STRATEGIC CHOICE FOR ACHIEVING THE MDGs: A CRITIQUE AND A STRATEGY

1. STRATEGIC CHOICE FOR ACHIEVING THE MDGs: A CRITIQUE AND A STRATEGY Sanjay Reddy and Antoine Heuty New York, August 18, 2004

2. Why is it necessary to estimate the cost of achieving the MDGs? • All MDG needs assessment and cost estimation models make both implicit and explicit assumptions concerning appropriate strategies to achieve the MDGs • Evaluating the cost of achieving the MDGs is one important prerequisite for choosing strategies to achieve the MDGs

3. A Rationale for cost estimates • Strategic choice for achieving the MDGs may be helpful in answering two kinds of questions: • A normative question: Should an end be pursued ? • The feasibility of achieving the MDGs, given a sufficient application of resources and adequate policy and institutional reform , is not generally in doubt. • However , the discussion implicitly supposes that the commitment to achieving the MDGs is not unconditional. • An implicit rationale: Convincing developing countries and donors that the MDGs can be achieved without undue sacrifice of other objectives. • An operational question: How should an end best be pursued? • Budgetary Planning: needs, gaps, “stickiness” (irreversibilities, cost of planning). • What is the most cost efficient approach to achieving the goals? Within-country cost information is indispensable to developing an effective country-specific plan for achieving the MDGs.

4. Global cost estimates • Zedillo Report: “The cost of achieving the 2015 goals would probably be on the order of an extra $50 billion a year”. • The Bank’s initial estimates of the cost (to donors) of achieving Goal 1 range between US $ 54 billion and $ 62 billion a year. Its estimates of the cost of achieving the goal depend on ad hoc assumptions concerning, ‘poverty elasticities of income’, capital-output ratios, national savings rates, and ‘absorption constraints’. • The Bank estimates the total cost of achieving the other goals (by adding existing sectoral estimates, as does the Zedillo commission) as ranging between US $ 35 and $ 76 billion per year.

5. Limits of global approaches to MDG needs assessments • These studies draw to a significant extent on existing global cost estimates developed for individual sectors (some of which predate the MDGs and do not refer to the same targets). These sectoral estimates do not generally account for causal interdependencies in the achievement of the goals. • Global sector estimates are limited by inadequacies in data and in knowledge of the causal processes by which outcomes are jointly produced. They depend on ‘heroic’ generalizations. • Appropriately, all of the reports recognize the limits of global estimates and call for country-level cost estimates to be produced.

6. Approaches and Limits to Costings

7. MDG needs assessment at the country level • UNDP country offices have participated in a pilot project which has attempted to estimate the cost of attaining the MDGs in six countries. The reports focused on six MDG targets: income poverty, primary education, child mortality, maternal health, HIV/AIDS and water. • The Millennium Project is also preparing a number of country case studies to map out the major policies and investments required to achieve the MDGs in the countries concerned. • The World Bank approach gives priority to the Poverty Reduction Strategy (PRS) previously defined by each country, and asks how, giving priority to the objectives and strategy of the PRS, the MDGs can best be achieved. PRSPs often prominently feature macroeconomic policy objectives that are not directly referred to among the MDGs.

8. Requirements of an estimate • Accurate specification of the cost concept • Accurate identification of the baseline scenario • Accurate identification of the cost function • Identification of unit costs • Projection of unit costs over the coverage range

9. Main methodological problems - Choice of Assumptions • Existing national and global cost estimates are not robust to the choice of assumptions. • Examples • Constant unit costs; • “Absorptive capacity”; • Aid ineffectiveness and "good policies" ; • Complementarities between the distinct MDGs – Studies vary widely in their (ad hoc and perhaps overly optimistic) assumptions; • Assumptions concerning future growth rates, future tax/GDP ratios, and the balance of public and private financing of expenditure that may reasonably be expected.

10. Data Weaknesses • Data for baseline scenario of the MDGs and monitoring are severely deficient. • As a result, it is often not possible meaningfully to judge either the extent of progress required or the costs of achieving progress. • Data on unit costs are rare, and where available are produced using methodologies that are most often both inadequately specified and idiosyncratic. • Confusion between average and marginal costs • Unclear cost concepts

11. Unpredictable Future Shocks • Unpredictable future shocks are sure eventually to undermine the accuracy of MDG cost estimates. • Examples: • Diseases (such as HIV/AIDS); • Climatic events (such as El Niño and global warming); • Civil wars and regional wars (e.g. that in the Great Lakes region). • Shocks to terms of trade and global demand may influence the share of overall MDG costs that will have to be borne by developed countries.

12. Technocratic approaches lead to poor strategic choices • EXPERT DRIVEN APPROACH • RIGID FRAMEWORK • COST ESTIMATES DERIVED FROM INACCURATE MODELS INCORRECT MDG COST ESTIMATES LONG TERM DAMAGE FOR MDG COUNTRY STRATEGY

13. Rationale for an MDG Institutionalized Financing and Learning Mechanism (IFLM) • What is the most sensible way to determine countries’ needs and allocate resources? • Cost estimates are necessary but not sufficient. A flexible and comprehensive approach is needed: An MDG Institutionalized Financing and Learning Mechanism (IFLM). • Purpose of the IFLM: a flexible, contextualized and capacity-enhancing approach to planning and financing at both the country and global level. • The IFLM will limit the damage potentially arising from inappropriate strategic choices through its focus on short and intermediate term strategies planning towards the MDGs rather than once and for all selecting optimal strategies for the long-term.

14. Empirical ideas underlying the MDG IFLM • The IFLM is motivated by two core empirical ideas: • The importance of learning: It cannot be known in advance how the MDGs can be best achieved. As a result, it is necessary to foster individual and collective learning and lesson-sharing about alternative strategies, and their costs and benefits. • The importance of flexibility: It cannot be known in advance what it will cost to achieve the MDGs. As a result, it is necessary periodically to reassess these costs (and associated resource gaps) on the basis of new information. Budgetary planning and strategic choice should incorporate these periodic reassessments, as a way to avoid costly long-term errors.

15. Normative ideals underlying the MDG IFLM • The IFLM approach is further underpinned by two core normative principles directly reflected in the “Monterrey Consensus”: • A need principle: Countries ought to have access to the resources they need to meet the MDGs. • A capacity principle: Countries -- whether developed or developing -- ought to provide the resources required to meet the MDGs to the extent of their capacities.

16. A Peer Review Mechanism for the MDGs: Definition and History • Definition • OECD: a peer review mechanism involves “the systematic examination and assessment of the performance of a State by other States, with the ultimate goal of helping the reviewed State improve its policy making, adopt best practices, and comply with established standards and principles”. • A peer review system for the MDG would help to assess developed and developing country governments’ current efforts toward the goals and systematically to identify bona fide resource gaps, as well as opportunities to generate additional resources, reallocate efforts, and reorient policies. • History • Pioneered by the OECD • UN bodies and specialized agencies, the European Union, the IMF and WTO also use peer review to evaluate national policies in various sectors. • OEC DAC peer review for evaluating development cooperation efforts and the African Peer Review Mechanism within the New Partnership for Africa’s Development (NEPAD) are important sources of inspiration for the IFLM.

17. Actors & Functions of the MDG peer review mechanism • The frequency of the reviews would depend on practical judgments concerning the most effective planning horizon and the capacities of participants. • The IFLM Secretariat supports the review process, by • Providing financial and human resources to peer-review committees; • Organizing missions and meetings; • Maintaining the quality and the continuity of the process; • Disseminating the results of the reviews to the public. • The members: Any country wishing to undergo an MDG-related peer review process may do so.

18. Procedures of the MDG peer and partner review mechanism Incorporation into Resource Generation Mechanism Preparatory phase Communication Consultation Assessment

19. Size, Scope and Coverage • Developing countries will have an incentive to participate in the peer review process so as to attract additional resources, improve their capacity to achieve the goals, and highlight their commitment to the MDGs. • Developed countries will have an incentive to participate in the peer-review process so as to improve their individual and collective capacity to promote the goals, and highlight their commitment to the MDGs. • In all instances, participation will be voluntary

20. Principles, criteria and standards of MDG peer reviews • A set of common criteria and indicators for a fair, credible and internationally comparable review process should be developed. • The criteria for assessment should reflect the following principles: • Full incorporation of MDG Needs Assessments and expert judgments into the peer review process, with due emphasis on their respective limitations. The IFLM seeks to pluralize expert models, which should enter into the review process and appropriately be synthesized by decision-makers. No one set of expert judgments will be automatically privileged. • National MDG efforts (measured for instance by the pattern and level of public expenditures and the transparency of the administration) should be assessed on the basis of national MDG reports and supplementary information. • Due attention should be given to the resources required to build institutional capacities and relax “absorptive capacity” constraints. • All assessments should reflect a country’s economic, political and social conditions.

21. Making the IFLM work for the Poor • The IFLM is potentially compatible with PRSP, but a clear hierarchy must be defined: • MDGs and PRSP objectives are different • PRSPs should recognize the MDGs as legitimate long-term objectives. • The IFLM approach highlights problem solving and “fair brokering” rather than conditionalities • For the rich countries, the peer review mechanism will provide a basis for assessing their commitment to the MDGs in terms of aid, policies and practices. • In developing countries, the peer review process will: • identify bona fide resource requirements to achieve the MDGs • suggest relevant policy changes. • A global report drawing attention to the balance between global needs and global resources (“needs and gaps”) shall be prepared periodically by the central secretariat of the IFLM.

22. Global Contingency Fund: Principles & Modalities • The formation of a GCF would secure the timely provision of adequate resources to cope with extreme events, to avoid human development reversals, and to enhance the feasibility of achieving the MDGs in all countries. • The scope of the fund is limited to helping countries facing adverse shocks achieve their MDGs strategy. The GCF will provide additional resources in the form of grants to governments of the affected countries, when required. A GCF can potentially take many forms. It need not require creating a new institution.

23. EXISTING APPROACH EXPERT DRIVEN RIGID FRAMEWORK COST ESTIMATES DERIVED FROM INACCURATE MODELS ASYMMETRY PROPOSED MECHANISM (IFLM) COUNTRY DRIVEN FLEXIBLE PROCESS EVIDENCE BASED POLICY MAKING EQUITY FROM TECHNOCRATIC TO DEMOCRATIC STRATEGIC CHOICE FOR ACHIEVING THE MDGs