Working Paper 167 - Promoting Economic Reforms in Developing Countries Rethinking Budgetary Aid?

This paper examines donor practices in the use of budgetary aid to promote economic and structural reforms in developing countries, notably those of Africa. It is based on an observation in recent literature to the effect that, despite its increased use since its advent in the 1980s, budgetary aid appears to have had limited impact on the design and implementation of economic reforms in developing countries. To remedy this situation and reposition budgetary aid as a catalyst for structural reforms in recipient countries (one of this instrument’s fundamental objectives), and to strengthen the linkages between fund transfers to national treasury accounts and implementation of profound and far-reaching reforms in support of growth and job creation, the paper proposes a new instrument for donors, namely Enhanced Budget Support (EBS). The latter seeks three major objectives: i) devote budget support to the implementation of reforms requiring the creation of intangible assets, an area in which it has a comparative advantage; ii) clearer identification of the changes in economic behaviors and, therefore, the results, targeted by the reforms and iii) align budget support financing with the estimated budgetary cost of the structural reforms to be pursued, an approach which few donors have adopted today. Apart from enhancing transparency, this approach would afford the stakeholders the means of more fully guaranteeing accountability, thereby strengthening the link between budget support and implementation and, consequently, the outcomes of reforms. The challenges often mentioned in assessing the budgetary cost of reforms, can be overcome.