«Pity the Finance Minister» Comments on Peter Heller John RobertsODI, 16 June 2005
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
Comments focus on: • Aid or budget increase effects? • Evidence: • Macro: Dutch Disease • Aid Growth question • Micro: incremental costs • Resource use planning: Millennium Project
Aid Problem or Budget Problem? • Aid not sui generis: similar to natural resource rent • Issue is one of expanding budgets of LICs
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
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
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
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?
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)?
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!
Ghana Primary Education → Rising Unit Costs • Average cost/pupil: Cedis 19 000 – 33 000 • Incremental cost: Cedis 60 000
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