by Wolfgang Fengler of the World Bank
The World Bank and IMF have received much press attention in recent weeks in Kenya. The Kenyan Kazi Kwa Vijana (“work for youth”) initiative, which the Bank was supporting through its Youth Empowerment Project, and Government’s decision to request substantial IMF funding to support macroeconomic stability have been the source of heated debates in parliament.
In recent years, the aid industry has been a focus of critical examination and the object of debate. On the one hand, aid experts such as Peter Singer and Jeffrey Sachs advocate a huge increase in foreign aid and see enduring poverty as a direct by-product of the West’s stinginess. Their message: aid works, only we don’t provide enough of it. On the other hand, aid critics, such as William Easterly and Dambisa Moyo, claim that aid has actually stifled progress in poor countries by undermining the accountability link between aid-receiving governments and their citizens. Somewhere between those two extremes, aid practitioners argue that foreign aid could work if only it were done right.
Today, the main paradox of aid is that, despite increasing flows and more players, aid has declined in relative importance in most countries. Kenya is a case in point: there are many new players on the aid scene in Kenya and increasing aid fragmentation is a result. In addition, Kenya has been exposed to a high degree of aid volatility due to the “stop-and-go” behavior of many donors. The relationship between the Kenyan government and the international community has often been contentious and is based on three misperceptions of the role of aid in East Africa’s largest economy.
Myth number one: Kenya needs donors to finance its budget. Kenya doesn’t really need donors – although it certainly could use donor funds to bolster its development spending, as many emerging economies have demonstrated. Kenya is not aid dependent. Only some 15 percent of Kenya’s public expenditures are foreign-financed, compared to more than 40 percent in other EAC countries (see figure). Kenya boasts one of the strongest revenue performances in Africa and most of Kenya’s public services are financed with Kenyan taxpayer’s money.
Figure: Uganda and Tanzania are aid dependent – Kenya is not
Source: World Bank staff estimates
Myth number two: Kenya’s financial management systems are too weak to permit direct budget support. Donors typically channel their resources in two ways: project financing, which is tied to a specific activity (such as constructing a road or energy plant), or budget support, which is a direct infusion of cash into the Treasury in support of government spending through the national budget. Most developing countries receive a combination of project financing and budget support. Even countries with relatively weak governance, such as Afghanistan, Iraq or Burundi, have benefitted from budget support in recent years. But Kenya, even though it performs better than its peers on most public financial management benchmarks, has been left out. Clearly, there are still major weaknesses in Kenya’s budget system, and many of these have in fact been exposed by Kenyan institutions. The sticking point for donors is their perception that “corruption with impunity” still flourishes in Kenya, despite a public financial management architecture that has been greatly improved over time.
Myth number three: to deliver outcomes, make your projects small and “ring-fence” them tightly from government processes. Small projects can deliver many benefits. They can spur innovation and reach isolated communities. But they also contribute to aid fragmentation, multiplying administrative costs and complicating donor coordination by recipient governments. Moreover, they are almost never able to achieve transformative change. Unfortunately, although aid volumes have been growing in recent years, average project size has been shrinking.
Moreover, ring-fencing donor funding almost guarantees that even successful projects will leave no lasting improvements in government capacity to deliver key services, since the government will have been bypassed rather than engaged in service delivery. Ring-fencing also won’t help to ensure that development spending, on the whole, achieves better results because money is ‘fungible’. In Kenya, the health sector is still receiving a substantial amount of international support, most of which bypasses government systems. As a result, donors feel confident that their money is well-spent, but they are making no contribution to improving the quality of the much larger government spending in the health sector. In addition, large “off-budget” donor contributions to the health sector are freeing up government resources that might have been spent on health for other expenditures that may or may not be achieving results for Kenyans. By contrast, when donors provide funding that is on budget, their interests are aligned with the interests of Kenyan taxpayers to ensure that all resources are spent for the purposes intended.
So how can we deliver aid differently?
In Kenya as in other emerging economies it is high time to rethink the old aid model, where the North channels money to the South to finance discrete development projects. Today, this model is increasingly irrelevant because strong growth in developing countries, including in Africa, has reduced the financial prominence of aid. Instead, aid should catalyze and leverage itself into larger transformative programs inside and outside government. Donors should not seek to build their own successes but instead to identify local success stories and help amplify them.
In Kenya, the best way to do so is to use information technology, which can also create pressures to hold local leaders accountable. Big players with global experience should also focus on knowledge services to help governments leverage their overall development program. They should help out in the “machine room”, behind the scenes, instead of building their own monuments.
Wolfgang Fengler is a Lead Economist in the Nairobi office of the World Bank where he covers Kenya, Eritrea, Somalia, Comoros and Seychelles. He took this position in August 2009. Until then he has been a Senior Economist in the Jakarta office of the World Bank. For more than five years he lived with his wife and three small children in Indonesia. He has been managing the Public Finance and Regional development team consisting of 27 members, predominantly national research analysts and economists. While in Indonesia, Wolfgang has worked on several activities, including a national Public Expenditure review, a sub-national support program to provinces, Aceh post-Tsunami reconstruction, Development Policy Loans and SWAPs. Prior to joining the World Bank, he was a Fellow at the Research Institute for International Relations (now in Berlin) and set up Africa Consulting, LLC.