One of the most frequently quoted expectations of donor harmonization is reduced transaction costs. Can harmonization reduce transaction costs? Can reduced transaction costs (TCs) increase aid effectiveness? This paper by the United Nations Development Programme (UNDP) was written at a critical time of change in government/development partner relations in Tanzania in 2004. It looks at TCs associated with different funding instruments in relation to education reforms and makes recommendations for increased aid effectiveness. It suggests that TCs do not only exist as discreet units which can be cut down with consequent increases in efficiency. They also form the most visible part of a spectrum of shared commitment to eradicating poverty.
Primary education is the priority for Tanzania’s second generation Poverty Reduction Strategy (PRS) ‘Mkukuta’. In 2004, reform of the education system was also the focus of debates about aid modalities and aid effectiveness, characterized by rapid moves towards harmonization and budget support.
It is impossible to quantify transaction costs. They are a number of working definitions, such as administrative, those result from the involvement of stakeholders with different perspectives, tying costs and fiscal costs. Whilst there has been increased academic attention on transaction costs, there is a danger of misunderstanding the issue. It is important to note that:
- Without attention to underlying problems between government and donors, TCs will simply be shifted from one part of an agency to another, and from one part of government. This will not contribute to greater aid effectiveness.
- Part of the problem is a lack of clarity on the part of donors about the overall objective of their TC-inducing activities.
- The tendency for Development Partners (DPs) to ‘harmonise’ without effective communication with government can be perceived as donors ‘ganging up’.
- The real ‘cost of poverty’ is that government officers have to keep up with the changing modalities and differing priorities of development partners.
A number of steps need to be taken to ensure that progress is made in terms of aid effectiveness, government effectiveness and poverty eradication. The Organisation for Economic Cooperation and Development – Development Assistance Committee (OECD DAC) recommends working in sector wide and more harmonised approaches. The following are additional recommendations arising from observation of the education sector in Tanzania. It is important that they are mutually supportive and proceed together.
- The Government of Tanzania should be more assertive about priorities. In education, a national debate should focus on the role of education in development and how the school system can eradicate poverty.
- The Government and DPs should invest time in achieving a genuine understanding. Capacity gaps, which exist on both sides, should be addressed.
- A few strategic interventions should be developed and communicated to stakeholders at all levels of society.
- DPs should take responsibility for building common ground with bi-lateral and UN agencies that currently have different approaches.
- Pooling of funds can reduce the burden on government so long as the pooling arrangements do not create additional unworkable demands.
- Reforms need to be supported by on-going high level dialogue to ensure that key decision makers are actively engaged. This can be expensive in short term TCs, but the potential long term gains justify the cost.
