The Politics of Aid Selectivity

Good Governance Criteria in World Bank, U.S. and Dutch Development Assistance

Wil Hout

• Publisher: Routledge
• Year: 2007
• eBook ISBN: 9781134182381
• Topic: Business
• Subtopic: Business General
• Index: Business

The first extended analysis of selectivity policies of important bilateral and multilateral aid donors, this book combines a policy-analytical with a quantitative-empirical approach. Bringing out the conflicts that may exist between foreign assistance agendas and the desire of governments in developing countries to set priorities for their national

1 Introduction

1.1 The emergence of the ‘good governance’ agenda

The attention of most Western policy-makers to the nature of political regimes in the developing countries is of relatively recent origin. For many, the end of the Cold War was a watershed between negligence of and renewed attention for non-Western political systems. Part of the lack of concern during the Cold War was attributable to the seemingly rigid power relations that characterised the era, while part of it was a function of political manipulation.

On the one hand, many Western politicians turned a blind eye to the political repression and violation of basic political rights and civil liberties in the countries that belonged to the Soviet Union’s sphere of influence. For instance, dissident movements such as Czechoslovak Charta 77 and Polish Solidarnosć received little attention from Western politicians during the period of Soviet dominance of Central and Eastern Europe, as these politicians feared to disrupt the fragile political balance between the East and West.

On the other hand, the attitude of many Western politicians towards developing countries was coloured by the position of the latter countries in the bipolar Cold War world. Statements such as ‘He may be a son-of-a-bitch, but he’s our son-of-a-bitch’ and ‘The enemy of our enemy is our friend,’ although both older than the Cold War, can be cited as credos in the foreign policies of both superpowers and their allies in the post-Second World War period. Concerns related to the maintenance of the two opposite Cold War alliances explain the long-term affiliation of the West to Mobutu’s Zaire, and the superpowers’ shift of allegiance between Menghistu’s Ethiopia and Siad Barre’s Somalia in 1977 without any concern for these countries’ internal politics.

With the ending of the political dichotomy in world politics around 1990, attention for the nature of political regimes in developing countries has clearly gained momentum. Along with the emphasis on market-oriented policies, which had been the dominant trend in economic policies suggested to the developing countries after the Reagan–Thatcher ‘revolution’ of the early 1980s, the attention for the principles of governance of developing countries achieved prominence. ‘Good governance’, the term that has been en vogue since the publication of a World Bank report on Africa (World Bank 1989), became an important objective in the policies of many aid-giving Western countries and the main international financial institutions, such as the World Bank.

Looking at the post-Cold War period in retrospect, the attention for governance issues in developing countries seems to have been part of a more general trend, which produced a remarkable comeback of development issues and development assistance policies on the international agenda. The United Nations’ Millennium Declaration, the Monterrey Consensus on the financing of development and the Millennium Development Goals (MDGs) are witness to the increasing salience of poverty reduction in international policy arenas. Key global players in the domain of development assistance, such as the United Nations and the European Union (EU), are increasing their contributions to the global funds for development. The likely failure to achieve several of the MDGs is perceived by many as a major sign of the continuing relevance of poverty as the main contemporary global social problem.

Critics of the international project that produced the MDGs have commented that the MDGs are little more than a technocratic fix for the issue of poverty that have served to cement a compromise among politicians from a variety of backgrounds and with highly distinct national constituencies. Some see the MDGs even as ‘a simplistic vending machine model that largely ignore[s] institutional factors and governance’ (Hulme and Chhotray 2006: 4). It is highly plausible that the depoliticised nature of the MDG agreements has contributed to their success in international policy circles. This is not, however, equivalent to saying that the adoption of the MDGs has resulted in the downplaying of governance concerns among the most important development assistance agencies. On the contrary, recent documents issued by several agencies witness a continuing concern with issues of governance in development assistance strategies. Examples of policy documents that stress governance include the United Kingdom’s 2006 White Paper on poverty reduction and governance (Secretary of State for International Development 2006), the paper on governance and anticorruption tabled at the World Bank and International Monetary Fund (IMF) Development Committee’s meeting in Singapore of September 2006 (Development Committee 2006) and the European Commission’s governance statement related to the ‘European Consensus on Development (European Commission 2006b; see also Chapter 6).

1.2 The reinvention of development assistance

Recent concerns about development, poverty and governance have followed a period of widespread scepticism about development theory and policy. The late 1980s and early 1990s were an episode of doubt both about the intellectual foundations of development and the targets and instruments of development policy.

The theorising about development in the 1980s and 1990s showed many signs of a discipline that was trapped in an impasse (Booth 1985) or was in crisis (Leys 1996). The main pillars of post-Second World War development thinking had come under attack (Schuurman 2000: 8–13). First, the quick pace of economic growth in some developing countries in the East and South-East Asia challenged the schematic ‘North–South’ frame of analysis as well as the very notion of the Third World, which had underpinned much of development studies. Second, notions of progress, which had arguably been equally important as the idea of the Third World, turned increasingly vacuous as a result of increasing international inequality, the apparent failure of African countries to develop and the imminent ecological emergency. Third, the role of the state as a central tool of development policies was put more and more into question.

Apart from the crisis in theorising, the scepticism about development policy was fuelled by the apparent inability of aid to lift countries out of poverty (cf. Burnside and Dollar 1997: 1). Interpretations of the East Asian success stories of development in the 1980s and 1990s stressed the importance of domestic factors, although assessments of the relative contribution of the market and the state differed. What the interpretations seemed to agree upon, however, was that foreign aid had been only marginally important, if at all (Wade 1990; World Bank 1993). Accounts of the impact of development assistance on the poorest countries, focusing on the abuse of funds by corrupt regimes and the continuation of policies harmful to economic growth, contributed to the spread of cynicism about the usefulness of aid (cf. Bauer 1991: 45–9).

The general scepticism about development policy brought about a stagnation of the worldwide spending on development assistance during the first part of the 1990s and resulted in a real decrease of funds after 1996 (Organisation for Economic Co-operation and Development 2006b). Several initiatives, most importantly at the Organisation for Economic Co-operation and Development (OECD) and the World Bank, aimed to counter this trend by rearticulating the objectives and reasserting the effectiveness of development assistance.

The report Shaping the 21st century can be interpreted as an attempt of the donor community, brought together in the OECD’s Development Assistance Committee (DAC), to reformulate the objectives of development aid in the light of declining aid levels (Development Assistance Committee 1996). Although the DAC (1996: 1) acknowledged that ‘the efforts of countries and societies to help themselves have been the main ingredients in their success’, the committee emphasised the continuing relevance of development assistance:

[T]he record also shows that development assistance has been an essential complementary factor in many achievements: the green revolution, the fall in birth rates, improved basic infrastructure, a diminished prevalence of disease and dramatically reduced poverty. Properly applied in propitious environments, aid works. . . . We have learned that development assistance will only work where there is a shared commitment of all the partners. . . . We have seen, on the other hand, the countries in which civil conflict and bad governance have set back development for generations.

(Development Assistance Committee 1996: 1, italics added)

On the basis of its analysis of development needs, the DAC formulated three development targets – some with several sub-targets – that would subsequently be used in the context of the MDGs (Development Assistance Committee 1996: 9–10; see also Chapter 2).

The World Bank set out on a similar enterprise as the OECD in the mid-1990s. Two reports published towards the end of the decade (Burnside and Dollar 1997; World Bank 1998) produced an argument on aid effectiveness that tied in with the emerging discourse on governance. The Assessing Aid report phrased the objective of the reassessment as follows:

Assessing Aid is a contribution to this ongoing learning process. It aims to contribute to a larger ‘rethinking of aid’ that the international community is engaged in – a rethinking in two senses. First, with the end of the cold war, there is a group that is ‘rethinking aid’ in the sense of questioning its very existence in a world of integrated capital markets. In response to this trend, we show that there remains a role for financial transfers from rich countries to poor ones. Second, developing and developed nations alike are reconceptualizing the role of assistance in light of a new development paradigm. Effective aid supports institutional development and policy reforms that are at the heart of successful development.

(World Bank 1998: ix, italics added)

The message contained in the last sentence of the quote – that aid is effective if given to countries with good governance and policies – would become a central element of the approach to development assistance of various bilateral and multilateral donors.

1.3 Aid selectivity

This book focuses on the emphasis on good governance that has characterised and in some cases even dominated the foreign assistance agendas of some of the important bilateral and multilateral aid donors in the 1990s and the early twenty-first century. In particular, this study analyses the introduction of governance quality as a selection criterion for development assistance.

Development assistance policies have always been influenced by ideas that became fashionable in academic circles or the development community more broadly. Because of the highly complex nature of policy interventions in developing countries, almost all development agencies have traditionally tried to monitor the success and failure of their approaches to development problems. The attention for what works and what does not in development has frequently produced new approaches to policy making and implementation (cf. Nederveen Pieterse 2001).

In this book the argument is made that the concept of selectivity is one of the latest of policy fashions related to development. It is argued (in Section 1.3 and Chapter 2) that the notion of aid selectivity was the product of the reassessment of development assistance in the 1990s that followed upon the period of crisis in development theory and policy making. For a variety of reasons, many of which revolved around the political necessity to find ways out of the intellectual and policy impasse that development was in, an ‘effectiveness discourse’ was adopted in the development community. The language of effectiveness resonated well with broader concepts of government policy making deriving from the so-called ‘new public management’ approach. In development policy making, the emphasis was placed on effectiveness in the first place as a defensive tool to rescue development assistance strategies in an increasingly hostile world.

Aid selectivity thus needs to be seen as a highly political concept, adopted by policy makers to distinguish contemporary approaches to development from those that had come under attack in the late 1980s and early 1990s. Aid selectivity is a concept that aims to give new legitimacy to development assistance by focusing on well-defined targets, new delivery mechanisms and greater attention for the recipients of aid (see Section 2.5 for more details).

The analyses contained in this book focus on one specific part of the aid selectivity agenda: the selection of aid recipients on the basis of considerations on governance quality, which are being applied alongside traditional povertyrelated criteria since the end of the 1990s. Country selectivity is the most visible, and arguably the most political, part of the aid selectivity agenda, as this element is the clearest response to the criticism that aid monies have often been used to support countries with insufficient capacity to produce results.

The next chapters are an attempt to analyse the ways in which country selectivity has been implemented in various contexts. The cases of the World Bank’s performance-based allocation mechanism, the Dutch policy on the selection of aid recipients, and the United States’ Millennium Challenge Account (MCA) have been chosen as these are the clearest examples of contemporary policies based on country selectivity. The analysis of these cases serves to establish how country selectivity has been applied by several important aid donors, what the strengths and weaknesses of the principle are and what future the concept might have in development assistance policies.

1.4 Outline of the book

This book is both about the making of policy and about the way in which policy ideas are being implemented. A substantial part of the book deals with the analysis of policies that claim to apply the argument of aid selectivity to development assistance. The analysis of three main cases of aid selectivity – the World Bank’s performance-based allocation mechanism, the Dutch selection of preferential and partner countries, and the US MCA – aims to bring out the policy theory that is guiding important decisions with respect to foreign assistance. Policy analysis serves here to highlight the central assumptions underlying policy decisions, as well as the relationship (or the lack of it) between the assumptions held and final decision-making.

In addition to studying the policy theories supporting aid selectivity, this book also attempts to analyse the implementation of selectivity policies in the case of the World Bank, the Netherlands and the United States. This part of the analysis, which tries to establish the impact of certain key variables on the selection of recipient countries and the allocation of aid over recipients, is performed with the use of quantitative-empirical techniques. The objective of this part of the analysis is to establish to what extent the choices reflected in country selection and allocation can be explained on the basis of the very criteria that were applied in the policy theory of the respective donor country or organisation.

Chapter 2 provides an analysis of the paradigm shift that occurred in the thinking about development assistance at the end of the 1990s. The discussion in this chapter builds on the interpretation of good governance and development assistance in sections 1.2 and 1.3. Chapter 2 argues that the emergence of the selectivity agenda has been the result of a successful ‘framing’ of development policy in terms of effectiveness and governance. The framing exercise can be interpreted as part of the move away from the Washington Consensus, which emphasised pro-market reforms in developing countries. The move to a new paradigm was underpinned by a reorientation in economic theory, a rethinking of assistance modalities and a reinterpretation of the preconditions of aid effectiveness. In economic theory, the increasing prominence of the new institutional economics and the emphasis of information for the functioning of markets has led to a rethinking of the role of the market in development. Importantly, the proper working of the market was increasingly seen to depend on certain institutions, such as a system of property rights, the rule of law and contract enforcement. In the mid-1990s, policy-makers started to question publicly the prevalent methods of aid delivery. The effectiveness of project-based assistance was increasingly questioned, and the emerging discourse revolving around the principles of ‘ownership’ and ‘alignment’ led to the introduction of the sector-wide approach and budget support. Finally, the concern with the effectiveness of aid was instrumental in the thinking about the quality of governance (‘good governance’) as an important co-determinant of successful development assistance policies. The rethinking of the use of development assistance produced changes in the objectives, modalities and conditions of aid. For a good number of donors, selectivity proved to be the keyword in all three dimensions: the central objectives of assistance policies were reduced to a set of quantifiable targets (the MDGs), aid delivery was focused more on specific sectors in developing countries (sector-wide approaches), preferably with limited donor intervention (budget support), and the number of targeted countries was reconsidered in the light of overall governance quality (country selectivity or ex post conditionality).

Chapter 3 contains an analysis of the performance-based allocation mechanism implemented by the World Bank’s International Development Association (IDA) since 1998. The introduction of the IDA’s approach to aid selectivity is analysed against the background of the changes in thinking about governance in World Bank circles, where changes were particularly evident under the presidency of James Wolfensohn. Issues of governance and governance quality were addressed by the World Bank primarily in the context of public sector management and the regulatory framework of a well-functioning market economy. The introduction of the Country Policy and Institutional Assessment (CPIA) as the Bank’s primary tool to judge policies and governance in countries eligible for IDA support since IDA12 (1999–2002) is analysed as an attempt to develop a relatively apolitical measurement device. The so-called governance discount (later renamed ‘governance factor’), which is based on a sub-section of the CPIA items, is discussed in the light of the World Bank’s attempt to enhance the role of governance quality in its performance-based allocation policy. The chapter contains an analysis of the implementation of this policy, to the degree that this is possible given the relative lack of transparency of the decision making process at the World Bank. The chapter is concluded with an evaluation of policy-based allocation, focusing primarily on the policy theory, the methodology and the role of the World Bank as a multilateral institution.

Chapter 4 reports on the case study of Dutch development assistance policy, in which the selection of recipient countries on the basis of governance quality has played a central role since 1998. The chapter analyses two stages of aid selectivity. During the first stage (1998–2002), when social democrat Eveline Herfkens was Minister for Development Cooperation, a group of 22 developing countries (the so-called ‘19+3’) was selected for structural bilateral assistance from the Netherlands on the basis of three criteria (socio-economic policies, the good governance record and the extent of poverty). Next to the programme to support the 22 ‘preferential’ countries, three important thematic programmes – focusing on environmental issues, human rights, peace-building and good governance, and private sector development – were provided with substantial government funds. The second stage (2003–5), under christian democrat minister Agnes van Ardenne-Van der Hoeven, demonstrated a change of course. The new minister decided to merge the programme of structural bilateral aid with the environmental and the human rights, peace-building and good governance programmes into one bilateral programme aimed at the support of 36 ‘partner’ countries. Chapter 4 concludes with an evaluation of the policy theory that was used during the two phases of aid selectivity, the methodology that was applied in the selection of the 22 preferential and 36 partner countries, and the implementation of the selection process.

Chapter 5 analyses the US MCA, which was launched by President Bush in 2002 and came into operation in 2004. The MCA is understood as an attempt of the Bush administration to reorient US development assistance policies, which until then had revolved mainly around the activities of the US Agency for International Development (USAID) and had been very much subject to strategic and foreign policy considerations. The chapter discusses the MCA’s legal framework and, more specifically, the mandate of the Millennium Challenge Corporation, the government agency that was created to implement the MCA. The analysis highlights the three sets of criteria that were applied in the selection of recipient countries – governance quality, social policies (focused, in particular, on education and health) and economic policies – and discusses their application in the selection of s...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Illustrations
• Acronyms
• Preface and Acknowledgements
• 1 Introduction
• 2 The Paradigm Shift in Development Assistance
• 3 The World Bank and Performance-based Allocation
• 4 The Netherlands and the Selection of Recipient Countries
• 5 The United States and the Millennium Challenge Account
• 6 Selectivity and Good Governance in the United Kingdom, Denmark and the European Union
• 7 Quantitative-empirical Analyses of World Bank, Dutch and US Aid Selectivity
• 8 Conclusion
• Appendix A Interviews
• Appendix B The Country Policy and Institutional Assessment (CPIA)
• Appendix C IDA Borrowers, by Per Capita Income, 1999
• Appendix D Selection Criteria of the Millennium Challenge Account
• Appendix E Low-income and Lower-middle-income Countries in the Analyses
• Notes
• Bibliography