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Finance & Development
A quarterly magazine of the IMF
March 2006, Volume 43, Number 1

Letters to the Editor

Aid recipients must be more accountable
Peter Heller ("Making Aid Work," September 2005) has highlighted some important challenges facing aid agencies and recipient countries. He correctly points out that more needs to be done to achieve tangible results in aid programs. However, he makes only passing reference to another important challenge: ensuring that aid recipients are sufficiently motivated to work with aid agencies. Many aid programs still lack specific incentives for aid recipients—especially government agencies—to ensure that aid does in fact reach its intended final beneficiaries. Aid program–related performance pay for key government officials in recipient countries could do wonders in this regard. Accountability of recipient countries remains limited. Indeed, if one aid program fails, the next one is as sure to come along as day follows night. Unhealthy donor competition ensures that.

Ownership of aid programs by recipient authorities has fortunately been given a lot more prominence since poverty reduction strategy papers (PRSPs) became the cornerstone of World Bank and IMF programs. Still, the reality is that the staff of multilateral institutions and their consultants draft substantial portions of these papers and then ask recipient governments and civil society representatives to sign off on them. Result: true ownership remains limited. Finally, penalties for noncompliance with aid program rules and reporting requirements rarely go beyond the temporary suspension of aid disbursements. Donor competition ensures that these penalties are soon forgotten. Specific penalties should not only be imposed at the country level but should also affect the remuneration of key government officials in recipient countries.

Lucien Peters
Public Finance Expert
European Statistical Office, Luxembourg

Why not limit new borrowing?
According to Raghuram Rajan ("Debt Relief and Growth," June 2005), debt relief is useful but no panacea. It is preferable, he argues, for a country to receive "additional" (new) resources rather than only debt relief. His argument goes like this: a country that pays $100 million a year to service its debt should be indifferent as to whether it receives $200 million in new loans without debt cancellation or debt cancellation of $100 million plus $100 million worth of new loans. The annual net inflow of money is the same; only the stock of liabilities differs.

I would respectfully disagree. If the country cannot repay its debt, what is the point of providing it with additional debt to repay old debt? Such an approach adds up to a Ponzi pyramid scheme aimed, it would seem, at keeping up appearances on the balance sheets of multilateral institutions. In the above example, even though the $100 million in new loans may help the country increase budget outlays (for poverty alleviation or some other purpose), the unpaid debt service will still be there. Accordingly, receiving debt forgiveness of $100 million (thereby reducing the stock of debt) is not equivalent to receiving a new loan of $100 million, which will further increase the debt stock if it is used to increase fiscal expenditure, as is most likely.

I fully agree with Rajan when he says that debt forgiveness will not by itself spur growth. But the debt overhang issue remains a major problem for many poor countries. The initiative for Heavily Indebted Poor Countries, which was supposed to deal with the debt problem for good, has just been complemented by the Group of Eight Gleneagles initiative. It is more than likely that these initiatives will have to be followed by others down the road. Instead of increasing new flows as advised by Rajan, it might, therefore, make more sense to require a limit to new borrowing in poor countries through a fiscal rule.

Jean-Pierre Dumas
Economist and Consultant, France

Redesigning aid
Steven Radelet, Michael Clemens, and Rikhil Bhavnani ("Aid and Growth," September 2005) argue that while "early impact" aid should be expected to have a significant positive impact on growth, aid given for humanitarian, institutional, and development purposes does not have the same immediate effect. Their findings represent a credible and substantive contribution to the debate about the impact of aid on development. The publication of their study coincides with the Gleneagles summit where the Group of Eight countries committed themselves to increase aid by $50 billion. But the increase in aid does not provide a global panacea to poverty. It can be only one piece of the vast reform puzzle needed to ensure growth and reduce poverty. Aid for development has so far failed to raise growth enough to reduce poverty in a meaningful way, and indicators for poverty, health, and education are disappointing, even alarming, especially in sub-Saharan and North Africa. Make no mistake: this poverty is the primary cause of international terrorism, social alienation, drug-related problems, and illegal immigration.

The question is why aid (grants or loans) has not resulted in growth in the majority of developing countries. What are the bottlenecks that prevent aid from promoting development? Growth is a multidimensional problem encompassing not only economic factors (investment, savings, fiscal and monetary policy, and customs) but also noneconomic factors (institutional, political, and social). For growth to happen, aid policy must be rethought based on a more integrated approach. For their part, developing countries must modernize their institutions, fight corruption, implement rational fiscal policies, and take steps to control aid flow volatility. Without such reforms, development aid amounts to no more than a halfhearted effort.

Hicham Houari
Ministry of Finance and Privatization