better control over the use of aid resources.
This paper demonstrates in a simple principal-agent framework with asymmetric information that in the absence of transaction costs, for a wide range of combinations of
aid dependency and recipient government commitment to reduce poverty, all three forms of aid are equivalent with regard to fungibility and fiduciary risks. The paper proceeds to demonstrate that as long as donors can rely on the recipient government to be at least minimally committed to poverty reduction, a well co-ordinated modality mix of general budget support and aid on delivery does not bear higher fiduciary risks than project aid. It concludes that if project aid does indeed involve higher transaction costs than budget support, donors should provide aid in the form of such a modality mix, albeit only if they are able (and willing) to closely co-ordinate their support.
"This study - commissioned by the German Ministry for Economic Cooperation and Development (BMZ) ... more "This study - commissioned by the German Ministry for Economic Cooperation and Development (BMZ) – evaluates the direct effects (i.e. the direct and induced outputs) of budget support in Zambia. It forms part of a joint international evaluation of budget support in Zambia.
The report focuses on strategies of the cooperating partners in providing budget support, the processes and structure of donor harmonization and alignment with government policies and systems, and the effects of budget support on induced outputs such as institutional performance, public financial management, and allocative and operational efficiency. The overall assessment of budget support in Zambia is positive: The evaluation concludes that budget support has helped to realize a number of objectives in Zambia, especially as a financing instrument supporting the national development strategy. At the same time, the evaluation also concludes that budget support could have been even more effective in Zambia, in particular as an instrument to promote good governance and effective state institutions. Weaknesses on the part of Zambian government as well as a lack of harmonization and coordination on the donor side have weakened the potential of the instrument in this respect."
Many approaches to supporting democracy in developing countries have been affected by recent inte... more Many approaches to supporting democracy in developing countries have been affected by recent international reforms geared towards improving aid effectiveness through better harmonizing interventions and greater alignment to recipient countries’ strategies. The paradigmatic instrument for these attempts has been direct budget support, whereby donors attempt not only to promote poverty reduction but also to achieve the institutional modernization conducive to public sector reforms and democratic accountability. However, based on empirical evidence from a recent evaluation of budget support in Zambia, this article argues that attempts at harmonization among donors can
be easily hampered by varying interpretations of the goal hierarchy of budget
support. In the course of the Multi-Donor Budget Support process in Zambia,
some donors have prioritized the financing function of the instrument, while others have emphasized its potential influence on institutional reforms. While some harmonization efforts proved successful at fostering a number of public-sector reforms, the remaining harmonization deficiencies hampered the realization of the instrument’s full potential to craft a coherent incentive system for facilitating improvements in democratic accountability.
ABSTRACT An analysis of statistical cross-country research shows that there is no robust evidence... more ABSTRACT An analysis of statistical cross-country research shows that there is no robust evidence with regard to a positive impact of development assistance on economic growth or poverty reduction. Since most individual aid projects have nevertheless been evaluated positively, the resulting micro-macro paradox can be explained with unintended externalities of growing aid dependence. Additionally, an increasing amount of research shows that development assistance confronts serious organizational challenges. Beyond diverging interests of foreign policy actors, special interests within the policy field of development assistance can also obstruct aid effectiveness. Thus, as with domestic social policies, international development cooperation too needs an adequate regulatory framework to be effective in promoting overall economic development in partner countries.
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This paper demonstrates in a simple principal-agent framework with asymmetric information that in the absence of transaction costs, for a wide range of combinations of
aid dependency and recipient government commitment to reduce poverty, all three forms of aid are equivalent with regard to fungibility and fiduciary risks. The paper proceeds to demonstrate that as long as donors can rely on the recipient government to be at least minimally committed to poverty reduction, a well co-ordinated modality mix of general budget support and aid on delivery does not bear higher fiduciary risks than project aid. It concludes that if project aid does indeed involve higher transaction costs than budget support, donors should provide aid in the form of such a modality mix, albeit only if they are able (and willing) to closely co-ordinate their support.
The report focuses on strategies of the cooperating partners in providing budget support, the processes and structure of donor harmonization and alignment with government policies and systems, and the effects of budget support on induced outputs such as institutional performance, public financial management, and allocative and operational efficiency. The overall assessment of budget support in Zambia is positive: The evaluation concludes that budget support has helped to realize a number of objectives in Zambia, especially as a financing instrument supporting the national development strategy. At the same time, the evaluation also concludes that budget support could have been even more effective in Zambia, in particular as an instrument to promote good governance and effective state institutions. Weaknesses on the part of Zambian government as well as a lack of harmonization and coordination on the donor side have weakened the potential of the instrument in this respect."
be easily hampered by varying interpretations of the goal hierarchy of budget
support. In the course of the Multi-Donor Budget Support process in Zambia,
some donors have prioritized the financing function of the instrument, while others have emphasized its potential influence on institutional reforms. While some harmonization efforts proved successful at fostering a number of public-sector reforms, the remaining harmonization deficiencies hampered the realization of the instrument’s full potential to craft a coherent incentive system for facilitating improvements in democratic accountability.
This paper demonstrates in a simple principal-agent framework with asymmetric information that in the absence of transaction costs, for a wide range of combinations of
aid dependency and recipient government commitment to reduce poverty, all three forms of aid are equivalent with regard to fungibility and fiduciary risks. The paper proceeds to demonstrate that as long as donors can rely on the recipient government to be at least minimally committed to poverty reduction, a well co-ordinated modality mix of general budget support and aid on delivery does not bear higher fiduciary risks than project aid. It concludes that if project aid does indeed involve higher transaction costs than budget support, donors should provide aid in the form of such a modality mix, albeit only if they are able (and willing) to closely co-ordinate their support.
The report focuses on strategies of the cooperating partners in providing budget support, the processes and structure of donor harmonization and alignment with government policies and systems, and the effects of budget support on induced outputs such as institutional performance, public financial management, and allocative and operational efficiency. The overall assessment of budget support in Zambia is positive: The evaluation concludes that budget support has helped to realize a number of objectives in Zambia, especially as a financing instrument supporting the national development strategy. At the same time, the evaluation also concludes that budget support could have been even more effective in Zambia, in particular as an instrument to promote good governance and effective state institutions. Weaknesses on the part of Zambian government as well as a lack of harmonization and coordination on the donor side have weakened the potential of the instrument in this respect."
be easily hampered by varying interpretations of the goal hierarchy of budget
support. In the course of the Multi-Donor Budget Support process in Zambia,
some donors have prioritized the financing function of the instrument, while others have emphasized its potential influence on institutional reforms. While some harmonization efforts proved successful at fostering a number of public-sector reforms, the remaining harmonization deficiencies hampered the realization of the instrument’s full potential to craft a coherent incentive system for facilitating improvements in democratic accountability.