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Least Developed Countries Report 2008 says outside conditionalities should be subordinate to local knowledge and national policy priorities
Geneva, 17 July 2008 - The world´s 50 poorest countries should have greater control and flexibility over how the foreign aid they receive is used so that is has the greatest positive impact, Least Developed Countries Report 2008(1) recommends. The report says rules and conditions attached to this incoming money should not be so stringent -- or so tied to meeting economic targets -- that governments are hindered from tailoring development plans that meet local and national conditions. Greater "ownership" will not only channel aid where it is most effective, the report contends. It will also help governments in least developed countries (LDCs) improve their governance capacities -- their abilities to plan, analyze, and carry out development projects in ways that stimulate economic growth.
The notion of ownership is at the heart of the partnership approach to development cooperation elaborated internationally since 2000. The principle has received strong political support at the highest level, such as from the Group of 8 summit at Gleneagles, Scotland, in 2005. "It is up to developing countries themselves and their governments to take the lead on development. They need to decide, plan and sequence their economic policies to fit with their development strategies, for which they should be accountable to all of their people." (Gleneagles communiqué, 2005).
This year´s Least Developed Countries Report is subtitled "Growth, poverty and the terms of the development partnership." The study says that while foreign aid can help mobilize domestic resources so that they spur economic progress, such aid is not an engine for long-term development. Domestic resources, talents, and ideas have to be the basis for that. Employing foreign aid to catalyze the process and matching it to local conditions requires that LDC governments -- which know these conditions best -- assume the leadership role.
LDCs continue to rely heavily on external sources of growth, especially official development assistance (ODA). Among LDCs in 2006, the average share of ODA disbursements as a share of GDP was about 8%; with island LDCs registering the highest aid dependence (17%), followed by African LDCs (9.3%). The lowest aid dependence was shown by Asian LDCs (4.8%), and if Afghanistan is excluded, the Asian rate was only 2.7%. However, in the case of some LDCs, dependence far exceeds regional averages (see figure 1).
The report recognizes that "second generation" Poverty Reduction Strategy Papers (PRSPs) have become the main instrument by which aid donors and recipient governments fashion development plans. Thirty-nine LDCs thus far have prepared PRSPs and have presented them to the boards of the World Bank and the International Monetary Fund (IMF). Since 2000, aid partnerships have placed increased emphasis on the principle of national country ownership, and the approach is one of the main components of the Paris Declaration on Aid Effectiveness (2005) whose implementation will be assessed at a meeting in Accra, Ghana, in September 2008.
But there is still a big gap between rhetoric and practice, the report contends. The current aid system is not as effective as it could be because ongoing aid delivery mechanisms continue to undermine effective country ownership. Problems include poor alignment between donors and recipients, lack of information, lack of transparency, donor-led, top-down, parallel systems of aid delivery, lack of coordination and harmonization between aid and government plans and budgets and processes, lack of aid predictability, and wide annual fluctuations in the amounts of aid delivered.
Both the World Bank and IMF have made major efforts to reduce the negative effects of conditionalities for the use of aid, but the job is far from done, the report says. For example, official development assistance (ODA) inflows to Malawi, Zambia, and Sierra Leone were cut in 2003 and in 2007 because of those countries´ failures to meet macroeconomic targets. Macroeconomic stabilization, privatization, and liberalization of the banking and financial sectors remain key conditions applied to aid, complemented with more rules on governance affecting LDCs than ever before. These requirements limit what governments can do and have adverse consequences, the report says. -- a system is needed that allows government ownership while ensuring donors that aid is used properly and effectively. The report also suggests that the development model underpinning IMF-style conditionalities on aid has not led to sustainable or inclusive growth in most LDCs.
There must be greater harmony between donor preferences and recipients´ real needs, the report says. It sees some signs of optimism in the PRSPs developed by Mozambique, Tanzania, Uganda, and Afghanistan, which have strong aid-management components.
Reclaiming development through aid management policies
UNCTAD recommends Aid Management Policy (AMP) - a practical new instrument that stresses mutual accountability of donors and recipient governments and aims at reducing transaction costs. Aid Management Policy also provides a framework for strengthening state capacities for effective use of foreign aid.
LDCs need to take a bottom-up approach with their aid programmes, focusing on home-grown solutions through maximum use of local knowledge, the report says. This will require strengthening their management and technical skills -- a process already under way in a number of LDCs -- so that solutions can be tailored to meet local challenges. LDCs also have to improve their capacities for exploration of theoretical and policy alternatives and think more independently about how to advance development, the report says. There should be space for trial and error in designing and trying policies, and space for governments to adjust their methods to meet local realities over time. The intent is for governments to turn themselves into effective states capable of spurring and managing economic growth through active, home-grown development governance, the report says.
Tables and figures
Figure 1 - LDCs most dependent on foreign aid (Net ODA disbursements as a percentage of GDP, 2006)