«Pity the Finance Minister» Comments on Peter Heller John Roberts ODI, 16 June 2005

1. «Pity the Finance Minister» Comments on Peter Heller John RobertsODI, 16 June 2005

2. Peter Heller argues: • Scaled-up aid inflows may aggravate underlying fiscal, budgetary and public expenditure management problems: • Dutch Disease • unpredictability of receipts  FE/fiscal reserves and monetary management policies. – upsetting macro-fiscal stability/sustainability • Expenditure prioritisation and planning - reducing discretionary space • Accountability • Harmonisation & alignment per se don’t solve these problems

3. Comments focus on: • Aid or budget increase effects? • Evidence: • Macro: Dutch Disease • Aid  Growth question • Micro: incremental costs • Resource use planning: Millennium Project

4. Aid Problem or Budget Problem? • Aid not sui generis: similar to natural resource rent • Issue is one of expanding budgets of LICs

5. Scaling-up: Two Examples • Uganda • Huge increase in aid post-1986 • REER under controlRecent concern about liquidity growth; use of sterilisation: worries about cost • Budgetary practice & PE management saw pioneering improvements: PAF, PEAP, M/LTEF, Output budgeting • Low effectiveness of expenditure programmes (roads, power) in early 1990s; 1998 education expansion initially mis-budgeted • Ethiopia • Aid increases after both wars end (1990, 1995) • Macro & fiscal control maintained • Depreciating REER

8. Macroeconomic Issues: 1. Dutch Disease • Two symptoms: • rising REER : less serious, reversible • rising share of non-traded sectors in GDP: more serious, structural • Solutions: • trade liberalisation • labour market flexibility • restrain public sector employment growth

9. Macroeconomic Issues: 2. Monetary • Rise in liquidity may be normal monetary deepening • Effect on liquidity depends on leakages into BOP • Rise in domestic liquidity (Uganda): import liberalisation counteracts; preferable to sterilisation

10. Macroeconomic Issues : 3. Aid & Growth • More aid → higher growth because of : • Capacity building effect? or, • Expenditure multiplier effect? • Declining effect of aid on growth? Is the growth function quadratic, logarithmic, logistic?

11. Macroeconomic Issues: 4. Resource flow/re-entry • Unpredictability of aid: serious threat to stability, given path dependency of public expenditure • => Reserves management and borrowing strategy • Unpredictability: effect on growth (Guillaumont) • Life after 2015: • LTBF as well as MTBF • At least cover recurrent costs • Fiscal rules for fiscal sustainability (other than dual budgeting)?

12. Microeconomic Issues: Programme Costs and Effectiveness • Accelerating activity  ? rising unit costs • => plan on basis of incremental costs • The road to better - more efficient, more accountable - PEM practice is long: don’t lose the map!

13. Ghana Primary Education → Rising Unit Costs • Average cost/pupil: Cedis 19 000 – 33 000 • Incremental cost: Cedis 60 000

14. Postscript: Effect of Millennium Project • Resource unconstrained planning encouraged (Big Push inspired Needs Assessments) • Capacity constraints quickly surmountable • Horizon 2015 => Tsunami expenditure profile • Expenditure priorities set by MDGs

15. Yemen: Assessed Investment Needs, Annualised

16. After Scaling-up: View from the Top

17. Scaling-up: View from the Top