Aid in developing countries has not always been effective. Ghana’s debt problem has increased, as has its dependence on aid. Recently the government of Ghana and its development partners agreed on an aid package called Multi-Donor Budget Support (MDBS) to finance poverty reduction. This draft paper, produced by the Institute of Economic Affairs in Accra, investigates whether MDBS in Ghana can overcome the problems of tied aid and other programme support, particularly in light of Ghana’s debt burden.
Ghana’s historical record suggests that in the 70’s donors benefited more from aid packages in Ghana since most aid was in the form of multilateral loans not grants. In the 80s aid flow increased substantially but it was not until the 90’s that aid was aligned to an agenda to alleviate poverty. More recently, emphasis has been placed on country ownership and skilled policies to make aid effective.
Old-style tied aid is considered less popular and less efficient than direct budgetary support (DBS). Ideally, maximising development should be separated from the notion of pursuing commercial interest. MDBS aims to overcome the problems associated with dealing with different donors, particularly, to reduce transaction costs and to ensure a continuous flow of aid to finance poverty related expenditures. However, limitations arise from the fact that:
- Historically, aid volatility has been a major factor driving ineffectiveness. There is little proof that MDBS would make aid inflows more predictable.
- Given that donors are in consultation with each other and are likely to “compare notes”, it is possible the bigger donors could cut down on the grant component and restructure their aid.
- MDBS is unlikely to operate in a vacuum. The concern is that the mix between MDBS and other forms of aid would not significantly reduce transaction costs, a major factor driving aid ineffectiveness.
- Japan, one of Ghana’s biggest donors has not signed up to MDBS. Japan could jeopardise MDBS by continuing to give food aid and other project support which has high transaction costs.
Multi donor budgetary support should reduce transaction costs and make use of local accounting systems to build local capacity and promote country ownership of policies and programmes. MDBS is innovative and would work in Ghana but requires trust and coordinated effort between government and its development partners. Policy implications for the success of MDBS should note that:
- The effectiveness of MDBS depends crucially on measures that would help reduce the debt burden. The government must not be compelled to use inflows to service its debt.
- Gains from MDBS would be significantly higher if aid policies were synchronised so that other forms of project support operate in a similar way.
- Unlike direct budget support, MDBS aims to harmonise development partners (DPs), policies and procedures to minimise transaction costs for government. Provision of pooled funding is unique to MDBS.
- MDBS should minimise donor influence, especially on policy reversals. Progress assessment would be based on goals set by the government of Ghana. Government would have the prerogative to determine on which policy areas the fund is spent.