Elsevier

World Development

Volume 90, February 2017, Pages 1-5
World Development

Reforming Performance-Based Aid Allocation Practice

https://doi.org/10.1016/j.worlddev.2015.05.006Get rights and content

Summary

Performance-based aid allocation systems are used by a number of multilateral agencies to allocate aid among developing countries. A number of bilateral agencies also allocate aid on the basis of the performance of recipients, albeit in a less systematic way than these multilateral agencies. This paper points to a number of fundamental problems associated with performance-based aid allocation systems, including a problematic balancing of need and performance criteria, being reductionist with respect to the drivers of effective aid and not being sufficiently nuanced with respect to performance by ignoring a lack of human capital and economic vulnerability in recipient countries. Together with providing a theoretical framework that articulates these issues, this paper introduces and outlines the papers that follow in this Special Section.

Introduction

Development aid remains a vitally important transfer to developing countries. Global official development assistance reached $US134.8 billion in 2013, the highest level ever recorded (OECD, 2014). These flows represent a major source of revenue for most developing countries, rivaling the level of taxation revenue in low-income countries in recent years, at the equivalent of roughly 10% of their GDPs (World Bank, 2014). Aid is the principal form of revenue for governments of many of the world’s poorest countries. It is crucial, therefore, that official aid is used effectively for development purposes in developing countries and that both donor and recipient countries continuously strive to improve its effectiveness. They owe this to the 1.4 billion people in developing countries living in extreme income poverty, but also to donor country taxpayers.1

It is equally important that the allocation of aid among developing countries is appropriate from a development perspective. Multilateral development banks and other organisations, following the leadership of the World Bank International Development Association (IDA), employ performance-based allocation systems in allocating aid among recipient countries. Performance is gauged on the basis of subjective assessments of the quality of recipient country policies and institutional performance. These allocation systems provide more aid than would otherwise be the case to countries with better performance, with some allowance for their need defined in terms of population size and income (World Bank, 2010). This approach is considered to enhance the global effectiveness of aid, by giving more aid to countries that are thought to use it more effectively for development purposes, poverty reduction in particular, and less to those that use it ineffectively for these purposes. The same principle guided the derivation of poverty efficient aid allocations by Collier and Dollar, 2001, Collier and Dollar, 2002. It can also provide incentive for developing countries to improve their performance if they value more aid.

Bilateral donors have made much progress in their approaches to aid allocation over the last 10–15 years, giving greater emphasis to developmental considerations and less to political, strategic, and commercial self-interests. They too have come to give more aid to countries with better performance, although not always as systematically as the multilateral development banks (McGillivray, 2003).

That aid is allocated on purely developmental criteria, with a view to enhancing its effectiveness, rather than on commercial or political criteria, is clearly to be welcomed. That a formal model is used to allocate aid among countries avoids the chaos that can otherwise afflict this process. But performance-based aid allocation, and aid allocation in general, invokes a set of complex issues and related challenges. There is the uncomfortable trade-off between need and effectiveness. Those countries which arguably have the greatest need, the poorest, often have the lowest levels of performance and are therefore judged to use aid relatively less effectively. They are therefore allocated less aid than would otherwise be the case by performance-based systems. There is also the implied reductionist approach to aid effectiveness, as performance is only one of a number of developing country attributes that are thought to influence aid effectiveness (Amprou et al., 2007, McGillivray, 2003). In addition, there is an argument that performance is too narrowly defined, ignoring why some countries exhibit better performance than others. These are but a few of the criticisms of performance-based aid allocation. The other criticisms include the design of the measure of performance, weightings assigned to performance and need, and the reliance on per capita income to measure need.

Such is the focus of this Special Section, on the operational difficulties and limitations of performance-based allocation and ways of making aid allocation more efficient, and fair, from a development perspective. The Section contains a set of papers that not only address an issue of fundamental importance, but do so in academically rigorous and policy relevant manner. Importantly, the papers address a major gap in the academic literature and provide policy recommendations that if adopted would involve profound changes to aid allocation practice.

This introductory paper provides a brief overview of performance-based allocation systems, and outlines a theoretical framework intended to provide insight into the main arguments presented in the papers that follow, as well as underpinning and providing context for the number of the empirical papers that follow. The presentation of this framework also identifies studies from a body of literature to which this Special Section seeks to contribute. The paper introduces and briefly outlines the contents of the Special Section. We provide the overview of performance-based systems in Section 2 and present the theoretical framework in Section 3. The contents of the Special Section are outlined in Section 4. Section 5 concludes.

Section snippets

Performance-based allocation systems

Performance-based allocation systems have the following general structure:AIDi=f(Piα,Popiδ,yiε)i=1,,nwhere AIDi is the performance-based aid allocation to country i, Pi is the performance rating of i based on an assessment of the quality of its policies and the behavior of its institutions, Ni is i’s population size and yi its per capita income. α, δ, and ε are exponents. Per capita income is interpreted as an indicator of poverty and in turn the need for aid. A relatively low per capita

A theoretical framework

That a trade-off exists between need and performance is a theme that runs through all of the papers that follow in this Special Section, to varying degrees. That performance-based allocation systems ignore important information on recipient countries is a theme also pursued in others. In what follows we present a simple theoretical analysis that considers both issues. While the second paper in the Special Section also provides a theoretical analysis of the trade-off, the following analysis

Special section contents

The Special Section contains a further three papers, papers two to four.

The second paper extends the theoretical focus of this Special Section. It is written by François Bourguignon and Jean-Philippe Platteau and entitled “Does Aid Availability Affect Effectiveness in Reducing Poverty?” Bourguignon and Platteau comment that there is a surprisingly small body of theoretical literature devoted to the question of aid effectiveness and the allocation of available funds by donors. One issue that has

Conclusion

Development aid is an important source of revenue for developing countries, one that can potentially have important implications for driving growth and reducing poverty, and in so doing lessen gaps in living standards between developed and developing countries. As such it is essential that its allocation among countries is both fair and growth and poverty reduction enhancing. Performance-based aid allocation systems are used by a number of multilateral agencies to allocate aid among developing

Acknowledgments

The authors are grateful for the very helpful comments on an earlier draft of this paper from two anonymous referees. The usual disclaimer applies.

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