Enhancing Aid Allocation for Fragile States: The PBA System Analysis

1. Application of the Performance Based Allocation System (PBA) to Fragile States Edward Anderson, Karin Christiansen and Rowan Putnam Poverty and Public Policy Group, Overseas Development Institute Meeting of EU+ IDA Deputies, June 19th 2007, Berlin

2. Summary of Presentation • Background • Definitions and categories of fragile states • Overview of IDA aid to fragile states, 2003-2006 • Does the PBA allocate enough IDA resources to fragile states? • What would be the implications of adjusting or ‘fine-tuning’ the PBA? • Conclusions and recommendations

3. Background • The PBA is the mechanism used to allocate IDA resources across eligible countries; • Under 14th IDA replenishment (FY2006-FY2009): • US$31.5bn (SDR 21 billion) to be allocated • across 81 low and lower-middle income countries • As with systems used by other donors, PBA allocates IDA resources on the basis of ‘performance’ and ‘need’.

4. Background (cont.) • Key features of the PBA: • use of Country Policy and Institutional Assessment (CPIA) scores to measure performance; • large weight attached to performance relative to need; • additional emphasis given to governance component of CPIA in measuring performance; • additional assistance given to post-conflict countries, for limited period, over and above ‘normal’ PBA allocation.

5. Definitions of fragile states • Fragile states: • poor countries + weak governance, conflict and/or insecurity • More specific ‘LICUS’ definition (World Bank): • low-income countries + low Country Policy and Institutional Assessment (CPIA) scores*: • CPIA less than 2.5 = severe LICUS/fragile state • CPIA 2.5 to 3.0 = core LICUS/fragile state • CPIA 3.0 to 3.2 = marginal LICUS/fragile state

6. Relevant categoriesof fragile states • Post-conflict: “countries emerging from violent and protracted conflict” (IDA definition); • Conflict-affected: “recently experienced, are experiencing, or are widely regarded as at risk of experiencing, violent conflict” (World Bank definition); • Not conflict-affected: all other fragile states; • Non-accrual: repayments to IDA are overdue by more than six months; • Other distinctions, e.g. on the basis of development performance, natural resources, prospects for reform.

7. Categories of fragile states,FY2003-2005 Notes: Under-lined countries were in non-accrual status for at least part of period. Population data refer to 2005.

8. IDA net disbursementsto fragile states, 2003-2005 (1) Notes: *Constant 2004 prices. Source: OECD-DAC (2007)

9. Net disbursementsto fragile states, 2003-2005 (2) Source: OECD-DAC (2007)

10. Disbursements from World Bank Trust Funds to fragile states Source: World Bank staff

11. Estimated IDA allocation ‘norms’ under IDA14 Notes: *India, Indonesia and Pakistan; **includes regional projects, arrears, tsunami and Iraq. Source: Authors’ simulations.

12. The PBA and fragile states:key questions addressed • Does the PBA allocate enough of total IDA resources to fragile states, given: • IDA’s objectives, i.e. “to raise standards of living in the less-developed areas of the world” (IDA Article 1) • evidence of the effectiveness of aid to fragile states in achieving those objectives. • If not, how the PBA could be adjusted or ‘fine-tuned’ to bring about a more appropriate allocation?

13. Insights from poverty-efficiency approach • Approach proposed by Collier and Dollar (2002): • allocate aid so as to achieve largest possible reduction in poverty; • Assumes that: • aid affects poverty through its impact on economic growth; • effect of aid on economic growth higher in countries with higher CPIA scores and in post-conflict countries; • Approach justifies higher allocations to countries with higher CPIA scores, and to post-conflict countries – as in the PBA; • But PBA still under-allocates to fragile states in comparison with a Collier-Dollar ‘poverty-efficient’ allocation.

14. Further considerations

15. Further considerations(cont.)

16. Allocations to post-conflict countries

17. Implications of adjusting or ‘fine-tuning’ the PBA • Advantages of the PBA: simple formula, transparent, and linked to empirical evidence • But still possible to adjust or ‘fine-tune’ the PBA to achieve a more desirable allocation • Three main sorts of adjustments considered here: • changing the weights attached to existing indicators in the PBA formula; • adding new indicators and/or enhancement factors to the PBA formula; • altering the way post-conflict countries are treated.

18. 1. Changing the weights attached to existing indicators *Not including resources allocated to capped-blend countries or special purposes

19. 2. Adding new indicators and/or enhancement factors *Not including resources allocated to capped-blend countries or special purposes

20. 3. Changing the way post-conflict countries are treated *Not including resources allocated to capped-blend countries or special purposes.

21. Summary and conclusions • ‘Fragile states’ currently receive around 20% of total IDA resources, while post-conflict countries receive around 10%; • There is evidence to suggest that these shares are too low; • Potential ways to raise the share of IDA resources allocated to fragile states include: • reducing the size of the ‘governance factor’ in the PBA formula; • reducing the weight attached to performance relative to need; • adding additional indicators of need.

22. Summary and conclusions(cont.) • There is a case for exceptional allocations to post-conflict countries: • a post-conflict enhancement factor (PCEF) provides a simple and transparent method to achieve this, although care needed when setting the level of a PCEF; • evidence that existing duration of exceptional allocations to post-conflict countries appears too short. • Areas where further research is required: • research on aid effectiveness and absorptive capacity in post-conflict countries, and in countries with high economic vulnerability; • research on links between IDA aid allocations and actual net disbursements.

23. Thank you for listening Edward Anderson Poverty and Public Policy Group, e.anderson@odi.org.uk June 19th 2007