Aid instruments

This topic guide aims to provide introductory information on the governance aspects of aid instruments and aid effectiveness. It focuses on government-to-government aid. This guide is supported by three in-detail topic guides to budget support, Poverty Reduction Strategy Papers (PRSPs) and Sector Wide Approaches (SWAps).

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Definition of topic and content

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Aid effectiveness

Definition of topic and content

Since the late 1990s, new aid instruments, such as SWAps and Budget Support, have been developed to overcome the shortcomings of both projects and structural adjustment lending in supporting poverty reduction. Common to these new approaches is a focus on trying to build national ownership of poverty reduction policies, and an attempt to create a government-led partnership among aid donors and other stakeholders. To this end, they prioritise the use of recipient government systems of policy-making, public financial management, and accountability. The objectives of increased national ownership and enhanced partnership are the rationale for the Poverty Reduction Strategy (PRS) process.

Where is a good place to start?

Foster, M. and Leavy, J. 2001, 'The choice of financial aid instruments', ODI Working Paper 158, Overseas Development Institute, London.
This paper provides an excellent and easily accessible discussion and illustrations (such as the decision tree) of what forms of aid are appropriate in specific country context. The appendix includes matrix tables and a flow chart of different aid instruments and when they might be used.
Full document available online

Aid effectiveness

The perceived failure of aid programmes to contribute significantly and consistently to poverty reduction throughout the 1980s and early 1990s led to an examination of the conditions needed for aid to be effective. In many instances, the effectiveness of aid in reducing poverty was found to depend on the quality of governance in the recipient country. These documents debate this finding, and discuss its implications on the way that aid is delivered:

Dollar, D., and Pritchett L., 1998, Assessing Aid. What Works, What Doesn’t and Why, World Bank, Oxford University Press, New York.
This report summarises the findings of a research programme on aid effectiveness. A key theme is that aid is a combination of money and ideas. Money has a big impact but only if countries have good economic institutions and policies. The ideas side of aid is critical for helping countries reform and effectively provide public services.
Full document available online

Beynon, J., 2003, 'Poverty Efficient Aid Allocations - Collier/Dollar Revisited', Economics and Statistics Analysis Unit Working Paper 2, Overseas Development Institute, London.
What makes aid effective and what are the implications of this analysis for aid allocations? Recent World Bank research has stimulated a major debate around these issues. There is growing consensus among donors that ‘good’ policy is a key factor for aid effectiveness and should therefore be a criteria for allocation. This paper from the Economics and Statistics Analysis Unit of the Overseas Development Institute re-examines the evidence on which those arguments are based, and analyses aid efficiency over the 1990s.
Full document available online

Aid harmonisation and alignment

Increasingly, the effectiveness of aid is seen to relate to the degree to which donors harmonise their procedures and align their assistance with the recipient country's priorities and institutional arrangements. Where each donor has proprietary processes and procedures that guide engagement with partner countries, the transaction costs of delivering aid are very high. The movement for donor harmonisation seeks to find ways of streamlining aid delivery and thereby increasing aid effectiveness. The following guidelines on harmonisation were drawn up by the Development Assistance Committee (DAC) of the OECD. They underpin the Rome Declaration on Harmonisation which was endorsed in February 2003 by Ministers and other Senior Officials representing aid recipient countries and multilateral and bilateral development agencies.

Organisation for Economic Cooperation and Development, 2003, 'Harmonising Donor Practices For Effective Aid Delivery: Good Practice Papers', OECD, Paris.
How should donors and developing countries work towards co-ordinating practices to ensure the effective delivery of aid? These guidelines, approved in the Rome Declaration, offer a set of good practices for donor-government engagement, inter-donor co-ordination, and intra-donor reform. Their goal is to simplify and harmonise procedures, thereby reducing costs and boosting progress towards the Millennium Development Goals.
Full document available online

Alignment refers to improving the level of consistency between donor policies, procedures and practices, and national strategies, institutions and processes. Aid instruments such as SWAps and Budget Support utilise government budgetary systems wherever possible. If the aid channelled through these is to be effective, it must be designed to complement existing systems and to strengthen good practice, as discussed in the following document:

Foster, M. and Fozzard, A. 2000, 'Aid and Public Expenditure: A Guide', Overseas Development Institute Working Paper no. 141, (also included in DFID Economist Manual 2000)
This paper focuses attention on the difficult inter-relationship between aid and the reform of domestic institutions. Changes in the way aid is delivered make it imperative to understand the budget processes in individual countries and particularly how donors interact with them.
Full document available online

Donor reform

In parallel to the development of new aid instruments, there is an increasing focus on the internal incentives and behaviour of aid agencies, and the way they can influence the outcome of aid programmes. The following study, while it is primarily concerned with incentives for and against the delivery of sustainable projects (i.e. those whose benefits outlast the donor inputs), is a major contribution to the analysis of donor behaviour and relevant to other forms of aid.

Ostrom, E. et al., 2002, 'Aid, Incentives and Sustainability: An Analysis of Development Co-operation', Swedish International Development Co-operation Agency (SIDA), Stockholm.
Recent studies of development assistance programs conclude that despite tremendous efforts and good intentions, aid has produced disappointing results. Does aid itself create incentives that undermine sustainability? This study from SIDA explores how the incentives that arise in the system of development co-operation affect sustainable outcomes, and recommends strategies to mitigate some of the perverse incentives often found in development assistance systems.
Full document available online

Delivering aid in challenging environments

Aid instruments such as SWAps and Budget Support depend on recipient governments having sufficient capacity and will to engage in poverty reduction efforts. In some environments, where this is not the case, donors may still want to support poverty reduction. This document examines some of the options for delivering aid available in such circumstances.

Collier P. and Okonjo-Iweala N. (World Bank Task Force Leaders), 2002, World Bank Group Work in Low-Income Countries Under Stress: A Task Force Report, World Bank, Washington D.C.
This report by the World Bank suggests that the challenge of aid effectiveness in poor countries with ineffective governments is to use other instruments, supplemented by financial transfers where necessary, to promote change.
Full document available online

What other resources are available on the GRC Exchange?

Organisations

The Overseas Development Institute (ODI)
ODI is home to the Centre for Aid and Public Expenditure (CAPE) which was established in 1999 and has since carried out policy-focused research on a variety of aspects of aid instruments, budget processes and the reform of public expenditure systems.
Full summary of Overseas Development Institute available through Organisations Database

Use the site search at the top of this page, or within the left navigation if you wish to look for wider resources on aid instruments.

Key texts
More documents on aid instruments can be accessed from the GRC Exchange's Information Database.

Additional information resources

Aid Harmonization and Alignment website
This website provides publications and news on Aid Harmonization and Alignment. It includes information on the activities of the DAC's Working Party on Aid Effectiveness and Donor Practices.

OECD Study on Donor Practices
The International Development Department (IDD) of the University of Birmingham undertook a study of donor practices for the OECD in 2002- 2003. The background to and reports from the study are available on the IDD website.

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