A Macroeconomic Framework for the Poverty Strategy A critical challenge: Enhancing aid effectiveness in Post-conflict S

1. 1 A Macroeconomic Framework for the Poverty Strategy A critical challenge: Enhancing aid effectiveness in Post-conflict Sudan Sudan JAM: The Economic Policy Cluster (Int. team, World Bank) Civil Society Consultations: Khartoum, Dec. 1, 2004; Yei, Dec. 2004

2. 2 A critical challenge: Enhancing aid effectiveness in post-conflict Two important findings of aid effectiveness (e.g. Burnside and Dollar, 2001): More aid is associated with higher growth, provided that it is delivered in a good policy and institutional environment However, aid is subject to diminishing returns

3. 3 A critical challenge: Enhancing aid effectiveness .. (continued) In post-conflict, aid is likely to be unusually productive and thus may be associated with super-normal growth since it may: Restore substantially depleted infrastructure Replenish collapsed revenue base However, post-conflict aid may not be productive if: The war legacy of opportunistic social equilibrium and high corruption is persistent in the aftermath of peace Low capacity for economic management remains pervasive

4. 4 A critical challenge: Enhancing aid effectiveness .. (continued) Nevertheless, the evidence from growth regressions suggests that the �catch up� effect dominates despite low policy ratings: Supra-normal growth effect Supra-normal aid effectiveness However, it does not happen in the immediate post-conflict

5. 5 A critical challenge: Enhancing aid effectiveness .. (continued) Cross-country evidence suggest the following pattern for growth maximizing aid ratios for various levels of institutions and policies (CPIA): Figure V.1 - Across all three post-conflict episodes, higher institutional and policy performance (CPIA) allows economies to effectively absorb more aid - For any given level of CPIA, absorptive capacity was usually modest during the immediate post-conflict (peace onset) then it tend to peak in the second period (postconflict1) before moderating in the third period (postconflict2)

6. 6 A critical challenge: Enhancing aid effectiveness .. (continued) Implications for the Sudan (Figure V.1): - the relatively small aid ratios projected for the Sudan might suggest that only limited CPIA improvements are needed - However, given that some regions will receive much larger aid ratios, the requirements for increased absorptive capacity might require much more improved CPIA, perhaps to the median for post-conflict countries

7. 7 Figure V.1: Growth Optimizing Aid for three levels of Institutional and Policy Performance (CPIA) over the Three Post-conflict Episodes

8. 8 A critical challenge: Enhancing aid effectiveness .. (continued) How does aid profile in post-conflict compares to the optimum (Figure V.2): Donors come in slowly but they significantly raise their presence over time This pattern is consistent with development aid as a share of GDP, per capita aid, and per capita emergency aid.

9. 9 A critical challenge: Enhancing aid effectiveness .. (continued) Actual median aid/GDP is higher than the optimum aid expected under minimum CPIA profile but still much lower than the optimal values under median CPIA assumptions. If compared to the growth regressions, Aid/GDP in post-conflict I could be much higher than what the median post-conflict country actually receives.

10. 10 Figure V.2: Profile of Development Assistance in Post Conflict-Median Values

11. 11 A critical challenge: Enhancing aid effectiveness .. (continued) Summary of recent African post-conflict experiences (Figures V.3-6) In Mozambique and Liberia donors enter and leave early In Sudan and Uganda donors enter gradually and they tended to stay Emergency aid comes in early in the cases of Liberia and Uganda but enters late in the case of Sudan and Mozambique

12. 12 Figure V.3: Profile of Development Assistance in Mozambique

13. 13 Figure V.4: Profile of Development Assistance in Liberia

14. 14 Figure V.5: Profile of Development Assistance in Uganda

15. 15 Figure V.6: Profile of Development Assistance in Sudan

16. 16 A critical challenge: Enhancing aid effectiveness .. (continued) Breaking down development aid by its impact on growth: New aid literature argues for the need to disaggregate aid when investigating its impact on short-run growth (Radelet et al. 2004) The types of aid that are only likely to impact aid in the long run include support for institutions, health, and education

17. 17 A critical challenge: Enhancing aid effectiveness .. (continued) On the other hand, the types of aid that can potentially impact aid in the short-run (about four years) include: - infrastructure, productive sector, and budget support - unlike the other types of aid, empirical evidence shows that this type of aid strongly impacts short-run growth regardless of the initial level of income or institutions

18. 18 A critical challenge: Enhancing aid effectiveness .. (continued) Short, Long, and Humanitarian Aid Profiles (Figure V.7): As expected, donors of short-impact aid come in quickly in the peace onset Long-impact aid flows in slowly in the peace onset and increases over time Humanitarian aid is a small share of total development aid but stays rather constant over the three post-conflict periods

19. 19 Figure V.7: Short, Long, and Humanitarian Aid in Post-conflict Periods

20. 20 A critical challenge: Enhancing aid effectiveness .. (continued) Profile of Sectoral Aid (Figure V.8): Development aid is balanced across sectors Aid directed to infrastructure dominates in the peace onset and remains significant in the other periods The social sector (i.e. education, water & sanitation) receive large amounts of aid in all three post-conflict periods and dominate all other sectors in post conflict1 and 2 In the latter two periods, the productive sector accounts for 10% of total aid, followed by budget support and government & institutions

21. 21 Figure V.8: Sectoral Aid Commitments in post-conflict Periods

22. 22 A critical challenge: Enhancing aid effectiveness .. (continued) Key lessons for the Sudan: The first best should be to enhance aid effectiveness through substantial institutional and policy reforms Focus on infrastructure, productive sector and budget support in the first four years (peace-onset and postconflict1): - generate short-term growth when limited initial capacity makes high CPIA performance not likely (south and other war-affected regions) - scope for effective budget support through TFs

23. 23 A critical challenge: Enhancing aid effectiveness .. (continued) However, ensure that aid is balanced between long and short run impact types: - under provision for education, health and long-term capacity-building in the first two or four post-conflict years may threatens growth in the medium to longer runs Do not neglect the other side of the aid equation: - debt relief is critical for enhancing quality of aid - so is minimizing the perverse impact of TA, including through use of expatriate Sudanese whenever possible - donors coordination, including harmonization of procedures ..etc (see Box V.1)

24. Lessons from Recent World Bank for Donor Assistance to Post-Conflict Sudan The World Bank experience with post-conflict reconstruction includes valuable lessons such as: early engagement and strong field presence; aid coordination; partnerships with other donors, and agreements on respective roles of each donor; and, adoption of services and products to post-conflict situations. These lessons are relevant for effective Bank and donor assistance to post-conflict Sudan, which has a fragile political balance, limited capacity, and extreme time pressure. Source: Hassan, Fareed M.A. (2004) �Lessons Learned from World Bank Experience in Post Conflict Countries and Their Relevance for Sudan.� Working paper.

25. 25 Lessons for Donor Assistance to Post-Conflict Sudan (cont�d.) The Bank and other donors� strategies for post conflict Sudan must put into consideration the following: Support for effective client dialogue. Options for donor re-engagement. Institutional capacity and governance A partnership-oriented approach. A result-based assistance approach. Source: Hassan, Fareed M.A. (2004) �Lessons Learned from World Bank Experience in Post Conflict Countries and Their Relevance for Sudan.� Working paper.

26. 26 Support for effective client dialogue The Bank and other partners must provide conceptual and material support to establish an effective and intensive dialogue with the government, and work toward developing the necessary environment for normalization of relationship. The Bank needs to provide effective analytic work that is discussed/prepared jointly with the client, and offers a list of options that the client can choose from. And of equal importance, deepening the country�s knowledge base can help the authorities make more informed and strategic choices.

27. 27 Options for donor re-engagement Depending on the level of intensity, three inter-related options for donor re-engagement in post-conflict Sudan exist: one, continue abreast political and economic developments and collaborate in advising the government on next steps; two, undertake analytic work directed at key issues with the objective of guiding future assistance programs; and three, develop and implement an assistance strategy, if feasible.

28. 28 Institutional capacity and governance The Bank and other donors� assistance must start with measures to strengthen and to increase the accountability and transparency of the country�s governing structure. The Bank can take an institutional and governance to analyze the institutional constraints to reform, particularly the political economy factors, and to provide measures to address them. Likewise, the country needs to create a civil society that challenges public authorities to enhance their performance with responsiveness to the citizenry. The Bank and donors can work with the government and with non-government stakeholders to design clear operations with objectives to strengthen existing organizations, build institutional capacity, and ensure that projects and programs are adapted to the local context and enjoy support. The Bank and other donors should not overwhelm the government�s absorptive capacity by the diversity and complexity of various procurement and administrative requirements. Moreover, it is essential to deal with the institutional weaknesses of the country rather than to bypass them. Lending delivery mechanisms that utilize project management units and limit the need for government execution should be viewed as a short term solution, which could be used while taking longer term measures to strengthen the country�s institutions and line ministries.

29. 29 A partnership-oriented approach Close donor coordination is necessary for any success in Sudan�s weak institutional environment. However, country�s ownership and leadership for international assistance and donor activities is essential. The Bank�s use of consultative groups has been effective for mobilizing resources, and the economic development dimensions of peace accord options in Sudan can help improve economic governance components of peace accords and lay a foundation for more effective interpretation and implementation in the critical first months following the agreement. A collaborative model of donor assistance can be developed by associating Sudanese professionals with donor analytic work and lending, by decentralizing appropriate authority and task management to the field office, and by deploying disbursement and procurement expertise in the filed to build government implementation capacity (for example, the Bank has recently placed an operation officer in the resident mission

30. 30 A result-based assistance approach Donors and the country must be prepared to allocate sufficient resources for adequate monitoring and evaluation (M&E). The government can work with the World Bank�s Operations Evaluation Department and the Africa Region to develop a program of evaluation capacity development. Strengthening monitoring of output and outcome indicators embedded in an improved M&E framework helps to anchor donor assistance program in a result-based approach, which should be evaluated periodically for relevancy to sustainable peace and development.