28 February 2013

Promoting Economic Reforms in Developing Countries Rethinking Budgetary Aid?

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This paper, published in January 2013 by the Chief Economist Complex of the African Development Bank, examines donor practices in the use of budgetary aid to promote economic and structural reforms in developing countries, notably in Africa. It is based on an observation in recent literature to the effect that, despite its increased use since its conception in the 1980s, budgetary aid appears to have had limited impact on the design and implementation of economic reforms in developing countries.

To remedy this situation and reposition budgetary aid as a catalyst for structural reforms in recipient countries, and to strengthen the linkages between fund transfers to national treasury accounts and implementation of profound and far-reaching reforms in support of growth and job creation, this paper proposes a new instrument for donors, namely Enhanced Budget Support (EBS).

This new instrument has three major objectives: to devote budget support to the implementation of reforms requiring the creation of intangible assets, an area in which it has a comparative advantage; to provide clearer identification of the changes in economic behaviours and, therefore, the results, targeted by the reforms; and to align budget support financing with the estimated budgetary cost of the structural reforms to be pursued - an approach which few donors have adopted today.

Apart from enhancing transparency, this approach would afford stakeholders the means of more fully guaranteeing accountability, thereby strengthening the link between budget support and implementation and, consequently, results outcomes. The challenges often mentioned in assessing the budgetary cost of reforms, can be overcome.

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