Underdevelopment and aid: search for a right balance - Part I

For one, it should be acknowledged that policy-based program lending remains the best instrument for achieving “growth with poverty alleviation” objectives in the developing world. Given the well-known fungibility of resources, the country is still the only sensible “project”, and the default position of some critics such as Easterly and Rodrik, to return to a “projects-only” approach, continues to make little sense.

Second, the donor community should permit such new windows to act like banks, or to be more passive, letting would-be borrowers take the initiative but ready to respond, if and when a would-be recipient presents a reform package deemed politically and economically viable. While admittedly large uncertainties attach to what is precisely the right reform package for a particular country at a particular time, such a package has a better chance if genuinely cobbled together by various domestic stakeholders.

Third, an applicant country needing help in formulating such a reform package should look to independent third parties, not the major donors who will find it difficult to avoid repeating the mistakes of the past. For the same reason, such help should preferably be financed by foundations or NGOs.

Fourth, the would-be borrowing country would present a “self-conditionality” list. Given the difficulty of any government to do everything at once on a number of policy fronts, realism calls for restricting this number to a few critical bottleneck areas over any three- to five-year period.

The donors, acting like banks, would not simply sign on the dotted line, but negotiate contents and conditions of the proposed reform package. In the final analysis, agreement may or may not be reached in every instance. There should be absolutely no compulsion to lend, and some countries may not be interested in or able to use the new windows over some periods of time. Consequently, prolonged fallow years should be viewed as normal, not failure.

The credibility of this new plan requires the ability to commit funds for successful applicants over a three- to five-year period, long enough to match domestic adjustment requirements occasioned by the reforms. The availability of several new windows would also reduce the current plethora of competitive spigots while avoiding donor monopoly.

The critical element of restored aid credibility also requires that if self-conditionality terms are not met, disbursements are indeed cut.

Admittedly, the obstacles to adopting such an initiative are formidable. It requires a change in the culture in both aid-giving and aid-receiving countries deeply embedded over five decades: OECD parliamentarians must be willing to give up some favourite physical demonstration projects; executive branches must be willing to give up using such flows as an instrument to enhance short-term foreign-policy objectives; and recipients must accept the notion that such aid is meant to reduce the inevitable adjustment pains caused by real reforms, not to take the pressure off.

The stakes are high, but if the current opportunity for change is missed, the sceptics will have had their way.