When Markets Do Not Work, Should Grants Be Used?

Abstract

To deal with problems of inadequate markets and the persistence of deep poverty, development agency personnel designing projects have increasingly turned to grants to provide solutions. This paper examines the theory of grants, draws lessons from a review of their use in twelve projects that started mostly in the years 1998-2000, discusses findings, and recommends ways to deal with problems faced in grant projects. The paper recommends the following: guidance notes, standard guidelines and manuals, and training for task managers, emphasizing the need to explicitly identify market failures and justify the use of grants to address them, as well as providing frameworks for detailed design of grant schemes; detailed cost-benefit analyses of all grant-financed investments, to the extent that such investments are of an economic nature for which such analyses are possible; broader analyses of other investments such as community-driven development (CDD) projects and cash or food-for-work schemes; analysis of pilot interventions or stylized model investments; Project Appraisal Documents should include more details of implementation, and give more guidance to the implementers; and the World Bank's Independent Evaluation Group (IEG) should evaluate grant schemes with special attention to justification, economic evaluation, and implementation details.