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Forum for the Future of Aid

Southern Voices for Change in the International Aid System Project

The Forum on the Future of Aid is an online community dedicated to research and opinions about how the international aid system currently works and where it should go next

organised by ODI

Policy Coherence: Aid, Trade and Investment

Source: North South Institute

In principle aid is used to assist low-income countries evolve an appropriate mix of policies and institutions to support their development goals. The efficiency and effectiveness of this process could be enhanced by increased coherence within and across the aid, trade, and investment policies which feature prominently in the donor-recipient relationship. Policy coherence exists when the gap between policy intent and outcome is minimized by using mutually supportive approaches in related policy areas in pursuit of a common goal. Policy coherence is naturally more complicated where national policy is significantly influenced by policy-making at the supranational level. In this case policy coherence requires harmonization through international cooperation around jointly determined and voluntarily accepted common norms and approaches.

Central to the aid relationship is a common understanding of development as societal transformation for the purpose of enhancing the abilities of all members of the society to shape their own lives. In this context, the goals of development combine income growth with poverty eradication and human development, while the “drivers” of development include macroeconomic stability, openness, good governance, quality infrastructure and strong institutions. Among these, openness and institutions are the most contentious and constitute the main sources of policy incoherence. In both cases, no general consensus has emerged regarding the best approaches, the adjustment processes and time paths for generating sustainable growth through policy and institutional reforms.

The aid relationship presumes an understanding that both sides share a common interest in achieving certain development objectives. It is characterized, however, by policy coherence issues arising from ineffective partnership and collaboration which in turn reflect donor prescription of policy and institutional reforms considered unacceptable by recipients, and unwillingness by donors to accept experimentation in these reform areas. Similarly, standard donor prescription that trade openness enhances growth and poverty reduction often clashes with recipient-country perspectives that are more nuanced because in low-income countries supply response capacity is typically limited, the adjustment process is slow and, hence, the expected efficiency gains are limited and/or delayed while up-front costs of liberalization are real and can be substantive. Finally, with regard to investment policy where donors have tended to push aid recipients towards full liberalization, the latter seem to prefer a two-track approach which promotes export-oriented foreign direct investment (FDI) through liberalization and attracts market-seeking FDI through protection.

In addition to policy coherence within each of aid, trade, and investment policy area, coherence across the three policy areas is also critical for enhancing the positive impact of development assistance. For instance, aid disbursement conditioned upon trade liberalization will lack policy coherence where the aid recipient’s economy has limited supply-response capacity or is patently unable to defray the short-run costs. Similarly, the donor provision of aid to particular low-income countries may be more or less offset when the donors simultaneously erect trade barriers against their exports. There are many examples of this conflict. For instance, distortions to agriculture in several donor countries lead to significant reduction in the real income of many aid-recipient countries.

Across the aid, trade, and investment policy areas, there is a fundamental difference in the perspectives of aid donors and recipients. The former generally expect that aid disbursement should go hand-in-hand with the liberalization of the trade and investment regimes of the aid recipients; while the latter contend that building their supply response capacity should have priority and, hence, that trade and investment policies must be coordinated and strategically linked and involve gradual, selective and differentiated liberalization.

Enhancing policy coherence and, thus, effectiveness of aid requires an appropriate mechanism for reconciling and accommodating these differences. This should encourage the aid-recipient country to articulate a consistent development program with coherent policies for dealing with identified constraints and indicating how and where external assistance is required. It should then permit donors to evaluate the program’s coherence and feasibility and, in the process, coordinate donors’ activities with the program as a basis for establishing a constructive and mutually beneficial partnership.

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Challenge of the Current Aid Architecture: Addressing the Development Needs of Africa


"African countries like many other developing countries need external resources primarily to supplement their meagre domestic resources from their economies. The assistance countries receive redress the financial gap that arises from their development needs and act as catalyst and play a complimentary role in the implementation of the national development programs as well as stretegies. The articles concludes by saying that aid architecture must address political interests of both donors and recipient as well. Aid would only work with good public institutions and if policies are nationally-owned. Other important factors include the need to address weak public finance management systems, respect public systems by donors, and the development of Partnership principles are mutually agreed. Lastly engagement with non-state actors and parliaments must be meaningful if Africa is to make head way in improving aid architecture in the continent."

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AERC Research News

Source: African Economic Research Consortium

This edition of Research News was the first for Olu Ajakaiye, the AERC Research Director and the first after the launch of the AERC Strategic Plan for 2005 - 2010, whose theme is continuity and innovation. In Policy Forum, Stephen Gelb addresses the feasibility of attaining the Millennium Development Goals in Africa. After reminding us of the abysmal performance of sub-Saharan Africa between 2000 and 2005, as enunciated in the MDGs progress report, Professor Gelb takes issue with the stance of the Millennium Development Project that the binding constraint to ending poverty in SSA is finance. In his view, at least two problems confront this money is the problem argument: The prevalence of states weakened by 20 years of structural adjustment and economic decline and the preponderance of even weaker or missing institutions. Without effective states and strong institutions, he posits that SSA countries would not be able to use the massive amounts of financial support proposed. Professor Gelb suggests that unless poverty reduction, improved health and education, and gender equity are at the heart of policy goals, any coalition to support policy would exclude the interests of the majority of the population and would stand little chance of succeeding politically.

Considerable attention is given to 'Collaborative Research' in this issue because the substantive aspects of all collaborative research projects embarked on during the late 1990s have been concluded. Some of the projects were massive – they produced numerous individual country case studies and involved as many as 150 researchers – and as a part of the dissemination process, it is important to articulate clearly the key findings and policy lessons that can be drawn from them. Accordingly, the project coordinators have provided summaries of the major findings and policy lessons emanating from the following research projects:

• African Imperatives in the New World Trade Order

• Explaining African Economic Growth Performance

• Poverty, Income Distribution and Labour Markets in Sub-Saharan Africa (phase I)

• Managing the Transition from Aid Dependence in Africa

• Determinants of Foreign Direct Investment in Africa

The collaborative research project on 'Managing the Transition from Aid Dependence in Africa', coordinated by Samuel M. Wangwe and Carol Lancaster, stemmed from concern about ever higher levels of aid dependence in Africa, coupled with equal concern about the efficacy of aid. The output of this project has already been published by AERC in the form of the report of the dissemination conference organized in collaboration with the Economic and Social Research Foundation (ESRF), the World Bank, and the Norwegian Agency for Development Cooperation (NORAD). The ODC also published a Policy Essay on Managing a Smooth Transition from Aid Dependence in Africa.

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Amartya Sen review of “White Man's Burden?

Amartya Sen, Lamont University Professor and Professor of Economics and Philosophy at Harvard University, reviews The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good by William Easterly.

According to Sen the book offers important insights about the pitfalls of foreign aid. However, he criticises Easterly's attack on global "do-gooders" arguing that aid can work when implemented correctly.

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