Eleven recommendations

Even though a clear trend is discernable among multilateral donors toward more budget assistance, it is too early to speak of a new paradigm. So far, no sufficient empirical basis exists for deciding for or against such financing. It is not even possible yet to meaningfully assess the effects of budget support on the recipient countries. The assessments conducted so far, however, do suggest certain trends (Wahlers 2008).

The goal of budget support is to strengthen the public administration and state-run welfare services in developing countries. It is assumed that conditioning aid creates incentives for political change, and that governments in developing countries will identify more strongly with reform programmes. Budget support is also supposed to streamline planning processes, reduce transaction costs and make donor coordination more efficient. On top of all that, it is meant to improve dialogue between donor and recipient governments.

Another assumption is that budget support can strengthen the role of parliaments and audit courts, by increasing transparency. The state's improved performance is then supposed to boost the legitimacy of public institutions as well as national cohesion in general.

The 2005 Paris Declaration on Aid Effectiveness set several goals that are supposed to be met by 2010. Among them are that at least 85 % of Official Development Assistance (ODA) flowing to the government sector be reported on the recipient country's budget; that at least 75 % of ODA be disbursed according to annual or multi-year frameworks; and that a minimum of 66 % of ODA be spent as part of programme-based approaches, especially through budget support.

Risks and side effects

Unfortunately, budget support can also have negative effects. For example, it can weaken legislative competence (Molt, 2006). When important budget decisions are made in negotiations between governments and donors, the parliament loses its authority over the budget. If legislators face a fait accompli and the opposition’s rights are curtailed, then budget support completely flies in the face of efforts to support democracy.

No doubt, governments will do their best to fulfil the conditions imposed by the donors filling their coffers. Accordingly, they will feel at least partially discharged from their obligation of accountability to their parliaments and the public in general.

Further problems with budget support arise primarily with respect to administration and finance. The effectiveness of budget support may be hampered by misallocation of funds, lack of implementation capacities and plain embezzlement. Measures to strengthen the financial administration in donor countries are supposed to cut these risks.

Capacity building in public finance, however, is a massive challenge (Hoff, 2008). The task extends beyond central government offices to include local, regional and various sector-specfic administrations. Bureaucracies at all levels must be made resistant to corruption, and empowered to implement policies more efficiently. Obviously there is a risk of losing sight of the principle goals of development: democracy and balanced economic, financial and welfare policies.

Another concern is that budget support will undermine the initiative of governments in poor countries. That applies particularly to issues such as boosting productivity and achieving a balanced budget in the medium or long run. No matter how intense, political dialogue will never equal the power of economic coercion.

Where oversight is insufficient, moreover,
budget support can also free up internal funds, which could then be used for questionable purposes, such as defense spending or conspicuous infra­­struc­ture that have nothing to do with the common good.

Democratic oversight

Considering these potential problems, budget support is clearly most effective in countries where a strong, legitimate, reform-minded and democratically established government is in power. Further conditions for success include transparency, accountability, oversight by democratic institutions and independent assessment. Only where all these criteria are met will budget support strengthen the quality and capacities of public-finance institutions in the partner country, bolstering economic and social reforms domestically.

The instrument can also help to temporarily stabilise social welfare funding. It could also be used in support of administrative decentralisation programmes in order to boost local ownership (note essay on page 169 on local governments). In any case, however, budget support must be supplemented by other efforts to build and develop institutional capacities at all the relevant levels.

Most countries that already receive or should receive budget support, however, have certain shortcomings. Every specific case must be individually reviewed to determine:
- how serious the deficits are,
- what opportunities exist for improvement, and
- whether the attendant fiduciary risks are acceptable in relation to the expected advantages of budget support.
Budget support is certainly an inadequate tool for rebuilding fragile states, even if this aid modality is combined with other forms of assistance. Of course, states that are no longer dependent on foreign aid – emerging-market nations, for instance – also require other strategies and tools. The Paris Declaration is only partially applicable to these countries.

Steps in the right direction

Rejecting budget support in general is certainly not in Germany's interest. Germany's participation in general budget support has been minimal so far, preferring to focus instead on sector-specific programme assistance. But the Federal Government has stated the intention of expanding the share of general budget support in the future.

So far, Germany’s participation in the dialogue among multi-lateral institutions on general budget support has been insufficient. German engagement needs to intensify, especially within the World Bank and European Union. Drawing on our evaluation of several diverse institutions, we offer 11 recommendations for a more successful application of budget support.

(1) Country-specific decisions: Germany should support efforts to shape the international debate so that it does not wholly centre on the Paris criteria. It would be wrong to make these criteria into obligatory guidelines: they are simply too sweeping. The Federal Government should instead push for a nuanced discussion, particularly when it comes to the political processes in partner countries and the question of citizens’ ownership, which is especially relevant among the poor. Germany should demand a detailed analysis of the effects of budget support – and of the Paris Agenda in general.

(2) Democracy and the rule of law: If a decision has been made in favour of budget support, then both the receiving country and the donors must ensure that an auditing process is put in place. The parliament and an independent auditing agency have to be able to monitor the flow of both external and domestic funds. Germany’s Federal Government should ensure that strengthening the auditing process does not come at the expense of other important goals, such as strengthening parliamentary responsi­bility.

(3) Exit strategy: Scenarios for the period after budget support ends must be consistently kept in mind from the very beginning. Budget support is, by its very nature, a limited affair. If, as intended, this tool is supposed to contribute to the stabilisation of countries, then measures are needed early on to address potential problems when the flow of aid ends. It should also be considered to use budget support as a kind of reward for a democratic and well-run country. That approach would reduce dependency.

(4) Careful selection of recipients: Budget support is only suitable for a few, democratically-run countries. They have to be moving in a positive direction and must be involved in a variety of international cooperation projects. Germany needs a multifaceted relation with these countries that goes beyond budget support alone.

(5) Transparent decisions: The criteria determining which countries receive budget support and how the criteria are weighted should not only be presented in a more transparent manner, but they should also be consistently reviewed. In practice, many of these criteria do not match the expectations of German aid agencies. It is a step in the right direction that the appropriation criteria for budget support used by the Federal Ministry for Economic Cooperation and Development are known in Germany, but it remains unclear in certain cases how these criteria are weighted in the country selection process.

(6) Clear conditions: In the case of serious violations of human rights or other international standards, donors should impose sanctions more quickly and decisively. Sanctions could include the suspension or reduction of payments. If cooperation continues with these governments without any consequence, that would create the impression that donors are supporting destructive behaviour. Non-governmental organisations are best suited to provide aid to people under such conditions. Under no circumstances may problems of fund-disbursement lead to support for policies that run counter to Germany's interests. Even small violations of agreements in regard to development goals or the administration of funds should immediately be discussed in political dialogue. Germany should push for fulfilment of agreements.

(7) Concentrate on a few countries: Germany should consider limiting its participation in budget support to the few countries that meet the necessary preconditions for efficient implemention. That would be an opportunity to assume more of a moderating role in the political dialogue in these cases. Doing so would make particular sense where German agencies are involved in complementary programmes with the governments concerned on issues such as strengthening parliaments and other democratically elected bodies such as local governments, the security sector or the judiciary.

(8) Engage civil society: The success of budget support depends on basic democratic oversight. Multi-lateral donors frequently limit their support for parliament and parties to technical assistance to committees and agencies at the national level. But to ensure the full participation of citizens in the political process, there must be a diverse and empowered civil society. Thanks to Germany's party-political foundations, which are closely aligned with the parties represented in the Bundestag, Germany has an internationally recognised and proven set of tools to support democratisation in a wide sense, involving civil society, for instance. Involving these party-political foundations in budget-support programmes could also help further public debate in developing countries on such issues as budget management and financial oversight.

(9) A mix of instruments: Consulting services should always accompany the political reforms agreed to as a condition for budget support. Germany should only provide budget support to countries where it also has established programmes and projects. German development agencies command sectoral expertise based on the experience of many years. Such knowledge should be used in a more systematic manner when making decisions on funds or engaging in political dialogue. Germany’s Federal Audit Office confirmed in a 2008 report that using the various development tools in a coherent system was particularly effective.

(10) Clear responsibility: Decision-making on budget-support volumes, conditions and evaluation of results is not transparent enough. The principle of individual responsibility must not be weakened in favour of some kind of collective responsibility. Currently, no one can really be held responsible for the decisions that are made during complicated rounds of negotiations, neither the recipient country nor any individual donor agency. That is another reason to focus on just a few partners. Germany would then take on a particular responsibility in selected countries, and that responsibility would also apply to the political dialogue.

(11) European consistency: One of the most important demands of the Paris Declaration is for better coordination and division of labour among donors. Donors certainly back this goal in principle, but in practice, there is quite a bit of resistance on their side. It would be a huge step forward if there were at least closer coordination within the EU. Its members supply 55% of the world's ODA, and they are particularly involved in sub-Saharan Africa, where the majority of low-income countries are located.