Development Centre Studies

OECD Development Centre

English
ISSN: 
1990-0295 (online)
ISSN: 
1563-4302 (print)
http://dx.doi.org/10.1787/19900295
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This series of monographs from the OECD Development Centre covers development issues generally and in some cases issues in specific countries. It  includes Angus Maddison’s books containing long-term historical estimates of GDP for various areas of the world.

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Policy Ownership and Aid Conditionality in the Light of the Financial Crisis

Policy Ownership and Aid Conditionality in the Light of the Financial Crisis

A Critical Review You do not have access to this content

OECD Development Centre

English
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Author(s):
OECD
26 Aug 2009
Pages:
94
ISBN:
9789264075528 (PDF) ;9789264075511(print)
http://dx.doi.org/10.1787/9789264075528-en

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The current economic situation has obliged the international donor community to reexamine its stance on the conditionality of development assistance. This study evaluates which controversies persist with respect to aid conditionality, how successful donors have been in stemming the rising tide of aid conditionality of the 1980s and 1990s, and whether the donor community practices what it preaches regarding the allocation of aid based on governance and development criteria. Above all, the report considers how the financial crisis has rendered it increasingly difficult to maintain traditional conditionality frameworks. Strategies for reducing the number of aid conditionalities and for enhancing recipient ownership of aid policies are proposed in light of the unsustainability of existing frameworks.

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  • Preface
    Since the Paris Declaration of 2005, there has been a genuine reappraisal of the modality of aid giving. "Good policy environments" and "national ownership" have become key elements within the new framework. Nevertheless, although the lexicon of the donor community has moved on, "aid conditionality" is still very much part and parcel of aid-giving. Where do the controversies persist on aid conditionality? How successful have donors been in stemming the rising tide of conditionality of the 1980s and 1990s? Does the donor community practise what it preaches in terms of aid allocation according to governance and developmental criteria? And what implications does the financial crisis have for the sustainability of existing conditionality frameworks? These are some of the questions that this study attempts to address.
  • Introduction
    The international financial crisis, which started in July 2007 but took a decided turn for the worst in September 2008, has given a renewed prominence to the international financial institutions (IFIs), especially the World Bank and the International Monetary Fund (IMF). Before the crisis struck, both institutions had confronted sharply declining demand for their services. Benefiting from extremely favourable external circumstances (particularly high commodity prices), many developing countries no longer had pressing needs for the financial resources of the IFIs. Moreover, because accepting their funds usually implied heavy conditionality, many developing countries preferred other sources of finance.
  • Shifting Aid Modalities

    Conditionality has grown over the last three decades in a way probably unimaginable in the early years of development aid. Donors now have an enormous influence on policy decision making and execution in areas as disparate as democracy, judicial reform, corporate governance, health, education and environmental policy (Chang, 2005). As Robert Chambers (2005, p. 39) has noted,

    "Now, to a degree that during the 1960s would have been vilified as gross neo-colonialism, in many small and low-income countries – especially in sub-Saharan Africa – lenders and donors not only fund much government expenditure (over 50 per cent in Uganda, for example), but also call many of the policy shots."

    A little historical perspective on the way in which conditionality has evolved is thus important to put these shifts in context, for it ties intimately with the way in which aid disbursement has changed. At the risk of excessive simplification, one can distinguish broadly between five different periods in donor-recipient relations:

  • Is Conditionality Increasing or Diminishing?
    The implications of this last big shift in donors’ conditionality policies are controversial, and will be examined in more depth later in Chapter 7 of this study. In principle, however, the donor community is now strongly committed to reducing conditionality and enhancing ownership. For instance, the Commission for Africa (2005, p. 314) proclaimed that "policy conditionality…is both an infringement on sovereignty and ineffective." The same year the United Kingdom produced an important policy document boldly committing the government to eliminate it and to adopt a non-interventionist approach: "The United Kingdom will not make our aid conditional on specific policy decisions by partner governments or attempt to impose policy choices on them (including in sensitive economic areas such as privatisation or trade liberalisation)" (DFID, 2005, p. 10). At their July 2005 meeting at Gleneagles, the G-8 leaders confirmed the need for recipient countries to "decide, plan and sequence their economic policies to fit with their own economic strategies for which they should be accountable to their people". Such declarations have been become increasingly frequent since the second half of the 1990s, when disillusions with the results of Structural Adjustment became more widespread. Some countries such as Canada abandoned conditionality altogether. Over the last ten years, then, calls for the reduction of conditionality and enhanced ownership have gained momentum. But how much has really been achieved?
  • A Brief Review of Some Empirical Studies of Conditionality's Impact
    Much, though not all, of the empirical literature on the impact on conditionality covers IMF programmes, for straightforward reasons: the conditionality associated with these programmes is the most long-standing, and data are more readily available. Since the 1990s, the IMF itself has provided data on compliance with its programme conditionality, through its database on Monitoring Fund Arrangements (MONA)1. The empirical studies on the impact of conditionality have two different strands. A large literature admirably summarised by Dreher (2008) tries to determine the extent to which recipients have complied with conditionality. This literature generally concludes that compliance is lax (see, inter alia, Mecagni, 1999 and Edwards, 2001). The second strand looks at the impacts of compliance on economic policy and outcomes.
  • The Intrinsic Difficulty of Distinguishing Between Good and Bad Policies
    A surprising consensus now exists among economists that there is "no one way to do things." As far back as 1979, the IMF’s Guidelines on Conditionality stressed the need to avoid blueprint approaches, pay due regard to individual political and economic circumstances of particular countries, and keep the number of conditions attached to loans to a minimum. The World Bank (2005, p. 22) recognised in its 2005 Conditionality Review that "the lessons of the 1990s show that generalised policy prescriptions often fail, and that there is no single model of development." Such declarations cut across ideological divides. Stiglitz (2005, p. 1) observes "if there is a consensus today about what strategies are likely to help the development of the poorest countries it is this: there is no consensus." Feldstein (1998, p. 5) makes a similar point:
  • The Slippery Slope of Political Conditionality
    The effectiveness of conditionality hinges in large measure on the willingness of donors to suspend aid in the case of non-compliance. Yet, for a multitude of reasons, donors often hesitate (Killick, 1998; Kanbur, 2000; Woods, 2007; Dreher, 2008). Donor governments have historical, foreign policy, security, investment and trading reasons to support particular recipient governments and to use their aid and their influence within the IFIs to secure lenient treatment for favoured clients. Economic and geopolitical considerations still go a long way in explaining the geographic allocation of aid flows. Indeed, the diplomatic use of aid undoubtedly received a boost from the terrorist attack of 9/11, with aid flows to the Middle East increasing four-fold between 2001 and 2004 (Lancaster, 2007, p. 7). Against this backdrop, donors are often reluctant to cut aid, regardless of how recipients have scored in achieving targets and objectives. As Kanbur puts it (2000, pp. 5-6), "When push comes to shove, all of the pressures, mostly from the donor side, are to look the other way when conditionality is violated." Moreover, the instruments of donor co-ordination are only on rare occasions strong enough to maintain solidarity in the face of conflicting donor interests (Killick, 1998, p. 174). And clever recipient governments often adopt effective divide-and-rule strategies towards donors.
  • Conditionality and the Shift to New Aid Modalities
    Having established the practical difficulties of allocating aid according to performance, in this Chapter we ask the question about how donors can limit the difficulties associated with conditionality. Arguably, part of the solution entails re-examining the arguments in favour of different aid modalities. OECD (2008b, p. 15) points out that most donors mix aid modalities depending on local contexts, with no one preferred way of delivering aid. Many donors still rely on project aid, whether or not as part of sector or programme approaches, to maintain contact with field realities, to work with non-traditional actors such as the private sector and civil society, to develop innovative approaches and to compensate for weak national capacity. The proliferation of decentralised cooperation, especially in donor countries such as Spain which have expanded their co-operation significantly in recent years, has increased the visibility of project aid.
  • Policy-Based Conditionality and the Economic Crisis – A Final Nail in the Coffin?
    Part of the debate here might in any case be surpassed by events. As noted in the introduction to this study, prior to the crisis de facto power to impose conditionality via the IFIs, the custodians of the current international system of conditionality, had very much waned. The IMF in particular had seen its role very much diminished, by a combination of high commodity prices and extremely low market interest rates, giving many developing countries a degree of financial autonomy that they had not enjoyed in generations. The World Bank too had been embroiled by internal governance problems and saw the demand for its finance curtailed.
  • Conclusions and Policy Recommendations
    There is a strong sense in which the whole debate on ownership and conditionality is counterproductive and detracts attention from some serious problems which donors need to deal with urgently. The international aid architecture has grown spontaneously, and, unfortunately, suffers from major dysfunctions. Reisen (2008) describes it as a "non-system". The persistent problems which plague development assistance are well summarised in Kharas (2009). Despite the professed objective of reducing it (paragraphs 6 and 33 of the Paris Declaration), aid fragmentation is still increasing (World Bank, 2008; OECD, 2008a). There is little evidence that the administrative burden for recipient governments associated with aid delivery has decreased. Co-ordination is poor and technical assistance has grown excessively, at the expense of investment in productive and social sectors. Meanwhile, the share of country programmable aid (that is, the amount of funds available for development projects and programmes in the recipient countries) in total aid flows is still too low. These structural problems with aid delivery need urgent attention.
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