The prospect of a substantial scaling-up of external aid flows offers much promise for low-income countries’ efforts to realize higher growth rates and realize the Millennium Development Goals. To make good use of these resources, development partners will need to address a number of important issues, including the potential impact of higher aid flows on the competitiveness of low-income countries in international markets (the so-called “Dutch disease issue”); the more complex task of managing fiscal and monetary policy in an environment of greater aid derived from multiple, external sources associated with different degrees of uncertainty; the budgetary management issues for both
ministries of finance and sectoral ministries of delivering public services which are largely financed by external donors; and the various and complex behavioral incentive effects arising from a high dependency on external funding sources. Beyond new approaches to macroeconomic policy management, other issues that will become important to consider include the appropriate sequencing of aid-financed investments; the balancing among alternative expenditure priorities; considering the implications for fiscal and budget sustainability; and strategizing for the ultimate graduation from reliance on donor funding. For the donors and international financial institutions, greater efforts will be required in ensuring higher long-term predictability of aid and lesser short-term volatility in the provision of aid, as well as more intensive guidance on macroeconomic, fiscal, and budgetary management, in addition to the existing policy agenda of greater harmonization and alignment of aid practices and policies. The paper also offers some suggestions on the ways in which the IFIs--IMF, World Bank, and regional development banks--can strengthen their efforts in helping countries to address the various scaling-up issues.
These are remarkable times. The global community appears increasingly energized to confront long-standing issues of persistent poverty in Africa and parts of Latin America and Asia. Major industrial countries have begun to respond to the challenge of mobilizing additional resources for development. Several countries have pledged to reach the 0.7 percent target for ODA within the next decade and others, including the United States have begun to significantly increase their commitments for development assistance. Combined with the possibility of new global financing initiatives, there is the possibility of a dramatic scaling up of aid resources far beyond the levels of past experience (for some countries at least). This is all to the good and a sign for hope that the enormous and inexcusable gaps in living standards between rich and poor countries can be narrowed.
Contents
I. Introduction
II. Some Key Policy Challenges associated with a Substantial Scaling up of Aid
- 1. “Dutch Disease”
2. Managing Macroeconomic Policy in the Context of Higher Aid Flows
3. Managing a Budget and the Delivery of Public Services when a Government is Heavily Dependent on ODA Flows
4. Aid and Growth
III. The Task for Development Partners in Responding
- 1. The Donors
2. The Aid-Recipient Countries
3. The IMF and World Bank
IV. Some Concluding Thoughts
Tables
- 1. A Perspective on Role of External Grants and Loans in Financing Government Expenditure
2. Rough Estimate of the Size of HIV/AIDS Disbursements Relative to the Size of the Health Sector and GDP
References
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Pity the Finance Minister: Managing a Substantial Scaling-Up of Aid Flows
