Transcript Day 1 - AM - Mick Foster - The case for aid

Absorptive Capacity for
Increased Official Development
Assistance
Mick Foster
Definition of ‘Absorptive
Capacity Constraint?’
‘The full value of aid committed and available for
spending within a given period can not be
disbursed while achieving an acceptable level of
benefits.’
Comments:
• No absolute limit on how much can be spent
• The problem is ensuring it achieves something
• Aid can always be absorbed by reducing taxes or
borrowing- & sometimes that will be good use of
aid
Aid and Local Costs
Evidence on Absorptive Capacity
1- Econometric Studies
• Most (but not all) studies find evidence of
diminishing returns to aid at high aid:GDP
ratios
• Some evidence that countries with better
policy and institutional environments delay
the onset of diminishing returns
Evidence on Absorptive Capacity
2- Country Experience
• Successful aid ‘graduates’ grew out of high
aid dependence while sustaining growth
(e.g. Taiwan, Botswana)
• Mozambique, Uganda reconstruction cases
combined high aid levels and rapid growth
Empirical Evidence 3- Aid has
fallen!
1. Need 50% increase to restore 1990 real p.c. aid.
2. Terms of trade losses also increased need for aid.
3. Much higher aid could easily be absorbed in
South Asia- where aid is low, has fallen steeply,
there are more people living on less than $1 per
day than in Africa, and will still be after 2015.
Potential Causes of Absorptive
Capacity Constraints
• Donors
• Macro-economic constraints (‘Dutch Disease’)
• Declining marginal returns to aid-financed public
expenditure
• Limitations of management and administrative
capacity
• Sustainability concerns
• Failing states (not discussed)
Problems
Donors
Solutions
1. Too many projects &
donors
2. Parallel procedures
3. Conditions prevent
disbursement
4. Unpredictability of
donor support
1. GBS, SWAPs,
donors specialise
2. Use Govt procedures
3. Use institutional
assessments & track
record, not promises
4. Provide disbursement
schedule in advance
Good Aid Practice
• Strong in-house planning, budgeting, appraisal
capacity
• Govt makes allocation decisions on domestic and
foreign resources, strong central direction
• Examples: Taiwan, Botswana, Uganda
• Contrast with 7000 projects listed in Tanzania
• GBS/SWAPs & Govt procedures will help absorb
aid sensibly- but also needs a light hand & room
for Govt decision-making
Dutch Disease
• Problem: Aid inhibits growth in traded goods and
services sectors.
• Cause: Increased aid without increased forex
demand reduces international competitiveness,
usually through real exchange rate appreciation.
• Consequences: may damage long-term
development if traded sectors are particularly
important e.g. because of technology transfer.
• Empirical evidence: some claimed in crosscountry econometrics and country cases- but the
evidence & the policy significance is disputed.
Policy Responses 1- Dutch
Disease
• Innocent till proven guilty- monitor real
exchange rate, relative price trends, growth
• Focus on relieving supply bottlenecks
• Offsetting tax and regulation measures
• Could reduce tax, reduce debt instead of
increasing spending
• Trade off- but needs strong assumptions
before refusing aid looks sensible
Diminishing Returns to Public Expenditure?
Issue
Possible Response
1.
2.
3.
Marginal returns in
short-run will usually be
below average returns.
Govt crowds out private
expenditure (credit,
labour, non-tradeables).
‘Projects’ lead to
unsustainable &
unbalanced budget.
1.
2.
3.
Inevitable. Use planning,
appraisal, sequencing to
ensure adequate returns.
Crowding in (education,
infrastructure), phasing
major infrastructure.
Broad-based budget with
appropriate mix of donor
instruments.
Limited Public Sector capacity
1. Human resourcesespecially in remote areas
where the poor live
2. Weak institutions of
accountability
3. Mobilising communities
for sustainability, versus
‘big push’ for 2015
4. Targeting dilemmas
1. Capacity Building,
incentives, changed skill
mix, partnerships
2. Transparency,
community control,
readiness criteria with
independent verification
3. Real dilemmas on e.g.
water & sanitation
4. Focus on narrow
preventive & promotive
health interventions for
all?
Absorptive Capacity &
Sustainability
• Little point in big boost for 2015 goals if benefits
not then sustainable
• Countries reluctant to become more dependent on
donors for e.g. salaries, consumables
• Donor support is volatile & fickle• so countries may choose not to use aid to build
public sectors that will require long-term aid to
maintain
Africa can sustain higher aid
financed spending
Stylised Illustration
2001
2006
2015
2020
SSA GDP $Bn
203
259
402
624
Population, mn
640
734
916
1144
Revenues,$bn
30
41
80
125
Aid $Bn
13
26
3
0
Spending $bn
43
67
83
125
$67
$91
$91
$109
Aid Doubles
Spend p.c.
-but some major countries remain
dependent: Ethiopia example
2002
2007
2012
2017
2022
2027
GDP
6.0
8.4
10.7
13.6
17.4
22.2
Popn
68
77
87
98
111
125
Revenue
1.3
1.9
2.4
3.1
3.9
5.0
Spending
p.c.
30.7
61.1
61.1
61.1
61.1
61.1
Revenue
p.c.
19.1
24.5
27.6
31.1
35.1
39.7
Aid p.c.
12.8
36.6
33.5
29.9
25.9
20.4
Aid $mn
865
2800
2898
2930
2871
2557
Summary Conclusions
1. Much higher Aid p.c. achieved high returns in
1990s- so no reason for absorption constraint.
2. Proliferation of donors, projects, procedures
fragmented in every sector is (the?) major cause.
3. Successful aid supports Govt plans & budgets.
4. Countries can raise absorption by better
planning, management, prioritisation, capacity
building, & procedures.
5. TA if needed should be under Govt control.
6. Sustainability needs credible long-term
commitment.