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Contributions from
the Column
Focus
Ownership and donor harmonisation: a brief introduction
Harmonisation: Donor pledges are steps in the right direction
How KfW Entwicklungsbank assesses budget support
Bangladesh’s PRSP and civil society
African opposition to neoliberalism
Political instability and programme-based approaches
07/2006
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Challenges of
political instability
In Nicaragua and Bolivia, crises and unorthodox government action have stalled the implementation of poverty reduction strategies and programme-based budget support. A crucial question is how donors are to ensure that acceptable results are achieved even in difficult contexts. Key requirements are ownership by the recipient country, appropriate entry and exit strategies, as well as coordination and continuity of donors’ activities.
[ By Wolfram Klein and Philipp Knill ]
Budget support is commonplace in the poorer countries of Latin America today, especially in Nicaragua, Bolivia and Honduras – countries that have benefited from multilateral debt relief (HIPC, see p. 276). As much as 20% of all funding is already being pledged as budget support. Recently, KfW Entwicklungsbank took stock and came up with overall positive findings. Budget support, it was said, is a flexible tool, promotes poverty reduction, asserts German priorities, and enhances the effectiveness and efficiency of international cooperation.
However, such an up-beat assessment should not blind us to the following three imponderables:
– Poverty Reduction Support Credits (PRSCs), which are funded by the World Bank, and Multi-Donor Budget Support (MDBS) have only been around for a few years. It is too early to tell whether they will meet the high expectations in terms of poverty reduction in the long run.
– There is no consensus on the context in which budget support works best. Skeptics say that several preconditions must be met, including high national budget transparency, effective systems for monitoring use of funds, the will to implement programmes and the ability to do so efficiently. Optimists, on the other hand, stress that budget support rewards credible policy and acts as a lever to gradually improve the environment in which it operates. What is crucial, in their view, are not perfect preconditions, but a positive, developmental trend.
– Finally, there is no agreement on how such trends might be assessed. What needs to be done to keep donors delivering budget support? What needs to be avoided? This is the starting point for a complex debate. Exit conditions have not been defined clearly. One camp speaks of a new – albeit poverty-oriented – version of the old structural adjustment approach, stressing binding terms and sanctions. In that camp’s eyes, the instrument will only work if aid disbursement is directly linked to meeting conditions. Others point to the failure of such approaches in the past. They see conditions less as a mechanism based on incentives and sanctions, but rather regard them as the basis of dialogue, placing faith in recipient countries’ ownership and capacity for implementation. These people would impose short-term restrictions on payments only in serious cases.
Bolivia and Nicaragua are the biggest aid recipients in Latin America. As such, they are interesting cases for discussing these issues.
Nicaragua
Programme-based budget support started in 2004 in the form of Poverty Reduction Support Credits (PRSC I and II). These are worth around $91 million. More are to follow. Germany’s contribution at present runs to ¤10 million. The PRSC contains around 50 targets and indicators. Only 10 of them are hard, binding conditions. In late 2005, moreover, Nicaragua presented a new poverty reduction strategy for the years up to 2009. Donors consider it the basis for future budget support.
2005 saw the launch of MDBS by a group of nine donors (again including the World Bank and Germany). Many conditions were copied from the PRSCs; 42 targets were drafted for 2005 alone. A joint progress monitoring system is in place; however, payment decisions are left entirely to the respective donors, who are required to report them in due time before the Nicaraguan budget is approved.
This practice was supposed to take effect in 2005, a year in which an awkward constitutional conflict occurred. Enrique Bolaños’ liberal government, elected in 2001, had stepped up the fight against poverty and corruption. Among other things, former President Arnoldo Alemán – also a liberal politician – was sentenced on charges of corruption. Nonetheless, many in the party remained loyal to him and sided with the opposition Sandinistas, who took manipulative advantage of their control of the judiciary in several other cases. For a while, the government was in limbo. Nicaragua is officially considered a well-run country; in practice, it is ungovernable. Accordingly, the budget support process was also unsatisfactory:
– Initially, Nicaraguan ownership was not very pronounced; the matrix of conditions was geared to the heterogeneous interests of the donors. Finance and foreign ministries in Managua groaned under the burden of coordinating donors, but the line ministries remained troubled and torpid. They did not receive the money they needed. The legislative and judicial arms of government were at odds with the executive. It took an IMF threat to declare Nicaragua “off track” before a reasonably tenable budget was approved by the end of the year. A large share (20 %) was still earmarked for servicing internal debts, most of which date from the fraudulent financial crisis of 2000. The 2005 budget was tenable and “poverty-oriented” only because of the contributions donors made. However, a fruitful dialogue has started with the Nicaraguan government since.
– The progress made so far has been modest; indeed, some developments are worrisome. By late 2005, some progress had been made in terms of budget management and financial-sector consolidation. However, serious shortcomings were notable in health, education and some aspects of governance (governmental efficiency, corruption). Donors even doubted that fundamental principles like democracy, rule of law and judicial autonomy were still guaranteed. Such concerns persist. Poverty-induced spending has edged up on target to 13.6% of GDP. But the way it is measured is imprecise; most of the upturn was used for pay rises. As for the figures relevant to the Millennium Development Goals (MDGs), some trends are alarming. In primary education, for example, current data suggest that the rates of net enrolment and completion have gone down.
– The donors have made joint statements – and some of them had some effect. But donors’ payment decisions were totally disparate in 2005. Because of perceived fiduciary risks, the British made their (small) contribution elsewhere. The Finns and Germans made partial payments, whereas the Swedes and Dutch said even during the verification mission that they would pay up in full. The EU Commission initially refused to pay but then changed its mind. Some donors said what troubled them most was the lack of progress made on meeting conditions; others pointed to the “fundamental principles” originally regarded as minimum requirements; and yet others highlighted the shaky budget situation.
The situation today is no longer as tense, but matters remain precarious. Even after the elections in November, clear-cut power geometry will stay unlikely. Nevertheless, the schedule is still “non-political”, which irritates some donors. Pledges to support Nicaragua’s budget are expected before the elections. In order to make the instrument of budget support work better, it has been proposed to reduce conditionalities, make disbursement decisions more transparent and to place more emphasis on capacity building.
Bolivia
In Bolivia, the first steps towards multi-donor budget support were taken in 2003. They included the SSPC (Social Sector Programmatic Credit) financed by the World Bank and Germany and the less mandatory regime of MDBS provided by a number of bilateral donors (including Germany), the Inter-American Development Bank and the European Commission. When these programmes were drafted, the country was already politically unstable. Two presidents have resigned since. A transitional government had to pave the way for early elections, which were won by Evo Morales and his party MAS (Movimiento al Socialismo) in December last year.
According to an internal document drafted on behalf of Bolivia and the donors, the SSPC has had some positive results. For instance, continuity was maintained in social-sector policies. As for the health sector, insurance coverage has been extended to include marginalised groups. As for drinking and waste water, even the Morales government – whose representatives had formerly criticised key SSPC rules – seems prepared to accept the guidelines with little modification. Target figures for supply and disposal were achieved both in urban and rural areas in 2005. In the SSPC context, $75 million has been disbursed in the past two years. MDBS (with payments of around $40 million) has also led to results. The programme was created to complement the SSPC. It focuses on transparency of public finances, fiscal policy and poverty reduction. Despite several changes of ministers, country ownership is pronounced. The medium-range plan for strengthening public finances has been met. Budget preparation and implementation have become more transparent and more realistic; tax and customs authorities have been strengthened – and, accordingly, government revenue boosted. Moreover, the spending has decreased thanks to anti-corruption measures in the pensions authority.
However, multi-donor budget support also had its drawbacks. SSPC and MDBS do not harmonise well. In the case of MDBS, in particular, there have been wide gaps in terms of capacity building and technical advice. Donors have, moreover, failed to agree on entry conditions for budget support. The United States and France, for example, have withdrawn, upset at Bolivian decisions to regain government control over basic-service provision and oil and gas production. They consider the rights of private investors threatened. The World Bank reduced its SSPC contribution by $10 million in 2005; this year, it seems to want to stop budget support for the time being. Its fundamental mistrust of Morales is apparent.
The donor community is currently on hold. The future of budget support in Bolivia will depend on how donors assess the new development plan, which the new government wanted to present in June, and measures to reduce poverty. Governmental control over natural gas and land distribution are likely to become crucial issues. Moreover, preparations are underway for the election of a constituent assembly, which will decide on the powers assigned to the regions and the central government. These issues may yet prove explosive and re-trigger crisis in Bolivia.
After initial hesitation, the government has shown that it regards budget support as an important instrument in line with the Paris agenda. Macroeconomic and fiscal trends are also encouraging. At present, the country does not acutely depend on budget support because of increased tax revenues from the oil and gas sector. However, that situation might change fast if private investment were to dry up. Moreover, a trade agreement with the USA is about to expire. As for the MDGs, the figures show that advances were made in social sectors such as education, health and water supply as well as waste-water disposal up to 2004. The biggest problems are still stagnation of per capita income and the widening gulf between rich and poor.
Conclusions
Political and economic turbulences have made Bolivia and Nicaragua difficult partners for budget support – a fact clearly reflected by donor differences in terms of motivation, targets and approaches.
Budget support should be designed better. Greater donor transparency is one – but not the only – prerequisite for creating more credibility and “harmony”. Fulfilling the Paris Agenda depends on a broader consensus and clearer division of labour by donors as well as greater willingness to assign topical leadership to individual donors.
Erratic entry and exit decisions make the political dialogue volatile and undermine donors’ credibility. In order to exert leverage through budget support in unstable situations, donors need to become more consistent and coordinated.
– One recommendation is to split payments into different tranches, as in the EU model, so that a fixed sum is paid when certain minimum requirements are met (democracy and human rights, macroeconomic stability, presentation of a poverty-aware reform agenda), thus demonstrating the donors’ willingness to carry on cooperation despite short-term problems. Further payments (conditioned tranche releases) could then follow once other conditions are met and coherent anti-poverty strategies implemented.
– Initially, conditions should focus even more than in the past on transparent and efficient budget cycles, efficiency, poverty-relevant spending and a limited number of key reforms. Later, more sectoral conditions may be added. Clearly defined intermediate targets would be helpful to make corrective action possible in time should aberrant developments occur. That is why monitoring systems need to be improved. This topic, however, has received too little attention so far.
Ownership by partners is the crucial requirement for budget support succeeding. In the past, especially in Latin America’s presidential systems, ownership was normally too confined to the executive branch. It would be illusionary to expect financial dependence on budget support and political pressure to create real ownership. At best, ownership can be enhanced by continuous strengthening of institutions and a respectful dialogue with not just the executive, but also the parliament, the judiciary and civil society. That kind of dialogue has not sufficiently taken place.
There are many indications of budget support being a procyclical instrument, which works in a favourable environment, adding thrust to positive trends. Capacity-building, coherent conditionalities, greater transparency and flexibility of payment can bridge short-term crises. In protracted downward spirals, however, budget support will probably reach its limits. This instrument depends on ordered, rational, autonomous budget and implementation processes. Dashed expectations, diminishing payments and weak governance in target countries could therefore easily add up to a vicious circle. In difficult contexts, analysis and management of crises will prove cornerstones for budget support.
Finally, programme-based budget support is not a substitute for traditional forms of development cooperation. On the contrary, “new“ and “traditional” instruments complement one another. German agencies, for example, have been active in the drinking-water sector in Bolivia and Nicaragua for many years. Pertinent experience was useful for defining conditionalities, which, in turn, made projects more successful and reduced structural bottlenecks.
Dr. Wolfram Klein
is currently the desk officer for Nicaragua and regional issues in the Central America Division of the Federal Ministry of Economic Cooperation and Development (BMZ). The views expressed here are his personal opinions.
Wolfram.Klein@bmz.bund.de
Philipp Knill
is the desk officer for economic cooperation at Germany’s Embassy in La Paz, Bolivia. Again, the views expressed here are his personal opinions.
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