Evolving Aid Modalities and their Impact on the Delivery of Essential Services in Low-Income Countries
School of Law,
University of Warwick.
The late 1990s and early 2000s saw a shift in the conceptual framework of development financing, particularly in relation to financing for low-income countries. The complexities of these new conceptual approaches necessitated the development of new financing modalities to give operational content to the policy framework of donor countries and multilateral institutions. This paper examines the changing modalities of development financing in the context of essential service provision in low-income countries and considers how the delivery of basic services in these countries will be affected by the shifts in development aid policy and implementation. This paper argues that the modalities for development financing - insofar as they affect the delivery of public services – contradict the rhetorical conceptual underpinnings of this ‘new architecture of aid’ that is meant to be premised upon the principle of local ownership, participatory politics and the reduction of poverty.
Keywords: Aid Modalities, Bilateral Aid, Budget Support, Debt, Development Financing, Education, Health, IMF, International Financial Architecture, Multilateral Aid, Public Services, Water, World Bank
Author’s Note: The author wishes to thank the Special Issue editor Daniel Bradlow and the anonymous referees for their constructive comments on this paper.
This is a refereed article published on: 5 October 2005
Citation: Tan, C, ‘Evolving Aid Modalities and their Impact on the Delivery of Essential Services in Low-Income Countries’, 2005 (1) Law, Social Justice & Global Development Journal (LGD). <http://www.go.warwick.ac.uk/elj/lgd/2005_1/tan>
The World Bank estimates that 20 percent or more of public resources, including resources for essential services, in more than 60 low-income countries are supplied by external donors, with donors funding more than 40 percent of public expenditure in at least 30 countries (World Bank, 2003a, p 203). Development financing1 for public services in low-income countries2 take many forms, from outright grants for service delivery and public sector training and technical assistance to concessional loans from bilateral and multilateral sources.
Donors play a pivotal role in the delivery of public services in developing countries, not only through the disbursement of financing for service delivery but also through services reform. The reform of public services in developing countries is increasingly taking place in essential services sectors - water, sanitation, education and healthcare - either supported by external donors through the explicit financing of structural reforms or necessitated by loan or aid conditions.
The importance of development aid in the financing of public services in low-income countries therefore necessitates an examination of recent changes in development finance modalities and their impact on the delivery of essential services in these countries. The ‘new architecture of aid’ that has come to dominate the field of development financing in recent years (see Lister and Nyamugasira, 2003, p 36) has led to the inception of new aid strategies and the creation of new aid instruments based on the evolving conceptual framework of development financing (see Degnbol-Martinussen and Engberg-Pedersen, 2003, p 49).
This paper examines the changing modalities of development financing in the context of essential service provision in low-income countries and considers how the delivery of basic services in these countries will be affected by the shifts in development aid policy and implementation. This paper argues that the modalities for development financing - insofar as they affect the delivery of public services – contradict the rhetorical conceptual underpinnings of this ‘new architecture of aid’ that is meant to be premised upon the principle of local ownership, participatory politics and the reduction of poverty.
The first part of this paper gives an overview of the recent changes in development finance thinking and the attendant mechanisms created or adapted to give operational form to the new conceptual underpinnings of development finance. The second part of this paper then considers how these new modalities and their accompanying policy and structural reform and will affect the delivery of essential services to the populations in these countries. Central to this discussion will be a consideration of the increasingly concerted drive to privatise essential service provision in developing countries, as part of a global shift towards the privatisation and liberalisation of services sectors, efforts that are backed by substantial corporate lobbies in the north.
The significance of any conceptual and operational shift in development financing in the provision of essential services in low-income countries necessitates an examination into the circumstances of these countries’ dependence on external funding for essential public services. By way of conclusion, the third part of this paper will consider how developing countries came to become so reliant on external donor financing for public services and lay down the reasons why any research on the modalities of aid in relation to their impact on public service delivery must include a discussion of the international economic system that has resulted in this dependence.
The late 1990s ushered in a new era of development aid and policy as a result of the criticism levelled at bilateral and multilateral donors over the failure of structural adjustment programmes (SAPs) initiated in the 1980s of the decade. Debates over the effectiveness of conditionality and the considerable amount of research published on the negative effects of SAPs – beginning with Cornia, Stewart and Jolly’s critical account of the effects of SAPs on children in 19973 (Cornia, Stewart and Jolly, 1987) and culminating with the controversy over the Structural Adjustment Participatory Research Initiative (SAPRI) Report4 - led to a need to rethink the modalities of development financing.
Traditional approaches to development financing, in particular, the disbursement of aid through individual projects, were increasingly perceived as failing to meet its intended targets while at the same time increasing transaction costs for the recipient governments through duplicity of administrative processes associated with each project grant or loan (Killick, 2004, pp 18 –20; Jones, 2000). The need for donor coordination and multilateralism in aid-giving became apparent. At the same time, criticism of the donor-dictated policymaking associated with SAPs began to find favour with donor technocrats who viewed the limits of conditionality from a technical perspective of aid efficacy, suggesting that ‘an increasing body of experience and research into the development effectiveness of aid has emphasised the weaknesses of the model of policy-based lending under conditionality reflected in structural adjustment programmes’ (Jones, 2000).
The appointment of James Wolfensohn as president of the World Bank Group5 in June 1995 has been widely regarded as the turning point for the World Bank’s financing policies, and consequently, for that of most other bilateral and multilateral donors who regard the World Bank as the ‘leader’ in development policy thinking. Wolfensohn’s mission ‘to carve out a new role for the Bank [and] to build a new legitimacy for its interventions’ resulted in ‘a fundamental overhaul of the Bank’s policy outlook and its mode of operation’ (Pender, 2001, p 402) with a significant impact on the modalities of international development financing. Joseph Stiglitz, appointed as the Bank’s chief economist in February 1997, further supplemented Wolfensohn’s reforms by reorienting the Bank’s development policy and insisting on a re-evaluation of the process of development dialogue between the donor countries and institutions and countries in receipt of development financing (Pender, 2001, pp 402 – 408).
A result of this reorientation was the inception of the Comprehensive Development Framework (CDF), a policy instrument consolidating the conceptual changes within the World Bank towards more holistic assessment and implementation of financing needs (reflecting the move towards economic relativism)6; and placing recipient governments in the driving seat of negotiations for development finance (World Bank, 2003b, p 4). The CDF, is often referred to as the ‘new conceptual framework for aid’ as it not only serves as the benchmark for development policy dialogue within the Bank, but also as the model upon which operational mechanisms for aid flows, such as the Poverty Reduction Strategy Papers (PRSPs) are based (Christiansen with Hovland, 2003, pp viii, ix).
The World Bank views the PRSP approach as ‘a new form of social contract with donors for the production of a ‘credible framework for concessional lending’ in return for financing from the Enhanced Heavily Indebted Poor Countries Initiative (HIPC II), and the IMF or the World Bank as well as providing a ‘single framework for government policy’ that all other donors could align their development assistance to, thereby reducing transaction costs and the proliferation of donor conditionality (World Bank, 2003b, p 13).
However, critics of the PRSP approach view it as little more than an extension of the odious principle of conditionality7, criticism of which led to the rethink of the practice of development finance. With the use of conditionality having been acknowledged as conflicting with the trend towards facilitating increased local and national ‘ownership’ of economic policies, recent efforts by the IMF and the World Bank to ‘streamline’ conditionality have been made on the basis of trying to reduce the use of conditionality, commentators have noted that the PRSP approach may have strengthened the use of conditionality rather than vice-versa (Eurodad, 2003, p1; IMF, 2002, p 1; Killick, 2004, pp 13 – 16). Killick observes that this has happened in areas such as ‘privatisation, health system reform and public sector reform’ (Killick, 2004, p 16).
The PRSP approach therefore represents the operational pinnacle of the trend towards ‘policy-oriented aid’ that have increasingly become the norm in international development financing. Where previously, negotiations for development financing were ‘mostly a technical dialogue about capital, technology and organization’ of usually individual projects – for example, the construction of schools or clinics – the new architecture of aid demands ‘an all-encompassing political dialogue about the structure of society and management of society’s development processes’ (Degnbol-Martinussen and Engberg-Pedersen, 2003: 41). ‘Policy dialogue’ as such involves ‘exchanges between aid donors and recipients about the domestic policy framework, influencing the outcome of an aid transfer and the behaviour of the economy as a whole’ (Cassen et al, 1994, p 58).
The PRSP approach consolidates the fundamental shifts in development aid thinking and practice in the mid and late -990s and marked the movement from what Hall and de la Motte term as ‘tied aid’ to ‘globalised aid’ (Hall and de la Motte, 2004, p 3) whereby financing is increasingly channelled through multilateral development organisations, such as the World Bank and the IMF, rather bilaterally by the donor countries. Under the PRSP approach, eligibility assessments for such financing for low-income countries are also ‘multilateralised’ as appropriate financing will only be available to countries whose PRSPs have been evaluated by the World Bank and IMF staff and considered by the institutions’ Executive Boards under the Joint Staff Advisory Note (JSAN) process.
The complexities of the new conceptual approaches to development financing consequently require the development of new financing modalities to give operational content to the policy framework of donor countries and multilateral institutions. According to Hall and de la Motte, ‘[t]his shift from micro to macro levels takes a number of forms through shifting aid from project support to more general budget and policy support, through the ‘pooling’ of donor aid from different countries behind common policy conditions or the use of regional aid instruments (Hall and de la Motte, 2004, p 4, see also Degnbol-Martinussen and Engberg-Pedersen, 2003, pp 49 -52).
These financing instruments attempt to straddle the conflicting objectives of this new architecture of aid: to reduce donor interference in recipient country policymaking and improve local participation in decision-making and, at the same time, ensuring that developing finance is disbursed to meet the goals set by the new development agenda8. The former requires donors to move away from the imposition of structural policy conditions on recipient countries yet the latter requires donors to impose procedures to ensure aid disbursement is managed in accordance with the standards set by international development goals.
Five particular financing initiatives have gained popularity in recent years: (1) multilaterised policy assessments and financing, such as the PRSPs; (2) general budget support, such as the World Bank’s Poverty Reduction Strategy Credits (PRSCs); (3) Sector-wide Approaches (SWAPs); (4) Community-Driven Development (CDD) projects; and (5) Output-based Aid (OBA).
The first three modalities of financing are related to the general shift towards ‘policy coherence’ in the management of development finance. Two types of policy coherence underpin the new conceptual framework of aid today: (1) Policy coherence at the donor level, involving coordination among donor countries and institutions, to avoid duplication of funded projects and programmes and to minimise transaction costs for recipient countries by removing unnecessary administrative procedures, and (2) Policy coherence at country level, involving a cross-sectoral assessment and implementation of development programmes as opposed to individually-funded projects.
Collectively, these three forms of financing are known as ‘programme aid’ or ‘programmatic lending’ as they entail disbursement of funds for facilitating a ‘programme’ of policy measures (which could include financing of individual projects within the programme) as opposed to support of discrete and disparate projects without an overarching policy framework for the specific social or economic sector or sectors. Degnbol-Martinussen and Engberg-Pedersen comment that for some donors, these new modalities could be seen as ‘a necessary way out of ‘projectitis’ … the spreading of aid to countless projects that gradually became a serious burden for the weak administrations and public finances in developing countries’ (Degnbol-Martinussen and Engberg-Pedersen, 2003, pp 49 – 50).
Multilateralised policy assessments are one form of aid coordination. Prior to the PRSP approach, the current institutional vehicle for such coordination, aid policy harmonisation have taken place on an ad-hoc basis or through country-specific mechanisms, such as the World Bank -initiated ‘Consultative Groups’ (CGs) for larger developing countries, or debt rescheduling meetings under the auspices of the Paris Club9. These meetings are secretive and very much donor-controlled, usually centred around aid distribution and allocation from the lenders’ perspective as opposed to the recipients’ (Degnbol-Martinussen and Engberg-Pedersen, 2003, p 191). The PRSP framework was meant to redress this by providing a more transparent mechanism for ‘aid management’, a platform enabling policy dialogue between donors and the governments of low-income countries and between donors themselves10.
The PRSP was also supposed to serve as an operational blueprint around which donors and creditors would be able to coalesce around in terms of financial support for low-income countries11, in accordance with the shift towards ‘general budget support’ as a modality of aid that has accompanied the move towards multilateralised aid assessments. Budget support is where financing is disbursed not to individual, discrete projects in specific sectors but towards the general budget of the recipient government. Budget support can be supported bilaterally – whereby individual donors set aside a particular amount of finance for an approved expenditure plan – or multilaterally – through instruments such as the PRSP where an expenditure plan is set out by the recipient government (in consultation with civil society and other stakeholders) and donors coordinate resources among themselves based on the budget that has been approved.
Under the PRSP framework, it is expected that social spending, that is, expenditure on basic services, is prioritised under the budget over the emphasis on economic development as was the case before under the old-style SAPs. Financial support can then be apportioned to countries that are perceived by donors as being ‘committed to ‘pro-poor policies’’ (Lister and Nyamugasira, 2003, p 94).
General budget support is further accompanied by commitments to ‘sector-wide approaches’ or SWAPs in which all significant public funding for a particular sector – for example, healthcare – are channelled towards a single sector policy and expenditure programme, led by the recipient government, and disbursement and accountability of aid is similarly channelled through the government (Brown et al, 2001, in Lister and Nyamugasira, 2003, p 94; and Foster and Macintosh-Walker, 2001).
SWAPs combine elements of the old project-based aid with policy dialogue under the SAPs (Degnbol-Martinussen and Engberg-Pedersen) as funding for individual projects are combined with policy reforms undertaken in that sector. For example, under the Bangladesh Health and Population Sector Programme (HPSP), a US$3.2 billion SWAP which ran from 1998 – 2003, the UK’s Department for International Development (DFID) supported a project to develop public-private partnerships (PPP) in pilot areas across Bangladesh to develop community groups who will contract essential services from public, non-profit and government providers (Foster and Macintosh-Walker, 2001, Annex 7). This funding represents both a project aid (in a sense that the parameters of the programme are set with defined objectives and measurable outcomes) and a programme of policy reform, that is moving away from purely state-based healthcare delivery into private-public initiative.
Community-Driven Development (CDD) projects and output-based aid (OBA) represent another facet of this new architecture of aid, the first being the shift towards policy coherence and aid management, as discussed above. This development sees the locus of decision-making and financing for development projects, especially financing for infrastructure and delivery of public services, being transferred from national governments and the public sector to local government, community groups and the private sector (see World Bank, 2004b).. CDD and OBA approaches are the operational result of an increasing trend of donors to bypass central governments and hand funds directly to communities and private organisations and corporations.
CDD approaches, such as the popular social funds12, channels decision-making and resources directly to community groups and local governments (Alexander, 2004; Kessler, 2003, p 8). Communities themselves identify projects and fund them through the contracting out of services to private contractors, including not-for-profit service providers, such as NGOs.
CDD schemes have developed in tandem with the trend towards decentralisation, policies supported by the World Bank and the IMF. Proponents of decentralisation policies have argued that it increases local and regional autonomy and fosters greater democratic representation in government. Critics have argued that the policy of decentralisation, as supported by international financial institutions, go hand in hand with the push towards privatisation. World Bank and IMF loans, for example, have included conditionalities for decentralising public services and devolving fiscal and administrative responsibilities for these services to sub-national entities, such as local governments. Resource-strapped local governments and communities look to plugging the financing gaps with donor aid, often through the form of CDD projects or output-based aid (OBA).
Output-based aid is also another means through which the donor community can support community development outside the central government machinery. According to the Citizens Network on Essential Services based in Washington DC, multilateral development banks (MDBs), such as the World Bank, and other development agencies are scaling up the financing of infrastructure and social service projects through OBA (Alexander, 2003; Kessler, 2003, p 7). Output-based aid is where the financing of development projects, such as the construction of schools or provision of water services, is contingent upon the delivery of services. Funds are disbursed upon the completion of the projects which must meet certain performance criteria. This is in contrast with the traditional mode of development financing whereby funds are disbursed prior to work on the project.
Output-based approaches are commonly used in the construction of large infrastructure projects, such as roads and electricity. For example, such approaches are used by independent power producers (IPPs) who construct power plants at their own expense and whose profits come from the electricity generated subsequent to the construction.
The popularity of OBA is such that in January 2003, the United Kingdom’s Department for International Development (DFID) and the World Bank established the Global Partnership on Output-Based Aid (GBOBA), a multi-donor trust fund, administered by the World Bank, whose main function is ‘to provide supporting documentation and promote OBA’, specifically developing pilot projects and documenting OBA methods (Hall and de la Motte, 2004, p 11; see also DFID, 2004).
The rationale behind both CDD and OBA approaches appear to be to improve the efficiency of service provision, ensure greater accountability and transparency in resource mobilisation and deployment, and increase the participation of diverse groups in development planning and provision in pursuant of international developments goals, such as the MDGs. For example, the World Bank argues that the institutional and fiscal flexibility of social funds are more responsive to the needs of local communities and enable the poor and other vulnerable groups to have input into the provision of services13. However, the efficacy of this approach in terms of the sustainability of its funded projects remains questionable, as will be discussed in the following section.
The challenge of operationalising the new conceptual framework of development financing requires a substantial investment in public services, especially in the delivery of basic services, such as water, sanitation, health and education. Six out of eight MDGs refer to improving such services in order to attain the MDG targets, including reducing child mortality (Goal 4), promoting maternal health (Goal 5), combating HIV/AIDS, malaria and other major diseases (Goal 6), halving the proportion of people without access to safe drinking water (Goal 7, Target 10), and ensuring access to affordable drugs for people in developing countries (Goal 8, Target 17). Access to essential services are therefore seen by the international community as key to human development and to poverty reduction. ‘Reaching the MDGs will require universal access to basic social services of good quality’, writes Jan Vandemoortele, United Nations Development Programme (UNDP) Poverty Reduction Group Leader (Vandemoortele, 2003, p 13).
Yet, the goal of providing adequate services to citizens is elusive to most low-income country governments. Vandemootle argues that the two reasons that prevent people in developing countries from graduating out of a vicious cycle of poverty, hunger and disease are ‘under-investment in basic social services’ and a failure to coordinate public action at a cross-sectoral level (Vandemootele, 2003, p 13). He notes that most low-income countries, particularly those in sub-Saharan Africa and south Asia, ‘will need to expand their budgetary outlays on basic social services at a rate that will not be sustainable without additional assistance … [i]t would be unrealistic to expect that low-income countries can meet the MDGs without additional and concerted international support (Vandemootele, 2003, p 15).
This ‘international support’ is expected to come in the form of official development assistance (ODA) or development aid and debt relief, especially for the least developed and low-income countries (Vandemootele, 2004, p 13). However, while participants of the United Nations Financing for Development (FfD) conference in 2002, including both developed and developing member countries of the UN, have given the stamp of approval for the current conceptual underpinnings of the new MDG-based architecture of aid in the form of the Monterrey Consensus, progress on achieving the ODA targets of 0.7 percent of the GDP of developed countries remains slow. The World Summit 2005 Outcome reiterates the call for the 0.7 percent ODA targets to be reached by 2015 (0.5 percent by 2010) but currently, ODA hovers at around 0.2 – 0.25 percent on average for OECD countries (UN, 2005a, para 23(b); UN, 2005b, para 6).
And therein lays the crux of the problem: public services in low-income countries remain heavily dependent on donor money14 which, in turn, remains subject to the political whims of the donor community. The new architecture of aid was aimed at redressing some of the problems of the old model of financing development programmes or assist countries overcome their domestic budgetary constraints that prevent them from channelling adequate resources into national development and poverty reduction through increasing country ownership of development policymaking and improving fiscal coordination within the country and outside (see section 1.1, above).
However, the creation of new modalities of financing does not detract from the fact that the political reality of aid remains unchanged. Official development assistance is still a top-down, donor-dominated process that is largely dependent on the political climate of the donor community. The political and media circus which accompanied the run-up to the recent 2005 G8 and UN World Summits demonstrates how much the ‘international development’ agenda remain largely contingent upon ambitions (or lack thereof) of political personalities in the world’s wealthiest nations. The funding priorities of bilateral development agencies remain subject to the foreign policy needs of their industrialised country governments while those of multilateral development institutions, including the World Bank and regional development banks, are determined by the powerful shareholders on their Boards who are the major developed countries.
The PRSP, for one, was meant to redress the problem of top-down, donor-owned development finance policymaking but, as discussed in section 1.1 above, the approach suffers from the same institutional constraints as previous mechanisms. In fact, the PRSP approach may be counter-productive insofar as it institutionalises and universalises donor-driven financing assessments that were previously ad-hoc and country-specific as it requires recipient countries to submit to set pre-financing procedures, such as the requirement of ‘participation’ and ‘consultation’ in PRSP formulation. This not only creates an additional burden on the weak administrative capacities of recipient governments – an operational hindrance to aid efficacy that donors were keen to overcome – but also constitutes interference in the recipient country’s domestic policymaking, contradicting the principle of ownership that is supposed to underlie the PRSP approach.
The pre-financing interference of the PRSP approach is extended through the gatekeeping function of the World Bank and IMF under the framework. The Bank and Fund wield considerable power over access to financing under the PRSP framework as country PRSPs must be assessed by Bank and Fund staff and approved by the Executive Boards of the Bank and Fund before funds can be accessed under PRSP-related financing instruments. This situation has led to much criticism that the donor countries – who wield considerable weight within the constitution of the Bank and Fund – can leverage developing countries into undertaking considerable structural and policy reform in-country in order to access financing.
This constitutes an extension of the principle of ‘selectivity’, that is, making the availability of aid or concessional loans contingent upon the formulation and implementation of ‘appropriate policy reform’ see Degnbol-Martinussen and Engberg-Pedersen, 2003, pp 50 – 51). This trend in development financing policy has serious implications to the fulfilment of development objectives, including the universal access to essential services – water, sanitation, health, education - as it requires recipient countries to make adjustments based on what they think donors want in order to access financing. In recent years, such reforms have entailed facilitating a ‘conducive’ investment climate for infrastructure development and service delivery. In most cases, this has involved the privatisation of essential services sectors in recipient countries by removing the state from the provision of services, such as water, sanitation, healthcare and education, and placing these services in the hands of private companies or non-profit organisations (see section 2.4 below).
In theory, budget support as a development aid modality constitutes a positive development. Unlike traditional adjustment loans, there are no formal conditions for the release of the loans or tranches of loans, and the grants or loans are not tied to a particular list of expenditure. Budget support enables governments to design their own national development strategies and determine their own national expenditure priorities which are then financially supported by donors, bilateral and multilateral. Governments are therefore no longer tied to donors’ funding priorities and can channel resources to sectors they deem fit and necessary.
In reality, budget support is rarely untied. A UK government-commissioned study for example, found that the relationship between donors and recipients in this new financing relationship can be construed as ‘a bargaining relationship which trades money for policy influence’ (Hall and de la Motte, 2004, p 14). Funded by the Department for International Development (DFID) for which budget support forms 20 percent of its country aid programmes (Lawson and Booth, 2004, p 17), the report concludes that: ‘In supporting the budget, donors are lending their loyalty to the government’s entire policy programme. In exchange for loyalty, donors are granted a formal ‘voice’ in policy dialogue, debate and influence …’ (DFID, 2003, Box 5f p 108; Lawson et al, 2002, p 80).
In order to receive budget support from the World Bank and other donor subscribers to the PRSP process (including DFID), many PRSP-eligible countries liaise closely with the donors in order to develop a strategy or development plan that will be acceptable to the donors15. Even if countries do propose strategies that do not conform to the donors’ ‘development agenda’16, there is little likelihood that donors would support the strategy financially17. And while technically, ‘conditionalities’ for lending are absent from budget support instruments, such as the World Bank’s PRSC, much of the actual ‘conditions’ for financing has shifted to ex-post conditions, usually in the form of pre-lending conditions or loan tranche ‘triggers’ – conditions that countries have to fulfil before loans are approved or tranches of loans are disbursed.
Within the World Bank, the development agenda of low-income countries is increasingly set by the International Development Association (IDA) and the Bank’s lending to low-income countries generally reflect the priorities of the donors of the IDA. Donors often make their contributions to the Bank’s concessional lending facility contingent upon acceptance by the Bank Board and management of their policies and strategic objectives. Long-time Bank and Fund watcher Nancy Alexander of CNES notes that, for example, ‘due largely to donor priorities, IDA has doubled its commitments to finance infrastructure, to US$1.5 million annually or almost half of its allocation to Africa’ (Alexander, 2004). Influence of donors is also reflected in the adoption of the World Bank’s Private Sector Development (PSD) Strategy, which include proposals to promote privatisation of basic services sectors in low-income countries.
Budget support is a double-edged sword. While it extends governments the opportunity to design their own national development strategies and offers resources to finance corresponding budgetary expenditure, it also forces governments to adhere to a cross-sectoral umbrella of policy priorities that are determined outside national centres of decision-making. Similarly with sector-wide approaches where governments must comply with a set of policies for a particular sector. Governments in low-income countries must now have an overarching framework of doing business while at the same time, purporting to maintain some domestic autonomy over development objectives and expenditure priorities.
Under the old system of project financing, a government will only be tied to aid conditions specific to the project that is being financed, or at the very worse, to a particular sector, such as the electricity sector. Under SWAPs and budget support, a government may be obliged to undertake reforms in a cross-section of the economy in order to receive financing of the budget. These national reforms are harder to undo than reforms in a particular sector, in effect ‘locking-in’ the changes desired by donors.
Funds channelled via budget support instruments are also more difficult to trace and account than project-specific financing, making it harder to discern tangible results, particularly in the service sectors over a medium and long-term. Without a strong participatory system of representation and active citizentry, it is difficult to ensure that funds channelled by donors are used to improve basic services or reduce poverty, even if these objectives are clearly spelt out in financing documentation. Whereas project financing enables donors and recipients of services to measure discernable outcomes – the construction of a school or water well – budget support instruments do not provide for specific earmarking of projects.
To this end, it is difficult to ensure that money provided to governments for poverty reduction and development, including access to basic services, are actually channelled into such programmes. The PRSP process does not, as yet, have good monitoring systems in place in PRSP countries to track the progress made towards achieving domestic PRSP objectives. Commentators have suggested that such ‘weaknesses in public expenditure management’ may require ‘additional safeguards … to accompany budget support, in the form of conditionality, earmarking of support to specific expenditures, or additional accountability provisions’ (Foster and Leavy, 2001, p 7). To do so, however, raises questions of ownership and country autonomy over budgetary processes once again.
Ironically, it is the difficulty in tracking the funds provided through central and local governments, discussed in section 2.2 above, that has prompted the donors to increase financing for development projects through instruments that bypass the state apparatus. Community-driven development (CDD) approaches are gaining popularity among the donor community as a means of financing infrastructure projects and social services. Social funds, for instance, are popular because they transfer fiscal resources directly to communities, reducing the reliance of communities on funds from local or central governments. Communities then contract out the delivery of services to private firms or organisations, such as NGOs, rather than wait in the queue of local and central government budget priorities.
CDD instruments may be a short-term solution to the problem of accessing basic services at the community level but critics have contended that they may be negative medium and long-term effects on the delivery of services. For one, by sidestepping the state apparatus, CDD instruments undermine state capacity ‘to plan and implement development programs – especially in health, education and water sectors’ (Dossani, 2002). This has implications for the delivery of basic services in two ways.
Firstly, the lack of national planning and budgetary control by the state means that CDD approaches are much less sustainable than conventional means of delivery public services. Social fund programmes, for example, are implemented in parallel with government programmes and usually without much fiscal and administrative accountability to the authorities, making national level coordination difficult and sustainability of programmes difficult to achieve (Dossani, 2002). The World Bank’s OED found in 2002 that only 43 percent of social fund operations surveyed were sustainable (World Bank, 2002, quoted in Dossani, 2002). The reliance of CDD projects on a set allocation of funds means that it is difficult for communities to continue financing programmes once the aid has been disbursed. This often leads to project designs which include ‘cost recovery’ as a means to sustaining delivery of services. (see section 2.4 below). The imposition of ‘user fees’ for water, health and education services, especially in poor communities where CDD financed programmes are deemed to be more effective than state provision, contradict the objectives of CDD approaches in themselves, which are aimed at ‘empowering’ the poor and other marginalised groups.
Secondly, the nature of basic services delivery demands that a comprehensive national strategy is required in order to ensure universal coverage. The World Bank itself has noted the dangers associated with direct financing of frontline service providers and bypassing central government. One of them being that ‘recipients’ policymakers lose control of the expenditure programme, because the finance is off-budget and the activities bypass the compact’ between the state, consumers and the service providers (see section 2.4 below) and that as a result incoherent spending allocations, coverage of services are uneven (World Bank, 2003, p 205).
CDD approaches also prevent cross-sectoral subsidy in national budget planning where resources from more profitable sectors of the economy are used to subsidise the provision of basic services, especially to poor communities. The undermining of national budgetary processes through CDD instruments prevent states from exercising a redistributional policy with regards to service provision, for example, progressive tariffs on services such as water or healthcare where user fees, if implemented, are calculated according to income. Furthermore, the provision of essential services to poor people in itself is a redistributional exercise in and of itself. CDD approaches undermine the capacity of the state in low-income countries to implement redistributional policies which are commonly practised in donor countries in the north.
Output-based aid has more or less the same effect on the delivery of essential services. While the financing of the services may be contingent upon service delivery and/or performance outcomes, OBA projects can also have sustainability challenges as services are contracted out to private service providers. This has implications for government regulation of essential services provision similarly to those of the CDD approaches. As OBA requires contractors to put up a substantial initial outlay, bidders for OBA contracts are restricted to companies or large not-for-profit organisations with means to raise the capital. Placing service delivery outside the remit of national and local governments do not guarantee adequate regulation as to consistency of services, quality and universal access. Many private firms charge ‘user fees’ for their services and the priority for resource allocation is determined by the companies, usually on the basis of profit, rather than on issues of social justice or poverty reduction.
In the case of OBA in services, payment for the output of services may be linked to output-based subsidies where low-income consumers are, theoretically, given a ‘market choice’ in the form of education vouchers or water subsidies which they can use to purchase services from the range of service providers available. Contractors’ payments are then tied to performance (Bayliss and Hall, 2001, p 31). However, this rarely represents real ‘market choice’ as some public services – such as water – are inherently monopolistic – it is difficult to get a range of providers bidding for water supply contracts in one area. Encouraging competition without regulation in service sectors, such as health and education, may also lead to a deterioration in standards of service delivery where all providers attempt to cut corners in order to meet output targets. Low-income consumers are also likely to more vulnerable to exploitation by competitive providers because of a lack of consumer education.
It is also difficult to assess outputs under OBA contracts and this in itself increases transaction costs, money which can be spent on improving access to the services themselves. Kessler notes that it difficult to specify the terms in a performance contract, particularly for public services, ‘because there is inevitable uncertainty about what kinds of goods and services are needed, where they are needed and by whom’ (Kessler, 2003, p 18). Drawing on a study by US economist Elliot Sclar18, Kessler argues that ‘as services become more complex – and as the economic and social outcomes they are supposed to achieve become more difficult to measure with simple indicators – the pubic sector inevitably gets involved’ and this ‘raises serious questions about the ability of governments in poor countries to even produce, much less enforce, the complex contracts involved …’ (Kessler, 2003, p 13).
Channelling resources through non-governmental groups and corporations further erodes an essential function of government – that is to determine national expenditure and provide public services. This has institutional ramifications, both for the government machinery in countries where the state is already weak, and for citizens whose only contact with state authorities is as consumers of the services the state provides. Removing this role of the state takes away a mechanism through which many citizens can hold their governments accountable (see further section 2.4 below).
It is also difficult under such circumstances for citizens to articulate their needs as financing allocations take place outside the domestic political constituency. For example, Eveline Herfkens, Special Advisor to the UN Secretary-General for the MDG Campaign, writes that during her tenure at the European Commission, the European Union spent 60 million euros on hundreds of projects in Mozambique, none of which the country’s finance ministry was aware of (Herfkens, 2003, p 104). The World Bank notes that evidence indicates that direct financing of service providers, such as that from ‘global funds’19, ‘can pit the recipient [country]’s policymakers – in charge of the overall spending program – against its provider organizations who directly lobby for off-budget funds at the international level (World Bank, 2003, p 205).
In this respect, CDD approaches and OBA serve to undermine rather than strengthen democratic processes in countries. Indian economist Kavaljit Singh argues that there is a romanticism associated with transferring developmental tasks and social responsibilities onto local groups and non-profit organisations which is not borne out of experience. To the contrary, he argues that reality has shown that ‘there is nothing inherently democratic about local bodies and NGOs’ and that there ‘are NGOs that are more accountable to donors than people at large’ (Singh, 2003, p 17). Community groups and NGOs are as susceptible to the same biases, incompetence and corruption as elected officials and government bureaucrats. There are also limits to how effectively non-governmental groups can function with regards to delivering public services. As Singh contends: ‘[s]ince NGOs lack the power and legitimacy to enforce their edict, most of their efforts remain voluntary, precisely because they cannot perform the functions of a legally constituted government’.
Underpinning these new financing mechanisms are the policy reforms necessitated by donor financing on service sectors of aid recipient countries, in particular, those obligated by the conditions attached to aid access and disbursement. Structural and policy reform in public services sectors have increasingly been driven by donor preference for ‘market’-driven service delivery that invariably includes privatisation and liberalisation of one form or another (Hall and de la Motte, 2004, p 3; Kessler, 2003, p 6; Tan, 2003, p 3).
Ironically, the drive to privatise and liberalise essential services contradict the conceptual framework of the ‘new architecture of aid’ as ‘[t]he provision of essential services is a basic requirement for poverty reduction … without effective public intervention, poor people can be excluded from, or denied access to essential services (Kessler, 2003, p 3).
This is because privatising service delivery often involves the imposition of ‘user fees’, where consumers of the service or utility are made to pay for them, often at uniformed commercial rates that make no distinction between commercial users of the service and household or individual consumers. Often this policy is implemented simultaneously with the elimination of cross-subsidies, common in public provision where income generated from the more profitable areas of the service sector is used to subsidise the non-profitable sectors, thus enabling poorer communities to access basic services. Studies from Africa where user fees were introduced for healthcare services in 1980s during the expansion of SAPs indicate that user fees further restricted access to healthcare for already marginalised groups, such as the urban poor, rural communities and women (Lethbridge, 2002, pp 12 - 13, drawing on Bloom and Lucas, 1999; Bloom and Nuwugaba, 1999; and Nyontator and Kutsin, 1999).
While the commitment to publicly funded healthcare remains strong in many countries in the context of worldwide pressures to privatise public services (Lethbridge, 2002, p 5), the threat posed to universal access and coverage in essential services sectors by the drive towards privatisation and liberalisation imposed by donor conditionalities and enforced trade agreements is very real. Privatisation and liberalisation of essential sectors is more of a pressing concern in developing countries, particularly in low-income countries, where the funding of these services is dependent on the availability of financing from bilateral and multilateral aid.
The drive towards privatisation and liberalisation in essential services sectors also casts doubts over the sincerity of the much-touted growing consensus among donor countries and development agencies’ recognition of the importance of local and national ‘ownership’ and space for policy autonomy in social and economic policy. Commentators, have argued that privatisation of essential services are merely part of the trend towards reforming the public sector and reducing the role of the state in the economy (Lethbridge, 2003, p 9; Whaites, 2001, pp vii – xix). The United States under the Bush administration, in particular, have consistently insisted upon the prioritising of development assistance, both bilaterally and in its contributions to multilateral agencies, to countries ‘that have policies that promote economic growth and private enterprise’ (US Treasury, 2002).
Lethbridge contends that governments have relinquished (or been made to relinquish) direct control over the delivery of healthcare services by moving away from the provision of such services, and instead, have taken on (or have been made to take on) coordinating and/or regulatory roles – from ‘provider’ to ‘enabler’ (Lethbridge, 2003, p 9).
The World Bank itself admits to this. In assessing the provision of public services in its latest World Development Report (WDR), the Bank acknowledges the failure of the market in providing for ‘public goods’ but hesitates to advocate for public provision: ‘These market failures call for government intervention, but they do not necessarily call for public provision: it could well be that the proper role is financing, regulation, or information dissemination’ (World Bank, 2003a, p 33).
The abstraction of the state from the provision of essential services through mechanisms of privatisation has a knock-on effect on the political dimensions of poverty as ‘[t]he decline of the state as a service provider in education, health and income-generation activities have helped to reduce the presence of government functions within communities’ and have therefore ‘remove[d] an important impetus to democratic participation on the part of the poor’ (Whaites, 2001, p xv).
Whaites further contends:
‘This retreat of the tentacles of government diminishes both the direct experience of citizens of their government’s efficiency and also their level of vested interest in the performance of the state … the separation of government from its people is not conducive to either overcoming any existing disenfranchisement of the poor or to strengthening a participatory system … the role of government as a service-provider is inevitably the root through which most citizens experience their state. Addressing political poverty therefore means working to provide the poor with the state and the services they want’ (Whaites, 2001, pp xv – xvi).
While there appears to be some retreat from the more contentious aspects of privatisation vis-à-vis service delivery, there remains an overwhelming support for private sector involvement in the delivery of essential services. Although the UK government has recently stated that it will no longer make their aid ‘conditional on specific policy decisions by partner governments or attempt to impose policy choices on them (including in sensitive areas such as privatisation and trade liberalisation)’ (DFID et al, 2005, p 10, emphasis added), this policy decision only relates to the department’s bilateral assistance and does not include the UK’s policies within the international financial institutions, such as the World Bank and the International Monetary Fund (IMF), in which conditionalities for privatisation remain features of structural and sectoral adjustment programmes.
Furthermore, the UK’s DFID, while acknowledging that it expects the public sector to remain the major provider of infrastructure to developing countries in the ‘foreseeable future’, maintains that ‘if the Millennium Development Goals are to be achieved, the attraction of increased private sector investment in infrastructure service provision in the poorer developing countries will be essential’ (DFID, 2004, p 2). The agency believes, and has done for many years, that public-private partnerships in infrastructure development is key to providing universal access to basic services, and have argued that it is the ‘nervousness’ surrounding the implications of such involvement is ‘inhibiting’ the development of the concept (ibid).
Another aspect of the new conceptual framework for essential services provision that is advocated and operationalised by bilateral and multilateral development financing agencies is that of the notion of accountability. In many ways, the drive to privatise is inextricably linked with efforts to increase accountability in the delivery of essential services However, the definition and practice of ‘accountability’ and consequently, ‘empowerment’ to utilise the process of accountability is very different from Whaites’ conception of accountability and empowerment as outlined above.
The WDR 2004 provides an analytical framework of accountability for service provision that reflects much of the conceptual trends in developing in this area from the donors’ perspectives, comprising of a tripartite arrangement that distinguishes between the state; clients; and providers. In the WDR 2004, the World Bank makes a distinction between the ‘long route’ to accountability which consists of the ability of citizens or consumers of services to articulate their interests to the state (‘voice’) which then regulates the service providers through a ‘compact’ (World Bank, 2003a, pp 49 – 50; fig 3.2). In this ‘long route’ model, ‘the direct link of client power’ is missing (World Bank, 2003a, p 55). This is contrasted with the ‘short route’ to accountability whereby service providers are directly accountable to their clients through the market (World Bank, 2003a, pp 57 –58). According to the WDR 2004, this model is preferable in many instances as ‘[g]iven the failures and limitations of the traditional model of service provision – the long route – greater reliance will inevitably be placed on more direct client influence – the short route’ (World Bank, 2003a, p 58).
Client-driven accountability (the ‘short route’) however, assumes a level of consumer awareness among the consumers of services and corresponding consumer legislation and accessible dispute settlement mechanisms to protect and enforce breaches of contract. In many low-income countries, institutions such as small claims courts are often absent or weak and most low-income consumers have no recourse to such adjudication. Furthermore, social services, such as public health interventions in communicable diseases, do not render themselves well to market-driven provision. These are public services that need to be performed whether individual consumers desire them or not for the good of the entire community.
Although accountability issues feature extensively in arguments against public provision of services, there is little consideration of the same in arguments for privatisation of such services. Most private companies hedge their risks when investing in public utilities, drawing up complex contracts to shield themselves from financial risk and legal action, thereby shifting the risk of failure onto consumers or governments who are forced, in many cases, to provide a guarantee for the privatised entity. For example, the infamous water consortium, Bechtel-owned Aguas del Tunari in Cochabamba, Bolivia, demanded a 15 percent profit margin guarantee from the government, in addition to a monopoly of all local water resources while Enron’s power plant in Dahbol, India was granted a 16 percent guarantee on returns and a five-year tax exemption by the Maharashtra state government (Bayliss and Hall, 2001, p 35; Kessler, 2003, p 14). Governments would be forced to pay the companies compensation should the profit margins not be met and this creates a ‘debt-like’ burden on governments and citizens in low-income countries (Bayliss and Hall , 2001, pp 34 – 35).
The paradox of privatisation of essential services in low-income countries is that the public sector in many of these countries resorted to private provision as a result of being unable to meet the demands for these basic services due to sovereign debt – debt owed to sovereign creditors and multilateral financial institutions, such as the World Bank and the IMF – and consequently, end up in debt to the private financiers instead. Somewhere along the line, the objectives of poverty reduction and equity in the delivery of basic services have been lost.
The operational complexities of the new architecture of aid are too lengthy to be considered in detail in a paper of this nature but the above discussion provides a snapshot of the implications of these new financing modalities and their operational policies on the delivery of basic services. Any review of development aid modalities in the context of public services, however, cannot be limited to a discussion on the operational aspects of donor financing.
The politics of development aid matter inasmuch as the operational aspects of aid disbursement. Aid flows to developing countries, even for essential development projects, are subject to immense volatility and are dependent not only on the strategic interests of the donor countries, but also on the financing modes that are the ‘flavour of the month’.
The heavy reliance of a substantial number of countries on development assistance as a means of financing public services means that a high proportion of people around the world are reliant on the development agenda set outside their domestic constituencies for access to basic services. Donors often try to influence service expenditure priorities in recipient countries, particularly in countries with weak institutional governance and/or weak democratic structures, in an effort to ‘replace the weak voice of citizens in disciplining policymakers’ (World Bank, 2003, p 209).
This paternalistic approach to aid policy often hinders rather than helps as the WDR 2004 acknowledges. Donors have different priorities to national governments - many of them prefer funding technical assistance and capacity building while governments tend to look to funding infrastructure construction and purchasing human resource. For example, in Malawi, donors spent US$4.5 million on training healthcare workers when the same amount of money could have been translated into an average 50 percent increase in the salaries of all healthcare staff, while technical assistance also accounted for 24 percent of donor spending in the same country (World Bank, 2003, pp 207 – 208).
The WDR 2004 also acknowledges that development aid ‘differs in important ways from domestically financed services’ as the beneficiaries of the services and the financiers ‘are not just distinct – they live in different countries with different political constituencies’ (World Bank, 2003, p 203). This means that ‘aid effectiveness is determined not only by the performance of the recipient but also by the incentives embedded in the institutional environment of aid agencies’ (World Bank, 2003, p 204). The report goes on to argue that:
‘When aid flows are substantial relative to the recipient’s resources, donors affect the compacts between policymakers and provider organizations … in many ways. By influencing spending patterns and budgetary processes, donors interfere directly with the design of the compact [between the state, clients and providers]20. And by going straight to provider organizations, donors sidestep the policymaker as well as the compact’ (World Bank, 2003, p 204).
The impact of donor-driven objectives on public services cannot be overstated. The donor-recipient relationship is one of unequal bargaining power and the conceptual underpinnings of the new aid architecture cannot be properly analysed without reference to the political overtures that structure it. In the context of basic services, at best, the political dimension of aid is limited to appeasement of voting constituencies in donor countries. At worst, reform of public services is a deliberate move to reform the state machinery in developing countries for strategic objectives.
The conceptual underpinnings of this new architecture of aid, as discussed in section one, rests on poverty reduction, country ownership of development priorities and strategies and participation of stakeholders in the national planning processes. Affordable access to basic services is key to poverty reduction and human development but such access, along with other poverty alleviation strategies, are in themselves political objectives. Piron and Evans contend that ‘relations of power, access to state resources, government policy priorities, legislative frameworks, and even constitutional guarantees may need to be transformed if there are to be enhanced opportunities for the poor to secure livelihoods, enjoy access to state services and become less vulnerable’ (Piron and Evans, 2004, p 4).
The authors, however, refer only to domestic political dynamics. While this is important in the context of aid and public services in developing countries, the more pertinent dimension of power politics is in the international realm. While delivery of aid for public services in developing countries does contain an element of altruism, like all donor financing, it is more often than not, an expression of the political and economic objectives of the donor community. The move towards privatisation of service sectors is clearly a demonstration of the neoliberal ideology that permeates international development policy as it removes the state from more sectors of the economy. As discussed earlier, there is little policy autonomy in low-income countries that are highly dependent on donor resources, in spite of the new emphasis on country ownership. Much of this is also a result of the lack of capacity to formulate alternatives to the status quo in these countries, most of which have their public sectors severely cut-back during the structural adjustment policies of the 1980s and early 1990s.
Furthermore, transfer of resources via development aid remain highly dependent on the foreign policy objectives of the donor countries. Christian Aid has recently criticised countries in the west for diverting resources from poverty reduction projects towards funding strategic interests in the ‘war on terror’. Its report The Politics of Poverty: Aid in the New Cold War states that OECD countries were increasingly allocating aid on the basis of the recipient country’s willingness to ‘cooperate’ on ‘security issues’ (Christian Aid, 2004, pp 1- 2, 20 – 21). For example, much of Denmark’s ODA has been reallocated to middle east states with strategic importance in the ‘war on terror’, including a DK 300 million aid and reconstruction package to Iraq while spending on projects in African countries has declined from DK 2.6 billion in 2001 to DK 2.1 billion in 2004, a fall of 19 percent since 11 September 2001. Meanwhile, Australia has currently committed to spending AUS$ 120 million on Iraq from its ODA budget but the overall budget for 2003-04 has risen by just AUS$79 million from the previous budget, suggesting that ‘projects targeting he poor will suffer as a result of Australia’s ‘politised aid’ to Iraq’ (Christian Aid, 2004, p 22).
The unpredictability of aid flows demonstrate the difficulty in relying on development assistance as a means of financing basic services in low-income countries. This situation is not expected to improve in the near future as aid flows are expected to decrease over time in spite of global promises to the contrary. Aid, however, is only one part of the equation.
For many of these countries, however, the real source of their inability to finance public services lie in debt. Countries have become reliant on aid flows to fill financing gaps in the public expenditure because of high levels of public debt. Even so, some studies have indicated that developing countries may actually have paid out much more to service interest payments on debt and for the services of private capital than they received in aid (Raffer and Singer, 1996, p 27). Aid has also been disbursed, either implicitly or explicitly to service official debts, a situation that Gore describes as ‘the ‘debt-tail’ wagging the ‘aid-dog’’, undermining the developmental impact of aid (Gore, 2003, p 111).
High levels of public debt has impact on the delivery of basic services on two fronts.
Firstly, it has a significant effect on government budgets, reducing the amount of resources available to fund basic services. Debt ‘adversely affects government budgets, reducing domestically-driven public investment in physical and human infrastructure’ (Gore, 2003, p 120). Vandemoortele cites a United Nations study21 that found that two-thirds of the 30 countries surveyed spend more of their budget on debt servicing than on basic social services, with some spending three to five times more on debt (Vandermootele, 2003, p 16). In sub-Saharan Africa, the author notes that ‘governments spend about twice as much to comply with their social obligations vis-à-vis their people’ and that ‘[d]ebt servicing often absorbs between one-third and one-half of the national budget’ (Vandermootele, 2003, p 16). In Tanzania, debt servicing alone accounted for 40 percent of government revenues by the end of the 1990s with negative implications for delivery of essential services, including lack of resources to fund basic immunisation programmes and the provision of essential drugs – in some areas, drug kits from the government lasts only four days a month (Whaites, 2002001, p viii - ix).
Secondly, debt service payments absorb foreign exchange which for many low-income countries is very high relative to their domestic currency and this reduces the import capacity of these countries (Gore, 2003, p 120). Some basic services require a substantial amount of foreign capital input – drugs, hospital equipment, machinery for constructing and maintaining water and sanitation pipes – that are not produced domestically. Servicing debt reduces the foreign exchange reserves a country has, resources which could be spent on purchasing the capital necessary to provide basic services to the community.
Additionally, indebted countries have weak bargaining positions vis-à-vis the international community. Beholden to creditors and international financial institutions for debt relief and debt rescheduling, and to donors for development financing, countries in debt are often not in a position to negotiate for the benefit of their own citizens. Countries lose policy space with regards to determining national priorities in public services and are dependent on donors’ funding and policy recommendations when they are reliant on donor financing of public services. As discussed earlier, governments are often required to undertake public sector reforms in return for concessional financing, debt relief or grant aid. Governments have little choice over which financing instruments used to channel resources to fund public services.
Gore points out that while it is possible to achieve international development targets, including increasing access to basic services, through an increase in aid, without corresponding debt relief, it will be difficult as increased aid flows will only go towards servicing existing debt and undermines the effectiveness of aid as development tool (Gore, 2003, p 121). Increasing aid without relieving countries of their debt burden leaves governments ‘cash-poor’ but ‘project rich’ (Gore, 2003, p 121), once again undermining the capacity of the state to plan and implement its own development programmes.
Current debt relief efforts are, however, doing little to help countries get out of the debt trap (Gore, 2003, p 116). The Heavily Indebted Poor Countries (HIPC) initiative in 1996 – the locus of the PRSP approach - acknowledged, for the first time, the linkages between sovereign indebtedness and poverty (Fogarty, 2003, p 243) and attempted to link debt relief with social expenditure, insisting that governments spend the money saved from debt relief on services for the poor and on poverty reduction programmes. But HIPC has done very little to expand the resource envelope22 of developing countries as this ‘debt relief’ is virtual rather than real. According to debt campaigners, [m]ost HIPC countries will require additional grants as well as full debt relief if they are to achieve their MDGs’ (Jubilee Research, 2005). The recent G8 ‘debt deal’ does little to redress this problem of ‘additionality’ as the money for debt relief are expected to come from existing aid budgets (Jubilee Research, 2005) and there is no evidence of additional funds to these countries under the proposal.
Gore observes that throughout the history of debt relief, creditors have sought to ‘grant the minimum relief that they considered necessary to ensure that the remaining debt service burden could be paid without recourse to further debt relief’ and that ‘there has been a persistent tendency to underestimate the amount of debt relief required to provide an exit from the problem’ (Gore, 2003, p 121). This is no different in the HIPC situation where countries are dependent on virtual financial flows where ‘debt relief’ is an accounting process. ‘Such flows are not additions to financial inflows, but reductions in the difference between debt service payments that are contractually due and debt service payments that are actually paid’, Gore argues (Gore, 2003, p 121). This means while debt relief has freed up some resources for indebted countries, there is technically no additional funds coming into the country.
While it is outside the scope of this paper to consider further the debate on debt relief, it is suffice to say that the public sectors in countries with high debt burdens cannot be rehabilitated through the current limited efforts at debt relief. This is because the HIPC initiatives is premised on debt sustainability rather than debt reduction, aimed at reducing debt to a manageable level rather than at outright cancellation of debt stock23 (Callaghy, 2003, pp 211 – 213; Granville, 2003, pp 47 – 50; Gore, 2003, pp 116, 120 – 121; Whaites, 2001, p viii). As a result, debt relief ‘does not guarantee the new development funding necessary to achieve long-term development goals, nor does it guarantee the rebuilding of lost state capabilities and services’, as in the case of Tanzania discussed above. (Whaites, 2001, p viii). Furthermore, debt relief from the enhanced HIPC (HIPC 2) initiative is also contingent upon countries having an IMF programme in place, in the form of a loan from the Poverty Reduction and Growth Facility (PRGF), the IMF’s concessional lending facility, which raises the possibility of more debt accumulation.
In order to move forward, commentators, economists such as Gore and international non-governmental debt coalitions, such as the Jubilee network, have called for further and deeper debt relief for indebted countries to enable them to start on a clean slate. Debt relief must go further than the current HIPC framework and the recent debt write-off proposed by the G8. Debt relief must be untied from onerous conditionalities, including those requiring privatisation and liberalisation, be placed on a more workable and predictable framework that is not premised on exceptional financing and rescheduling, and must be provided on terms that will not lead to the build-up of further debt. In this manner, countries can channel their resources towards more productive economic activities and towards providing the social and economic services that citizens need.
Debt aside, many countries find their capacity to raise revenue for financing public services thwarted by structural and macroeconomic strictures imposed upon them by international financial institutions, including those imposed by the World Bank and the IMF under the guise of debt relief and poverty reduction strategy programmes. Aside from conditions to privatise the delivery of essential services discussed above, two other sets of conditionalities routinely imposed to developing countries borrowing from these two institutions are having significant impact on countries’ ability to: a) mobilise resources for financing public services; and b) spend the resources allocated for such expenditure.
The first set of conditionalities are those requiring countries to undertake trade liberalisation measures as a condition of loans from the World Bank or the IMF. While the structural effects of unmitigated trade liberalisation has been extensively debated — including implications for the viability of domestic industrial and agricultural sectors and, consequently, the impact of economic growth and social and economic revenue generated from the continued existence and development of such sectors — the fiscal dimensions of trade liberalisation has not been widely publicised. Most notably is the effect of trade liberalisation on domestic resource mobilisation in low-income countries that have traditionally relied on taxes from the import and export of goods as a source of revenue, and hence, as a source of financing for basic services (see Ebrill, Stotsky and Gropp, 1999).
Studies, including those conducted by the World Bank and the IMF, have indicated a marked decline in trade tax revenue relative to national income as a result of trade liberalisation measures. A recent paper by the IMF highlighted a sharp decline in the tax revenue associated with trade liberalisation in developing countries over the past 20 years. The paper shows a halving of trade tariff collection rates across all countries since the 1980s but ‘with the largest absolute decline’ in low-income countries and ‘with the sharpest absolute declines in Asia and Sub-Saharan Africa’ (IMF, 2005, para 4). The paper also indicated that poorer countries have been unable to recover the lost revenue through other forms of taxation, observing that ‘[a]mongst low-income countries, total tax revenues as a percent of GDP have on average declined in parallel with trade tax revenues’ (IMF, 2005, para 5).
As trade tax revenue ‘typically constitutes between one-quarter and one-third of total tax revenues in low-and middle-income countries’ as opposed to ‘a negligible share in high-income countries’ (IMF, 2005, para 3), the cuts in tariffs as a consequence of trade liberalisation conditionalities impacts upon the revenue available for investment in basic services in these countries. The international financial institutions’ proposals for redressing this deficit have been challenged by critics as unfeasible and regressive. Most importantly, the IMF’s recommendation for countries to impose domestic consumption taxes – particularly general sales tax (such as the ‘value-added-tax’ or VAT) – to offset revenue losses from trade tariff reduction (see for example, IMF, 2005, paras 15 - 16), have been demonstrated to have negative implications, especially for the poor (Cobham, 2005, pp 17 – 18; Emran and Stiglizt, 2004, pp 618 – 621). Swapping revenue from trade taxes levied at the country borders to imposing taxes on domestic consumption taxes is not only administratively difficult (requiring significant investment in tax administration capacity) and practically difficult in countries with an significant informal sector, it has also be shown to discriminate against poorer segments of society who have to now pay taxes on consumables – including on the purchase of basic services -- as opposed to taxes levied on industries and companies who shoulder conventional trade taxes.
Conversely, the IMF’s alternative to replacing lost trade tax revenues from domestic sources – through reducing ‘the overall size of government’ (IMF, 2005, para 19) – may have correspondingly negative implications for the delivery of basic services, as discussed above in section 2.4. Where countries have lost the capacity to generate domestic resources, they have become reliant on donor assistance to fund basic services, but this too has been subject to the strictures of conditionality.
The second set of conditionalities commonly applied by the IMF that has a direct bearing on countries’ ability to generate and spend resources for basic services is the requirement for fiscal austerity in national expenditure. A report by a coalition of NGOs published last year first highlighted this little-publicised macroeconomic condition that the IMF routinely applies to borrowing countries – the requirement for low-inflation targets - which has significant impact on countries’ capacity to fund public services. The report Blocking Progress: How the Fight Against HIV/AIDS is Being Undermined by the World Bank and the International Monetary Fund argues that strict adherence to the IMF’s low-inflation targets and public expenditure ceilings can result in countries not accepting aid that is earmarked for public services even when the resources have been pledged to them (Rowden, 2004).
According to the report, the IMF’s insistence on countries’ adherence to low-inflation targets and low budget deficits has lead to strict caps on the countries’ public expenditure, limiting the government’s capacity to spend on areas of health, education and other public services (Rowden, 2004, p 13). More worrying however, is the effect the IMF’s low-inflation targets is having on countries’ ability to receive foreign aid to finance public services. The IMF’s rationale for such budget austerity is based on the idea that the ‘rapid inflow of foreign exchange associated with the increase in aid receipts can drive up the value of the recipient country’s currency’, increasing the price of its exports and undermining its competitiveness on the global market, an occurrence known as the ‘Dutch disease’ (Ooms and Schrecker, 2005, p 1821; also Rowden, 2004, p 7).
Countries are therefore routinely made to impose ceilings on social sector expenditure which often means that ‘countries must include the value of all new donor funding received’ in their budget and any additional funds cannot be absorbed or the equivalent amount must be forfeited from the government’s own resources, thus creating a ‘disincentive for external funders to offer financing (ibid). Such problems have been documented in the case of Mozambique and Tanzania (ibid). Critics have argued that this fixation with low-inflation rates in developing countries has little to do with ensuring macroeconomic stability for the majority of the population in these countries, let alone in securing adequate social services provision. Often, these targets are set to ensure that foreign investors are not unduly affected by the inflationary pressures and that their profits in investments are protected by higher interest rates in that country (Rowden, 2004, p 11). The result is however that low-income countries are deprived of much needed revenue to fund the delivery of basic services to their population.
This paper has considered the new architecture of aid in relation to meeting the basic needs – water, sanitation, education and health – of people in developing countries, particularly low-income countries. As discussed in the preceding discussions, the shifts in development discourse over the past decade and a half is both a cause and a result of the renewed focus on international development targets, of which access to basic services for the world’s poor is paramount.
The move away from traditional conditionality-loaded, project-based development aid towards a more comprehensive, country-owned, participatory process of financing is based on an acknowledgment that the disjuncture between macroeconomic policy and social policy must be bridged for there for to be genuine human development. At the same time, it is recognised that in order to have comprehensive development strategies, there must be benchmarks towards which the development financing must strive towards achieving.
In pursuant to such goals, new modalities of aid have been developed to give operational content to the conceptual underpinnings of this new architecture of aid. And yet, as this last section has demonstrated, focusing merely on the conceptual and operational technicalities of aid in the financing of public services in low-income countries will only go a limited way towards addressing the problem of resource gaps in low-income countries. Aid, in the form of grants or concessional loans from the donor community, is not a long-term means to achieving international development targets such as the MDGs. It is too unpredictable, too loaded with political, economic and social conditionality, and much too dependent on the strategic interests of the donor countries to be a reliable source of financing for critical areas of public expenditure such as the provision of basic services. Moreover, the conditions attached to aid and concessional lending have often left countries worse off in terms of mobilising resources for development than before.
Aid is also a political weapon and a form of discourse that is disempowering to developing countries looking to escape the poverty trap. Some political economists, such as Robert Biel, have characterised aid as a rationing of capital transfer to the south (Biel, 2000, pp 86 – 87) that regulates the use of financial resources to tightly-controlled parameters. It is clear from the discussions in this paper that the new conceptual underpinnings of aid and the corresponding operational instruments remain subject to the control of the northern countries who act as the ‘donors’ and financiers of development programmes in low-income countries. The delivery of essential services to communities in developing countries is still dependent on the development agenda that is set by donor agencies, international NGOs and international financial institutions.
The more genuine solutions to the resource problem of the south, in particular low-countries, lie in redressing the inequities of the global financial and economic system, of which the problem of debt and unequal trade terms are two of many. Countries cannot deliver the social services their citizens need because they do not have the resources to fund them. Resources are scarce because the international economic system favours the industrialised countries who write the rules of the game.
Mobilising resources for development in low-income countries requires both demands for more ODA from industrialised countries as part of an international income redistribution policy, and demands for the reform of the international economic system so as to enable developing countries to mobilise their own resources for development on a level playing field. This means resolving the problem of debt, removing unfair trade barriers in the north that prevent countries from exporting their goods to industrialised countries, recognising the need for protectionist policies in vulnerable sectors of the economy in developing countries to enable countries to develop self-sustaining economies, and addressing the problem of falling commodity prices that affect low-income countries.
Unless the inequities in the global arena are redressed, low-income countries will remain reliant on aid and remain subservient to the interests of the aid-givers and meeting the international development targets will be reliant on the budgetary priorities and good will of others. A real shift in development thinking needs to go beyond the existing ‘comprehensive development framework’ and involve a real global partnership. Aid can only do so much.
1 The term ‘development financing’ is generally used to refer to all forms of financing for economic development purposes, commercial or otherwise, and undertaken by both the public and private sectors. This paper, however, uses ‘development financing’ to refer to what is commonly known as ‘development aid’ or ‘official development assistance’ (ODA). The OECD Development Assistance Committee (DAC) classifies ODA as transfers from donor countries or multilateral institutions, such as the World Bank or regional development banks or United Nations’ agencies, to developing countries. In order for transfers – financial or otherwise (usually in the form of ‘technical assistance’) – to be classified as ODA, they must: (1) be undertaken by the official sector; (2) have economic development and welfare as their main objectives; and (3) be provided on a concessional basis, trhough outright grants, debt relief, or loans with a 25 percent grant element (Degnbol-Martinussen and Engberg-Pedersen, 2003, p 56; see also Raffer and Singer, 1996, p 3).
2 I use the term ‘low-income countries’ to denote countries eligible for concessional financing from the World Bank’s concessional lending window, the International Development Association (IDA). At present, countries eligible for financing under this facility must have a per capita income of US$ 865 or less (see IDA website: http://www.worldbank.org/ida).
3 A report commissioned by the United Nations Children’s Fund (Unicef).
4 SAPRI began as a World Bank-initiated, four-year, multi-country, participatory research into the effects of structural adjustment policies involving World Bank teams, country governments and a network of civil society organisations, collectively known as the Structural Adjustment Participatory Research International Network (SAPRIN). The Bank subsequently withdrew itself from the results of the SAPRI findings after attempting to dilute the critical country assessments that were filtering in for the global report and block the release of funds destined for the completion of SAPRI research (SAPRIN (2002), pp 1 – 26). The SAPRI experience is viewed by many critics of the World Bank as an example of the disingenuous nature of the World Bank’s efforts at participatory decision-making and at forming consultative relationships with civil society (see for example SAPRI, 2002, p 26).
5 The World Bank Group is made up of the International Bank of Reconstruction and Development (IBRD) – the ‘original World Bank’ set up at the Bretton Woods conference in New Hampshire, USA in 1944; the International Development Association (IDA); the International Finance Corporation (IFC); the Multilateral Investment Guarantee Agency(MIGA); and the International Centre for the Settlement of Investment Disputes (ICSID). The term ‘World Bank’ is generally used to refer to the IBRD and the IDA.
6 Pender observes the shift towards economic relativism within the Bank’s new outlook as ‘the shift away from an approach to development premised on the primacy of economic growth’ with economic growth being ‘increasingly relativised in a sense that it was viewed as one among many aspects of development’ (Pender, 2001, p 403).
7 ‘Conditionality’ is variously defined but a general working definition of ‘conditionality’ refers to it as a condition for the use of financial resources from donor institutions, such as the World Bank or the IMF or regional development banks, the purpose of which is to act as a ‘substitute for borrower collateral’ (Killick, 2004, p 17). ‘Conditionality’ can take many forms and can be applied ex-post (based on forecasted outcomes or promises) or ex-ante (based on actual results) (see: Eurodad, 2003, Box 1; IMF, 2002, p 1; Killick, 2004, pp 13 –18).
8 Most of these objectives have been set out in the United Nations’ Millennium Development Goals (MDGs), a set of socio-economic targets with a deadline of 2015 which have been rhetorically adopted by a number of multilateral institutions, including the World Bank and the United Nations Development Programme (UNDP), and bilateral agencies, such as the UK’s Department for International Development (DFID) and the Canadian International Development Agency (CIDA). See: the UN’s website on the MDGs http://www.un.org/millenniumgoals and the World Bank’s http://www.developmentgoals.org
9 The Paris Club is an association of official sovereign creditors who have lent to sovereign states. Private creditors who lend to sovereign governments come under a different umbrella organisation – the London Club.
10 The success of this has been varied, according to recent evaluations of the PRSP framework by the World Bank’s Operations Evaluation Department (OED) and the International Monetary Fund (IMF)’s Independent Evaluation Office (IEO) (see World Bank, 2004a and IMF, 2004).
11 Again, the success of this has been varied, with success stories more the exception than the norm (see above).
12 The World Bank describes social funds as funds which ‘directly finance small community managed projects and help to empower the poor and vulnerable’. It says it has funded 108 social funds and other similar projects in 57 countries in the last decade and is planning to spend US$3.716 billion on financing these schemes in the 2005 financial year (see World Bank website on social funds at: http://wbln0018.worldbank.org/HDNet/HDdocs.nsf/socialfunds/912775EDFEC3102C85256BBA0065558D?OpenDocument
13 See above.
14 For example, donor contributions to public health expenditure in sub-saharan countries are substantial. Foster et al, 2000 estimates that such contributions account for 53 percent of the health budget in Tanzania, 58 percent in Uganda and 79 percent in Mozambique (Lethbridge, 2002, p 29).
15 Interviews with World Bank staff, Washington DC, April-May 2004.
16 This ‘agenda’ remains reflective of the ‘Washington Consensus’ of economic liberalism practised by international sovereign and private creditors, the World Bank and the IMF during the old debt regime, ie pre-HIPC/PRSP (Fogarty, 2003, pp 237 -238).
17 Interview with World Bank staff, Washington DC, April-May 2004.
18 Sclar, Elliot (2001). You Don’t Always Get What You Pay For: The Economics of Privatization. Cornell University Press, quoted in Kessler (2003).
19 ‘Global funds’ are one form of community-driven development whereby private-public partnerships at the global level fund service providers directly on a project-by-project basis (World Bank, 2003, p 205).
20 See section 2.4 above.
21 Unicef and UNDP (1998) ‘Country Experiences in Assessing the Adequacy, Equity, and Efficiency of Public Spending on Basic Social Services’. Document prepared for the Hanoi meeting on the 20/20 Initiative. New York: United Nations Chidren’s Fund (Unicef).
22 A term used to denote the financial resources available to countries for public expenditure.
23 Debt stock is the amount of debt owed by countries, including both the principal owed and the interest on the principal. Many countries fell into a situation of ‘debt overhang’ as a result of a vicious cycle of debt, borrowing, debt rescheduling, more borrowing to the extent that ‘even if countries were able to meet some or all of their interest payment on their loans, the total amount they owed continued to grow’ (Fogarty, 2003, p 236).
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