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Aid and Public Expenditure: A Guide

M Foster and A Fozzard (2000)
86 pages (294 KB)

Which way forward for development aid? Current practice tends towards a more comprehensive approach to funding. Will this be more effective than specific project aid? It could be, according to this study. The key to success is a thorough understanding of the budget process in developing countries.

In recent years, poverty reduction has become the central objective of development co-operation. The World Bank and International Monetary Fund have called for Poverty Reduction Strategies to be prepared by all countries receiving support. This has resulted in several changes in the relationship between donors and developing countries. This study by Mick Foster and Adrian Fozzard of the Overseas Development Institute suggests that donors are (1) beginning to co- ordinate their aid (2) offering budgetary support at increasingly macro levels (3) focusing their attention on the effectiveness of governments due to new development targets. These changes make it imperative to understand the budget processes in individual countries and particularly how donors interact with them. The paper suggests that even where the main focus of support is private sector growth, an understanding of how the government operates in the wider economy is vital.

In analysing the budget process and the role of aid within it, the report defines several key areas for attention. These include:

  • The quality of public expenditure, planning and management. An assessment of this will determine the appropriate form of financial support.
  • Ways of integrating issues of poverty elimination, gender sensitivity and participation into the budgetary process.
  • The relationship between public expenditure and the forms of aid which support it directly or indirectly.
  • The co-ordination of aid-flows and debt relief with the budget process.
  • Different types of aid and the appropriateness of interventions at macro, sectoral or project level.
  • The design and appraisal of programme aid, sector support and support for budget reform.

The report underlines the fact that time spent in understanding the flow of funds and accounting systems within the budget system will be repaid in better understanding of problems of economic management at every level. The study recommends ways in which donors can assist in improving the system:

  • Aid flows should be integrated within the budget and programmed alongside resources from internal sources. Donor governments can help host countries by ensuring that they provide comprehensive and timely information on aid flows.
  • The design of programme aid, sector support and project aid needs to be pursued within the wider context of the government budget system.
  • The effectiveness of budget plans in reducing poverty should determine (1) the amount of aid that a country receives (2) how it is made available.
  • The development of an appropriate common funding system should be a goal for the medium to long-term future.
  • Sector level reforms are unlikely to be achieved or sustained if the basic budget systems are dyfunctional.
  • Where public expenditure planning and management is weak, appropriate skills are needed to facilitate the design and appraisal reform programmes.

Source: Foster, M. and Fozzard, A. 2000 'Aid and Public Expenditure: A Guide,' Overseas Development Institute Working Paper no. 141, (also included in DFID Economist Manual 2000)

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