34353405.doc - Reforming the Formula A Modest Proposal for...

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Reforming the Formula: A Modest Proposal for Introducing Development Outcomes in IDA Allocation Procedures By Ravi Kanbur * First Draft: October 2004 Contents 1. Introduction 2. The IDA Process and Formula 3. The Logic of the Formula, and a Critique 4. Outcomes Based Aid Allocation: Criticisms and Responses 5. Conclusion: A Modest Proposal Abstract This paper develops a modest proposal for introducing final outcome indicators in the IDA aid allocation formula. It starts with a review of the current formula and the rationale for it. It is argued that this formula, and in particular the Country Policy and Institutional Assessment (CPIA) part of it, implicitly relies too heavily on a uniform model of what works in development policy. Even if this model were valid "on average", the variations around the average make it an unreliable sole guide to the country-specific productivity of aid in achieving the final objectives of development. Rather, it is argued that changes in the actual outcomes on these final objectives could also be used as part of the allocation formula. A number of conceptual and operational objections to this position are considered and debated. The paper concludes that there is much to be gained by taking small steps in the direction of introducing outcome variables in the IDA formula, and assessing the experience of doing so in a few years' time. * T.H. Lee Professor of World Affairs, International Professor of Applied Economics and Management, and Professor of Economics, Cornell University. Paper for presentation at the AFD-EUDN conference, Paris, November 25-27, 2004. The ideas in this paper have been presented at seminars and panels at Princeton University, IFAD (Rome), IFPRI (Washington, DC), the World Bank (Panel on Lessons of the 1990s), the DPRU/TIPS/Cornell conference on African Development (Cape Town), and at DFID’s Conference on Reaching the Very Poorest (London). Parts of this paper draw on my contribution to the DFID conference, “What Change Does Attention to the Poorest Imply?” I am grateful to participants at these meetings for their helpful comments. 1
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1. Introduction How should aid donors allocate aid between recipient countries if their objective is to advance development? 1 This question poses both conceptual and operational issues. All donors have rules and procedures that feed into the determination of the level and composition of aid transfers to different recipients. In many cases there is an explicit formula which, while not determining in a mechanical sense, certainly sets the benchmarks from which the allocation decision begins. One such formula is the IDA allocation formula, but other donors have procedures that are similar in spirit. A very simple framework would suggest the importance of two key factors in the allocation choice between potential recipient countries. First, how successful would this aid be in aiding development? Second, how is the development in one country to be valued against that in another? The first is an “aid productivity” question. The
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