Flash Info April 2016

How do earmarked funds change
the geographical allocation of multilateral assistance?

by Laurent Wagner, research officer, Ferdi

 

Traditionally, development assistance has fallen into two distinct categories, bilateral and multilateral official development assistance (ODA). However, for the last 10 years, bilateral donors have increasingly opted for a new third category which is a loose combination of the former two and is generally called “multi-bi” aid. This form of aid allows bilateral donors to channel funds directly through multilateral agencies without providing them with the authority to spend these funds at their own discretion. It is this direct control (or earmarking) of bilateral donors over multilateral activities characterized by a strong earmarking to specific sectors, regions or countries in which the funds may be used that makes multi-bi aid radically different for multilateral institutions compared to their traditional core activities.

The rising level of earmarked funds

Earmarked funds represent today more than 20% of bilateral aid and 60% of multilateral aid according to Reinsberg et al. (2015). While the importance and popularity of these new instruments among traditional donors have increased, their management, their global objectives and their implementation remain largely under-documented. Similarly, their impact and effectiveness in many non-traditional sectors remain to be cautiously assessed. Furthermore, the multiplication of earmarked funds is not without its problems, especially in terms of consistency and of coordination among actors and their actions, or in terms of geographical and sectoral allocation of resources.
For the main Multilateral Development Banks (MDBs) the principles determining the allocation of aid among eligible countries are governed by a formula, called “Performance Based Allocation” (PBA). This formula which has been used since 1977 by the World Bank for the International Development Association (IDA) has been modified several times. It is used by the main Multilateral Development Banks.
Performance representing the quality of public policies has an overwhelming weight in the allocation process (see Guillaumont et al., 2010 and Guillaumont & Wagner, 2015, for an extended discussion).
With the rise of multi-bi aid and the significant share of activities financed through trust funds, one major concern for institutions belonging to the PBA club is the relationship between trust fund geographic allocation with regard to performance and how trust funds complement or distort the PBA.

Earmarked funds, support or substitute to performance?

Our results, using Eichenauer and Reinsberg (2015) data, show that performance tends not to be used as the only criterion for allocation and as the share of concessional public financing channelled through earmarked funds rises, the share of aid allocated through the strict PBA decreases.
Then, focusing on IDA, we also show that for many countries the distortion introduced by trust funds is far from negligible, notably for low income countries or fragile states.
The fact that trust funds are effectively used to reach countries that lag the most behind is obviously a good thing as the design of new instrument aimed at those countries is certainly one of the main challenges faced by the MDBs today. However, this new approach cannot be totally disconnected of the global strategy leading their concessional windows at a risk of the emergence of a double narrative hardly understandable by their clients and stakeholders.
Indeed earmarked funds have developed at such a pace that a comprehensive review of its efficacy and more importantly, of its consistency with traditional concessional financing windows is yet to be made. For the last decade, most MDBs, following the lead of the World Bank, have opted for some sort of performance based allocation for their main concessional funds. Countries that perform well according to an assessment of the quality of their economic policies are expected to receive more multilateral ODA. This widespread practice appears to be the cornerstone of the common philosophy regarding multilateral aid allocation. Trust funds on the other hand, are designed to provide a greater efficacy and flexibility by escaping the constraint of this rigorous allocation rule. As the allocation processes as well as the core objectives of both instruments are meant to be different, their aggregation is likely to undermine the dominant weight of performance. This means more discretionary aid allocations by country, which are harder to predict.

In the end, this fast development of trust funds may reflect some doubts from bilateral donors about the general allocation rules they are supposed to support, due to its possible lack of flexibility. It also highlights increasing concerns from bilateral donors about global public goods such as climate change and peace and security issues, difficult to address within the framework of the PBA, notably in a preventive way.

Contact : Laurent Wagner – laurent.wagner@ferdi.fr

References

  • Eichenauer, V. Z. and B. Reinsberg (2015). Multi-bi aid: Tracking the evolution of earmarked funding to international development organizations from 1990 to 2012. CIS Working Paper No. 84. Center for Comparative and International Studies (CIS).
  • Guillaumont, P., Guillaumont Jeanneney, S., and Wagner, L., 2010, How to Take into Account Vulnerability in Aid Allocation Criteria. ABCDE Conference Stockholm, FERDI Working paper N°13. Forthcoming in World Development.
  • Guillaumont P., Wagner, L., 2015, “PBA still alive?”, in Handbook on the Economics of Foreign Aid, Arvin M. (Edr), Edward Elgar Publishing.
  • Reinsberg, B., K. Michaelowa, and V. Z. Eichenauer (2015). The proliferation of trust funds and other multi-bi aid. in Handbook on the Economics of Foreign Aid, Arvin M. (Edr), Edward Elgar Publishing.

 Related Publications

  • Guillaumont P., McGillivray M. et Wagner L. (forthcoming) "Performance Assessment, Vulnerability, Human Capital, and the Allocation of Aid Among Developing Countries", World Development, doi:10.1016/j.worlddev.2015.05.005 (lien vers la publication)

  • Guillaumont, P., Guillaumont Jeanneney, S., Wagner L. (forthcoming) "How to Take into Account Vulnerability in Aid Allocation Criteria and Lack of Human Capital as Well: Improving the Performance Based Allocation" World Development, doi:10.1016/j.worlddev.2015.10.045 (formerly Document de travail Ferdi P13 - update : janvier 2015) (lien vers la publication)

  • Audibert M. et Mathonnat J. (2016) "Fonds fiduciaires et programmes verticaux : quelles contributions aux politiques sectorielles ? Revue de la littérature et exemple du secteur de la santé" Papiers de Recherche AFD, n° 2016-20, Janvier (lien vers la publication)

  • Wagner, L. (2016) "How do Earmarked Funds Change the Geographical Allocation of Multilateral Assistance?" Ferdi Working Paper P150, March 2016 (lien vers la publication)

  • Chauvet L. (2015) "On the Heterogenous Impact of Aid on Growth. A Review of the Evidence." Chapter 21 in Arvin M. and Lew B. (eds.), Handbook on the economics of foreign aid , Edward Elgar Publishing (lien vers la publication)

  • Chervalier, B. (2015), "Concessional financing windows or the need to reform the magic triangle" Ferdi working Paper P129, July 2015 (lien vers la publication)

  • Guillaumont, P. and Wagner, L. (2015) "Performance-based allocation (PBA) of foreign aid: still alive?" Chapter 2 in Arvin M. and Lew B. (eds.), Handbook on the economics of foreign aid , Edward Elgar Publishing (lien vers la publication)

  • Boussichas, M., et P. Guillaumont (2014) "Measuring Official Development Assistance. Why and how to change" Ferdi, Policy brief B100, August 2014 (lien vers la publication)

  • Guillaumont, P. et L. Wagner (2014) "Aid effectiveness for poverty reduction: which lessons can be drawn from cross-country analyses, with a special focus on vulnerable countries" Ferdi, document de travail P96, mars 2014 - version française : "Efficacité de l’aide pour réduire la pauvreté: quelles leçons tirer des analyses transversales, en particulier dans le cas des pays vulnérables", Revue d'économie du développement 4/2013 (lien vers la publication)

  • Tomasi, S. (2014) "Does aid have a future?" Ferdi, Working paper P82, janvier 2014" (lien vers la publication)

  • Guillaumont, P., M. McGillivray, and L. Wagner (2013) "Performance Assessment: How it Depends on Structural Economic Vulnerabilty and Human Capital. Implications for the Allocation of Aid" Ferdi, Working paper P71, June 2013." (lien vers la publication)