Efforts by the international community to accelerate progress toward the Millennium Development Goals received a boost in June 2005, when the heads of government of the Group of Eight industrial countries pledged to increase aid, especially to Africa. But the prospect of more aid also highlights the importance of donors delivering aid efficiently and of recipients using it effectively. To discuss these challenges, the IMF and the United Kingdom’s Royal African Society organized a forum in London on July 4. The panelists were Tony Venables (U.K. Department for International Development), Elliott Harris (IMF), and Christopher Eads (Economist Intelligence Unit).
Leading off, Venables pointed to evidence that aid can be particularly effective in countries with low per capita incomes and good policy environments, as well as in countries just emerging from conflict. But many countries receive less aid than they can use effectively, whereas other countries are “overaided.” Not only can aid fund poverty reduction programs and investment in economic infrastructure, it can also help build capacity if delivered in ways that strengthen public administrations and institutions, and make public resource management more transparent. Venables stressed the importance of careful macroeconomic management when aid is increasing, particularly to limit the risk of Dutch disease, and the need to guard against becoming overly dependent on aid.
Countries face four key issues in managing increased aid, Harris said: absorbing and spending the aid effectively; dealing with unpredictable and volatile aid flows; ensuring that additional aid-financed spending is fiscally sustainable, particularly as aid flows taper off; and using the new “borrowing space” created by debt relief prudently to avoid renewed debt distress. The appropriate macroeconomic response to additional aid requires careful coordination of fiscal, monetary, and exchange rate policies, but this is often complicated by unpredictable or volatile aid disbursements.
In all of these areas, Harris said, the Fund can offer policy advice and technical assistance and help countries develop alternative macroeconomic scenarios for preserving stability and growth as aid increases.
Budget support and its pitfalls
Eads observed that donors are increasingly providing general budget support—rather than earmarked aid and project financing—because it can be better aligned with recipients’ poverty reduction priorities and has lower transaction costs. However, donors also attach greater importance to the political context of budget support recipients. Political developments that are considered unfavorable are more likely to lead to an interruption of the flow of budget support, introducing additional uncertainty into the aid relationship. Eads argued for mutual agreement on the conditions under which donors would reconsider their provision of general budget support.
Speakers cautioned donors against scaling up aid under a “business as usual approach” that would repeat past mistakes. If recipient countries do not improve their policy environments and institutions and strengthen governance, more aid might fuel additional capital flight or be wasted. Mutual accountability between recipients and donors should be the foundation of an aid relationship based on clearly defined rules. Donors need to listen more closely to those they are trying to help in poor countries and, above all, focus on results to ensure that their assistance is having the intended effect at the local level—a necessary condition for it to have its intended effect of contributing to development and poverty reduction nationally.
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