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A quarterly magazine of the IMF
September 2005, Volume 42, Number 3

Debating Aid

Many developing countries, particularly in Africa, will need substantially more foreign aid to achieve the Millennium Development Goals (MDGs) by 2015. But capacity constraints can make it difficult for them to absorb all the extra aid. F&D asked a leading donor, the Department for International Development of the United Kingdom, and the finance ministers of two African aid-recipient countries, Tanzania and Burkina Faso, to outline how they set about promoting aid effectiveness. The U.K. is the current President of the Group of Eight (G8) industrialized countries, Tanzania has been living with relatively high levels of aid for some time, while Burkina Faso is just starting down that road.

U.K.: More Country Ownership
Sam Sharpe, Adrian Wood, and Ellen Wratten

"We in the developing countries must own the development agenda, and our partners have to align their support to our agenda, our priorities and the sequencing we have set for ourselves.... Development cannot be imposed, it can only be facilitated."

—President Benjamin Mkapa of
Tanzania, November 2004

In 1999, only 50 percent of Tanzania’s children went to primary school. Now the figure is over 90 percent. There are similar stories in Uganda, Ethiopia, Mozambique, and other African countries. How has this happened? Because an elected government in Tanzania chose to expand educational opportunities and was able to use aid money flowing through its own budget, rather than into separate donor projects, to abolish school fees.

The UN Millennium Summit in 2000 articulated a new consensus about the urgency of poverty reduction and the importance of more and better aid to support it. For Britain, the change began in 1997, when poverty reduction became the sole aim of our international development policy. Over the past eight years, we have more than doubled our aid, to £4 billion a year, and committed ourselves to raise it much further, reaching the UN target of 0.7 percent of gross national income by 2013. During 2005, we have been pressing other countries to increase their aid substantially (including through debt relief and the U.K.’s proposed International Finance Facility). We give 90 percent of our bilateral aid to low-income countries and urge others to do likewise.

But the Summit, and its follow-up meeting in Monterrey, Mexico, recognized that more aid is not enough. Too much aid in the past was badly used, often because it was driven by the priorities and preferences of donors rather than of poor people and poor countries. Like many other donors, the U.K. has been convinced by past experience that the most promising path to better aid is a "country-led" approach, in which the governments of developing countries themselves define and lead the poverty reduction agenda.

The country-led approach was first put into action on a large scale under the Heavily Indebted Poor Countries debt relief initiative, in which recipient countries were asked to formulate national poverty reduction plans to show how they would use the money saved on debt service. But the approach has since been extended by many—though not all—donors to other sorts of aid. It is now central to the U.K.’s aid program, and we are working with others to expand the scope of the country-led approach.

Development is a very long-term business, so it is still early to evaluate the success of the new approach. But we have already learned much about how to apply it, and about the challenges that it faces.

Guiding principles

Experience suggests five key principles for making the country-led approach work.

First, support country strategies. Donors should base their country strategies on their partner countries’ plans, rather than on their own analysis of priorities. The U.K. Department for International Development (DFID) tries not to tell countries what to do. They tell us what they want to achieve, and if we have confidence in their commitment and approach to poverty reduction, we try to help them achieve it. This means ensuring that aid strengthens a country’s systems for planning, budgeting, and accounting, rather than undermining them by parallel donor-run structures. Not least, as much aid as possible should flow through governments’ budgets, so that finance ministries can accurately assess resources and plan spending. It also means moving away from traditional conditions on aid. The U.K. recently published a new policy on conditionality, stating that it would not impose specific policies on partner countries (see box).

Theater of aid effectiveness

Second, match aid instruments to country needs. Donors must listen to partner countries’ priorities for aid delivery, which vary widely (see chart). The country-led approach has been developed from the experience of countries in the middle segment of the theater: low-income countries that are dependent on aid and able to develop poverty reduction strategies. Their main need is for untied, long-term, predictable finance to spend through their budgets, including to meet the recurrent costs of scaled-up access to services. To qualify for this type of aid, countries also need robust and reliable administrative, technical, and financial systems.

Rethinking conditionality

Traditional conditionality, under which donors link aid to the implementation of particular policies by developing countries, is not compatible with the guiding principles of the country-led approach. It limits governments’ freedom to design poverty reduction plans suited to the circumstances of their countries, and it compromises their accountability to their own citizens. It also undermines efforts to make aid more predictable. Conditionality has been particularly criticized when applied to privatization and trade liberalization. But even where it has been less controversial, there is little evidence that conditionality has been effective in promoting long-term policy reform.

The U.K. has therefore adopted a new approach, in which the key purpose is to safeguard donor resources from misuse, rather than to promote policy change in partner countries. Good policy remains vital for development, and we will continue to discuss policy options with partner countries. But we will not attempt to impose policies on them by making aid conditional on specific policy decisions. Our aid relationships will be based on three shared commitments—to poverty reduction, to human rights and other international obligations, and to sound financial management and accountability. Only if countries veer substantially away from these commitments will we consider reducing or withdrawing agreed aid.

To specify what our aid is intended to achieve, and as a basis for measuring progress, we will agree on benchmarks with partner countries, drawn from national poverty reduction plans. They will focus on outcomes and results, rather than on particular policies, and will be the basis for both partners to be accountable to their citizens for the effective use of aid. Although aid will not be conditional on the achievement of any particular benchmark, the rate and pattern of a country’s progress will contribute to our assessment of its continuing commitment to poverty reduction and may be reflected in our subsequent aid allocation decisions.

In countries of this sort, DFID and other donors now provide an increasing share of their aid as direct budget support. In Mozambique, for example, 15 donors are jointly supporting the budget. But even in these countries, it may be worth supplementing budget support with other forms of aid to reach the poorest and most excluded people. In Uganda, where most of DFID’s aid is budget support, we provide technical assistance to improve gender analysis in the national poverty reduction strategy.

For countries in other segments of the theater, a country-led approach will be less centered on budget support. For countries that are less dependent on aid (for example, China or South Africa), governments may prefer donors to contribute through targeted projects, technical assistance, or sector support, rather than general budget support. This allows governments to ask donors to share technical know-how or bear the risks of piloting new approaches, without needing to involve them in the overall budget.

For fragile states, where there is less political commitment to poverty reduction or less capacity, pragmatic judgments are needed on the best ways to scale up aid, aiming to provide immediate help to poor people while supporting long-term drivers of change. The appropriate mix of instruments will vary according to context, ranging from budget support to infrastructure projects and technical support to strengthen the capacity of the state and of civil society.

Third, harmonize aid. Donors should not try to do everything everywhere. If the priority is to strengthen countries’ own policies and systems, they should attempt to avoid multiple donor strategies and disbursement mechanisms, which waste the scarce capacity of partners. DFID now gives priority to working jointly with other donors. It also tries to pay attention to partners’ circumstances and preferences. In aid-dependent countries where there are many donors, the gains from harmonization may be high, but in countries with fewer donors working in unrelated sectors, the government may prefer to deal with donors separately. Harmonization is not an end in itself, but a means to improve the alignment of aid with government priorities and systems.

Fourth, make aid flows more predictable. Without predictable aid, it is risky for recipient governments to make long-term spending commitments (for example, to employ more teachers, or to put people on antiretroviral drugs). So far, donors have been prepared to run their own multiyear projects, but have usually provided budget support to governments only on an annual, or occasionally a three-year, basis. The need for donors to be accountable to their taxpayers and parliaments makes it hard to promise funding far into the future, regardless of circumstances. But DFID has made 10-year funding commitments in Ethiopia, Sierra Leone, and Rwanda that it will seek to replicate in other countries. Our new conditionality policy also includes a more transparent process for deciding when and how we will reduce or withdraw aid when problems arise, and commits us to publish and monitor our aid conditions.

Fifth, insist on mutual accountability. Donors should be accountable to developing countries for how aid is given, just as developing countries should be accountable to their own people and to donors for how aid is used. Initiatives to strengthen accountability are in progress at the country level (for example, the Independent Monitoring Group in Tanzania), at the regional level (for example, the UN Economic Commission for Africa/OECD process in Africa), and at the international level (for example, the OECD High Level Forum on Aid Effectiveness in Paris earlier this year, at which donors committed themselves to track their delivery of support for country-led development).

Challenges to be faced

Five years into this new approach, the proportion of donors’ overall aid provided as budget support is rising. European Union donors have committed to providing 50 percent of their total aid in this way by 2010. But progress is slow. Even in Tanzania, which has led the way, only 35 percent of total aid is budget support. Five main challenges must be confronted in seeking faster progress.

Interest in sectoral spending and outcomes. Donors need to show taxpayers that their money has delivered results. And they are under public pressure to make progress in achieving tangible development goals, as opposed to making progress in the long, slow business of state-building. There are also strong political constituencies for spending in particular sectors. The U.K., for example, has agreed to a spending target for HIV/AIDS and has announced sectoral spending plans for water and education. Progress in these areas is vital. But a proliferation of "vertical" aid programs in particular sectors would conflict with countries’ own choices and plans about how best to allocate resources to accelerate poverty reduction.

This challenge has been amplified in 2005, with the recommendations in the reports of the Commission for Africa and the UN Millennium Project for a wide range of "quick wins" to achieve the MDGs. DFID believes that countries should strive for these goals within their national planning processes—but donors must resist the temptation to set up new earmarked financing mechanisms.

Weakness of countries’ poverty reduction strategies. Some strategies have been insufficiently prioritized. Others have focused on expanding government services with too little attention to growth, social exclusion, or the environment. Consultation with poor people has often been limited, and achieving the MDGs may not be a top priority in a developing country’s budgetary process. DFID accepts that the poverty reduction strategy process has been stronger in some countries than others and is working to promote improvements; but, despite weaknesses, we believe these strategies hold more promise than other approaches.

Risk of putting aid through public financial systems. Concerns about the weaknesses in government systems for budgeting and accounting, including the risk of corruption, have led some donors to resist providing aid as budget support. DFID believes that donors must strengthen, rather than bypass, government systems.

Inapplicability of the approach in some countries. It is often argued that country-led development is applicable in aid-dependent countries with relatively good governance frameworks, but not in fragile states or countries that receive little aid. DFID believes that the fundamental principles of this approach apply across the full spectrum of developing countries, but that they need to be applied in different ways to fit local circumstances and preferences.

Overemphasis on the state. Some donors worry that the country-led approach focuses too much on the role of the state and of government planning. They believe that greater attention should be paid to the roles of the private and voluntary sectors in growth and in service delivery. DFID agrees about the importance of the private and voluntary sectors, but believes that strengthening the governments of developing countries is essential for faster and more sustained progress.

In sum

In 2005, the UN Millennium Project recommended a doubling of aid flows worldwide from their recent levels of $60 billion per year. The Commission for Africa called for a doubling of aid to Africa over the next three to five years, and the Gleneagles G8 summit committed the major donors to achieving this target. But the impact of such increases in aid on world poverty will depend crucially on how they are spent. If a doubling of aid leads to a doubling of donor projects, missions, and bureaucracy, developing country administrations will collapse under the strain. But if it leads to a doubling of partner governments’ own spending on infrastructure, education, health, HIV/AIDS, and social safety nets, we can be optimistic about achieving the MDGs.

References (all of these documents are available at

Commission for Africa, 2005, Our Common Interest: Report of the Commission for Africa (London).

United Kingdom, 1997, "Eliminating World Poverty: A Challenge for the 21st Century, White Paper on International Development" (London: Her Majesty’s Stationery Office).

United Kingdom, 2000, "Eliminating World Poverty: Making Globalisation Work for the Poor, White Paper on International Development" (London: Her Majesty’s Stationery Office).

United Kingdom, Department for International Development, 2004, "Poverty Reduction Budget Support," DFID Policy Paper (London).

———, 2005, "Why We Need to Work More Effectively in Fragile States," DFID Policy Paper, January (London).

———, 2005, "Partnerships for Poverty Reduction: Rethinking Conditionality," U.K. Policy Paper DFID/FCO/HM Treasury (London).

Sam Sharpe is a Group Head, Adrian Wood is Acting Director, and Ellen Wratten is a Team Leader in the Policy Division of the U.K. Department for International Development.