Payments for Progress: A Hands-Off Approach to Foreign Aid - Working Paper 102

December 04, 2006

At the start of the millennium, the international community committed itself to help developing countries achieve the Millennium Development Goals (MDGs), including through major increases in foreign aid spending. But there are significant differences of opinion about the merits of additional aid in meeting the MDGs, including whether and how aid should be given in "fragile states," whether large amounts of additional aid can be effectively used even in well-managed economies, and whether the aid system, particularly in highly aid-dependent countries, undermines instead of strengthens local institutions. In this CGD working paper, Owen Barder and Nancy Birdsall discuss an approach to scaling up foreign aid aimed at strengthening local capacity and institutions, including in fragile states. "Payments for progress" would link additional aid to clear evidence of progress already achieved on the ground. It would also give flexibility and autonomy to local institutions, providing an opening for local institutional experimentation, while at the same time ensuring that aid pays only for real, measurable achievements.

In this approach, donors would bind themselves as a group to pay a specific amount for clear evidence of progress against one or more agreed goals—increased vaccinations or school completion rates—in low-income developing countries. Developing country governments would present an independently audited statement reporting their progress on the measures, and donors would pay the agreed amount. Payments would be determined as a function of the outcomes, and not linked to the implementation of any particular policies, any other intermediate outputs, or "tied" to purchases from particular suppliers or companies. Governments that found ways to provide services efficiently and so reduce the costs of providing them would benefit from a larger surplus.

Barder and Birdsall discuss the issues such an approach raises—in setting the benchmarks against which progress is measured, in avoiding cheating, and in managing unintended negative consequences of an incentives-based approach. They also discuss the advantages of paying for progress, which include increased accountability of recipient governments (if parents know that funding is unquestionably available for their government to meet the costs of providing primary education for all children, unencumbered by other conditionality, this permits them to hold the government accountable for public schooling), and increased accountability of donors (if donors agree to be held jointly and severally liable for their commitment to pay for progress, they can exert peer pressure on each other to bear the costs as they fall due).

Some donors believe that the world should be more generous in its funding for development. They are right: the efforts of developing countries should not be allowed to fail through lack of resources. Other donors believe that aid funding should be clearly linked to results. They are right too. Increasing aid without linking it to progress is pushing on a piece of string.

Barder, the director of Global Development Effectiveness at the United Kingdom Department for International Development, was a senior program associate at CGD when this paper was first drafted. Birdsall is the founding president of the CGD.

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