Owen Matthew Barder

Beyond Planning: Markets and Networks for Better Aid

The political economy of aid agencies is driven by incomplete information and multiple competing objectives and confounded by principal-agent and collective-action problems. Policies to improve aid rely too much on a planning paradigm that tries to ignore, rather than change, the political economy of aid. A considered combination of market mechanisms, networked collaboration, and collective regulation would be more likely to lead to significant improvements. A “collaborative market” for aid might include unbundling funding from aid management to create more explicit markets; better information gathered from the intended beneficiaries of aid; decentralized decision-making; a sharp increase in transparency and accountability of donor agencies; the publication of more information about results; pricing externalities; and new regulatory arrangements to make markets work. The aid system is in a political equilibrium, determined by deep characteristics of the aid relationship and the political economy of aid institutions. Reformers should seek to change that equilibrium rather than try to move away from it. The priority should be on reforms that put pressure on the aid system to evolve in the right direction rather than on grand designs.

Payments for Progress: A Hands-Off Approach to Foreign Aid

There are significant differences of opinion about the merits of additional aid in meeting the MDGs, including whether and how aid should be given in ‘fragile states’, whether additional aid on the scale envisioned can be effectively used even in well-managed economies, and whether the aid system, particularly in highly aid-dependent countries, undermines instead of strengthens local institutions. We discuss an approach to scaling up foreign aid that would explicitly be aimed at strengthening local capacity and institutions, including in fragile states. “Payments for progress” would link additional aid to clear evidence of progress already achieved on the ground. This approach would give flexibility and autonomy to local institutions, providing an opening for local institutional experimentation, while at the same time ensuring that aid pays only for real, measurable achievements. Donors would bind themselves as a group to pay a specific amount for clear evidence of progress against one or more agreed goals in low-income developing countries. Developing country governments would present an independently audited statement reporting their progress on the measures, and donors would pay the agreed amount. Payments would be determined as a function of the outcomes, and not linked to the implementation of any particular policies, any other intermediate outputs, or “tied” to purchases from particular suppliers or companies. Governments that found ways to provide services efficiently and so reduce the costs of providing them would benefit from a larger surplus. We discuss the issues such an approach raises—in setting the benchmarks against which progress is measured, in avoiding cheating, and in managing unintended negative consequences of an incentives-based approach. We conclude with a summary of the advantages for donors and recipients.

Advance Market Commitments: A Policy to Stimulate Investment in Vaccines for Neglected Diseases

Why are millions dying of neglected diseases without vaccines, and is there a way to cheaply change that? Owen Barder, Michael Kremer and Heidi Williams advocate a proposal--Advance Market Commitments--that the G8 finance ministers plan to pilot in 2006.

A Policymakers' Guide to Dutch Disease

It is sometimes claimed that an increase in aid might cause Dutch Disease—that is, an appreciation of the real exchange rate which can slow the growth of a country’s exports— and that aid increases might thereby harm a country’s long-term growth prospects. This essay argues that it is unlikely that a long-term, sustained and predictable increase in aid would, through the impact on the real exchange rate, do more harm than good, for three reasons. First, there is not necessarily an adverse impact on exports from Dutch Disease, and any impact on economic growth may be small. Second, aid spent in part on improving the supply side—investments in infrastructure, education, government institutions and health—result in productivity benefits for the whole economy, which can offset any loss of competitiveness from the Dutch Disease effect. Third, the welfare of a nation’s citizens depends on their consumption and investment, not just output. Even on pessimistic assumptions, the additional consumption and investment which the aid finances is larger than any likely adverse impact on output. However, the macroeconomic effects of aid can cause substantial harm if the aid is not sustained until its benefits are realized. The costs of a temporary loss of competitiveness might well exceed the benefits of the short-term increase in aid. To avoid doing harm, aid should be sustained and predictable, and used in part to promote economic growth. This maximizes the chances that the long-term productivity and growth benefits will offset the adverse effects—which may be small if they exist at all—that big aid surges may pose as a result of Dutch Disease.

Are the planned increases in aid too much of a good thing

Donor countries have committed themselves to increase aid to developing countries by 60 percent over the next five years; and larger increases would be needed to meet the Millennium Development Goals (MDGs). But there are concerns that there may be a limit on the amount of aid that developing countries can absorb and use effectively—and that large aid flows might even be harmful. Could a large increase in aid be “too much of a good thing?” This essay disentangles the seven possible reasons why additional aid might not be effective. These include microeconomic effects (e.g., transactions costs), macroeconomic effects (e.g., ‘Dutch Disease’) and the impact on political economy (e.g., the ‘Resource Curse’). The paper looks at each possible constraint in turn. The paper finds that there are indeed serious obstacles to effective use of increased aid, but that none is immutable. All of the constraints which limit the effective use of additional aid can be addressed by a relatively small set of practical improvements in the way that aid is provided and used. Donors have already committed themselves to a significant program of aid reform. If the measures to which donors are committed were consistently implemented, the seven constraints to effective aid absorption could be relaxed. The paper concludes that, provided increased aid is accompanied by reforms to the way aid is delivered, the capacity of developing countries to absorb and use aid should not be presented as a barrier to the increases in aid which would be needed to meet the MDGs.

The Costs and Benefits of Front-Loading and Predictability of Immunization

How can the international community save more children’s lives faster and more effectively in the 21st century? This Working Paper analyzes the extent to which “frontloading” and predictable vaccine funding, as proposed by the International Finance Facility for Immunization (IFFIm), is more effective in impacting vaccine coverage than spending vaccine funds equally throughout the lives of projects. The IFFIm is an initiative of the Global Alliance for Vaccines and Immunization (GAVI), and supported by the governments of the United Kingdom, France, Sweden, Italy, Spain and Norway. An initial IFFIm investment of

Europe Beyond Aid: Assessing Europe's Commitment to Development

4 billion is expected to prevent 5 million child deaths by 2015, and more than 5 million future adult deaths. Using a stylized model, the authors quantify the positive and negative effects of predictable vaccine funds and frontloading, and finds IFFIm’s approach can increase the impact of vaccine coverage by 22%. This is because stable and long-term financing allows vaccine manufacturers and countries to plan for long periods of time, knowing that resources will be available. Front-loading helps to reduce the spread of disease and to immunize large groups of people faster.

Guarantees, Subsidies, or Paying for Success? Choosing the Right Instrument to Catalyze Private Investment in Developing Countries

European countries pride themselves on being leaders in spurring development within poor countries. We find that Europe’s approach to development could be characterised as energetically tackling the symptoms of poor economic opportunities for developing countries by providing effective aid, while doing relatively little to tackle the underlying structural causes of poverty. We use the Center for Global Development Commitment to Development Index (CDI) as a tool to examine Europe’s performance overall. We combine the scores for the twenty-one European countries which are included in the 2012 edition of the Commitment to Development Index to calculate the single score they would have obtained if they had been a single country. This represents the combined commitment to development of these countries, by giving appropriate weight to the larger, more populous countries in Europe, which tend to have less development-friendly policies than the Nordic countries and the Netherlands. Our calculations show that compared to the other countries in the CDI, Europe as a whole performs better than most CDI countries on aid and environment, but less well in other dimensions such as trade and security. This paper provides the background to a series of more detailed studies of the policies of European countries, individually and collectively through the European Union, in each dimension of the CDI, which the Center for Global Development in Europe is coordinating.

Reforming Development Assistance: Lessons from the UK Experience

Governments, donors, and public sector agencies are seeking productive ways to ‘crowd in’ private sector involvement and capital to tackle international development challenges. The financial instruments that are used to create incentives for private sector involvement are typically those that lower an investment’s risk (such as credit guarantees) or those that lower the costs of various inputs (such as concessional loans, which subsidise borrowing). We argue that the public sector is unlikely to have better information about risk and reward than the private sector, so using either instrument shifts downside risk from private firms to taxpayers. We propose a better contract to support private sector investment by enhancing the returns to the private sector, linking payments to specific, measurable, and agreed milestones or outputs. We argue that these contracts are less distortionary and produce better results for a lower expected cost than other incentive programmes. We motivate the argument with an economic and financial model and discuss political economy considerations that reinforce the current status quo in favour of generally suboptimal instruments such as guarantees and loan subsidies.