30 August 2011

Does it Matter if Budget Support Goes Extinct?

Simon Maxwell is worried about budget support going extinct.
Budget support should not be allowed to fall off the agenda. Developing country finance ministers would miss it ... So would development practitioners ... Budget support ... delivers at scale, empowers developing country Governments, reduces transactions costs, and increases accountability.
All of which is true. But also makes the most sense when you are comparing it with "old" aid. Aid projects designed to replace government functions. Budget support is an improvement on these parallel systems, and a better form of government-to-government aid, in large part because it is built on respect for the recipients.

But is the best possible form of aid? I think that two new forms of aid can do better.

Cash-on-delivery is a close relative of budget support, but it does even more for empowerment and respect, as it manages to do away with all the process conditionality required for budget support, by paying only for results. No need to worry about PFM systems. Either the government delivers for its people, or it doesn't, no need for us tell them how to do it.

Cash transfers to individuals goes one step further from respect and empowerment for developing country governments, to respect and empowerment for poor individuals. It seem so obvious, when our goal is to make poor people less poor, to just give them the cash, especially when it is feasible at low overheads (see GiveDirectly) and globally affordable (see Charles Kenny).

Kenny estimates that $100 billion a year in cash transfers to individuals could eradicate extreme poverty.

There are about 1 billion people living in the rich world. So for just one hundred dollars a year each we could eradicate extreme poverty.

Cash-on-delivery and cash transfers also counter the #1 complaint from taxpayers about aid - that it is wasted.

The only trouble with cash-on-delivery and cash transfers? They get rid of the need for development experts.....


Update: Response from Ranil at Aidthoughts here


Simon Maxwell said...

A post based on the question `compared to what`. I see you really are an economist! My favourite joke: two economists meet in the street. "Hello", says the first. Haven't seen you for ages. How is your husband?" "Good question", replies the second. Compared to what?"

Anyway, what we all say over here is that COD is budget support by another name,contrived so as to satisfy US legislators. Personally,I think it oversimplifies the results franmework and encourages dishonest reporting. Have you seen my pieceon results2.0 ? As to direct transfers, yes, countries should roll out social protection,even though it is hard to target well and complements rather than substitutes for Government investment in e.g. roads.But have you looked at the cost of administration?

rovingbandit said...

Thanks for the response. 

Givedirectly.org think that they can do transfers for just 10% administration which is fantastically cheap, but does rely on M-PESA. But then the offer of ongoing large transfers could be a good incentive for other countries to allow such systems which also have their own wider benefits. I haven't looked into the cost of other schemes. Also in fairness, the endgoal of any donor-funded social protection scheme is a government owned and funded social protection scheme, which is also a transition from program aid to a kind of budget support. 

Don't you think that COD would satisfy UK taxpayers somewhat as well as US legislators?

Simon Maxwell said...

The question is transfers to whom? Do Givedirectly or others who favour direct transfers to the poor count the cost of identifying the poorest, and the associated Type1 and Type2 errors (of missing some poor people about, and including some people who are not poor)? Have they also thought about what happens if people cross the poverty threshold and suddenly lose benefits? In developed countries, marginal tax rates can approach 100% when people e.g. get a job and lose entitlements. In the UK, we have complicated tapering measures to deal with this. Which is not to say, don't think about long-term social protection and transfers, but don't think of them as a simple magic bullet.

I'm still a bit of a sceptic on COD, but worth reading Andrew Mitchell's speech on results, linked in my piece on Results 2.0 and an earlier one on 'What kind of shape is DFID in?', both on my website at www.simonmaxwell.eu. (And how do you insert a weblink on this site?)

rovingbandit said...

Wow that is a pretty great speech. Thanks for the link.

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