A quarterly magazine of the IMF

September 2005, Volume 42, Number 3

A big push on aid is not the sole answer

With just ten years to go before reaching the international community’s self-imposed deadline for achieving the Millennium Development Goals (MDGs)—a set of eight objectives incorporating targets for reducing poverty and other sources of human deprivation and promoting sustainable development—progress remains very uneven. China and India, the two countries with the most poor people, have grown rapidly over the past few years. As a result, East Asia has already achieved the goal of halving poverty by 2015, and South Asia is on target. Most other developing regions are also making steady progress. The exception is sub-Saharan Africa, where most countries are off track (see Chart 1). Poverty actually increased in the region during 1990–2001.

Prospects for achieving the health and education MDGs are even worse. Many countries—and not just in sub-Saharan Africa—will have trouble achieving the health goals. On current trends, most regions will fall short on goals for reducing child and maternity mortality, and the number of people infected with HIV/AIDS continues to grow. Prospects are brighter for education, but the goal of universal primary education will not be met in three of the six developing regions if current trends continue. And although progress has been made on reducing gender disparities, half of the regions will not achieve the goal of gender equality in primary and secondary education by the target year.

Against this background, is it still possible to meet the goals on time? What would need to change to really make a difference? We know that rapid progress is possible. In Vietnam, for instance, poverty was reduced from 51 percent in 1990 to 14 percent in 2002. And in many lagging countries, the foundation is being laid for better performance. This year’s Global Monitoring Report—produced jointly by the World Bank and the IMF to assess annual progress toward the MDGs—sets out five priorities that can help propel change.

Ownership matters

First, the scaling up of development efforts at the country level must be guided by country-owned poverty reduction strategies (PRSs) or similar national development strategies. Framed against a long-term development vision, these strategies should articulate a clear national plan for achieving the MDGs, including policy reforms, institutional strengthening, and investments. Donors should use these national strategies to align and harmonize their assistance.

To perform this role effectively, PRSs must be strengthened in many countries. Particular attention must be given to reinforcing the links between PRSs and fiscal frameworks, which in most countries will require further development of medium-term expenditure frameworks.

Growing the economy

Second, economic growth must be at the center of any strategy to achieve the MDGs. Growth has a direct effect on poverty and also helps expand the resources available for human development. There has been an encouraging pickup in economic growth in developing countries in recent years, thanks to continuing progress on policies and governance. In 2004, GDP growth in developing countries averaged 6.7 percent—the highest level in three decades.

In sub-Saharan Africa, where real income per capita currently is lower than it was in the mid-1970s, there have also been improvements. Twelve countries in the region—including Ghana, Mali, Mozambique, Tanzania, and Uganda—are experiencing growth accelerations of the kind more commonly associated with other regions, with annual GDP growth averaging more than 5.5 percent since the mid-1990s. Still, achieving the income poverty MDG in sub-Saharan Africa would require a doubling of the region’s average GDP growth rate—to around 7 percent annually over the next decade. Historically, it has been far more difficult for countries to sustain growth than to initiate it. This has been the case particularly in sub-Saharan Africa, where episodes of growth acceleration have more often been followed by periods of negative growth than in other regions.

On a more positive note, analysis of growth accelerations suggests that their onset and duration are correlated with important policy and institutional change. Longer accelerations tend to be accompanied by an up-front reduction in inflation and parallel market exchange rate premiums. They are often led by the private sector, with lower government consumption and higher private investment. And they are often accompanied by a perceived reduction in corruption.

While specific priorities vary across countries, promoting sustained growth requires particular attention to three areas: deepening recent progress on macroeconomic management; improving the environment for private sector activity; and strengthening public sector governance. For sub-Saharan countries that have achieved broad macroeconomic stability, better public expenditure management is key to sustaining it and creating fiscal space for critical investments. Excessive regulatory and institutional constraints must be removed to invigorate the private sector. This should include a push to simplify regulations for starting a business, secure property rights, strengthen contract enforcement and the rule of law, and improve weak infrastructure. Sub-Saharan Africa seriously lags other regions in all of these dimensions. For instance, investment in infrastructure in the region will need to almost double over the next decade. But most important, governance must be improved (see "10 Myths About Governance and Corruption" on page 41 of this issue). Recent progress on political governance, as reflected in a trend toward more representative governments, must be translated more clearly into progress on economic governance—such as improved public sector management and less corruption.

The scale of the development challenge in sub-Saharan Africa and low-income countries in other regions is such that more support is necessary. But more aid does not by itself constitute a growth strategy. While certain forms of aid do appear to raise growth, the effects can be relatively small and are subject to diminishing returns. Similarly, experience with oil windfalls in sub-Saharan Africa—for example in the Republic of the Congo—illustrates that large increases in public investment driven by foreign inflows are unlikely, by themselves, to lead to sustained growth. There is also no systematic evidence supporting the idea that many countries are stuck in a "poverty trap" and thus need large amounts of aid to jump-start growth.

Expanding health and education

Third, achieving the human development MDGs will require a major expansion of education and health services. Primary education, basic health care, control of major diseases such as HIV/AIDS, and women’s access to education and health care will all need to be stepped up. Water and sanitation infrastructure, which is closely linked to health outcomes, must also be upgraded.

The need to scale up is most urgent in sub-Saharan Africa. Estimates suggest, for instance, that the region will need to triple its health workforce by 2015, adding more than a million workers. The scaling up of human development services will require a substantial increase in financing, which will need to come from both improved domestic resource management and larger aid inflows. Developing countries have increased budget allocations to health and education, but many have scope to go further. In sub-Saharan Africa, budget allocations are, on average, short of the benchmark of 20 percent of the recurrent budget for education agreed to under the Education for All Fast Track Initiative and the benchmark of 15 percent of the recurrent budget for health adopted by African governments in 2000.

While official development assistance (ODA) needs to rise, the nature of donor support must also change. There is often a disconnect between the types of expenditures that countries need to finance to increase education and health services (recurrent local costs that largely go to pay for personnel) and what bilateral donors provide (in-kind financing and technical assistance). For instance, roughly two-thirds of aid for education is provided in the form of technical assistance. Future increases in aid should therefore be provided more flexibly.

Dismantling barriers to trade

Fourth, improving market access for developing countries would provide a major boost to economic growth and help spur progress toward the MDGs. Multilateral, reciprocal, and nondiscriminatory trade liberalization offers the best means for realizing the development promise of trade.

The international community must aim for an ambitious outcome to the Doha Round. Of highest priority is a major reform of agricultural trade policies—border barriers and trade-distorting subsidies—in developed countries. Also important are actions by these countries to reduce tariff peaks and escalation in manufacturing and commitments to ensure free trade in services via outsourcing and offshoring. This should be complemented by liberalizing the temporary migration of service providers.

Developing countries also must seize the opportunity provided by the Doha Round to further their own trade liberalization. For the least developed countries, improved market access needs to be complemented by increased support, through expanded "aid for trade," in addressing behind-the-border constraints to their trade capacity. This should include help to upgrade trade logistics and facilitation, and trade-related infrastructure.

More and better aid

Fifth, providing more and better aid is an important part of efforts to reach the MDGs.

For most low-income countries, ODA remains a major source of external finance—and for the poor and least developed countries it remains the predominant source. In sub-Saharan Africa, official flows account for about two-thirds of capital inflows. Even with stronger efforts to mobilize domestic resources and attract private capital inflows, these countries will need a substantial increase in ODA to improve their prospects for achieving the MDGs.

Aid volumes have been recovering since 2001, following a decade of almost continuous decline, as donors begin to live up to their Monterrey commitments. Between 2001 and 2004, net ODA increased by about 15 percent in real terms (see Chart 2). But most of the increase in development assistance has been in the form of noncash assistance and debt relief (see Chart 3). The increase in these categories cut into the shares of assistance available in cash and more flexible forms—for program and project assistance—to meet countries’ financing requirements for meeting the MDGs. Furthermore, aid still falls well short of what poor countries need and can use effectively. Roughly a doubling of ODA is needed within the next five years.

The pace of the increase in aid must be aligned with recipients’ absorptive capacity. A number of low-income countries, including in sub-Saharan Africa, have demonstrated the capacity to effectively manage a scaling up of development efforts supported by external assistance: examples include Tanzania’s scaling up of primary education and Uganda’s accelerated expansion of poor people’s access to primary health care and programs to combat HIV/AIDS. But there are also many countries where absorptive capacity remains weak and aid increases need to be more measured, with particular emphasis placed on support for capacity building.

Better quality aid matters, too. Aid is more effective in fostering growth and improving service delivery in countries with better policies and institutions. It is also more effective when it is aligned with the receiving country’s priorities, when it reduces transaction costs through coordination with other donors, when it is predictable, and when there is a clear focus on results. Firm implementation of the Paris Declaration on Aid Effectiveness, concluded at a joint meeting of donors and recipients in February 2005, will be key to improving aid quality.

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In sum, a big aid push is not the sole answer. International development policy needs to move beyond aid and aim for actions that, together with stronger reforms in developing countries, cohere into a broader big push. Such a push will inevitably have to include trade policy, but also policies that encourage private capital flows, promote knowledge and technology transfer, enhance security, and protect the environment. For heavily indebted poor countries pursuing credible reforms, debt relief is also important. It can complement new assistance and help expand the fiscal space for priority development spending, but it must be underpinned by better domestic expenditure management.