How should aid donors allocate aid between recipient countries if their objective is to advance development?2 This question poses both conceptual and operational issues. All donors have rules and procedures that feed into the determination of the level and composition of aid transfers to different recipients. In many cases there is an explicit formula which, while not determining in a mechanical sense, certainly sets the benchmarks from which the allocation decision begins. One such formula is the IDA allocation formula, but other donors have procedures that are similar in spirit.
A very simple framework would suggest the importance of two key factors in the allocation choice between potential recipient countries. First, how successful would this aid be in aiding development? Second, how is the development in one country to be valued against that in another? The first is an “aid productivity” question. The second is a “valuation of outcomes” question. The second question is relatively easy to answer if the donor’s valuation of development in recipient countries is clear. Given the development outcomes the donor is interested in, for example a reduction in infant mortality rates, a natural specification of the valuation is that a unit improvement should be valued more the worse is the starting point. Thus, roughly speaking, for any given degree of aid productivity, aid allocation should vary inversely with the level of development of a country (the exact relationship would need a closer specification of the valuation function).
The question on valuation of development outcomes is not without its complexities3. But it can be argued that, at least to some extent and especially in the wake of the consensus on the Millennium Development goals (MDGs), the international community has something of an idea of what it values as the outcome of development. Rather, it is the first question that has vexed aid analysts and practitioners alike, because the productivity of aid is not independent of the modalities of aid delivery and the usage of that aid. The arc of thinking has traversed a project oriented phase, where the outcomes of specific projects were the guide to aid allocation, and a policy oriented phase, where the policy parameters of the recipient country were seen as a better guide to the productivity of aid. The discussion has often been cast in terms of the much used, and abused, term “conditionality.”
At its most general, conditionality is nothing more than the rules and procedures according to which a donor transfers resources to a recipient. To be against conditionality in general doesn’t make sense. The devil really is in the detail—the detail of the rules and procedures according to which aid is allocated and disbursed4. And these rules and procedures kick in at different levels, in the overall resource envelope allocated to a country, in the division of this envelope between different types of assistance, for example project or program modalities, and in the specific conditions that apply to particular projects or programs.
This paper is about the logic used in deciding the allocation of the overall aid resource envelope for a country. Since total resources are finite, such allocation has to be based, explicitly or implicitly, on a comparison of relevant features of different
recipient countries. Perhaps the most prominent such method for comparison is the IDA allocation formula, not simply in terms of the total volume of resources that are allocated but because it is generally recognized that IDA procedures have a strong
influence on the procedures of other donors as well. The component that is of specific interest in this paper is the method of cross-country comparison, the Country Policy and Institutional Assessment (CPIA) formula. The paper considers the logic of this
formula, and proposes a revision to it5.
The plan of the paper is as follows. Section 2 outlines the IDA allocation procedure and the role of the CPIA in this procedure. Section 3 discusses the logic behind the use of the CPIA and offers a critique. Section 4 proposes allocations based
on development outcomes and debates the major criticisms of this approach. Section 5 concludes by offering a modest revision of the CPIA as the first step to moving towards a development outcomes based approach.
- T.H. Lee Professor of World Affairs, International Professor of Applied Economics and Management, and Professor of Economics, Cornell University. Paper for presentation at the AFD-EUDN conference, Paris, November 25-27, 2004. The ideas in this paper have been presented at seminars and panels at Princeton University, IFAD (Rome), IFPRI (Washington, DC), the World Bank (Panel on Lessons of the 1990s), the DPRU/TIPS/Cornell conference on African Development (Cape Town), and at DFID’s Conference on Reaching the Very Poorest (London). Parts of this paper draw on my contribution to the DFID conference, “What Change Does Attention to the Poorest Imply?” I am grateful to participants at these meetings for their helpful comments.
- For overviews of the aid literature, see Tarp (2000) or Kanbur (2003).
- See Kanbur (2004a)
- For a discussion of conditionality in the context of the history of development assistance, see Kanbur
- There are, of course, many aspects of the development assistance process that are important but are not
covered in this paper, for example, the sometimes perverse incentives in aid agencies to move money rather than focus on the best use of that money, or the interplay between foreign policy objectives and development objectives in the realpolitik of development assistance allocations. Also, my specific focus is on IDA, so I will not be discussing formulae used by other agencies such as the European Union, DFID or USAID.