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Finance & Development
A quarterly magazine of the IMF
June 2006, Volume 43, Number 2

In Brief

Aid must be better targeted for MDGs

With less than a decade remaining to achieve the Millennium Development Goals (MDGs), while considerable progress has been made in the fight against poverty, many countries, particularly in Africa and South Asia, are off track to reach their human development targets, according to the third annual Global Monitoring Report (GMR) published in April. The report, which tracks progress on the policy agenda for the MDGs and is produced jointly by the IMF and the World Bank, highlights economic growth, more and better-quality aid, trade reforms, and improved governance as essential elements in achieving the global targets.

The eight MDGs, which call for halving between 1990 and 2015 the proportion of the world's people living on less than $1 a day and improving health and education, were approved by 189 world leaders in 2000.

The GMR says that growth in both middle- and lower-income developing countries has accelerated since 2000, helping to secure further progress in reducing poverty. Aggregate income growth between 2000 and 2005 suggests a significant drop in poverty, by perhaps as much as 10 percent. But progress has been uneven, most of it taking place in East and South Asia. A few countries in Africa have had some success in poverty reduction, but most countries on that continent, and some in Latin America, have seen poverty stagnate or worsen.

Reduced infant mortality

Evidence of reduced child deaths in 9 out of 10 developing countries surveyed (see chart), rapid gains in primary school enrollment, and reduced HIV/AIDS infection rates in several countries suggest that strong economic growth, backed by improved policies in developing countries and increased aid, is delivering results in some countries. As for the human development goals, the report underlines that many countries, particularly in Africa and South Asia, are off track. Over 10 million children under the age of 5 die each year from treatable causes. Most of these deaths could be prevented by simple, low-cost treatments. Only 34 of 143 developing countries are believed to be on track toward halving the number of underweight children. Yet tangible evidence is emerging in some countries of significant progress in human development outcomes since the late 1990s. Sustaining these trends will require continued support by aid donors and governance reforms to strengthen the quality of services and accountability of service providers.

The GMR also highlights the role improved governance can play in progress toward the MDGs. It defines public sector governance as the way in which a country's government gains and exercises authority to manage public goods and services. Good governance requires more than simply technical skills and organizational capacities in the public sector. It also demands clear rules and expectations, transparent information to monitor performance, and incentives and enforcement mechanisms to reward success and address failure, the report says. More investment is needed to monitor aspects of governance such as public financial management, procurement practices, and institutions that provide checks and balances.

Watershed year

The year 2005 was a watershed for scaling up aid commitments and deepening debt relief to low-income countries. Over $50 billion was pledged in new commitments by 2010, including a doubling of aid to Africa. A new multilateral initiative will eliminate about $50 billion of debt, reducing debt service for heavily indebted poor countries by about $1 billion annually. But the GMR says that these aid commitments may fall victim to donor country efforts to cut deficits. "Debt relief is intended to be additional but may be counted toward fulfilling aid targets. Moreover, even if aid commitments are met, donors may not fulfill pledges to lift the quality of aid," the report argues. "Recent history suggests this will be an uphill struggle—aid remains poorly coordinated, unpredictable, largely locked into ‘special purpose grants,' and often targeted to countries and purposes that are not priorities for the MDGs."

"Aid must become more predictable, less fragmented, more closely aligned to countries' needs, and targeted to where it will be productively used to advance the MDGs," says Mark Sundberg, lead author of the GMR. "This includes allowing aid recipients to use aid to cover current expenditures, including teachers' and health workers' salaries, to accelerate and sustain progress on goals of increased school enrollment, child and maternal mortality, and HIV/AIDS."

Mind your data

More often than we imagine, data used by economists come from surveys. Apart from variables on institutions, public services, and corruption, even objective statistics on items such as inflation, GDP, wages, and taxes often come from surveys—especially in developing countries. Hence, to the extent that economists care about measurement errors, they should also care about how the data have been collected and what they really represent, according to a new book by Giuseppe Iarossi called The Power of Survey Design. Furthermore, when the same variable used in the analysis comes from different sources, ignoring the different methods of data collection could point to misleading conclusions.

We know that surveys collect data through questions. And we all know that the way the question is asked will influence the answers. But we don't really grasp how big this effect is. We think (and maybe hope) that this effect is small, but is our hope legitimate? Three decades ago, a group of students were shown a short movie in which two cars were in an accident. Then the students were divided into two groups where the first group was asked "Did you see the broken light?" and the second was asked "Did you see a broken light?" Switching one single word, the or a, in the otherwise identical question changed responses by an astonishing 31 percent.

All in a word

A body of literature has shown that there are many ways to influence respondents, too often too subtle to be recognized. You can probably guess that using the word "financial incentives" or "subsidies" will elicit different results. But would you think that the order in which different alternatives are presented to the respondent might influence his or her response? Probably not, but in reality it does.

Irrespective of how the question is worded, survey methods that could influence the data collected, such as using or not a public official as interviewer or reading the questions to the respondents instead of showing them written questions are known as survey fixed effects. Not taking such effects into account can bias the results, says Iarossi.

Oil prices give new chance for bioenergy

Under pressure from soaring oil prices and growing environmental constraints, momentum is gathering for a major switch from fossil fuels to renewable bioenergy sources, such as sugarcane or sunflower seeds, says the United Nations Food and Agriculture Organization (FAO).

"The gradual move away from oil has begun. Over the next 15 to 20 years, we may see biofuels providing a full 25 percent of the world's energy needs," Alexander Müller, the Assistant Director-General for the FAO's Sustainable Development Department, said in April. The FAO's interest in bioenergy stems from the positive impact that energy crops are expected to have on rural economies and the opportunity offered countries to diversify their energy sources.

"At the very least it could mean a new lease of life for commodities such as sugar, whose international prices have plummeted," FAO's Senior Energy Coordinator Gustavo Best noted.

Events in 2006

June 9–13, Vancouver, Canada
World Urban Forum III

July 3–5, Geneva, Switzerland
High-Level Meeting of the United Nations Economic and Social Council

July 15–17, St. Petersburg, Russia
Group of Eight Summit

August 27–September 1, Davos, Switzerland
International Disaster Reduction Conference

September 19–20, Singapore
Annual Meetings of the IMF and the World Bank