Good Donorship

Study Outline: Good Donorship and Aid Modalities (Preliminary Draft)

Objectives

The GRIPS Development Forum is planning to: (i) examine criteria for considering an optimal mix of aid modalities in the country-specific context ; and (ii) draw implications for how donors can effectively assist in achieving sustainable growth and poverty reduction. It is hoped that the study outputs will serve as practical guide for recipient countries in choosing specific aid modalities and/or their proper combination, under country ownership.

More specifically, the objectives of the GRIPS study are to:

Examine how and under what conditions specific aid modalities and/or their optimal combination (e.g., projects, budget support, common basket funds) contribute to enhancing aid effectiveness;
Provide practical criteria for the choice of a "best-mix" of aid modalities-taking account of the country-specific context and merits of respective modalities (or "best-mix" principles) --so that they can serve as a rough guide to both recipient governments and donors; and
Suggest ways how donors can assist in achieving sustainable growth and poverty reduction, by properly practicing aid.

The Rome Declaration of Harmonization (February, 2002) endorsed principles of a country-based approach, country ownership and government leadership, and the need to recognize diverse aid modalities.¹ At the same time, there is increased awareness of the importance of the program approach-typically, Sector-wide Approach (SWAp) and Program-based Approach (PBA)² --in ensuring the integration of projects and budget support (and other instruments as necessary) under a shared, coordinated policy framework.

Nevertheless, practical criteria how to apply such general principles in the country-specific context is yet to be established. It is thus essential to examine a set of criteria that make budget support and project aid effective, based on case analyses, and to foster understanding of "best-mix" principles of aid modalities among recipient countries and donors.

Background and Issues

Two distinct features of the current, new aid approach--compared to traditional project aid--are: (i) the adoption of a coherent and common framework for policy and strategies; and (ii) the integration of resources and aid money. The 1990s have seen a major shift in the practices of Western and Nordic donors, and to some extent the World Bank, from project to program aid such as SWAp, PBA, and budget support (e.g., general and sector budget support). [SWAp and PBA differ from budget support in that they neither require the above (ii) nor refer to a specific aid modality. However, in sub-Sahara Africa, budget support tends to be a primary tool to support SWAp and PBA.]

The new aid approach seeks to address coordination failures among recipient countries and donors, as well as other problems associated with stand-alone projects--e.g., high transaction costs of aid delivery, donor-driven projects leading to inefficient public spending, and parallel off-budget systems undermining the effectiveness of government systems and accountability. The recent introduction of the Poverty Reduction Strategy Paper (PRSP) and the Medium-Term Expenditure Framework (MTEF) has further accelerated this shift.

This trend can be largely seen as a reaction to a growing dissatisfaction with the experiences in sub-Saharan Africa, where the socio-economic landscape had deteriorated and led to a growing isolation of donor projects from local realities, upon which the projects would make no or rather limited sustainable development impact.³ Many sub-Sahara African countries are highly aid-dependent and constrained from limited institutional capacity. Under such circumstances, the proliferation of aid projects imposes heavy administrative burden on recipient countries. Moreover, these countries face pressing needs for delivering social services to a large number of poverty-stricken population. Thus, budget support, jointly with SWAp or PBA, is expected to serve as a primary tool to finance recurrent expenditures for the social sector, build institutional capacity and policy framework, and reduce duplication of donor projects.

By contrast, East Asian countries have different experiences and perception of project aid. Project aid continues to be dominant in East Asia.⁴ Some (but not all) countries have managed to keep low aid dependency. This has allowed them to self-finance large part of recurrent expenditures of the social sector (as counterpart funding) and to mobilize aid resources not only for social needs but also for growth promotion including infrastructure development. Moreover, they have possessed "home-grown" systems for planning and budget management-such as development plans and sector strategies, public investment programs (although their quality may need improvements)--even before the introduction of PRSP and MTEF. This is how East Asia halved poverty during the 1990s through sustained growth-well ahead of the Millennium Declaration. These are the very, specific context in which Japan has practiced its aid, mainly through projects.

In this way, there exist different development and aid experiences among countries in sub-Sahara Africa and East Asia, and this is a main reason why some perception "gap" exists over aid approaches between Western and Nordic donors and Japan. Now that experiences with the new aid approach have been accumulated in sub-Sahara Africa and that there has been increased interest in its applicability among Asian countries, it is highly relevant to examine how and under which conditions specific aid modalities and/or their optimal combination work and to develop "best-mix" principles of aid modalities. Such principles should duly recognize: (i) country diversity (e.g., the degree of aid dependency, capacity for aid management); and (ii) the features specific to sectors and activities where aid is oriented. Also, donor efforts should be directed to help achieve sustainable impacts on growth and poverty reduction.

The findings of this study could have implications for Japan's aid policy and practices, namely, in addressing the following questions.

How to formulate its policy for budget support, in order to effectively complement the impacts of project aid?, For example, how　can "best-mix" principles be applied in addressing the social sector needs in sub-Sahara Africa?;
How can "best-mix" principles be applied in supporting latecomer, low-income countries in Asia (which may face similar problems as their sub-Sahara African counterparts, in terms of the levels of aid dependency and institutional capacity)?; and
Whether and to what extent can the program approach be applied for supporting growth promotion (e.g., infrastructure, agriculture, industrial development)?, Are there any needs to adjust or modify the design of the current SWAp and PBA, and how?

Methodology

The study will carry out a literature review and case analyses in selected sectors and countries, and bring them together to develop practical "best-mix" principles of aid modalities. In doing so, the study will pay special attention to the following aspects:

Country-specific features: the degree of aid dependency, institutional capacity (capacity for aid management, the existence and/or functioning of planning and budget management systems, etc.), and so on.
Sector-specific features: the role of government in the sector (provider of public services vs. coordinator of various actors such as private sector and NGOs, etc.), the budgetary nature of aid inputs (capital-intensive vs. recurrent-intensive expenditures, etc.), and so on.
Activity-specific features: the degree of pilot and innovation (e.g., policy formulation stage), delivery of standardized services, or tailor-made services (e.g., implementation stage), and so on.

Candidate countries for case analyses include: Vietnam, Cambodia, Bangladesh (Asia) and Ghana, Tanzania, Uganda, Mozambique (Africa). [Tentative list. Other candidates may include: Ethiopia, Zambia, Lao PDR etc.]. The study intends to cover both social sector (e.g., basic education and health) and growth promotion measures (e.g., agriculture, infrastructure, industrial development).

Output

The study will produce various outputs, including Discussion Papers (including issues paper, thematic and country analyses), Policy Notes, and a Synthesis Report. These outputs will be disseminated through the website of the GRIPS Development Forum (http://www.grips.ac.jp/forum-e/).

Tentative Schedule

January-February 2004: Literature review and the formation of study concept.
February-March 2004: Inception mission to discuss and receive comments on the study concept (UK, Ghana, Tanzania).
April-October 2004: Country and sector analyses (on selected Asian and African countries, and sectors), main missions, preparation of Discussion Papers and Policy Notes etc.
November 2004-January 2005: Synthesis Report.

^Note:

^{Announced
at the DAC High-Level Forum on Harmonization. The DAC Guidelines of
Poverty Reduction (2001) also recognize the role of various aid
modalities (e.g., budget support, common basket funds, project aid,
and NGOs) in supporting poverty reduction efforts. [back
to text]}
^{According
to CIDA, a PBA includes four key elements: (i) leadership by the
host country or organization; (ii) a single program and budget
framework; (iii) donor coordination and harmonization of procedures;
and (iv) efforts to increase the use of local procedures over time
with regard to program design and implementation, financial
management, and monitoring and evaluation. This parallels the
definition of SWAp by Foster (2000).[back to text]}
^{Ole
Molgard Andersen, "Sector programme assistance" in Foreign
Aid and Development: Lessons Learned and Directions for the Future,
ed. By Fin Tarp (2000), p.179. [back to text]}
^{For
example, in Vietnam, budget support is not yet introduced except for
PRSC and common basket funding. Cambodia is pushing ahead with SWAp
in key areas, but the choice of implementation modality is left at
the discretion of each participating donor.[back to
text]}