Publication: Reforming Aid: Toward More Predictable, Performance-Based Financing for Development
Abstract
We explore ways of mitigating the costs of aid volatility: in particular, we show that these can be dramatically reduced by a flexible pre-commitment rule which adjusts flows in the case of drastic improvements or deteriorations in country performance ratings. Such a system can further reduce variability with only minor efficiency costs. Our simulations suggest that a buffer stock of the order of 50-100% of annual aid-financed spending might enable a corrective feedback loop, with the necessary buffer depending on the size and variability of aid flows. Our proposed mechanism is similar in principle to natural resource funds, which have worked well in some countries but not in others; we briefly discuss some issues in design and implementation.
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Publication Improving the Dynamics of Aid : Towards More Predictable Budget Support(World Bank, Washington, DC, 2005-10)This paper considers approaches towards improving the predictability of aid to low income countries, with a special focus on budget support. In order to accelerate progress towards the Millennium Development Goals, the donor community is increasing aid flows while pushing for more coordination and tighter performance-based selectivity. However, these factors may increase the unpredictability of aid from current levels, which are already high enough to impose significant costs. Predictability is a particular challenge in the area of budget support, which will continue to increase in importance as aid is sought to underpin longer-term recurrent spending commitments. Budget support reduces transactions costs and drains on capacity, but it tends to be more vulnerable to fluctuations than multi-year project support. Poor predictability raises the threat of a low-level equilibrium: countries, budgeting prudently within a medium-term fiscal framework, will discount commitments; donors will see few funding gaps, so pledges will fall. With some countries discounting aid commitments in formulating budgets, some already see signs of this happening. To improve predictability, donors must extend their funding horizons. However, even if this can be done, several major issues will remain at country level. First, how can countries deal with residual short-run volatility of disbursements relative to commitments? Second, can donors lengthen commitment horizons to individual developing countries without excessive risk of misallocating aid? Third, within a country's overall aid envelope, how should donors set the shares of project aid and budget support? Finally, the paper considers the other main approach to budget support, the output or outcome-driven approach of the European Union. The paper concludes that many of these issues can be addressed. Simple spending and savings rules built around a buffer reserve fund of 2-4 months of imports can help smooth public spending. Aid can be pre-committed several years ahead with only small efficiency losses, using a strategy of "flexible pre-commitment." Guidelines can be set to limit the volatility of budget support while keeping it performance-based, and past experience can be used more systematically to develop "outcome" norms to better guide aid allocation.Publication The Political Economy of Fiscal Policy and Economic Management in Oil Exporting Countries(World Bank, Washington, DC, 2002-10)Despite massive oil rent incomes since the early 1970s, the economic performance of oil-exporting countries-with notable exceptions-is poor. While there is extensive literature on the management of oil resources, analysis of the underlying political determinants of this poor performance is more sparse. Drawing on concepts from the comparative institutionalist tradition in political science, the authors develop a generalized typology of political states that is used in analyzing the political economy of fiscal and economic management in oil-exporting countries with widely differing political systems. In assessing performance, the authors focus on issues of long-term savings, economic stabilization, and efficient use of oil rents. The comparisons of country experiences suggest that countries with strong, mature, democratic traditions have advantages in managing oil rents well because of their ability to reach consensus, their educated and informed electorates, and a high level of transparency that facilitates clear decisions on how to use rents over a long horizon. Yet even these systems, ensuring cautious use of oil income is a continuing struggle. Traditional and modernizing autocracies have also demonstrated their ability to sustain long decision horizons and implement developmental policies. But resistance to transparency and the danger of oil-led spending and expenditure commitments becoming the major legitimizing force behind the state may pose risk to the long-term sustainability of their current development strategies. In contrast, little positive effect can be expected from the politically unstable, predatory autocracies, which typically have very short policy horizons and sometimes the characteristics of "roving bandit" regimes. Factional democracies, with weak political parties and highly personalized politics, present particular challenges because they lack a sufficiently effective political system to create a consensus among strong competing interests. Special attention will be needed to increase transparency and raise public awareness in these countries. And oil rent makes it more difficult to sustain a constituency in favor of sound, longer-run economic management because it weakens incentives for agents to support checks and balances that impinge on their individual plans to appropriate the rents. The country comparisons further demonstrate that technical solutions-such as the establishment of oil stabilization funds and budgetary reforms-to enhance transparency and efficiency in the use of oil rents will not work well unless constituencies can be developed in support of such measures.Publication Sovereign Wealth Funds and Long-Term Development Finance : Risks and Opportunities(World Bank, Washington, DC, 2014-02)Sovereign wealth funds represent a large and growing pool of savings. An increasing number of these funds are owned by natural resource exporting countries and have a variety of objectives, including intergenerational equity and macroeconomic stabilization. Traditionally, these funds have invested in external assets, especially securities traded in major markets. But the persistent infrastructure financing gap in developing countries has motivated some governments to encourage their sovereign wealth funds to invest domestically. This paper proposes some basic elements of a conceptual framework to create a system of checks and balances to help ensure that the sovereign wealth funds do not undermine macroeconomic management or become a vehicle for politically driven "investments." First, the risks and opportunities of domestic investment by sovereign wealth funds are analyzed. Central issues are the relationship of sovereign wealth fund financing to the budget process and to the procurement systems of sector ministries, as well as the establishment of appropriate benchmarks and safeguards to ensure the integrity of investment decisions. The paper argues that a well-governed sovereign wealth fund, with a sound mandate and professional management and staffing, can possibly improve the quality of the public investment program. But its mandate should not duplicate that of other government institutions with investment mandates, such as the budget, the national development bank, the investment authority, and state-owned enterprises. Establishing rules on the type of investment (for example, commercial and/or quasi-commercial) and its modalities (for example, no controlling stakes, leveraging private investment) is one way to ensure separation between the activities of the sovereign wealth fund and those of other institutions. The critical issue remains that of limiting the sovereign wealth fund's investment scope to that appropriate for a wealth fund. If investments that generate quasi-market returns are permitted, the size of the home bias should be clearly stipulated and these investments should be reported separately.Publication The Cost of Doing Business in Africa : Evidence from Enterprise Survey Data(2008)Data from the World Bank Enterprise Surveys show that indirect costs (related to infrastructure and services) account for a relatively high share of firms' costs in poor African countries and pose a competitive burden on African firms. We estimate firm-level revenue and value-added functions for six industries in 17 developing countries, demonstrating that firm performance is sensitive to the cost of indirect inputs. As indirect inputs are not usually included in estimations of value added, we argue that existing estimates understate the relative performance of African manufacturing firms.Publication Why Isn't the Doha Development Agenda More Poverty Friendly?(2009)Critics of the Doha Development Agenda rightly point to the lack of aggressive reform in wealthy countries for its role in dampening developing country gains. The authors find that the absence of tariff cuts on staple food products in developing countries also critically limits poverty reduction in those countries. Based on their analysis of the impacts of multilateral trade policy reforms in a sample of 15 developing countries, they find there is some evidence of poverty increases amongst the poor who work in agriculture when they lose protection for their earnings. However, these effects are minimized when agricultural tariffs are cut in all developing countries, and when the impact of lower food prices on low income consumers is taken into account in their 15 country sample.
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