Printer-friendly versionSend by emailPDF version

Foreign Aid Can Promote Enduring Growth and Reduce Poverty When Countries 'Drive' Their Own Development Strategies. 'Conditionality' cannot replace national commitment to reform process says World Bank.

News Release No: 2001/263/S
Contact Person:
Phil Hay (202) 473-1796 [email protected]

Foreign Aid Can Promote Enduring Growth and Reduce Poverty
When Countries 'Drive' Their Own Development Strategies
'Conditionality' cannot replace national commitment to reform process

WASHINGTON, March 27, 2001--Foreign aid can help key economic
reforms take root in developing countries, but only if recipient
governments and their people broadly support the need for change,
says a new World Bank report that investigates how development aid
has influenced economic policy in Africa. Without such "country
ownership," external cajoling or donor-imposed "conditionality" is
unlikely to make poor countries adopt reforms which they oppose.

The new report, Aid and Reform in Africa: Lessons from Ten Case
Studies, says where political leaders are committed to reform, and
capable civil servants and community groups can implement change,
aid increases public confidence in the reform process and attracts
greater private investment in national economies. In this way, foreign
aid can help deepen reform commitments and support high growth
rates.

As a result, the World Bank believes that rich countries should honor
their UN commitment to devote 0.7 percent of their annual GDP to
overseas aid and open their markets to developing country exports.
Development assistance to Africa has fallen drastically from $32 per
head in 1990 to just $19 in 1998, despite clear evidence of aid's
effectiveness in countries with effective economic and social policies.

" It is painfully ironic that just at the time when many African
governments are putting in place effective social and economic
policies, and committing to reform, development aid is being cut. This
is exactly the wrong message for donors to send," says World Bank
President James Wolfensohn, who returned recently from meeting with
22 African heads of state. "African leaders are determined as never
before to lead their own renaissance, but what they also need is
increased development assistance to support those reforms and
access to developed country markets. Rich countries need reminding
that their current levels of foreign aid, at some 0.24 percent of yearly
GDP, fall far short of the 0.7 percent target they promised to meet. The
difference between these figures is worth a hundred billion dollars a
year - for millions, this is the difference between life and death."

The new report, which examines ten national case studies during the
1980s and 1990s--comprising Côte d'Ivoire, Democratic Republic of
Congo (formerly Zaire), Ethiopia, Ghana, Kenya, Mali, Nigeria,
Tanzania, Uganda, and Zambia--reconfirms that development
assistance has little or no positive influence in poor countries that avoid
economic reforms which could spur economic growth and reduce their
incidence of poverty. While aid donors have absorbed this conclusion
and increasingly favor developing countries which can use their foreign
aid effectively, the report warns that donors must continue to be
selective. Where bilateral donors in particular give aid to national
recipients regardless of their poor economic track record, they may be
insulating developing countries from the need to adopt reforms which
would greatly benefit the social and economic well-being of their
people.

The report concludes that using "conditionality" to coerce developing
countries into reforms such as stabilizing their exchange rates or
fostering an independent judicial system are largely ineffective.
Countries that have successfully reformed have had clear political
movements leading to these changes. Countries that have made less
progress typically have had powerful vested interests blocking change.
Either way, economic policies are primarily domestically grown.

"This report shows that aid cannot 'buy' reform in poor countries that
are flatly opposed to it," says Shanta Devarajan, a co-author of the new
report and Chief Economist of the World Bank's Human Development
Network. "Without 'country-ownership' of a national development
strategy, even the most generous and well-intentioned aid packages
will have little or no impact in improving the quality of people's lives.
This is why country ownership is at the heart of the Poverty Reduction
Strategy Papers or PRSP process where poor countries devise their
own social and economic priorities, with the World Bank, the IMF, and
international donors playing a supporting role."

As the report shows, African countries have received large amounts of
aid since the early 1980s, aimed at stimulating policy reform, but the
results have varied enormously. Ghana and Uganda were successful
reformers that grew rapidly and reduced poverty. Côte d'Ivoire and
Ethiopia have shown significant reform in recent years, but unsettled
political conditions and the stress of conflict (respectively) leave open
the question of whether the reforms will be sustained. In other
countries policies changed very little or even became worse.

Aid can help once the reform process is underway

The report argues that while foreign aid cannot be used to impose
reforms on national recipients, the right composition of aid finance
together with policy advice and technical assistance can play an
extremely useful role in supporting the reform process.

Both the Ghana and Uganda case studies are emphatic that aid
finance played an important supporting role. In the case of Ghana,
balance of payments support,

"provided the government with the breathing space it required. [It]
allowed imports that helped fill the shelves of supermarkets and other
traders. The filled shelves provided a psychologically-induced breather
for the government because... people saw this as a sign of better
things to come" (see Ghana Case Study).

The report shows how in the successful case studies, aid flows rose in
lockstep with policy improvements. When countries actually reform,
finance increases the benefits of those changes. That is, the growth
impact of a particular improvement in policy is enhanced by the flow of
aid. There are two reasons for this. Aid increases confidence in the
reform program and calls forth greater private investment. Also, it
enables the government to provide public services that are
complementary to private investment. By increasing the benefits of
reform, aid enhances the likelihood that it will be sustained. As the
Ghana study notes,

"Coming back to politics, economic reform proved politically
sustainable in the end only because some results emerged quickly."

While Ethiopia has not made as much progress with reform, its case
nevertheless reveals the importance of aid in consolidating reform once
it has started:

"Aid had a minimal impact on growth or poverty in the 1980s since
Ethiopia was embroiled in a protracted civil war along with a bold
program of building a socialist economy. Market-oriented reforms were
initiated in 1990 in response to profound economic and political crises.
The reform program initially attracted a sizeable increase in external
assistance in support of liberalization, stabilization, and rehabilitation.
Subsequent aid helped to deepen reform commitments and supported
high growth rates" (see Ethiopia case study).

Consultation matters

Perhaps the most important lesson emerging from the ten case
studies is that successful reformers have consultative processes that
result in a broad consensus for reform.

For example, the Ugandan reform program was broadly consultative at
every step of the way. President Museveni established the Presidential
National Forum to debate reform issues in 1987. The Ugandan
Manufacturers Association sponsored seminars and discussion papers
in the 1987-89 period. The Presidential Economic Council had open
debates on reform and sponsored a December 1989 conference on
trade liberalization that has been described as a turning point in public
opinion. In Tanzania, when economists at the University of Dar es
Salaam in 1984 began holding public meetings on economic
liberalization, party leaders and policymakers had to start listening to
the reformist elements in government. That same year, the government
allowed own-funded imports, devalued the currency, and increased
agricultural prices by about 30 percent.

By contrast, policymaking in Kenya appears to be restricted to a small
circle. As a result, the reforms are not always "owned" by even the line
ministries, and other stakeholders are not consulted. The
establishment of the Export Promotion Council in 1992 was a step
toward involving the business community in policy decisions.

Zambia's reforms were pushed through during the "honeymoon period"
following multiparty elections.

As Finance Minister Kasonde put it, "Necessary but unpopular
decisions had to be quick. I was very interested in using the political
status of the MMD government to make economic advancements."
Yet, by moving quickly before opposition to the reforms could mobilize,
the Zambian government may in fact have contributed to the slow
implementation of some of the reforms. Interest groups, none of which
were consulted before the reforms, blocked certain reforms. Overall,
support for the Zambian reforms outside of a few cabinet ministers has
been shallow.

"The research is very clear that those developing countries that have
successfully reformed and consolidated popular support for change,
have consultative processes that helped to build the national
commitment to embrace the occasionally painful but ultimately
rewarding process of reform," says David Dollar, head of the
macroeconomics and growth team in the Bank's Development
Research Group, and a co-author of the report.

What aid donors can do in poor countries with weak policies

The report concludes that since development finance cannot jumpstart
reforms in countries with poor social and economic policies and no
coherent political movement to change the situation, donors should
instead offer only technical assistance and policy dialogue until such
times as countries forge their own commitment for change.

When Ghana was dealing with macroeconomic crisis in the early
1980s, for example, it had well-trained economists to develop policy
proposals, and these technocrats found the policy dialogue with the
international financial institutions to be helpful in working out plans. A
few years later, when Uganda's leaders were looking for new policies,
one thing that helped was donor-financed study tours to Ghana.

In the successful cases, political leaders learn from other countries
and from their own mistakes. Low-key assistance can help with this
policy learning, which generally has to take place at a country's own
pace. Even in countries that remain in the pre-reform phase for a long
time, technical assistance can lay the foundation for policy learning. In
Kenya, for example, donors are supporting the Kenyan Institute for
Policy Research and Analysis to help develop local capacity for policy
analysis and formulation. This kind of capacity building is not going to
have a large payoff as long as vested interests block serious reform,
but it is an essential foundation if a political movement for change
develops.

On the other hand, where donors fail to heed this advice and to
differentiate between effective and weak national performers, large
amounts of foreign aid can sustain poor policies, and delay key social
and economic reforms. Attaching conditions to the aid in these cases
has not successfully led to policy change, nor has it delayed the
disbursement of funds.

In general, donors have not discriminated effectively among different
countries and different phases of the reform process. Donors tend to
provide the same package of assistance everywhere and at all times.
The lessons from the Ghana and Uganda cases are that donors should
concentrate on technical assistance and other soft support without
large-scale budget or balance of payments support in the phase before
governments are serious about reform. If a reform movement develops,
finance can be increased as policies actually improve. In the early
stage of serious reform, political leaders and technocrats actually
welcome conditionality in order to bind themselves to policy change.
Once the reform movement is well entrenched, however,
"conditionality" becomes less useful because it limits participation and
disguises ownership, both of which are essential for the difficult,
"second-generation" changes such as civil-service reform and public
management reform.

"The positive news is that foreign aid can make a very significant
contribution in countries in which there is a serious movement for
change," adds the World Bank's Dollar. "In both Ghana and Uganda,
the World Bank and other donors played an important role in the early
period of reform, first with advice and evidence of what policies have
worked in other countries, and then with finance. These case studies
show in more detail what we have found in cross-country examinations:
the combination of good policies and foreign aid leads to good results
and hence more popular support for the reform program."

Foreign aid going forward

Co-financed by European aid donors, France, Germany, the
Netherlands, Norway, and Sweden, and widely discussed in regional
forums in Africa, Europe, and the United States, the World Bank's new
report, Aid and Reform in Africa: Lessons from Ten Case Studies,
seeks to help the international development community direct foreign
aid to poor countries most likely to use it effectively to achieve broad-
based economic growth and reduce poverty.

For those countries that cannot yet marshal popular support and
political motivation to adopt a national reform process, the report can
help both donors and aid recipients take the necessary first steps, with
technical assistance and policy advice, to start the process towards
national change.

Dutch Minister for Development Cooperation Eveline Herfkens says
foreign aid donors should embrace the report's findings in making sure
that their development assistance has the greatest possible impact in
reducing poverty in poor countries that are broadly committed to
reform:

"[It is] a wake-up call to the donor community: aid can contribute to
policy reform, but stop trying to buy policy change with large amounts
of aid. Instead, more aid should go to poor countries that are firmly
committed to pro-poor reforms. The case studies in this book provide a
solid basis for the reorientation of aid policy I have been working at for
years." ---

Measuring Economic Policy

The measure of policy used throughout this report is a broad one.
Conceptually, it measures the extent to which government policy
creates a good environment for broad-based growth and poverty
reduction. In practice, it has four components:

· Macroeconomic policies: whether fiscal, monetary, and exchange
rate policies provide a stable environment for economic activity; ·
Structural policies: the extent to which trade, tax, and other policies
create good incentives for households and firms to prosper; · Public
sector management: the extent to which public sector institutions
effectively provide services complementary to private initiative, such as
the rule of law (functioning of the judiciary, police), infrastructure, and
social services; · Social inclusion: the extent to which policy ensures
the full participation of the society through social services that reach
the poor and disadvantaged, including women and ethnic minorities. ---

The report is availiable at:
http://www.worldbank.org/research/aid/africa/intro.htm