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Towards A More Effective Conditionality: An Operational Framework
World Development Vol. 27, No. 2, pp. 285±299, 1999 Ó 1999 Elsevier Science Ltd All rights reserved. Printed in Great Britain 0305-750X/99 $ ± see front matter
PII: S0305-750X(98)00127-2
Towards A More Eective Conditionality: An Operational Framework JOSE E. LEANDRO European Commission, Brussels, Belgium HARTWIG SCHAFER The World Bank, Washington, DC, USA and GASPAR FRONTINI * European Commission, Brussels, Belgium Summary. Ð The ``inducement'' function of conditionality has failed. Its intrusive,
shortsighted and ineective character is now increasingly criticized, and may have contributed, at least in part, to the poor growth performance associated with adjustment programs in sub-Saharan Africa. This article proposes a new approach to conditionality attached to adjustment programs. It is built around three main features: recipient ownership of the appropriate reform program, considered to be a key factor for success; a more long-term approach to economic reform, avoiding in particular the disruptive practice of stop-go disbursements, and enhanced donor coordination as a factor for greater aid eciency. Its implementation should lead to greater aid selectivity in favor of reforming countries, increased responsibility for aid recipients to decide on the rhythm and sequencing of reforms, and smoother aid ¯ows with less disruptive aid suspensions. Ó 1999 Elsevier Science Ltd. All rights reserved.
1. INTRODUCTION Adjustment programs have been implemented around the world since the beginning of the 1980s and indeed have become an integral part of the development strategy for many countries in all continents. Evidence shows that, while these programs led to the resumption of growth in Asia and Latin America, their performance has been less successful in sub-Saharan Africa (World Bank, 1988, 1992)1. The speci®c characteristics of African economies might have reinforced the disappointing results in comparison to other developing regions (for a study on the reasons for the Asian success see World Bank, 1993). There are reasons, however, to believe that Africa's poor growth performance can, at least in part, be traced to the way in which donors have applied conditionality in adjustment programs. The emerging conclusion is that conditionality has been intrusive, short
sighted, and ineective in improving economic policies in recipient countries. The shortcomings of conditionality are wellrecognized (Killick, 1993, p. 315; Collier et al., 1997; Killick, 1997). Firstly, ownership of the reform program by the recipient country, considered to be a key success factor, has been undermined instead of reinforced. Second, donors have tended to increase the detail and the number of conditions in adjustment operations to compensate for a perceived lack of
*
Thanks are due to Mr. Bernard Petit, Chief Econimist, Directorate General for Development, European Commission, for his guidance, comments, and review during the drafting of this article. This article does not necessarily re¯ect the views of the European Commission or the World Bank. Final revision accepted: June 17, 1998.
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commitment to reform by some recipient governments, or for their weak administrative, technical and institutional capacity. Yet, this approach has failed to persuade these countries to implement consistent and long-lasting policy reforms which they do not wish to undertake. As a result of this inducement approach to conditionality (Collier et al., 1997), poor compliance rates have been recorded in sub-Saharan Africa, but have hardly ever aected the expansion of adjustment support, thereby undermining donors' and recipients' credibility and leading to perverse incentives in favor of bad performers. At the same time, when strictly applied, conditionality has led to ``stop-go'' disbursement situations that have aggravated macroeconomic crises. Finally, traditional conditionality largely ignores the necessary link between short-term program objectives and long-term development goals, thus contributing to the common criticism that adjustment programs are shortsighted. There is also a general consensus that some form of donor±recipient compact should be used in the future as a mechanism to foster reforms and move policies in sensible directions. In this context, this article proposes practical steps to enhance the eectiveness of the donor± recipient compact. Section 2 summarizes the limits to the current practice of donor conditionality and charts the way forward. Section 3 presents the salient features of a new approach to conditionality based on three core objectives: fostering program ownership by the recipient country, improving the long-term sustainability of reforms, and strengthening donors coordination. Its implementation should lead to greater aid selectivity in favor of reforming countries, increased responsibility of governments to decide on the rhythm and sequencing of reforms and, ®nally, smoother aid ¯ows with less disruptive aid suspensions2. This article does not address issues related to the nature or the sequencing of economic reforms, nor does it discuss the overall validity of the theoretical and analytical underpinnings of adjustment policies. 2. THE LIMITS OF CONDITIONALITY AND THE WAY FORWARD Three main features can be identi®ed in recent studies on the design and implementation of donor conditionality: an increasing number of conditions have been attached to disbursements; generally, poor compliance rates were
recorded, which were worse for technically and politically complicated reforms; and, ®nally, bad performance did not always translate into the suspension of external aid. The number of conditions attached to adjustment programs is usually impressive and has expanded from macroeconomic conditions to sectoral policies, such as human development and environmental protection (Killick, 1997, p. 486). The average number of conditions and performance criteria per adjustment loan rose from 21 in 1980±88 to 35 in 1989±91 (World Bank, 1992, Table A2.3). These developments support the notion that inducement has become the major rationale for conditionality (Collier et al., 1997). Indeed, experience shows that, paradoxically, doubts about government commitment in favor of reform, or the perception by donors of a lack of administrative and technical capacity on the recipient side, might be elements that contributed to this outcome. In such cases, donors have tended to ``®ne-tune'' the program by increasing the detail and the number of the measures to be undertaken, having the impression that this would ``lock'' the government into the reform process. This attitude, however, has at least two negative side eects. First, it diverts scarce administrative capacity from critical reforms. Second, it shifts responsibility for program management and monitoring from recipient countries to donors, thus reducing program ownership and transforming donors into major players on the domestic political stage. Compliance with conditionality is low and delays and interruptions have beset program implementation. The combination of an increased number of conditions with a weak administrative capacity, and in several cases government resistance to economic reform, leads inevitably to the generally poor compliance rates recorded. Only two out of every three conditionalities attached to World Bank programs in sub-Saharan Africa were implemented, (Webb and Shari, 1992, p. 73, Table 5±4)3 and, of a total of 37 sub-Saharan African countries who bene®ted from adjustment lending during 1980±96, 70% have a weak or very poor compliance record (World Bank, 1997). During 1979±93, 53% of all IMF standby, ESAF, and SAF programs were discontinued before the end of their intended life for noncompliance (Killick, 1995, p. 62). In addition, the aforementioned ®gures disguise the fact that in many instances conditionality is acceptably implemented only at the expense of
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watering down the original requirements (Berg, 1991, p. 219). Compliance rates dier depending on the type of reform. They are higher for ``single shot'' measures that require little follow-up (e.g., price and exchange rate policies) or reforms that can be put into eect by a small number of government ocials. Conversely, compliance rates are lower for reforms requiring institutional change (e.g., civil service reform), cooperation between various government agencies or with the private sector and civil institutions (European Commission, 1995a, p. 194). A ``partial reform syndrome'' with a bias in favor of measures mainly related to stabilization and less to structural/institutional transformation, has been observed (European Commission, 1995a, p. 19). This has important implications for future adjustment operations as some African economies have now reached some degree of macroeconomic stability and are ready to embark on second generation reform programs that go beyond the stabilization agenda. These generally involve, among other measures, budget management improvement, ®nancial and public sector reforms and human capital development, all measures that require a sustained reforming attitude over a long period, an extended planning horizon, and longer commitment periods for aid ¯ows. Piecemeal conditionality, which does not foster continuous recipient ownership, and short evaluation periods, are not conducive to facilitating the successful implementation of second-generation reforms. Poor compliance rates did not always translate into the suspension of adjustment support. In fact, weak compliers have received the largest number of loans, with about six operations per country, and nearly three-quarters of the funds (World Bank, 1997). Killick (1997) presents this donor dilemma within a principal± agent framework. An overwhelming body of evidence shows that non-implementation of conditionality is rarely penalized eectively because donors are constrained in their decision-making by non-economic or political factors, or the pressure to disburse is evident if disbursement delays/stops would exacerbate macroeconomic crises and result in default on past loans and debt service arrears. In addition, inappropriate sta incentives within donor organisations, which tend to reward high funding levels, are also an important factor preventing eective sanctioning in case of noncompliance with conditionality. Such a situation can only
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undermine donors' and recipients' credibility and introduces perverse incentives in favor of bad performers. Private investment is potentially one of the most important victims of these confusing signals, as potential investors lose con®dence in both the government's commitment to reform and the donors' capacity to enforce it. On the other hand, when strictly applied, aid suspension has often led to ``stopgo'' situations and the associated macroeconomic crises, especially in the case of highly indebted countries. Perhaps most important of all, the inability of external aid to eectively in¯uence the consistent implementation of appropriate policies, as recently demonstrated by Burnside and Dollar (1996), can also be related to the practice of donor conditionality as usually applied. Indeed, the authors demonstrate that aid only spurs growth and poverty reduction when the recipient country's economic policies are sound before external funding is provided, oering therefore, one of the most powerful criticisms of the usual conditionality, heavily based on the ``bribery'' or inducement function. The lion's share of the criticism of conditionality centers on the limits of its practice, as shown above, or the content and implications of the conditions themselves, which are in some instances ¯awed, linked to inappropriate policy advice and wrong sequencing of reforms. Yet, the principle of conditionality per se, is hardly contested. This probably echoes the realistic assumption that aid without strings attached will continue to be the exception rather than the rule in a climate of shrinking aid budgets and taxpayer pressure for greater aid accountability. It also re¯ects the fact that rationales for conditionality other than inducement Ð for instance, to signal government commitment to private investors or to lock-in reforms and protect them against domestic policy pressures Ð are legitimate and should not be abandoned5. But, the recent collapse of several East Asian economies, thought to be models of adjustment, only shows how dangerous it is to ignore issues such as institutional reform, good governance, transparency and accountability, all areas in which, as shown above, the current practice of conditionality is particularly ineffective. There is, therefore, a need for a new approach re¯ecting a renewed donor±recipient compact, characterized more by consensus than by con¯ict, and where there will be little room for the inducement function of conditionality. Such an approach should also take into account
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the eects of political liberalization on economic policy design which require greater internal consultation prior to economic decisions, reinforce the importance of distributional aspects and introduce the need to identify and compensate the losers of economic reform, as well as to mobilize the winners to support change. The new approach would also have to recognize the necessity to oer greater responsibility to reforming countries in order to better adapt reforms to local political circumstances (European Commission, 1995a, p. 20). 3. THE THREE DIMENSIONS OF A NEW APPROACH The proposed approach is built around three core features presented under the main headings of this section: (a) fostering recipient ownership, (b) improving the long-term sustainability of reforms and (c) improving donors coordination. (a) Fostering ownership There is consensus about the key role ownership plays in a program's success or failure. Killick (1995) stresses that ownership may well be the most important factor for a successful program. This point is also underlined, among others, by Loup (1995), McCleary (1991), Berg (1991) and the European Commission (1995a, b). In-depth case studies (Johnson and Wasty, 1993) reveal that recipient ownership of reform programs explains good program results in three-quarters of the cases, the rest being explained essentially by external factors. The authors made an ex-post assessment of recipient ownership according to a set of four criteria: (i) locus of initiative for program formulation and implementation (i.e., to what extent the initiative was on the recipient or the donor's side); (ii) level of intellectual conviction among key policy makers (i.e., to what extent there was a commitment in favor of reform among key players in the government); (iii) expression of political will by top leadership (i.e., which concrete actions were taken as the expression of this commitment) and (iv) eorts toward consensusbuilding among various constituencies (i.e., the extent of civil society participation). Unfortunately, ``ownership'' by governments is often not high. Johnson and Wasty (1993) show that, from a total of 81 cases, government ownership is considered high in only 16 cases,
whereas it is considered ``low'' or ``very low'' in half of the programs (40 cases). There is also evidence that the degree of ownership has, on the whole, been considerably less in Africa than in developing countries in other regions (McCleary, 1991). Although it has become a popular concept, no clear and unambiguous de®nition of ``ownership'' can be found in the literature. As far as we are concerned, we will consider it to be a combination of mainly two factors: ®rst, dedication, or commitment, in favor of adjustment by key policy makers and, second, technical and administrative capacity to conceive, negotiate and implement reforms. Thus de®ned, ``ownership'' is obviously a dynamic concept, which can evolve positively or negatively during the dierent phases of program design and implementation. Hence the need to support it throughout these successive stages. Some sophisticated and intellectually stimulating proposals have been made to enhance ownership, but they seldom have an operational or practical character and are, therefore, of little use to policy makers. A simple and effective way to foster ownership could be the following: ®rst, at the design stage, governments should be encouraged to formulate and draft their own reform programs on the basis of in-depth analytical work6. For all practical purposes, donors should refrain from taking the initiative to draft policy documents, and instead act as advisors providing feedback to governments and comment on the design and likely eectiveness of proposed reforms7. Once the program is agreed upon, external aid ¯ows could begin immediately where past government records show sucient commitment to reform or, in other cases, be deferred until the government has restored or built up its credibility by beginning to implement the reforms. Second, during the phase of program implementation, the recipient country would be given greater responsibility for the sequencing and timing of reforms, as long as overall progress is adequate and agreed performance criteria are met8. As an additional device to promote recipient ownership, donors should be prepared to ®nance the technical, administrative and institutional capacity-building necessary to conceive, negotiate and implement the envisaged policy reforms. Funding for those initiatives should be managed outside the adjustment operation and should not be made conditional on the shortterm economic performance of the recipient
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country, thereby adopting a long-term perspective. Promoting government ownership of the economic reform program also implies longer delays in preparation of the program because of the extensive consultation with stakeholders involved, as well as the design of less ambitious operations. These short-term costs, however, will be outweighed by the long-term bene®ts resulting from a program which is designed, implemented and owned by the recipient government. (b) Improving the long-term sustainability of reform The uncertainty and lumpiness of disbursement ¯ows under traditional adjustment operations are major areas of concern. Irregular disbursements and delayed tranches (if one or two out of a long list of conditions are not met) can ripple through the macroeconomic framework like external shocks. In addition, because of cross conditionality, one or two unmet conditions can hold up tranches under adjustment operations by several donors. The result is that the lack of resources can have a highly destabilizing eect on the macroeconomic framework and can even jeopardize the sustainability of medium to long-term reforms which have already been implemented. When confronted by such cases, the solution adopted by donors has often consisted in waiving the conditions which have not been ful®lled, thereby undermining donor and recipient credibility. When macroeconomic conditions for tranche release are met (...), but other conditions are not, we are faced with a cruel dilemma. Failure to disburse will violate macroeconomic stability and waste the progress already made on macroeconomic goals. Disbursing, on the other hand, will postpone progress on the non-macroeconomic reforms and weaken the credibility of the government and donors. (World Bank, 1995b, p. 11).
Alternatively, the question must be raised as to what extent, or according to which criteria, should adjustment support be continued in case of macroeconomic slippage but good progress on other fronts. These are issues which cannot be dissociated from the fundamental notion that policy reform must be conceived, formulated and implemented as part of a broader long-term strategy to achieve sustainable development and poverty alleviation. Enhancing
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and sustaining the reforming attitude of recipient countries over a suciently long period of time, and better linking the adjustment phase with the long-term development strategy, should therefore be key objectives of program implementation. Such an approach would signi®cantly improve upon the current short-term bias and ``stop-go'' practice of adjustment support. Disruptive and lumpy disbursement ¯ows of external support should be minimized. Complete disbursement stops should be limited to those cases where the fundamental conditions for program success, both with regard to stabilization and structural reforms, are not met. A possible mechanism to tackle these matters could be based on a two-pronged approach: ®rst, the unbundling of the reform package into dierent groups of coherent policy objectives, taking into account their time dimension, and linking the release of funds to these well identi®ed, and dierentiated, policy areas; second, a global assessment of the policy stance of the recipient country, the reforms initiated and their results. It would be complemented by a performance-based mechanism linking the volume of aid with results. (i) Unbundling the reform package The various policies that are usually supported under adjustment operations would be ``unbundled'' into three reform areas: macroeconomic fundamentals, budget management and equitable growth. The ®rst area, macroeconomic fundamentals, relates to economic stabilization and aims at achieving sustainable external and ®scal balances, price stability, and a stable exchange rate; all indispensable ingredients for sustained growth. The second area, budget management, covers issues related to budget composition and the budgetary process (a sustainable ®scal balance, aecting price stability, would fall under stabilization objectives). This has been identi®ed as a separate area of reform because it is a key issue in development, in adjustment, and in the emerging sector development programs for several reasons: ®rst, the structure of expenditures is a clear translation of the public eort in favor of the poor and in terms of long-term development priorities; second, the quality of budget planning, execution, monitoring and control are all essential features both for the eciency of public spending and for good governance, an issue which is becoming increasingly important in the context of aid allocation across countries.
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Finally, the area of equitable growth comprises structural policies and reforms which seek to enhance the supply response, support human resource development, and reduce poverty head counts through, inter alia, removing distortions in the factor and product markets and obstacles to greater economic eciency. Theoretically, the three areas Ð macroeconomic essentials, budget management and equitable growth Ð are all closely related and performance in one of them aects results in the other two. For example, high in¯ation contributes to lower growth by causing uncertainty, making business calculations dicult and putting pressure on the exchange rate. The composition of public expenditures also has an impact on economic growth, long-term development and poverty reduction to the extent that it is directed to increasing the stock of productive physical and human capital, to providing public goods complementary to private sector activity and to avoiding excessive ®scal de®cits which crowd out private investment. Finally, the structural reforms needed to elicit output growth and the equitable distribution of its fruits may have an impact on public expenditure and budgetary revenue, and, at the same time, may aect the level and structure of prices. Yet, in practice, these three areas are suciently self-contained to be treated separately, in particular if the time dimension is taken into account. Indeed, the spillovers between the three areas take some time to materialize due to time lags in the channels of transmission. A looser monetary policy may take several months before it translates into higher in¯ation, depending on structural elements such as the velocity of money and the supply elasticity. In turn, higher in¯ation may also take several months before it aects output growth, depending on expectations and eects on consumer wealth. Fiscal policy takes at least one ®scal year to aect the allocation of resources. Even longer periods may be expected before structural reforms aect economic eciency and equity. Therefore, it seems reasonable to allow for some ``unbundling'' between the area of stabilization on one side and the other two on the other side, as long as it is limited to a short period of time, say one ®scal year. To some extent, such an approach would only formalize a practice which is already applied in reality. A recent example is Mozambique, where an International Monetary Fund (IMF) mid-term review was not concluded at the end
of 1995 because of bad stabilization results but, in order to avoid further destabilization, this institution urged other donors to continue balance of payments/budget support while a new ESAF arrangement was being considered. Another example is the fact that mature adjustment programs generally become sectoralized with reforms pursued simultaneously on several parallel tracks, and it is generally considered that there is no reason to suspend disbursements on a sectoral program simply because of temporary macro-economic slippage. Adjustment support would match the aforementioned three areas of policy performance. This would avoid situations where the entire adjustment operation is put on hold because of poor performance in only a few areas, even if progress is good in others. At the same time, this mechanism would oer greater certainty to the recipient country concerning the available volume of external funding. Donors would be invited to link part of their adjustment support exclusively to macroeconomic performance and achievement of macroeconomic fundamentals. IMF and government projections of the macroprogram (balance of payments, monetary and ®scal targets) should include only this share of donors' support which is predicated on the purely macroeconomic fundamentals. Ideally, this will ensure that, where there is good macroeconomic performance, a minimum level of funding is secured to sustain the stabilization process, even where there is poor performance in the other two areas. In addition, donors wishing to do so could link the balance of their support to one or both of the other areas, budget management and equitable growth. This portion of adjustment support is over-and-above what is needed to sustain the macroeconomic framework in the short term. This ®nancing would be included in the budget, but would not be counted upon to ful®ll macroeconomic objectives. It would allow increasing budgetary expenditures in priority sectors, achieving a higher level of imports and reaching more rapid growth when structural microeconomic policy reforms create new pro®t opportunities9. Therefore, donors would not come under pressure to disburse this share of their support because of macroeconomic reasons, if the government is not performing in the areas of budget management and equitable growth. The level of public spending, however, would have to be adjusted in case this share of donors' support is not released.
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Each donor would be free to allocate/tranche the available funds across one, two, or all three of the aforementioned performance areas. But, the distribution of each donor's funding between the three areas would be agreed upon with the recipient country and in close consultation with the Bretton Woods Institutions. For example, one could envisage a scenario whereby each donor links part of the support to good macro management. In addition, some donors may split the remaining funds in separate tranches linked to budget management and equitable growth. (ii) Global performance conditionality According to this concept, the recipient country's performance would be evaluated on the basis of its overall reform eort, as well as on the basis of the results achieved, taking into account external factors aecting its performance. In this context, the purpose of external support would not be to enforce any particular reform, but to foster the good management of a coherent set of economic policy instruments and objectives over the longest period of time. The link between performance and disbursements would continue to exist and would concern all three areas. It is the nature of this link that would dier when applied to the area of stabilization or the other two. Performance on stabilization would continue to be subject to the usual type of conditionality, meaning the link between disbursements and the respect of speci®c performance criteria. The areas of budget management and equitable growth would be subject to a new kind of conditionality: disbursements are not linked to the implementation of any particular reform, but to the results achieved as compared to concrete objectives speci®ed in the reform program agreed with donors. These results would be regularly monitored in the context of joint donors assessments through the use of a set of progress indicators speci®cally designed for each of the two areas and previously agreed with the recipient country and among donors. Obviously, the choice of indicators clearly depends on each country's speci®c characteristics, as well as on the scope and objectives of the adjustment program. In addition, in order to allow for a coherent approach to performance evaluation, and to avoid the current criticism of the multiplication of conditions, these indicators would be the same for all donors providing adjustment support in a speci®c country. External and unanticipated
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developments which could aect performance would need to be included in the assessment (see Appendix A for a discussion on possible indicators). In this way, performance in the areas of budget management and equitable growth would be measured against tentative targets which have been agreed a priori between the government and all donors, while stabilization would continue to be assessed according to traditional performance criteria and benchmarks. This approach would oer greater responsibility to the recipient government to steer the program toward the agreed objectives, without increasing ambiguity with regard to which reforms are actually expected to be implemented and to what donors will regard as satisfactory performance. Taking into account the recomposed reform package, several scenarios are then possible with regard to diverging/converging macroeconomic and structural performance: Where there is a positive assessment of macroeconomic fundamentals, each donor's support exclusively linked to stabilization would be released. In addition, a joint donor assessment would determine if the performance in the areas of budget management and equitable growth is adequate and in line with the envisaged progress. In case of satisfactory performance in either one or both of the areas, donors would release additional assistance (¯oating tranches linked speci®cally to budget management or equitable growth). (Case 1 in Table 1). Where there is unsatisfactory macroeconomic performance, all donor's assistance exclusively linked to stabilization would be halted. Further, there are two possibilities with regard to the ¯oating tranches linked to budget management and/or equitable growth: ®rst, if the macroeconomic slippage is considered to be temporary and appropriate action has been agreed upon with the government to bring the program back on track (say within a ®scal year), then donors may release the ¯oating tranches linked to budget management and equitable growth, in case performance in the respective areas is satisfactory and the temporary macroeconomic slippage does not seriously hinder progress in the area of structural reforms (Case 2 in Table 1). Second, by the same token, if it is considered that the program cannot be brought back on track within a reasonable time frame (e.g., if an ESAF is abandoned) donors would suspend
292
WORLD DEVELOPMENT Table 1. ``Unbundling'' of policies disbursement of funds
Disbursement category/ assessment
Macroeconomic fundamentals
Macroeconmic fundamental
On track (case 1)
Temporary slippage (case 2)
O track (case 3)
release
withhold
withhold
Budget management
+ )
release withhold
release withhold
withhold
Equitable growth
+ )
release withhold
release withhold
withhold
disbursement of the ¯oating tranches regardless of performance in the areas of budget management and equitable growth (Case 3 in Table 1). (iii) Performance-based aid in¯ows The mechanism described above would, in practice, lead to a modulation of aid ¯ows according to performance, since some donors would stop support in case of poor performance in one or more of the three areas. A minimum level of resources, ideally compatible with the short-term ®nancial viability of the macro-programme, would be guaranteed in case of good macroeconomic performance. Additional ®nancing could be made available in case of good progress toward more povertyreducing, long-term development oriented and transparent budget management, on one hand, and structural reforms that enhance equitable growth, on the other. Conversely, the level of aid would be progressively reduced, or totally halted, in case of bad performance in one, two
or three of the areas simultaneously. Poor performance, however, would only imply a complete suspension of adjustment support in two extreme situations: bad stabilization results with lack of prospects for improvement within the following ®scal year, or bad performance on all three fronts. Table 2 illustrates the levels of aid in¯ows (ranging from a minimum of zero to a maximum of three) according to performance. Such a built-in modulation of aid ¯ows would represent an improvement compared with current practice for several reasons. First, the current sharp reductions, and especially cut-os, are often too drastic to be credible, particularly for highly indebted countries, and when implemented plunge the recipient country into macroeconomic crisis. Second, it would naturally lead to greater selectivity in favor of good performers, since bad performers would automatically get less aid than good ones. Third, the recipient country is given greater responsibility to decide on the rhythm of its reforms, since the government knows a
Table 2. Performance based aid in¯ows Results on macroeconomic fundamentals
Results of joint assessment
Level of aid in¯ows
Budget management
Equitable growth
On track
+ + ) )
+ ) + )
3 2 2 1
Temporary slippage
+ + ) )
+ ) + )
2 1 1 0
O track
0
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priori that any delay would have ®nancial implications which it would be obliged to deal with in order to maintain macroeconomic stability. In this respect, the system would certainly contribute to fostering greater program ownership. (c) Strengthening donor coordination It is generally recognized that improved donor coordination is one of the prerequisites for increased aid eectiveness. Some progress has been made since the beginning of the 1980s, but greater eorts should be deployed, especially at the operational level. The organization of a series of regular joint donor assessments, encompassing all of the aforementioned areas of reform and involving those donors who provide balance of payments or direct budgetary support, could be a powerful way of improving donor co-ordination. In order to maximize its eectiveness, such a mechanism should (i) minimize extra operational and administrative costs, both for donors and the recipient government, (ii) avoid duplication, and capitalize on potential synergy eects with other fora of policy dialogue and co-ordination, like Consultative Groups and Round Tables and (iii) ensure that the recipient country takes a lead role in the assessments. A joint donors assessment would take place around IMF mid-term reviews, or in the margins of the Article IV reviews. This evaluation should encompass all three areas of the concept of program conditionality developed above. Such assessments could be organized according to the following sequence: ®rst, a status report would be prepared by the recipient government ahead (say three weeks in advance) of the planned mid-term review. This report would review performance in all three areas on the basis of the stabilization performance criteria and the other areas' performance indicators. Second, the IMF mission would review progress in the area of macroeconomic fundamentals against the speci®c performance criteria previously agreed for this area. Third, taking the government report as the starting point, the assessment in the areas of budget management and equitable growth would be launched. Sectoral reviews would be undertaken combining the eorts of the World Bank and other donors providing adjustment support. Performance would be measured against the indicators previously agreed between the government and all the donors in-
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volved for each of these two areas, and the results/recommendations of public expenditure reviews would be taken into account. Fourth, a synthesis of the assessment would be organized at the end of the IMF mission. Ideally, the government would take the lead and brief all donors involved on the main conclusions and short-term prospects in the area of macroeconomic fundamentals as they result from its discussions with the Bretton Woods Institutions (where the government does not take the initiative, it should be done by the IMF and/or the World Bank). Such a brie®ng would be kept informal, since no ocial conclusions can be drawn by the mission before agreement by its headquarters. Yet, it should be carried out in the spirit of real partnership and would need to go beyond the spurious macroeconomic brie®ngs that are currently taking place in some countries. Finally, in the other two areas, the government would also present its view on the conclusions of the reviews undertaken. Where there is agreement with all donors involved, the process would be completed. Where there are divergent opinions between donors and the government, additional discussions should take place among donors only: there would be sector reports by donors, a discussion and an evaluation. A joint aide memoire would be prepared by the donors involved for the bene®t of the government and as a summary of the joint ®ndings (highlighting, where that is the case, speci®c issues where donors dier with regard to their assessment). Ideally, these discussions should lead to a common position, meaning that each donor would propose to its headquarters the same conclusions on disbursements. For legal and practical reasons, however, each donor would, after the joint assessment, decide on its own support according to its speci®c rules, procedures and objectives. Apart from the need for greater donor coordination, closer and regular contacts and exchange of experiences among the recipient countries themselves should also be encouraged. Such discussions on economic policy matters could take place in the context of existing regional organizations. They would probably contribute to emulation of good performers and a ``neighborhood eect''. Some kind of peer pressure would also arise from such contacts, contributing to positive spillover eects from the good to the bad performers.
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4. CONCLUSIONS The reform of donor conditionality attached to adjustment programs is unquestionably a sensitive issue. It is also inevitable if the current eorts to improve the results of economic reform programs in sub-Saharan Africa are to have a greater chance of success. This article proposes a new approach to conditionality which is centered on three core concepts: increased country ownership, a medium-term perspective on economic reform programs and enhanced donor co-ordination. Current analyses of country ownership seem unsatisfactory: ®rst, because they are developed ex-post, and second, because they are limited to the stage of program design, therefore ignoring its dynamic dimension. No universal solution exists, but a possible way to reinforce country ownership during the phase of programme implementation would be to oer committed governments greater responsibility to decide on the sequencing and timing of reforms. In this perspective, the concept of ``program conditionality'' could be a possible solution. The ``unbundling'' of the reform package and the proposals made to limit further cases of a total suspension of adjustment support, would oer the basis for a better link between short-term policy objectives and the long-term development strategy, while, at the same time, reducing the cases of ``stop-go'' and improving donor and recipient credibility. Greater selectivity in favour of good performers would also result from the built-in performance-based mechanism for external assistance. The proposals put forward on joint donors assessments would reinforce donor co-ordination, reduce the administrative burden of multiple donor missions on the recipient country, and improve aid eectiveness. Finally, in a wider context, this proposed new approach complements current eorts aimed at the progressive introduction of sectoral development programs, supposed to oer the bridge between macroeconomic support and project aid, but which have failed to provide a conceptually convincing answer to the following question: how, in practice, should sectoral budget support in favor of health, education or infrastructure, for example, be linked to macroeconomic stability? The proposals put forward in this article oer a possible solution to reconcile short-term stabilization imperatives and medium/long-term development goals, which demand longer implementation time frames as well as smoother and more predictable aid ¯ows.
APPENDIX A Ð CHOICE AND MEASUREMENT OF POSSIBLE INDICATORS The bene®ts of performance indicators come from their direct link with program objectives. Instead of measuring performance solely against decisions taken or completed actions and studies carried out, the proposed approach actually measures performance against the degree of achievement of speci®c policy objectives or improvements vis-a-vis baseline values of the indicator. Only recently have performance indicators started to be introduced in the context of adjustment operations (see e.g., Mosse and Sontheimer, 1996; Baird, Lav and Wetzel, 1995). In the context of reformulated conditionality, the use of performance indicators is proposed as a way of organizing information, clarifying the relationship between a policy impact, outcomes, and identifying problems along the way that could impede the achievement of program objectives. The choice of performance indicators helps both donors and government clarify and better articulate policy objectives and priorities. Without the appropriate feedback, neither donors nor the government could take necessary actions to achieve better the program's intended objectives. Performance monitoring involves periodically measuring a program's progress toward explicit short-term and long-term objectives and giving feedback on the intermediate results to both donors and policy makers. Periodic performance evaluation would also help satisfy concerns of external audiences (such as constituencies in donor countries) during the process of program implementation, and thus, enhance accountability and transparency of the reform process. Performance indicators must be tailored to the unique objectives and circumstances in a particular country. For each policy area the short and medium-term targets would be quanti®ed and measurable (and there should be as few as practical supported under one operation). This proposal distinguishes between policy areas, implementation indicators, and development impact indicators. Policy areas are of a generic nature and re¯ect the agreement between the recipient country and donors on what is needed to achieve sustainable growth and equity. They are directly derived from the Policy Framework Paper matrix and answer the question whether a country is implementing
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a set of policies that addresses its development needs. Implementation indicators are either measured quantitatively and compared against the baseline or as YES/NO indicators with regard to discrete policy measures. They answer the question whether policies are being implemented eectively and whether policies are likely to have the intended impact. They represent the main basis on which performance will be assessed in the areas of budget management and equitable growth. Implementation indicators are the tracking device over the life cycle of the adjustment operation to ensure that the policies are being implemented as envisaged and contribute to the desired impact. Implementation
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indicators should signal the need for ®ne-tuning in case of deviation from the desired pattern. Development impact indicators are proxies to measure how close the objectives/targets were achieved. This group of indicators is available over the medium to longer term and measurement has a life cycle longer than the average adjustment operation or the bi-annual performance assessment. They answer the question whether the policies have the intended developmental impact. For illustrative purposes Appendix B oers a sample of possible indicators to be used in an adjustment operation according to the proposed approach.
APPENDIX B Ð SAMPLE PERFORMANCE INDICATORS FOR ECONOMIC REFORM PROGRAM a
Objective/ target
Policy Areas
Implementation Indicators
Are policies being Is the government implemented implementing a set of eectively? policies that addresses the country's development needs? The policy areas are of generic nature and re¯ect agreement with the recipient country and among donors on what is needed to achieve sustainable growth and equity Macroeconomic fundamentals
Indicators are either measured quantitatively and compared against the baseline or as Yes/No with regard to discrete policy measures
Utilize performance criteria and benchmarks as agreed with the BWI
Budget Management Achieve transpar- Make the budget process Provide monthly updates more transparent on budget execution (cash ent, ecient, re¯ow and accrual basis) b sponsible and participatory budget management Carry out annual audits of all discretionary tax and tari exemptions b
Development Impact Indicators
Are the policies having the intended impact?
This group of indicators is available over the medium to longer term and measurement has a life cycle much longer than bi-annual assessment for the implementation indicators
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Make the budget process Deviation between ex-ante more ecient and ex-post expenditure allocations c Track average cost of services procured by public sector b Ensure that the budget re¯ects the right development priorities
Prepare three-year rolling public sector investment program consistent with overall ®scal framework b Actual budget share in total/recurrent/capital expenditures for education and health c Actual share of primary services in total/recurrent/ capital education and health budget c Share of public sector wage bill for non-priority sectors c Tax and tari collections eciency indicator (ratio of actual vs. statutory tari and tax revenues) c
Ensure that the budget provides the right incentives for economic agents
Amount of public sector arrears to private sector c Improvements in public sector procurement procedures b
Equitable Growth (Reduction of Poverty Head Count) Support employment generation through private sector development
Liberalize access to productive assets, make legal framework conducive to competition and reduce government ownership in productive sector
# of production and marketing monopolies (removed over 12 month period; still existing) c
GDP growth per capita
Employment levels in manufacturing, services and agriculture sectors
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Remove remaining price and marketing (export) controls
# of commodities with price controls and/or with export restrictions
c
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Level of foreign direct investment Share of private sector in total imports and exports of rice
Improve access to primary and secondary education (especially for girls)
Share of exports to GDP
Rationalize the tari structure Pursue participatory approach to support private sector development (PSD)
Average and maximum tari rate c Panel of ®rm surveys to monitor extent of major obstacles to PSD (including e.g. average cost of energy, road transport, freight, interest rates, wages, time lag in payments to private contractors,...)
Implement national policy to promote female education (including girls scholarship program for secondary education)
Girls' and overall enroll- Literacy levels ment rate (primary and secondary education) c Girls' literacy levels
Increase annual output of trained primary school teachers (950 new teachers in 1997)
Student/teacher ratio (in primary school) c
Student/text book ratio Improve supply (average and for 10 of text books and poorest provinces) c physical infrastructure conducive to high quality primary education, especially in poorest provinces Improve broadbased access to adequate primary health care services
Establish administrative structure of the health care system conducive to reaching broad segments of poor and adopt minimum stang norms
Share in total and # of fully staed primary health centers c
Increase supply and availability of medicines and drugs in rural
Immunization ratios
c
Infant mortality ratio Maternal mortality rate
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health clinics
Per capita spending on drugs and medical supplies c Implementation of Introduction of FP national family planning services in # of primary program and AIDS health centers c prevention program
Total fertility rate % of adolescents with child or pregnant
This table was prepared in collaboration with Jean-Louis Lacube of the European Commission and Alan Gelb and Deepak Bhattasali of the World Bank. b Yes/No indicator. c Targets would have to be agreed with the government. a
NOTES 1. For a critical analysis of World Bank evaluations of adjustment performance in Africa, see Mosley and Weeks (1993) and Mosley et al. (1995). For a quick overview of dierent studies on the impact of adjustment, see Killick (1993). 2. This article deals exclusively with adjustment resources used for balance of payments/budget support in connection with economic reform programs. Other types of aidÐinvestment projects or technical assistanceÐare not considered. 3. Although these data are not made available by other bilateral and multilateral donors involved in adjustment support, it seems reasonable to assume that this situation is not exclusive to World Bank ®nanced programs. 4. This document presents the main ®ndings and conclusions from three in-depth country case studies, namely Uganda, Senegal and Mozambique. It also draws on the results of other research work undertaken by the European Commission in the context of the Special Program of Assistance for Africa (SPA), in particular on a comparative study of 11 countries and a study on the sequencing of reforms in four African countries.
5. Collier et al. (1997) discuss the compatibility of the various rationales for aid: inducement, selectivity, paternalism, restraint, and signaling. 6. Collier et al. (1997) argue that a necessary condition for government ownership is that the government should do the design of policy. 7. Other interesting ideas capable of contributing to country ownership at the stage of program design can be inferred from the analysis made by Johnson and Wasty (1993). 8. Recent literature, however, tends to demonstrate that in¯ation stabilization, when reducing in¯ation from high levels, could positively aect per capita output growth even in the short run (Easterly, 1996). Therefore, while there may be room for ¯exibility with regard to scope and timing of structural reforms, there is less ¯exibility with regard to achieving and/or maintaining macroeconomic stability. 9. An identical mechanism is proposed in World Bank (1995b).
REFERENCES Baird, M., M. Lav and D. Wetzel, ``Performance indicators for adjustment programs: A ®rst edition note'', Unpublished paper (Washington, DC: World Bank, March 1995). Berg, E., ``Comments'' in T. Vinod, A. Chhibber, M. Dailami and J. De Melo (Eds.) Restructuring Economies in Distress - Policy Reform and the World Bank (New York: Oxford University Press, 1991), pp. 215±221.
Braz, J., ``A new approach to conditionality,'' Working paper prepared for the European Commission Seminar on Conditionality (Brussels: European Commission, September 1995). Burnside, C. and D. Dollar, ``Aid, policies and growth,'' Unpublished paper, Draft (Washington, DC: World Bank Policy Research Department, November 1996). Collier, P., ``Rethinking donor conditionality,'' Working paper prepared for the European Commission Sem-
TOWARDS A MORE EFFECTIVE CONDITIONALITY inar on Conditionality (Brussels: European Commission, September 1995). Collier, P, P. Guillaumont, S. Guillaumont and J.W. Gunning, ``Redesigning conditionality,'' World Development, Vol. 25, No. 9, (September 1997) pp. 1399±1408. Easterly, W. ``When Is Stabilization Expansionary?'', paper prepared for the IMF Research Department Seminar, (Washington, D.C: IMF, May 1996). European Commission, ``Community support for structural adjustment in ACP Countries: Towards the consolidation and strengthening of a realistic and concerted approach,'' Communication to the Council COM (94) 447 (Brussels: European Commission, October 1994). European Commission, ``The design of economic reforms in the context of political liberalization Findings and conclusions from case studies,'' Paper presented at the Special Program of Assistance for Africa (Washington, DC.: European Commission, January 1995a). European Commission, ``Reformulating conditionality in economic reform programs in Sub-Saharan Africa, an operational approach,'' Paper presented at the Special Program of Assistance for Africa (Paris: European Commission, December 1995b). Guillaumont, P. and S. Guillaumont, ``Orientations pour une reforme de l'aide a l'Ajustement'' in Ajustement et Developpement, L'Experience des Pays ACP (Afrique, Caraõbe et Paci®que) (Paris: Economica, 1994), pp. 94±112. Guillaumont, P. and S. Guillaumont, ``Pour un nouveau type de conditionalite,'' Working paper prepared for the European Commission Seminar on Conditionality (Brussels: European Commission, September 1995). Johnson, J. and S. Wasty, ``Borrower ownership of adjustment programs and the political economy of reform,'' Discussion Paper N 199 (Washington, DC: World Bank, 1993). Killick, T., The Adaptive Economy. Adjustment Policies in Small, Low-Income Countries, (Washington, D.C.: World Bank, 1993). Killick, T., ``IMF Progammes in Developing Countries. Design and Impact'' (London: Routledge, 1995), pp. 61±63. Killick, T., ``Principles, Agents and the Limitations of BWI Conditionality'', World Economy, No.19/2 (1996), pp. 211±229.
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Killick, T., ``Principals, agents and the failings of conditionality,'' Journal of International Development, Vol. 9, No. 4 (June 1997), pp. 497±506. Loup, J., ``Structural adjustment and conditionality,'' Working paper prepared for the European Commission Seminar on Conditionality (Brussels: European Commission, September 1995). McCleary, W., ``The design and implementation of conditionality'' in T. Vinod, A. Chhibber, M. Dailami and J. De Melo (Eds.), Restructuring Economies in Distress - Policy Reform and the World Bank (New York: Oxford University Press, 1991), pp. 197± 214. Mosley, P, T. Subasat and J. Weeks, ``Assessing adjustment in Africa,'' World Development, Vol. 23, N 9 (1995), pp.1459±1473. Mosley, P. and J. Weeks, ``Has recovery begun? Africa's adjustment in the 1980s Revisited,'' World Development, Vol. 21, N 10 (1993), pp. 1583±1606. Mosse, R. and L. E. Sontheimer, ``Performance Monitoring Indicators Handbook'', Technical paper N 334, (Washington, D.C: World Bank, 1996). Webb, S. and K. Shari, ``Designing and implementing adjustment programs'' in V. Corbo, S. Fischer and S. Webb (Eds) Adjustment Lending Revisited, Policies to Restore Growth (Washington, DC: World Bank, 1992). World Bank, Adjustment Lending. An Evaluation of Ten Years of Experience (Washington, DC: World Bank, 1988). World Bank, World Bank Structural and Sectoral Adjustment Operations: The Second OED Overview (Washington, DC: World Bank, 1992). World Bank, The East Asian Miracle, Economic Growth and Public Policy, (New York: Oxford University Press, 1993). World Bank, Adjustment in Africa. Reforms, Results and the Road Ahead, (New York: Oxford University Press, 1994). World Bank, ``A Continent in Transition: Sub-Saharan Africa in the Mid-1990s'', Unpublished report (Washington, D.C: World Bank Africa Region, 1995a). World Bank, ``Higher Impact Adjustment Lending'', Report presented at the Special Program of Assistance for Africa (Paris: World Bank Africa Region, October 1995b). World Bank, Adjustment lending in Sub-Saharan Africa: An Update (Washington,D.C.: OED, May 1997).
PII: S0305-750X(98)00127-2
Towards A More Eective Conditionality: An Operational Framework JOSE E. LEANDRO European Commission, Brussels, Belgium HARTWIG SCHAFER The World Bank, Washington, DC, USA and GASPAR FRONTINI * European Commission, Brussels, Belgium Summary. Ð The ``inducement'' function of conditionality has failed. Its intrusive,
shortsighted and ineective character is now increasingly criticized, and may have contributed, at least in part, to the poor growth performance associated with adjustment programs in sub-Saharan Africa. This article proposes a new approach to conditionality attached to adjustment programs. It is built around three main features: recipient ownership of the appropriate reform program, considered to be a key factor for success; a more long-term approach to economic reform, avoiding in particular the disruptive practice of stop-go disbursements, and enhanced donor coordination as a factor for greater aid eciency. Its implementation should lead to greater aid selectivity in favor of reforming countries, increased responsibility for aid recipients to decide on the rhythm and sequencing of reforms, and smoother aid ¯ows with less disruptive aid suspensions. Ó 1999 Elsevier Science Ltd. All rights reserved.
1. INTRODUCTION Adjustment programs have been implemented around the world since the beginning of the 1980s and indeed have become an integral part of the development strategy for many countries in all continents. Evidence shows that, while these programs led to the resumption of growth in Asia and Latin America, their performance has been less successful in sub-Saharan Africa (World Bank, 1988, 1992)1. The speci®c characteristics of African economies might have reinforced the disappointing results in comparison to other developing regions (for a study on the reasons for the Asian success see World Bank, 1993). There are reasons, however, to believe that Africa's poor growth performance can, at least in part, be traced to the way in which donors have applied conditionality in adjustment programs. The emerging conclusion is that conditionality has been intrusive, short
sighted, and ineective in improving economic policies in recipient countries. The shortcomings of conditionality are wellrecognized (Killick, 1993, p. 315; Collier et al., 1997; Killick, 1997). Firstly, ownership of the reform program by the recipient country, considered to be a key success factor, has been undermined instead of reinforced. Second, donors have tended to increase the detail and the number of conditions in adjustment operations to compensate for a perceived lack of
*
Thanks are due to Mr. Bernard Petit, Chief Econimist, Directorate General for Development, European Commission, for his guidance, comments, and review during the drafting of this article. This article does not necessarily re¯ect the views of the European Commission or the World Bank. Final revision accepted: June 17, 1998.
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commitment to reform by some recipient governments, or for their weak administrative, technical and institutional capacity. Yet, this approach has failed to persuade these countries to implement consistent and long-lasting policy reforms which they do not wish to undertake. As a result of this inducement approach to conditionality (Collier et al., 1997), poor compliance rates have been recorded in sub-Saharan Africa, but have hardly ever aected the expansion of adjustment support, thereby undermining donors' and recipients' credibility and leading to perverse incentives in favor of bad performers. At the same time, when strictly applied, conditionality has led to ``stop-go'' disbursement situations that have aggravated macroeconomic crises. Finally, traditional conditionality largely ignores the necessary link between short-term program objectives and long-term development goals, thus contributing to the common criticism that adjustment programs are shortsighted. There is also a general consensus that some form of donor±recipient compact should be used in the future as a mechanism to foster reforms and move policies in sensible directions. In this context, this article proposes practical steps to enhance the eectiveness of the donor± recipient compact. Section 2 summarizes the limits to the current practice of donor conditionality and charts the way forward. Section 3 presents the salient features of a new approach to conditionality based on three core objectives: fostering program ownership by the recipient country, improving the long-term sustainability of reforms, and strengthening donors coordination. Its implementation should lead to greater aid selectivity in favor of reforming countries, increased responsibility of governments to decide on the rhythm and sequencing of reforms and, ®nally, smoother aid ¯ows with less disruptive aid suspensions2. This article does not address issues related to the nature or the sequencing of economic reforms, nor does it discuss the overall validity of the theoretical and analytical underpinnings of adjustment policies. 2. THE LIMITS OF CONDITIONALITY AND THE WAY FORWARD Three main features can be identi®ed in recent studies on the design and implementation of donor conditionality: an increasing number of conditions have been attached to disbursements; generally, poor compliance rates were
recorded, which were worse for technically and politically complicated reforms; and, ®nally, bad performance did not always translate into the suspension of external aid. The number of conditions attached to adjustment programs is usually impressive and has expanded from macroeconomic conditions to sectoral policies, such as human development and environmental protection (Killick, 1997, p. 486). The average number of conditions and performance criteria per adjustment loan rose from 21 in 1980±88 to 35 in 1989±91 (World Bank, 1992, Table A2.3). These developments support the notion that inducement has become the major rationale for conditionality (Collier et al., 1997). Indeed, experience shows that, paradoxically, doubts about government commitment in favor of reform, or the perception by donors of a lack of administrative and technical capacity on the recipient side, might be elements that contributed to this outcome. In such cases, donors have tended to ``®ne-tune'' the program by increasing the detail and the number of the measures to be undertaken, having the impression that this would ``lock'' the government into the reform process. This attitude, however, has at least two negative side eects. First, it diverts scarce administrative capacity from critical reforms. Second, it shifts responsibility for program management and monitoring from recipient countries to donors, thus reducing program ownership and transforming donors into major players on the domestic political stage. Compliance with conditionality is low and delays and interruptions have beset program implementation. The combination of an increased number of conditions with a weak administrative capacity, and in several cases government resistance to economic reform, leads inevitably to the generally poor compliance rates recorded. Only two out of every three conditionalities attached to World Bank programs in sub-Saharan Africa were implemented, (Webb and Shari, 1992, p. 73, Table 5±4)3 and, of a total of 37 sub-Saharan African countries who bene®ted from adjustment lending during 1980±96, 70% have a weak or very poor compliance record (World Bank, 1997). During 1979±93, 53% of all IMF standby, ESAF, and SAF programs were discontinued before the end of their intended life for noncompliance (Killick, 1995, p. 62). In addition, the aforementioned ®gures disguise the fact that in many instances conditionality is acceptably implemented only at the expense of
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watering down the original requirements (Berg, 1991, p. 219). Compliance rates dier depending on the type of reform. They are higher for ``single shot'' measures that require little follow-up (e.g., price and exchange rate policies) or reforms that can be put into eect by a small number of government ocials. Conversely, compliance rates are lower for reforms requiring institutional change (e.g., civil service reform), cooperation between various government agencies or with the private sector and civil institutions (European Commission, 1995a, p. 194). A ``partial reform syndrome'' with a bias in favor of measures mainly related to stabilization and less to structural/institutional transformation, has been observed (European Commission, 1995a, p. 19). This has important implications for future adjustment operations as some African economies have now reached some degree of macroeconomic stability and are ready to embark on second generation reform programs that go beyond the stabilization agenda. These generally involve, among other measures, budget management improvement, ®nancial and public sector reforms and human capital development, all measures that require a sustained reforming attitude over a long period, an extended planning horizon, and longer commitment periods for aid ¯ows. Piecemeal conditionality, which does not foster continuous recipient ownership, and short evaluation periods, are not conducive to facilitating the successful implementation of second-generation reforms. Poor compliance rates did not always translate into the suspension of adjustment support. In fact, weak compliers have received the largest number of loans, with about six operations per country, and nearly three-quarters of the funds (World Bank, 1997). Killick (1997) presents this donor dilemma within a principal± agent framework. An overwhelming body of evidence shows that non-implementation of conditionality is rarely penalized eectively because donors are constrained in their decision-making by non-economic or political factors, or the pressure to disburse is evident if disbursement delays/stops would exacerbate macroeconomic crises and result in default on past loans and debt service arrears. In addition, inappropriate sta incentives within donor organisations, which tend to reward high funding levels, are also an important factor preventing eective sanctioning in case of noncompliance with conditionality. Such a situation can only
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undermine donors' and recipients' credibility and introduces perverse incentives in favor of bad performers. Private investment is potentially one of the most important victims of these confusing signals, as potential investors lose con®dence in both the government's commitment to reform and the donors' capacity to enforce it. On the other hand, when strictly applied, aid suspension has often led to ``stopgo'' situations and the associated macroeconomic crises, especially in the case of highly indebted countries. Perhaps most important of all, the inability of external aid to eectively in¯uence the consistent implementation of appropriate policies, as recently demonstrated by Burnside and Dollar (1996), can also be related to the practice of donor conditionality as usually applied. Indeed, the authors demonstrate that aid only spurs growth and poverty reduction when the recipient country's economic policies are sound before external funding is provided, oering therefore, one of the most powerful criticisms of the usual conditionality, heavily based on the ``bribery'' or inducement function. The lion's share of the criticism of conditionality centers on the limits of its practice, as shown above, or the content and implications of the conditions themselves, which are in some instances ¯awed, linked to inappropriate policy advice and wrong sequencing of reforms. Yet, the principle of conditionality per se, is hardly contested. This probably echoes the realistic assumption that aid without strings attached will continue to be the exception rather than the rule in a climate of shrinking aid budgets and taxpayer pressure for greater aid accountability. It also re¯ects the fact that rationales for conditionality other than inducement Ð for instance, to signal government commitment to private investors or to lock-in reforms and protect them against domestic policy pressures Ð are legitimate and should not be abandoned5. But, the recent collapse of several East Asian economies, thought to be models of adjustment, only shows how dangerous it is to ignore issues such as institutional reform, good governance, transparency and accountability, all areas in which, as shown above, the current practice of conditionality is particularly ineffective. There is, therefore, a need for a new approach re¯ecting a renewed donor±recipient compact, characterized more by consensus than by con¯ict, and where there will be little room for the inducement function of conditionality. Such an approach should also take into account
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the eects of political liberalization on economic policy design which require greater internal consultation prior to economic decisions, reinforce the importance of distributional aspects and introduce the need to identify and compensate the losers of economic reform, as well as to mobilize the winners to support change. The new approach would also have to recognize the necessity to oer greater responsibility to reforming countries in order to better adapt reforms to local political circumstances (European Commission, 1995a, p. 20). 3. THE THREE DIMENSIONS OF A NEW APPROACH The proposed approach is built around three core features presented under the main headings of this section: (a) fostering recipient ownership, (b) improving the long-term sustainability of reforms and (c) improving donors coordination. (a) Fostering ownership There is consensus about the key role ownership plays in a program's success or failure. Killick (1995) stresses that ownership may well be the most important factor for a successful program. This point is also underlined, among others, by Loup (1995), McCleary (1991), Berg (1991) and the European Commission (1995a, b). In-depth case studies (Johnson and Wasty, 1993) reveal that recipient ownership of reform programs explains good program results in three-quarters of the cases, the rest being explained essentially by external factors. The authors made an ex-post assessment of recipient ownership according to a set of four criteria: (i) locus of initiative for program formulation and implementation (i.e., to what extent the initiative was on the recipient or the donor's side); (ii) level of intellectual conviction among key policy makers (i.e., to what extent there was a commitment in favor of reform among key players in the government); (iii) expression of political will by top leadership (i.e., which concrete actions were taken as the expression of this commitment) and (iv) eorts toward consensusbuilding among various constituencies (i.e., the extent of civil society participation). Unfortunately, ``ownership'' by governments is often not high. Johnson and Wasty (1993) show that, from a total of 81 cases, government ownership is considered high in only 16 cases,
whereas it is considered ``low'' or ``very low'' in half of the programs (40 cases). There is also evidence that the degree of ownership has, on the whole, been considerably less in Africa than in developing countries in other regions (McCleary, 1991). Although it has become a popular concept, no clear and unambiguous de®nition of ``ownership'' can be found in the literature. As far as we are concerned, we will consider it to be a combination of mainly two factors: ®rst, dedication, or commitment, in favor of adjustment by key policy makers and, second, technical and administrative capacity to conceive, negotiate and implement reforms. Thus de®ned, ``ownership'' is obviously a dynamic concept, which can evolve positively or negatively during the dierent phases of program design and implementation. Hence the need to support it throughout these successive stages. Some sophisticated and intellectually stimulating proposals have been made to enhance ownership, but they seldom have an operational or practical character and are, therefore, of little use to policy makers. A simple and effective way to foster ownership could be the following: ®rst, at the design stage, governments should be encouraged to formulate and draft their own reform programs on the basis of in-depth analytical work6. For all practical purposes, donors should refrain from taking the initiative to draft policy documents, and instead act as advisors providing feedback to governments and comment on the design and likely eectiveness of proposed reforms7. Once the program is agreed upon, external aid ¯ows could begin immediately where past government records show sucient commitment to reform or, in other cases, be deferred until the government has restored or built up its credibility by beginning to implement the reforms. Second, during the phase of program implementation, the recipient country would be given greater responsibility for the sequencing and timing of reforms, as long as overall progress is adequate and agreed performance criteria are met8. As an additional device to promote recipient ownership, donors should be prepared to ®nance the technical, administrative and institutional capacity-building necessary to conceive, negotiate and implement the envisaged policy reforms. Funding for those initiatives should be managed outside the adjustment operation and should not be made conditional on the shortterm economic performance of the recipient
TOWARDS A MORE EFFECTIVE CONDITIONALITY
country, thereby adopting a long-term perspective. Promoting government ownership of the economic reform program also implies longer delays in preparation of the program because of the extensive consultation with stakeholders involved, as well as the design of less ambitious operations. These short-term costs, however, will be outweighed by the long-term bene®ts resulting from a program which is designed, implemented and owned by the recipient government. (b) Improving the long-term sustainability of reform The uncertainty and lumpiness of disbursement ¯ows under traditional adjustment operations are major areas of concern. Irregular disbursements and delayed tranches (if one or two out of a long list of conditions are not met) can ripple through the macroeconomic framework like external shocks. In addition, because of cross conditionality, one or two unmet conditions can hold up tranches under adjustment operations by several donors. The result is that the lack of resources can have a highly destabilizing eect on the macroeconomic framework and can even jeopardize the sustainability of medium to long-term reforms which have already been implemented. When confronted by such cases, the solution adopted by donors has often consisted in waiving the conditions which have not been ful®lled, thereby undermining donor and recipient credibility. When macroeconomic conditions for tranche release are met (...), but other conditions are not, we are faced with a cruel dilemma. Failure to disburse will violate macroeconomic stability and waste the progress already made on macroeconomic goals. Disbursing, on the other hand, will postpone progress on the non-macroeconomic reforms and weaken the credibility of the government and donors. (World Bank, 1995b, p. 11).
Alternatively, the question must be raised as to what extent, or according to which criteria, should adjustment support be continued in case of macroeconomic slippage but good progress on other fronts. These are issues which cannot be dissociated from the fundamental notion that policy reform must be conceived, formulated and implemented as part of a broader long-term strategy to achieve sustainable development and poverty alleviation. Enhancing
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and sustaining the reforming attitude of recipient countries over a suciently long period of time, and better linking the adjustment phase with the long-term development strategy, should therefore be key objectives of program implementation. Such an approach would signi®cantly improve upon the current short-term bias and ``stop-go'' practice of adjustment support. Disruptive and lumpy disbursement ¯ows of external support should be minimized. Complete disbursement stops should be limited to those cases where the fundamental conditions for program success, both with regard to stabilization and structural reforms, are not met. A possible mechanism to tackle these matters could be based on a two-pronged approach: ®rst, the unbundling of the reform package into dierent groups of coherent policy objectives, taking into account their time dimension, and linking the release of funds to these well identi®ed, and dierentiated, policy areas; second, a global assessment of the policy stance of the recipient country, the reforms initiated and their results. It would be complemented by a performance-based mechanism linking the volume of aid with results. (i) Unbundling the reform package The various policies that are usually supported under adjustment operations would be ``unbundled'' into three reform areas: macroeconomic fundamentals, budget management and equitable growth. The ®rst area, macroeconomic fundamentals, relates to economic stabilization and aims at achieving sustainable external and ®scal balances, price stability, and a stable exchange rate; all indispensable ingredients for sustained growth. The second area, budget management, covers issues related to budget composition and the budgetary process (a sustainable ®scal balance, aecting price stability, would fall under stabilization objectives). This has been identi®ed as a separate area of reform because it is a key issue in development, in adjustment, and in the emerging sector development programs for several reasons: ®rst, the structure of expenditures is a clear translation of the public eort in favor of the poor and in terms of long-term development priorities; second, the quality of budget planning, execution, monitoring and control are all essential features both for the eciency of public spending and for good governance, an issue which is becoming increasingly important in the context of aid allocation across countries.
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WORLD DEVELOPMENT
Finally, the area of equitable growth comprises structural policies and reforms which seek to enhance the supply response, support human resource development, and reduce poverty head counts through, inter alia, removing distortions in the factor and product markets and obstacles to greater economic eciency. Theoretically, the three areas Ð macroeconomic essentials, budget management and equitable growth Ð are all closely related and performance in one of them aects results in the other two. For example, high in¯ation contributes to lower growth by causing uncertainty, making business calculations dicult and putting pressure on the exchange rate. The composition of public expenditures also has an impact on economic growth, long-term development and poverty reduction to the extent that it is directed to increasing the stock of productive physical and human capital, to providing public goods complementary to private sector activity and to avoiding excessive ®scal de®cits which crowd out private investment. Finally, the structural reforms needed to elicit output growth and the equitable distribution of its fruits may have an impact on public expenditure and budgetary revenue, and, at the same time, may aect the level and structure of prices. Yet, in practice, these three areas are suciently self-contained to be treated separately, in particular if the time dimension is taken into account. Indeed, the spillovers between the three areas take some time to materialize due to time lags in the channels of transmission. A looser monetary policy may take several months before it translates into higher in¯ation, depending on structural elements such as the velocity of money and the supply elasticity. In turn, higher in¯ation may also take several months before it aects output growth, depending on expectations and eects on consumer wealth. Fiscal policy takes at least one ®scal year to aect the allocation of resources. Even longer periods may be expected before structural reforms aect economic eciency and equity. Therefore, it seems reasonable to allow for some ``unbundling'' between the area of stabilization on one side and the other two on the other side, as long as it is limited to a short period of time, say one ®scal year. To some extent, such an approach would only formalize a practice which is already applied in reality. A recent example is Mozambique, where an International Monetary Fund (IMF) mid-term review was not concluded at the end
of 1995 because of bad stabilization results but, in order to avoid further destabilization, this institution urged other donors to continue balance of payments/budget support while a new ESAF arrangement was being considered. Another example is the fact that mature adjustment programs generally become sectoralized with reforms pursued simultaneously on several parallel tracks, and it is generally considered that there is no reason to suspend disbursements on a sectoral program simply because of temporary macro-economic slippage. Adjustment support would match the aforementioned three areas of policy performance. This would avoid situations where the entire adjustment operation is put on hold because of poor performance in only a few areas, even if progress is good in others. At the same time, this mechanism would oer greater certainty to the recipient country concerning the available volume of external funding. Donors would be invited to link part of their adjustment support exclusively to macroeconomic performance and achievement of macroeconomic fundamentals. IMF and government projections of the macroprogram (balance of payments, monetary and ®scal targets) should include only this share of donors' support which is predicated on the purely macroeconomic fundamentals. Ideally, this will ensure that, where there is good macroeconomic performance, a minimum level of funding is secured to sustain the stabilization process, even where there is poor performance in the other two areas. In addition, donors wishing to do so could link the balance of their support to one or both of the other areas, budget management and equitable growth. This portion of adjustment support is over-and-above what is needed to sustain the macroeconomic framework in the short term. This ®nancing would be included in the budget, but would not be counted upon to ful®ll macroeconomic objectives. It would allow increasing budgetary expenditures in priority sectors, achieving a higher level of imports and reaching more rapid growth when structural microeconomic policy reforms create new pro®t opportunities9. Therefore, donors would not come under pressure to disburse this share of their support because of macroeconomic reasons, if the government is not performing in the areas of budget management and equitable growth. The level of public spending, however, would have to be adjusted in case this share of donors' support is not released.
TOWARDS A MORE EFFECTIVE CONDITIONALITY
Each donor would be free to allocate/tranche the available funds across one, two, or all three of the aforementioned performance areas. But, the distribution of each donor's funding between the three areas would be agreed upon with the recipient country and in close consultation with the Bretton Woods Institutions. For example, one could envisage a scenario whereby each donor links part of the support to good macro management. In addition, some donors may split the remaining funds in separate tranches linked to budget management and equitable growth. (ii) Global performance conditionality According to this concept, the recipient country's performance would be evaluated on the basis of its overall reform eort, as well as on the basis of the results achieved, taking into account external factors aecting its performance. In this context, the purpose of external support would not be to enforce any particular reform, but to foster the good management of a coherent set of economic policy instruments and objectives over the longest period of time. The link between performance and disbursements would continue to exist and would concern all three areas. It is the nature of this link that would dier when applied to the area of stabilization or the other two. Performance on stabilization would continue to be subject to the usual type of conditionality, meaning the link between disbursements and the respect of speci®c performance criteria. The areas of budget management and equitable growth would be subject to a new kind of conditionality: disbursements are not linked to the implementation of any particular reform, but to the results achieved as compared to concrete objectives speci®ed in the reform program agreed with donors. These results would be regularly monitored in the context of joint donors assessments through the use of a set of progress indicators speci®cally designed for each of the two areas and previously agreed with the recipient country and among donors. Obviously, the choice of indicators clearly depends on each country's speci®c characteristics, as well as on the scope and objectives of the adjustment program. In addition, in order to allow for a coherent approach to performance evaluation, and to avoid the current criticism of the multiplication of conditions, these indicators would be the same for all donors providing adjustment support in a speci®c country. External and unanticipated
291
developments which could aect performance would need to be included in the assessment (see Appendix A for a discussion on possible indicators). In this way, performance in the areas of budget management and equitable growth would be measured against tentative targets which have been agreed a priori between the government and all donors, while stabilization would continue to be assessed according to traditional performance criteria and benchmarks. This approach would oer greater responsibility to the recipient government to steer the program toward the agreed objectives, without increasing ambiguity with regard to which reforms are actually expected to be implemented and to what donors will regard as satisfactory performance. Taking into account the recomposed reform package, several scenarios are then possible with regard to diverging/converging macroeconomic and structural performance: Where there is a positive assessment of macroeconomic fundamentals, each donor's support exclusively linked to stabilization would be released. In addition, a joint donor assessment would determine if the performance in the areas of budget management and equitable growth is adequate and in line with the envisaged progress. In case of satisfactory performance in either one or both of the areas, donors would release additional assistance (¯oating tranches linked speci®cally to budget management or equitable growth). (Case 1 in Table 1). Where there is unsatisfactory macroeconomic performance, all donor's assistance exclusively linked to stabilization would be halted. Further, there are two possibilities with regard to the ¯oating tranches linked to budget management and/or equitable growth: ®rst, if the macroeconomic slippage is considered to be temporary and appropriate action has been agreed upon with the government to bring the program back on track (say within a ®scal year), then donors may release the ¯oating tranches linked to budget management and equitable growth, in case performance in the respective areas is satisfactory and the temporary macroeconomic slippage does not seriously hinder progress in the area of structural reforms (Case 2 in Table 1). Second, by the same token, if it is considered that the program cannot be brought back on track within a reasonable time frame (e.g., if an ESAF is abandoned) donors would suspend
292
WORLD DEVELOPMENT Table 1. ``Unbundling'' of policies disbursement of funds
Disbursement category/ assessment
Macroeconomic fundamentals
Macroeconmic fundamental
On track (case 1)
Temporary slippage (case 2)
O track (case 3)
release
withhold
withhold
Budget management
+ )
release withhold
release withhold
withhold
Equitable growth
+ )
release withhold
release withhold
withhold
disbursement of the ¯oating tranches regardless of performance in the areas of budget management and equitable growth (Case 3 in Table 1). (iii) Performance-based aid in¯ows The mechanism described above would, in practice, lead to a modulation of aid ¯ows according to performance, since some donors would stop support in case of poor performance in one or more of the three areas. A minimum level of resources, ideally compatible with the short-term ®nancial viability of the macro-programme, would be guaranteed in case of good macroeconomic performance. Additional ®nancing could be made available in case of good progress toward more povertyreducing, long-term development oriented and transparent budget management, on one hand, and structural reforms that enhance equitable growth, on the other. Conversely, the level of aid would be progressively reduced, or totally halted, in case of bad performance in one, two
or three of the areas simultaneously. Poor performance, however, would only imply a complete suspension of adjustment support in two extreme situations: bad stabilization results with lack of prospects for improvement within the following ®scal year, or bad performance on all three fronts. Table 2 illustrates the levels of aid in¯ows (ranging from a minimum of zero to a maximum of three) according to performance. Such a built-in modulation of aid ¯ows would represent an improvement compared with current practice for several reasons. First, the current sharp reductions, and especially cut-os, are often too drastic to be credible, particularly for highly indebted countries, and when implemented plunge the recipient country into macroeconomic crisis. Second, it would naturally lead to greater selectivity in favor of good performers, since bad performers would automatically get less aid than good ones. Third, the recipient country is given greater responsibility to decide on the rhythm of its reforms, since the government knows a
Table 2. Performance based aid in¯ows Results on macroeconomic fundamentals
Results of joint assessment
Level of aid in¯ows
Budget management
Equitable growth
On track
+ + ) )
+ ) + )
3 2 2 1
Temporary slippage
+ + ) )
+ ) + )
2 1 1 0
O track
0
TOWARDS A MORE EFFECTIVE CONDITIONALITY
priori that any delay would have ®nancial implications which it would be obliged to deal with in order to maintain macroeconomic stability. In this respect, the system would certainly contribute to fostering greater program ownership. (c) Strengthening donor coordination It is generally recognized that improved donor coordination is one of the prerequisites for increased aid eectiveness. Some progress has been made since the beginning of the 1980s, but greater eorts should be deployed, especially at the operational level. The organization of a series of regular joint donor assessments, encompassing all of the aforementioned areas of reform and involving those donors who provide balance of payments or direct budgetary support, could be a powerful way of improving donor co-ordination. In order to maximize its eectiveness, such a mechanism should (i) minimize extra operational and administrative costs, both for donors and the recipient government, (ii) avoid duplication, and capitalize on potential synergy eects with other fora of policy dialogue and co-ordination, like Consultative Groups and Round Tables and (iii) ensure that the recipient country takes a lead role in the assessments. A joint donors assessment would take place around IMF mid-term reviews, or in the margins of the Article IV reviews. This evaluation should encompass all three areas of the concept of program conditionality developed above. Such assessments could be organized according to the following sequence: ®rst, a status report would be prepared by the recipient government ahead (say three weeks in advance) of the planned mid-term review. This report would review performance in all three areas on the basis of the stabilization performance criteria and the other areas' performance indicators. Second, the IMF mission would review progress in the area of macroeconomic fundamentals against the speci®c performance criteria previously agreed for this area. Third, taking the government report as the starting point, the assessment in the areas of budget management and equitable growth would be launched. Sectoral reviews would be undertaken combining the eorts of the World Bank and other donors providing adjustment support. Performance would be measured against the indicators previously agreed between the government and all the donors in-
293
volved for each of these two areas, and the results/recommendations of public expenditure reviews would be taken into account. Fourth, a synthesis of the assessment would be organized at the end of the IMF mission. Ideally, the government would take the lead and brief all donors involved on the main conclusions and short-term prospects in the area of macroeconomic fundamentals as they result from its discussions with the Bretton Woods Institutions (where the government does not take the initiative, it should be done by the IMF and/or the World Bank). Such a brie®ng would be kept informal, since no ocial conclusions can be drawn by the mission before agreement by its headquarters. Yet, it should be carried out in the spirit of real partnership and would need to go beyond the spurious macroeconomic brie®ngs that are currently taking place in some countries. Finally, in the other two areas, the government would also present its view on the conclusions of the reviews undertaken. Where there is agreement with all donors involved, the process would be completed. Where there are divergent opinions between donors and the government, additional discussions should take place among donors only: there would be sector reports by donors, a discussion and an evaluation. A joint aide memoire would be prepared by the donors involved for the bene®t of the government and as a summary of the joint ®ndings (highlighting, where that is the case, speci®c issues where donors dier with regard to their assessment). Ideally, these discussions should lead to a common position, meaning that each donor would propose to its headquarters the same conclusions on disbursements. For legal and practical reasons, however, each donor would, after the joint assessment, decide on its own support according to its speci®c rules, procedures and objectives. Apart from the need for greater donor coordination, closer and regular contacts and exchange of experiences among the recipient countries themselves should also be encouraged. Such discussions on economic policy matters could take place in the context of existing regional organizations. They would probably contribute to emulation of good performers and a ``neighborhood eect''. Some kind of peer pressure would also arise from such contacts, contributing to positive spillover eects from the good to the bad performers.
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WORLD DEVELOPMENT
4. CONCLUSIONS The reform of donor conditionality attached to adjustment programs is unquestionably a sensitive issue. It is also inevitable if the current eorts to improve the results of economic reform programs in sub-Saharan Africa are to have a greater chance of success. This article proposes a new approach to conditionality which is centered on three core concepts: increased country ownership, a medium-term perspective on economic reform programs and enhanced donor co-ordination. Current analyses of country ownership seem unsatisfactory: ®rst, because they are developed ex-post, and second, because they are limited to the stage of program design, therefore ignoring its dynamic dimension. No universal solution exists, but a possible way to reinforce country ownership during the phase of programme implementation would be to oer committed governments greater responsibility to decide on the sequencing and timing of reforms. In this perspective, the concept of ``program conditionality'' could be a possible solution. The ``unbundling'' of the reform package and the proposals made to limit further cases of a total suspension of adjustment support, would oer the basis for a better link between short-term policy objectives and the long-term development strategy, while, at the same time, reducing the cases of ``stop-go'' and improving donor and recipient credibility. Greater selectivity in favour of good performers would also result from the built-in performance-based mechanism for external assistance. The proposals put forward on joint donors assessments would reinforce donor co-ordination, reduce the administrative burden of multiple donor missions on the recipient country, and improve aid eectiveness. Finally, in a wider context, this proposed new approach complements current eorts aimed at the progressive introduction of sectoral development programs, supposed to oer the bridge between macroeconomic support and project aid, but which have failed to provide a conceptually convincing answer to the following question: how, in practice, should sectoral budget support in favor of health, education or infrastructure, for example, be linked to macroeconomic stability? The proposals put forward in this article oer a possible solution to reconcile short-term stabilization imperatives and medium/long-term development goals, which demand longer implementation time frames as well as smoother and more predictable aid ¯ows.
APPENDIX A Ð CHOICE AND MEASUREMENT OF POSSIBLE INDICATORS The bene®ts of performance indicators come from their direct link with program objectives. Instead of measuring performance solely against decisions taken or completed actions and studies carried out, the proposed approach actually measures performance against the degree of achievement of speci®c policy objectives or improvements vis-a-vis baseline values of the indicator. Only recently have performance indicators started to be introduced in the context of adjustment operations (see e.g., Mosse and Sontheimer, 1996; Baird, Lav and Wetzel, 1995). In the context of reformulated conditionality, the use of performance indicators is proposed as a way of organizing information, clarifying the relationship between a policy impact, outcomes, and identifying problems along the way that could impede the achievement of program objectives. The choice of performance indicators helps both donors and government clarify and better articulate policy objectives and priorities. Without the appropriate feedback, neither donors nor the government could take necessary actions to achieve better the program's intended objectives. Performance monitoring involves periodically measuring a program's progress toward explicit short-term and long-term objectives and giving feedback on the intermediate results to both donors and policy makers. Periodic performance evaluation would also help satisfy concerns of external audiences (such as constituencies in donor countries) during the process of program implementation, and thus, enhance accountability and transparency of the reform process. Performance indicators must be tailored to the unique objectives and circumstances in a particular country. For each policy area the short and medium-term targets would be quanti®ed and measurable (and there should be as few as practical supported under one operation). This proposal distinguishes between policy areas, implementation indicators, and development impact indicators. Policy areas are of a generic nature and re¯ect the agreement between the recipient country and donors on what is needed to achieve sustainable growth and equity. They are directly derived from the Policy Framework Paper matrix and answer the question whether a country is implementing
TOWARDS A MORE EFFECTIVE CONDITIONALITY
a set of policies that addresses its development needs. Implementation indicators are either measured quantitatively and compared against the baseline or as YES/NO indicators with regard to discrete policy measures. They answer the question whether policies are being implemented eectively and whether policies are likely to have the intended impact. They represent the main basis on which performance will be assessed in the areas of budget management and equitable growth. Implementation indicators are the tracking device over the life cycle of the adjustment operation to ensure that the policies are being implemented as envisaged and contribute to the desired impact. Implementation
295
indicators should signal the need for ®ne-tuning in case of deviation from the desired pattern. Development impact indicators are proxies to measure how close the objectives/targets were achieved. This group of indicators is available over the medium to longer term and measurement has a life cycle longer than the average adjustment operation or the bi-annual performance assessment. They answer the question whether the policies have the intended developmental impact. For illustrative purposes Appendix B oers a sample of possible indicators to be used in an adjustment operation according to the proposed approach.
APPENDIX B Ð SAMPLE PERFORMANCE INDICATORS FOR ECONOMIC REFORM PROGRAM a
Objective/ target
Policy Areas
Implementation Indicators
Are policies being Is the government implemented implementing a set of eectively? policies that addresses the country's development needs? The policy areas are of generic nature and re¯ect agreement with the recipient country and among donors on what is needed to achieve sustainable growth and equity Macroeconomic fundamentals
Indicators are either measured quantitatively and compared against the baseline or as Yes/No with regard to discrete policy measures
Utilize performance criteria and benchmarks as agreed with the BWI
Budget Management Achieve transpar- Make the budget process Provide monthly updates more transparent on budget execution (cash ent, ecient, re¯ow and accrual basis) b sponsible and participatory budget management Carry out annual audits of all discretionary tax and tari exemptions b
Development Impact Indicators
Are the policies having the intended impact?
This group of indicators is available over the medium to longer term and measurement has a life cycle much longer than bi-annual assessment for the implementation indicators
296
WORLD DEVELOPMENT
Make the budget process Deviation between ex-ante more ecient and ex-post expenditure allocations c Track average cost of services procured by public sector b Ensure that the budget re¯ects the right development priorities
Prepare three-year rolling public sector investment program consistent with overall ®scal framework b Actual budget share in total/recurrent/capital expenditures for education and health c Actual share of primary services in total/recurrent/ capital education and health budget c Share of public sector wage bill for non-priority sectors c Tax and tari collections eciency indicator (ratio of actual vs. statutory tari and tax revenues) c
Ensure that the budget provides the right incentives for economic agents
Amount of public sector arrears to private sector c Improvements in public sector procurement procedures b
Equitable Growth (Reduction of Poverty Head Count) Support employment generation through private sector development
Liberalize access to productive assets, make legal framework conducive to competition and reduce government ownership in productive sector
# of production and marketing monopolies (removed over 12 month period; still existing) c
GDP growth per capita
Employment levels in manufacturing, services and agriculture sectors
TOWARDS A MORE EFFECTIVE CONDITIONALITY
Remove remaining price and marketing (export) controls
# of commodities with price controls and/or with export restrictions
c
297
Level of foreign direct investment Share of private sector in total imports and exports of rice
Improve access to primary and secondary education (especially for girls)
Share of exports to GDP
Rationalize the tari structure Pursue participatory approach to support private sector development (PSD)
Average and maximum tari rate c Panel of ®rm surveys to monitor extent of major obstacles to PSD (including e.g. average cost of energy, road transport, freight, interest rates, wages, time lag in payments to private contractors,...)
Implement national policy to promote female education (including girls scholarship program for secondary education)
Girls' and overall enroll- Literacy levels ment rate (primary and secondary education) c Girls' literacy levels
Increase annual output of trained primary school teachers (950 new teachers in 1997)
Student/teacher ratio (in primary school) c
Student/text book ratio Improve supply (average and for 10 of text books and poorest provinces) c physical infrastructure conducive to high quality primary education, especially in poorest provinces Improve broadbased access to adequate primary health care services
Establish administrative structure of the health care system conducive to reaching broad segments of poor and adopt minimum stang norms
Share in total and # of fully staed primary health centers c
Increase supply and availability of medicines and drugs in rural
Immunization ratios
c
Infant mortality ratio Maternal mortality rate
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WORLD DEVELOPMENT
health clinics
Per capita spending on drugs and medical supplies c Implementation of Introduction of FP national family planning services in # of primary program and AIDS health centers c prevention program
Total fertility rate % of adolescents with child or pregnant
This table was prepared in collaboration with Jean-Louis Lacube of the European Commission and Alan Gelb and Deepak Bhattasali of the World Bank. b Yes/No indicator. c Targets would have to be agreed with the government. a
NOTES 1. For a critical analysis of World Bank evaluations of adjustment performance in Africa, see Mosley and Weeks (1993) and Mosley et al. (1995). For a quick overview of dierent studies on the impact of adjustment, see Killick (1993). 2. This article deals exclusively with adjustment resources used for balance of payments/budget support in connection with economic reform programs. Other types of aidÐinvestment projects or technical assistanceÐare not considered. 3. Although these data are not made available by other bilateral and multilateral donors involved in adjustment support, it seems reasonable to assume that this situation is not exclusive to World Bank ®nanced programs. 4. This document presents the main ®ndings and conclusions from three in-depth country case studies, namely Uganda, Senegal and Mozambique. It also draws on the results of other research work undertaken by the European Commission in the context of the Special Program of Assistance for Africa (SPA), in particular on a comparative study of 11 countries and a study on the sequencing of reforms in four African countries.
5. Collier et al. (1997) discuss the compatibility of the various rationales for aid: inducement, selectivity, paternalism, restraint, and signaling. 6. Collier et al. (1997) argue that a necessary condition for government ownership is that the government should do the design of policy. 7. Other interesting ideas capable of contributing to country ownership at the stage of program design can be inferred from the analysis made by Johnson and Wasty (1993). 8. Recent literature, however, tends to demonstrate that in¯ation stabilization, when reducing in¯ation from high levels, could positively aect per capita output growth even in the short run (Easterly, 1996). Therefore, while there may be room for ¯exibility with regard to scope and timing of structural reforms, there is less ¯exibility with regard to achieving and/or maintaining macroeconomic stability. 9. An identical mechanism is proposed in World Bank (1995b).
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TOWARDS A MORE EFFECTIVE CONDITIONALITY inar on Conditionality (Brussels: European Commission, September 1995). Collier, P, P. Guillaumont, S. Guillaumont and J.W. Gunning, ``Redesigning conditionality,'' World Development, Vol. 25, No. 9, (September 1997) pp. 1399±1408. Easterly, W. ``When Is Stabilization Expansionary?'', paper prepared for the IMF Research Department Seminar, (Washington, D.C: IMF, May 1996). European Commission, ``Community support for structural adjustment in ACP Countries: Towards the consolidation and strengthening of a realistic and concerted approach,'' Communication to the Council COM (94) 447 (Brussels: European Commission, October 1994). European Commission, ``The design of economic reforms in the context of political liberalization Findings and conclusions from case studies,'' Paper presented at the Special Program of Assistance for Africa (Washington, DC.: European Commission, January 1995a). European Commission, ``Reformulating conditionality in economic reform programs in Sub-Saharan Africa, an operational approach,'' Paper presented at the Special Program of Assistance for Africa (Paris: European Commission, December 1995b). Guillaumont, P. and S. Guillaumont, ``Orientations pour une reforme de l'aide a l'Ajustement'' in Ajustement et Developpement, L'Experience des Pays ACP (Afrique, Caraõbe et Paci®que) (Paris: Economica, 1994), pp. 94±112. Guillaumont, P. and S. Guillaumont, ``Pour un nouveau type de conditionalite,'' Working paper prepared for the European Commission Seminar on Conditionality (Brussels: European Commission, September 1995). Johnson, J. and S. Wasty, ``Borrower ownership of adjustment programs and the political economy of reform,'' Discussion Paper N 199 (Washington, DC: World Bank, 1993). Killick, T., The Adaptive Economy. Adjustment Policies in Small, Low-Income Countries, (Washington, D.C.: World Bank, 1993). Killick, T., ``IMF Progammes in Developing Countries. Design and Impact'' (London: Routledge, 1995), pp. 61±63. Killick, T., ``Principles, Agents and the Limitations of BWI Conditionality'', World Economy, No.19/2 (1996), pp. 211±229.
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Killick, T., ``Principals, agents and the failings of conditionality,'' Journal of International Development, Vol. 9, No. 4 (June 1997), pp. 497±506. Loup, J., ``Structural adjustment and conditionality,'' Working paper prepared for the European Commission Seminar on Conditionality (Brussels: European Commission, September 1995). McCleary, W., ``The design and implementation of conditionality'' in T. Vinod, A. Chhibber, M. Dailami and J. De Melo (Eds.), Restructuring Economies in Distress - Policy Reform and the World Bank (New York: Oxford University Press, 1991), pp. 197± 214. Mosley, P, T. Subasat and J. Weeks, ``Assessing adjustment in Africa,'' World Development, Vol. 23, N 9 (1995), pp.1459±1473. Mosley, P. and J. Weeks, ``Has recovery begun? Africa's adjustment in the 1980s Revisited,'' World Development, Vol. 21, N 10 (1993), pp. 1583±1606. Mosse, R. and L. E. Sontheimer, ``Performance Monitoring Indicators Handbook'', Technical paper N 334, (Washington, D.C: World Bank, 1996). Webb, S. and K. Shari, ``Designing and implementing adjustment programs'' in V. Corbo, S. Fischer and S. Webb (Eds) Adjustment Lending Revisited, Policies to Restore Growth (Washington, DC: World Bank, 1992). World Bank, Adjustment Lending. An Evaluation of Ten Years of Experience (Washington, DC: World Bank, 1988). World Bank, World Bank Structural and Sectoral Adjustment Operations: The Second OED Overview (Washington, DC: World Bank, 1992). World Bank, The East Asian Miracle, Economic Growth and Public Policy, (New York: Oxford University Press, 1993). World Bank, Adjustment in Africa. Reforms, Results and the Road Ahead, (New York: Oxford University Press, 1994). World Bank, ``A Continent in Transition: Sub-Saharan Africa in the Mid-1990s'', Unpublished report (Washington, D.C: World Bank Africa Region, 1995a). World Bank, ``Higher Impact Adjustment Lending'', Report presented at the Special Program of Assistance for Africa (Paris: World Bank Africa Region, October 1995b). World Bank, Adjustment lending in Sub-Saharan Africa: An Update (Washington,D.C.: OED, May 1997).