• Financing the MDGs

Financing the MDGs

International aid donors have increasingly moved toward direct budget support as a means of reducing poverty and meeting the Millennium Development Goals (MDGs). This article discusses the relevance of budget support to financing the MDGs, how it should be designed and what attitude civil society organisations should adopt towards it. 

The proponents of budget support claim that it is an efficient mechanism for delivering scaled up aid effectively. As this view has gained ground, an increasing number of aid agencies have started disbursing more aid as budget support. As the paper describes, recent forms of budget support have focused more directly on the government budget, in order to support nationally owned poverty reduction strategies in ways that would strengthen national capacity and ensure more sustainable development.

The authors highlight and interrogate a number of assumptions made about budget support. For example, when used to finance country development strategies, budget support is expected to also have a wide range of complementary effects, such as:

• improved coordination and harmonisation among donors and alignment with partner country systems (including budget systems and result systems) and policies
• lower transaction costs
• increased effectiveness of the state and public administration as budget support is aligned with and uses government allocation and financial management systems
• improved domestic accountability through increased focus on the government’s own accountability channels

The paper argues, however, that budget support is only as good as the strategy it is financing. It can be an effective instrument, but only when the government is implementing a poverty reduction strategy that its aid partners broadly support. Similarily, the government must be able to maintain economic discipline and control public expenditures, and there must be a high level of trust between the government and its partners.

The paper highlights a number of best practices when engaging in budget support:

• general budget support needs to be conceived (and developed and managed) as part of strategy which takes explicit account of the interplay between different aid modalities and instruments, seeking to exploit complementarities and tackle dissonance between them
• there is no standard evolutionary sequence, in which project aid first gives way to sector programmes (or sector basket funds) before the eventual introduction of unearmarked budget funding
• there should be an incremental approach to the use of budget support which should be adapted to specific circumstances and government capacity

The paper concludes that budget support is not a panacea, but it should play an important role in meeting MDG commitments. Donors need to demonstrate political will and a willingness to innovate, so as to develop forms of budget support that ensure continuous support to poor people, even when the political context is difficult.

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