Budget support as development aid is effective to reduce poverty

The adoption of the Millennium Development Goals in 1999 led to renewed concerns on aid effectiveness. Donors and recipients agreed that recipient countries should have more ‘ownership’ over aid efforts, that more aid should be channelled through recipient countries’ budgets, and that donors should harmonise their aid procedures. Budget support, as non-earmarked aid that flows directly to the national governments of recipient countries, would be the ideal aid instrument for realising these principles, and thus for making aid more effective. Usually, this aid modality is accompanied by a policy dialogue in which donors discuss their policy preferences with the government. From the start however, this aid modality was also contested. It was seen as leading to high fiduciary risks and to enhancing bad governance and corruption. 

Nevertheless, many donors, and in particular the more progressive ones like the Nordics, the UK, Germany, The Netherlands, Austria, Switzerland and the EU began to provide budget support on a large scale. They signed Joint Financing Agreements on budget support with many developing countries. However, project aid remained the dominant aid modality. Moreover, from 2008 onward the flows of budget support began to decrease. This was also the case in Sweden, culminating in almost zero flows of General Budget Support in 2016 and 2017 (See www.openaid.se). Like several other donors, Sweden continued some budget support in the form of Sector Budget Support. In this case the resources are non-earmarked as well, but the policy dialogue focuses on a particular sector.

The report examines whether the declining volumes of budget support can be explained by the evidence on the effectiveness of budget support. The objective of budget support was to achieve more effective poverty reduction by adhering to the principles of ownership, use of country systems and donor harmonisation. However, a first conclusion of the report is that although the latter two principals were adhered to in practice, this was much less the case for ownership. Donors increasingly began to use budget support for attempts to change (improve) policies of the recipient, and especially also for attempting to improve the recipient’s political governance. For this reason the report assesses the effectiveness of budget support for both the original objective, poverty reduction, and for the added objective of good governance. It uses all available evidence from academic literature, earlier evaluations and synthesis studies.

Striking findings

The findings are striking. Budget support has been a very effective instrument for poverty reduction, and in particular for reducing so-called non-income poverty. It has led to more class rooms, more drug availability, and more staff for education and health. More importantly, budget support has contributed to higher school enrolment rates, more gender equality in access to primary education, more access to health services and to water and sanitation. Many countries also experienced improvements in primary school completion rates, immunisation rates, infant and child mortality rates, and maternal mortality rates. [The contribution of budget support to these achievements has been shown in both quantitative cross-country analyses and case studies. The more recent evaluations apply rigorous methods for establishing the causal relationship between increased investment facilitated by budget support resources and these positive results.]

On the other hand, the donor attempts to improve policies, political governance or respect for human rights have been much less successful. These demands usually conflicted with strategic or political interest of the recipient government and they led, at most, to cosmetic changes. There is one important exception, namely the area of public financial management and public accountability. The combination of budget support resources, policy dialogue and technical assistance has led to improvements in financial management systems, and to improved transparency of budgets and budget execution. In many countries, public oversight institutions like Supreme Audit Institutions were also strengthened. As a result, there was an increase in the number and volume of detected corruption – although this often did not mean (yet) that culprits are prosecuted and punished. However, there is no evidence that budget support has increased corruption.

All in all, concludes that the decrease in budget support volumes cannot be justified by a lack of effectiveness of the instrument, or by materialisation of the – assumed – fiduciary risks. To the contrary, budget support has proven to be a very effective instrument for poverty reduction. However, the gradual prioritisation of the second objective of budget support, that of improving political governance, had led to suspensions and withdrawals of budget support, thus making the instrument less effective for poverty reduction. This prioritisation was mainly due to domestic economic and political factors in the donor countries, such the 2008-9 economic crisis which led to a more critical stance toward development cooperation in general and instruments such as budget support in particular.

Taking into account the positive results of budget support but also the reality of the slight political backlash in donor countries, my report makes the following recommendations:

1. Increase the volumes of budget support, in particular to countries receiving bilateral aid, so countries in which the donor has a basic level of trust in policies and governance
2. Return to the original objective of  budget support, namely that of poverty reduction; this means that donors should use other channels for a dialogue on political democracy or human rights
3. Continue the positive effects on public financial management and public accountability by focusing the policy dialogue and technical assistance accompanying budget support on improving institutions in these areas
4. Consider providing Sector Budget Support if General Budget Support is too politically sensitive in donor countries or if the risk of using it for promoting political governance is too high.

Read the report here.

Media

Copy of press statement on EBA Report 04-2018 written by Geske Dijkstra