Global Development: Views from the Center
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May 09, 2006
Should we give aid to government budgets?
Posted by Owen Barder at 08:08 PM
Donors give about $5 billion a year - about a twentieth of all aid - directly to the government's budget, and this is increasing.
This has been a controversial policy. Supporters hope that budget support will focus attention on the government's own systems for managing public spending, improving the effectiveness of all public services and increasing the government's accountability to its own population. They say that the usual alternative - to provide help in the form of stand-alone projects - tends to bypass, and may undermine, the government systems for financial management and accountability that are desperately needed. On the other hand, opponents of budget support worry that it becomes impossible to say exactly how taxpayers' aid money has been used, and that there is no way to be sure that the aid has not gone into a black hole of a corrupt or dictatorial government. With projects, they argue, the donor remains in control of ensuring that real benefits are delivered.
Much of the debate has been ideological, because there has been little systematic evidence on which to make a judgement. But over the past 3 years, there has been an independent study under the auspices of the OECD, funded by a consortium of donors, to examine the effects of budget support, which has looked at its impact in 7 countries.
The evaluation finds that providing funds through national budget systems has produced
government-wide benefits for capacity, and particularly capacity for public finance
management, which the supporters of budget support predicted. While budget support is not a panacea, the evaluation found that budget support strengthens government ownership and accountability and that, in the short–medium term, there were useful effects on the allocative and operational efficiency of public expenditures (including those financed by foreign aid). These in their turn were linked with medium–longer term systemic effects on improving the links between policy and results. The report concludes that budget support tends to enhance the country-level quality of aid as a whole, through its
direct and indirect effects on coherence, harmonisation and alignment.
The OECD evaluation finds that there is no evidence that money given directly to government budgets is more affected by corruption than other forms of aid.
It is too early to say whether budget support will be effective in the ultimate goal - which is to reduce poverty. The evaluation does not provide evidence on that. But the evaluation does find evidence for the improvements in public financial management capacity and government accountability which were predicted by proponents of budget support.
The report makes a number of recommendations for how the operation of budget support might be improved, including better, shared analysis of political risk, and more attention to the way that budget support works with other forms of aid.
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Comments
As a selling point, lot of technical assistance is added to budget support; this may be one reason for improvements in public finance management. Also budget support most often require a supra ministry- like the ministry of finance to be very effective. A related post on the issue;
http://truckandbarter.com/mt/archives/2006/05/budget_support.html
Posted by: paul at May 15, 2006 03:36 PM
Owen, you should exert caution before bolding the adjective 'independent' before evaluation.
You should check, for instance, which agencies have ordered, monitored and funded the study.
The choice of countries is also important. At the exception of Malawi, all the countries studied were following positive trends during the evaluation period. In these circumstances, the only conclusion that get can be taken home from such study is that when everything goes well, budget support has positive impact.
Posted by: Robert at May 16, 2006 10:04 AM
Robert
The agencies that funded this evaluation, and which sat on the Steering Group, include several that are not known for their inclination towards budget support, including USAID and JICA.
I agree that nothing is truly independent; and that it is hard to know what would have happened if the same aid had been given in other ways. But the report does provide a compelling account of how greater use of budget support can help to focus everyone - country and donors alike - on key issues of improving financial management and increasing accountability. That is what the advocates of budget support predicted, and this report is evidence that supports their position.
Owen
Posted by: Owen Barder at May 16, 2006 01:28 PM
Budget Support -Does US use it to buy votes at UN?
http://truckandbarter.com/mt/archives/2006/05/budget_support_1.html
"Accounting for the potential endogeneity of aid, our results provide strong evidence that US aid has indeed bought voting compliance. More specifically, the results suggest that general budget support and untied grants are the major aid categories with which recipients have been induced to vote in line with the United States."
Posted by: paul at May 19, 2006 02:06 AM