Publication: Introduction : The Volatility of Overseas Aid
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Published
2008
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0305750X
Date
2012-03-30
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Evidence is mounting that the pattern of overseas aid through time, of which its volatility (or instability) is a key dimension, has an important influence on its effectiveness. The three papers in this special section examine the extent of this influence, and how it may be possible to control volatility in the interests of more effective aid.
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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 Gender and Growth : Africa's Missed Potential(World Bank, Washington, DC, 2001-12)In the study "Can Africa claim the 21st century?" the author argues on the enormous unexploited potential the region has in its people, "a hidden growth reserve" as he refers to them, and, most importantly in its women, who now provide more than half the region's labor, but who lack equal access to education, concluding that gender equality can be a potential force for accelerated poverty reduction in Africa. The note looks at women and men in African economies, identifying that women work far longer hours than men, being prominent in agriculture, which leads to estimate that women contribute about two thirds of the total rural transport effort. Case studies show how gender inequality limits growth, and the note further compares this reality to the potential productivity, given a gender-inclusive growth, suggesting key tasks should focus on systematic sex-disaggregation of data, to include economic production data and integration of gender modules in statistical surveys, so as to be reflected in national accounts.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 Reforming Aid: Toward More Predictable, Performance-Based Financing for Development(2008)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.Publication Development Economics and the International Development Association(2011-01-01)Prevailing economic ideas -- and fashions -- about development have influenced the International Development Association (IDA) since its creation in 1960. The creation of the organization itself is the result of two contemporaneous facts: an urgent need to channel development finance to least-developed countries and an increasing pressure on World Bank management to directly address the issue of poverty in developing countries. Changing views, over time, have been a rationale -- and, at times, a justification -- for emphasizing poverty and social sectors; for providing grants to particular groups of countries; and for strategic choices and sectoral priorities. IDA has been influential in development debates and been an advocate for specific views about development policy. This paper gives an overview of these views and documents how they have shaped the activities of the organization since its creation. After a brief review of development thinking and of the organization of research at the World Bank, the paper documents the shifts that have taken place in country allocations and in sector emphasis in IDA over the past 50 years and highlights the strategic themes that have guided its development agenda: toward increasing country selectivity; from projects to programs; from conditionality to country ownership of reforms; and from input-based to results-based performance.
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