The Architecture for Development Co-operation:

Is reform feasible without a policy paradigm shift?

by

Prof. Louka T. KatseliDirector, Development Centre

Assisted by Felix Zimmermann

4 February 2005

OECD DEVELOPMENT CENTRECENTRE DE DEVELOPPEMENT DE L’OCDE

A growing consensus for system reform

1. Agenda Setting

2. Implementation

3. Monitoring and Evaluation

Major Shortcomings – Agenda Setting

ACTORS• Hegemony of large donors in policy

priorities• Influential bilateral donors• Dominance of BWIs in policy

selection• Weakened and uncoordinated UN

agencies• Private financial institutions• Multinational companies

EFFECTS• Lack of voice and

ownership• Limited participation of

local stakeholders• Aid-dependency syndrome• Diffused political

responsibility• Weakened credibility of

domestic institutionsPOLICY PROCESS

• Normative “one-size-fits-all” approaches• Mismatch with local conditions and

needs• Selectivity• Lack of policy coherence across relevant

policy domains• Ambitious long-term agendas through

short-term instruments

Major Shortcomings - Implementation

ACTORS• Multitude of operating actors

EFFECTS• Unpredictable financing

and economic environment

• High transaction costs• Inefficient use of

resourcesPOLICY PROCESS

• Improved but limited harmonisation of donors

• Plethora of donor-driven projects, policies and practices

• Multitude of funding mechanisms and instruments

Major Shortcomings - Monitoring and Evaluation

ACTORS• Donor-side experts• Evaluation units within donor

institutions

EFFECTS• Limited monitoring capacity on

the ground• Low accountability to public (on

donor and recipient sides)• Lack of transparent operations• No arbitration mechanisms• No internal learning by doing• Limited international sharing of

best practices

POLICY PROCESS• One-way monitoring and

evaluation• Monitoring of inputs rather

than outputs• Limited use of objective

outcome indicators• Limited “peer reviews”

Informational Asymmetries and Adverse Selection– Informational asymmetries lead donors to engage in

practices harmful to recipient interests– Poor countries or weak-capacity states experience

more difficulties in obtaining adequate financing “Free-rider” effects among recipients

– Wait-and-see-strategy: a recipient country questioning existing practices might lose resources; an “obedient” recipient will not

How do we explain inertia?

Failure of collective action– Beneficiaries of reform - taxpayers and recipient

communities - are dispersed and disorganised– Future benefits from reform are uncertain– Reform transaction costs incurred by intermediaries

(i.e. agenda-setting institutions) are high and immediate

• Present costs of reform are larger than the present value of expected benefits

• “Agenda-setting” actors have no incentives to pursue reform

How do we explain inertia?

Therefore…

We have a policy regime intermediated by entrenched but rational institutional interests

We need a policy paradigm shift: reform requires new incentive structures for donors, intermediate institutions and recipients

A Bias for Reform through Restructured Incentives: 10 Ideas

1. Allow those with most to lose from failure to lead: recipient governments and local accountable institutions

2. Secure sustainable political support through domestic participative processes based on institutional competition

3. Encourage policy coherence through comprehensive strategies for growth and poverty reduction

4. Build a “bias for hope” by focusing on achievable short-term outcomes

5. Increase and coordinate diverse financing from public and private sources by tying and pooling financial allocations around specific outcomes

10 Ideas continued

6. Ensure predictability, shared commitment and responsibility through contractual relationships

7. Foster “learning by doing” through rolling programming

8. Develop mutual transparency and accountability through independent monitoring and evaluation mechanisms

9. Reward positive outcomes through “performance conditionality”

10. Lower “agencies’ costs” of reform through incremental change, diversity and enhanced options

Like the samba or the tango, development is not something one can learn by correspondence. It requires a shared process of active and retroactive learning by doing.

Javier Santiso (2000)

Is Best Practice on our Doorstep?

The EU Regional Policy– Aim: convergence and social cohesion of least-

developed EU regions– A long tradition of European Community Support

Frameworks (ECSF)• 1st CSF from 1989-1993• 2nd CSF from 1994-1999• 3rd CSF from 2000-2006• 4th CSF from 2007-2013 (currently being negotiated)

Development Support Frameworks (DSF)

How would they work?

Preparatory Stage

1. Consultation process with all major stakeholders

2. Recipient proposal of comprehensive and multi-annual development strategy

Including regional administrations and civil society

Giving voice to local stakeholders; allow for institutional competition.

ECSF DSF

Recipient government proposes strategy, consisting of National Operational Programs (NOP) and Regional Integrated Programs (RIP)

A development strategy proposed by recipient country (NDS) or regional institutions (RDS) to bilateral agencies and intergovernmental institutions

Preparatory Stage (cont’d)

3. Integrated and coherent programmes contain policy initiatives and projects with time frames, financing requirements and expected impacts

NOP projects address sectoral priorities.

RIP projects address regional priorities.

NOPs and RIPs adapted to country or regional specificities and institutional set ups, integrating the growth and social policy agenda.

Negotiation Stage

1. Stakeholder negotiations

2. Contractual agreement with detailed mutual obligations

Discussions between a designated Managing Authority and the EU Directorate for Regional Policy

Finance Ministry and local Managing Authority negotiate with bilateral agencies, or intergovernmental institutions (e.g. EU Development & EuropeAid)

ECSF DSF

Signed by recipient country and European Commission. Rolling programmes ensure continuity of projects across CSFs

Agreements would be flexible, but binding between two or more partners. Rolling programmes would assure continuity.

Financing and Implementation Stage

1. Financing provisions

EC’s Structural Funds cover up to 75% of total ECSF budget. The rest is supplemented by locally-raised public and private resources.

An advance allows ECSF to be initiated.

BWI and regional banks assist government with programme’s financial assessment.

Public and private partners align pledges around all, or a selected set of, programmes depending on donor preferences (e.g. Norway & MFTAM support education NOP)

Disbursement of funds coordinated by local budget authorities through decentralised special accounts.

ECSF DSF

Financing and Implementation Stage (cont’d)

2. Recipient-led implementation

A Managing authority with decentralised units.

A Managing Authority with a network of decentralised units and participating institutions.

DSFs serve as a focal point for donor harmonisation and coordination, and help to identify financing gaps.

Monitoring and Evaluation Stage

1. Independent monitoring & evaluation system

2. Mutually-agreed follow-up evaluations

Reports on all programmes at predetermined intervals evaluate absorptive capacity, implementation and effectiveness.

Representative, but independent, M & E Committee conducts regular evaluations at predetermined intervals.

Arbitration procedures could be envisaged.

ECSF DSF

Financial disbursements are conditional on positive outcomes.

Corrective action, penalties or even refunding may follow.

Managing Authorities and government are accountable to national parliament and the European Commission

Financial allocations and replenishments are tied to evaluations.

Managing Authorities and participating institutions are accountable to national authorities and development cooperation partners.

The DSF approach would not only encourage:

OwnershipCoordinationResults-Based ManagementPredictability

But would also provide incentives for:

Matching needs with financingRegional integrationMutual accountabilityPerformance-conditionalityCapacity building in recipient countries

Don’t go for the BIG BANG!

A development support framework should allow

for diverse approaches and preferences

Thank you!

In dealing with the multiple and complex problems of development, we have learnt that we must be deaf, like Ulysses, to the seductive chant of the unique paradigm.

Albert Hirschman (1995)