The Quality of Foreign Aid: Review and New Evidence on Selectivity, Transparency and Results-Based Management Pablo Bandeira 19-22 September 2011, University.

The Quality of Foreign Aid: The Quality of Foreign Aid: Review and New Evidence on Review and New Evidence on Selectivity, Transparency and Selectivity, Transparency and Results-Based ManagementResults-Based Management

Pablo Bandeira

19-22 September 2011, University of York

13th EADI General Conference

[email protected]

Foreign aid can help or damage growth and poverty reduction depending on recipient’s capacity, and form of aid.Towards enhancing positive impacts, two global agreements, new aid data and empirical studies have been recently produced

This paper reviews aid quality concepts, data and studies, and constructs new indicators on selectivity, transparency

and results-based management

IntroductionIntroduction

1. Defining Aid quality and the 1. Defining Aid quality and the unit of analysisunit of analysis

From the two international references on aid effectiveness (PD and AAA) we can define quality dimensions and concepts referred to donor practices:

Alignment: support participative national development strategies, use recipients’ systems when they provide assurance, and provide reliable multi-year commitments.Harmonization: coordination between donors at the country level for planning, funding and evaluatingResults-based management: link resources to human development resultsGood conditionality: conditions must be few, transparent and based upon development resultsTransparency: publicly disclose detailed and timely information on allocations, results and conditions associated with disbursements. Before (selectivity) or after?

Defining aid quality…Defining aid quality…

Most studies take donor and recipient countries as the unit of analysis, but aid is given and received by agents, not by countries.We cannot really state that aid from country A to country B is of any quality, because there are many agents on each side, with varying qualities.We need to differentiate agents as much as possible: national government, subnational governments, multilateral organizations (MO), and civil society organizations (CSO).

Defining unit of analysisDefining unit of analysis

2. The available aid data and 2. The available aid data and its characteristicsits characteristics

Three important worldwide data sources:DAC-OECD

AidData Project

PD 2008 and 2005 monitoring surveys

Besides, researchers have commonly used information on agencies’ web pages or send them questionnaires

Aid data sourcesAid data sources

DAC-OECD has two databases:DAC annual aggregates: by country

Creditor reporting System (CRS): by donor agency and project, including information on channelling organization.

AidData Project: based on the CRS, adding more donors and more information on projects.

Aid databasesAid databases

PD 2008 and 2005 monitoring surveys: 16 progress indicators, 10 of them referred to donors. Best indicators a priori, since we base aid quality on the PD, but 3 important problems:

Data measured by country

Specification/data gathering problems on 3 indicators.

Representativity: average of 16/26 recipients per donor measured, not randomly, when 151 recipients.

Aid databasesAid databases

3. Choosing aid quality 3. Choosing aid quality indicatorsindicators

Many empirical studies trying to understand how agencies allocate their aid flows. Self-interest, recipient needs, or recipient merits.Several recent empirical studies on donors’ aid quality: Roodman (2003-2010), Easterly and Pfutze (2008), Birdsall and Kharas (2010), Knack et al (2010).4 important problems in their indicators:

None of them differentiate between agency and country at the recipient level.Most use unrepresentative PD dataMost produce rankings based on an overall abstract notion of aid quality: highly sensitive to weightings and little policy meaning.Some use arguable indicators

Choosing indicatorsChoosing indicators

Therefore, there is an important need of more studies based on indicators that:

Differentiate between both donor and recipient agencies

Have representative or comprehensive data

Identify meaningful quality strengths and weaknesses for each donor

Have sufficient universal consensus

Choosing indicatorsChoosing indicators

4. New indicators on 4. New indicators on selectivity, transparency and selectivity, transparency and results-based managementresults-based management

Goal: see if donors reward/punish recipient governments’ merits/weaknesses on good governance.Data: AidData Project for aid flows and Kaufman, Kray and Mastruzzi (2009) for recipient governments’ governance indicatorsDonors = central governmentsDifferentiate between two type of agents per recipient country: governments and MO/CSO.

Selectivity indicatorsSelectivity indicators

∑j (GovAidij x WGIj/10)

∑ j GovAidij

S1i =

Proxy of % of aid channelled through governments that is likely to be effective due to adequate governance capacity of the recipient government.

Eg: Only 14% of govaid is likely to be effective when given to a country with a WGI score of 1.4

Selectivity indicatorsSelectivity indicators

∑j (GovAidij x WGIj/10)

∑ j GovAidij

S1i =

∑j (100 - |%GovAidij – (WGIj x 10)|) x TotAidij)

∑ j TotAidij

S2i=

Proxy of % of total aid given to countries with bad governance indicators that is likely to be correctly channelled.Eg: Total aid is well channelled to a country with score 1.4, if 14% is given to its gov, and 86% to MO and CSO.

Selectivity indicatorsSelectivity indicatorsCentral Government of S1 (%) S2 (%) Average S1-S2 (%)

Australia 34 29 32

Austria 11 59 35

Canada 21 64 43

Denmark 66 71 69

Germany 20 52 36

Greece 46 52 49

Ireland 50 77 64

Italy 27 71 49

Japan 19 49 34

New Zealand 56 83 70

Norway 45 77 61

Portugal 59 41 50

Spain 43 80 62

Switzerland 25 80 53

UK 26 63 45

US 21 70 46

Average 37 66 51

S1 average (37%): most aid given directly to governments goes to the worst governmentsS2 average (66%): : however, donors tend to give a higher proportion of aid MO or CSO if governments perform badly

It seems that donors first choose recipient countries based on poverty levels, commercial interests,

historic linkages and the like, and then do some agent selection based on governance capacities,

but still not enough (bad governments are probably receiving too much aid)

Selectivity indicatorsSelectivity indicators

Data source: central government and MO web pages

Do they publish:Project appraisal documents?

Results matrix within project appraisal documents?

Project evaluation documents?

Results analysis within project evaluation documents?

Transparency and results-based Transparency and results-based management indicatorsmanagement indicators

Transparency and results-based Transparency and results-based management indicatorsmanagement indicators

Donor Publishes Project Appraisal

Documents

Project documents

contain results matrix

Publishes Project Evaluation

Documents

Project Evaluations

evaluate results

Central governments

Australia 100 100 100 50

Canada 0 0 0 0

Denmark 100 0 0 0

Finland 0 0 0 0

Italy 50 0 0 0

Japan 100 100 100 100

Spain 0 0 0 0

UK 0 0 0 0

US 0 0 0 0

Multilateral agencies

AfDB 100 100 100 100

AsDB 100 100 50 50

EC 0 0 0 0

FAO 0 0 0 0

IADB 50 0 0 0

UNDP 50 0 0 0

UNICEF 0 0 0 0

WB 100 100 100 100

5. Conclusions5. Conclusions

Enhancing the quality of foreign aid is becoming one of the cornerstones of international relations.Empirical studies can help detect areas in which donors need to improve, but need to go beyond countries as the unit of analysis, and use meaningful indicators on which there is consensus and representative data.Applying these ideas, I have constructed indicators on selectivity, transparency and results-based management, which show that:

It seems that donors first choose recipient countries based on poverty levels, interests and the like, and then do some agent selection based on governance capacities, but still not enough (bad governments are probably still receiving too much aid)Only the governments of Australia and Japan, and 3 MO (African, Asian and World Banks) measure and publish information on results at the project level.

ConclusionsConclusions

¡Thank you for you ¡Thank you for you attention!attention!

[email protected]

Pablo Bandeira