Budget Support: Panacea for Poverty Reduction or Catalyst for Corruption?

Should donors be providing more or less budget support and does it have a significant impact on poverty reduction? Is it value for money and how could it be used more effectively? These are just some of the questions the European Commission asked at a recent public consultation.

The EC's Green Paper on the Future of EU Budget Support to Third Countries seeks to identify opportunities and challenges to improve its approach on budget support through several weeks of public consultations that closed on the 31 January 2011.

The contentious issue of budget support sparks intense debate in development circles. On one side, there are those who want budget support used more widely and see it as a panacea for poverty reduction. On the other side, there are those who denounce it as a financial money pit and catalyst for corruption.

Speaking at the launch of the public consultation, which began in December 2010, Director of General Affairs at EuropeAid Klaus Rudisschhauser tried to strike a middle path.

"Budget support ensures full ownership of the partner government as well as transparency. It also ensures that it is the partner country which sets the priorities and has the responsibility to put the money to good use,” said Mr Rudisschhauser. "We also know that budget support is not without risks and therefore, we are trying to do our best to improve the instrument."

"The specificity of budget support is that you cannot trace every single euro and therefore we are still developing methods, indicators and monitoring systems so that we have the best possible assurance that the money we have provided is put to good use," Mr Rudisschhauser explained. To hear more from Mr Rudisschhauser, click on the video icon below:

Budget support is a way of channelling finances directly into the treasury of partner governments. Once distributed, funds are monitored through local accounting systems and can be spent on sector or national policies rather than donor-identified project activities. However, the recipient governments do have to respect agreed conditions for payment and demonstrate progress.

Budget Support: Assessing the Impact

When used properly and appropriately, a number of studies have found that budget support provides a vehicle for dialogue with partner countries to work on their policies through their systems, as well as additional fiscal space to contribute to sustainable results in terms improved capacity and service delivery.

"In Malawi, budget support is making a huge improvement in people's lives and in Oxfam, we are in favour of it," said Helen Magombo, Advocacy and Policy Coordinator for Oxfam Malawi in an interview with capacity4dev.eu conducted during the 2010 EU Development Days. To hear more from Ms Magombo, click on the video icon below:

In a low-income country like Malawi, where budget support and other forms of aid make up about 40% of the country's national budget, health indicators have improved significantly in recent years. According to Ms Magombo, the number of Malawian women dying in childbirth has been reduced by 20% in the last five years. "We attribute that to budget support coordination and putting together resources to be able to support the health sector in Malawi," she explained.

"European taxpayers say: ‘We want value for money’. For me, if I save the life of one mother today or if I get 100 children into school for the rest of their primary education, no matter how much I spend, it is value for money," added Ms Magombo.

Many believe that budget support is best suited to low-income countries where transferred funds can make up a sizable proportion of government resources and so make a notable contribution to the national budget.

But even among the pro-budget support thinkers, there are divergent views. In Peru, a middle-income country in South America, the Head of the EU Delegation Hans Allden believes that budget support is an appropriate form of intervention. And recently the EC launched a 60.8 million euro programme of budget support – the EC’s largest in Latin America.

"On a personal basis, I am in favour of switching more and more to budget support, especially in middle income countries where the project approach is not 100% percent effective," he explained. To hear more from Mr Allden, click on the video icon below:

But some recent independent evaluations of significant EC budget support programmes in 20 countries have pointed out the difficulty in assessing – in full isolation from partner's policies – the impact of budget support on poverty reduction and other Millennium Development Goals indicators.

Similarly, a special report of the European Court of Auditors on EU assistance in the health sector concluded that general budget support had yet to make an effective contribution to the improvement of health services.

EU Budget Support: Containing the Risk

To ensure that funds are not misused a number of checks and balances guard against EU budget support being treated as a blank cheque and prevent some countries from receiving any of their aid in the form of budget support at all. Indeed, corruption and misuse of donated funds is a concern for development projects across the board.

Prior to approving a country for budget support, risks are assessed against potential benefits. Partner countries must fulfil certain criteria and conditions. Policy dialogue is a central part of the package.

"One of the key factors [for providing budget support] is obviously the quality of financial management in the partner country which means that corruption is being addressed properly, that civil society and parliaments are informed about the money that is received, so that they can also participate and ensure that the government uses the money properly," Mr Rudisschhauser explained.

While some conditions are essential to providing the assurances donors need, others argue that budget support that comes ‘with strings attached’ can have lasting long-term negative implications for partner countries.

Ms Magombo of Oxfam called for care: "We need to make sure that the conditionalities that are linked to budget support are not harmful.”

Along with conditions relating to public finance management, all partner countries are subject to general conditions relating to macro-economic stability. The EC also sets social conditions, whether that means guarantees that education spending does not fall below certain level or other measures of improvement are met, like progress toward reaching Millennium Development Goals, especially in health and education sectors.

You can read the contributions to the consultation on the future of the EU budget support here.

Visit the EuropeAid's portal for more information on EU budget support