The World Bank takes the view that aid should be targeted at countries that
have been pursuing ‘good policies’. Writing in the June 2004 Economic
Journal, Paul Mosley, John Hudson and Arjan Verschoor attack this
position, questioning the definition of good policies and arguing that they must
be extended to include the emphasis by governments in targeting expenditure
to meet the needs of the poor.
Hence, these researchers contend, aid should not simply be targeted at poor
countries, but the poorest inhabitants of those countries. It thus targets aid at
the poorest of the poor rather than the more traditional scattergun approach,
which sees aid benefiting everyone.
They also argue the case for a return to ‘conditionality’ – that is, the use of aid
as a bargaining counter to generate policy reform.
Work by World Bank economists David Burnside, Paul Collier and David
Dollar has led to a major revaluation of the formerly widespread view that aid
has failed to have a positive impact on growth and hence poverty. They argue
that aid does work but only in a ‘good policy environment’, the implication of
which is that aid should be focused on low-income countries following good
policies.
The paper by Mosley et al, in contrast with common practice, examines the
effect of aid on poverty, rather than on economic growth. Apart from average
living standards, a key impact on poverty is inequality. Also of importance is
the composition of government expenditure, in particular the extent to which it
is focused on the needs of the poor. Pro-poor expenditure (PPE) comprises
elements such as spending on education, agriculture and health, which
particularly benefits the poor and represents a significant new dimension in
our thinking as to what constitutes ‘good policies’.
Based on this analysis, an optimal allocation of aid is derived, which focuses
on countries with high poverty and low inequality and also takes into account
aid's potential impact on PPE. This allocation contains significant differences
from that derived using the World Bank's approach and, for example,
particularly benefits low-income, low-inequality countries such as
Mozambique. Overall, this results in an improvement in aid's impact of an
estimated 12%, which year on year is not an inconsiderable amount.
However, Mosley et al believe that the impact of aid can be greater still if we
fully take into account the potential to use it to influence policy reform.
Conditionality has in the past got something of a bad name because of the
frequent, almost ritualistic, process of developing countries reneging on
agreed policy reform, with promises to do better in the future if given another
tranche of aid, which duly materialises.
Unlike the World Bank however, they argue that this necessitates a new
approach to conditionality rather than its abandonment. In particular, they
argue for graduated penalties in future aid disbursements dependent on past
policy reform slippage. Instead of an all or nothing approach by which
developing countries either receive no punishment or are severely punished in
terms of their aid budget, a gradual approach is likely to secure much greater
compliance in the same way as when the only penalty for stealing a sheep
was hanging, many offenders were completely acquitted.
The law learned long ago that increasing penalties in line with the severity of
the offence is the most efficient way to induce compliance with the law. The
aid agencies need to take on board the same lesson.
This ‘new form conditionality’ also allows the opening up of a dialogue
between donor and developing country, which enables the latter to develop a
degree of ownership and commitment to policy reform and the former to gain
greater understanding of the problems and constraints facing developing
countries.
ENDS
Note for Editors: ‘Aid, Poverty Reduction and the ‘New Conditionality’’ by
Paul Mosley, John Hudson and Arjan Verschoor is published in the June 2004
issue of the Economic Journal.
Mosley is at the University of Sheffield; Hudson is at the University of Bath;
and Verschoor is at the University of East Anglia.
For Further Information: contact John Hudson on 07798-502891 or 01225-
385287 (email: j.r.hudson@bath.ac.uk); or RES Media Consultant Romesh
Vaitilingam on 0117-983-9770 or 07768-661095 (email:
romesh@compuserve.com).