Document Library

Key Text Constraints to Achieving the MDGs with Scaled-Up Aid

Author: F Bourguinon and M Sundberg
Date: 2006
Size: 26 pages (145 KB)

Access full text: available online

Summary

What are the macroeconomic and structural challenges associated with scaling up aid? This paper from the United Nations Department of Economic and Social Affairs (UN-DESA) explores six aspects of financing for scaling up public service delivery, using a dynamic model applied to Ethiopia. Under certain circumstances, the Millennium Development Goals (MDGs) could be achieved by 2015 but this will require large levels of grant financing and careful attention to the allocation and sequencing of investments.

There are a number constraints to scaling up aid flows to developing countries, including infrastructure, competitiveness and the real exchange rate, labour markets, fiscal constraints, governance, and aid volatility and fragmentation. For example, the amount of real health or education services that a dollar in aid can purchase may change because of alterations to exchange rates, prices and wages. This paper uses the MAMS (Maquette for MDG Simulation) framework to project attainment of MDG targets.

The MAMS framework as applied to Ethiopia suggests that while the MDGs can be attained, scaling up aid presents significant challenges and trade-offs to be negotiated:

Investment in infrastructure alone yields greater growth rates than investment in non-infrastructure MDGs. For example, basic infrastructure spending reduces the poverty incidence rate to 22 per cent, compared to 26 per cent in the case of spending on human development MDGs.
There is evidence of exchange-rate appreciation, rising real wage rates and a deterioration in the trade balance as imports expand and export performance is weakened.
There may be severe labour constraints. In the short run, skilled labour can be hired from other sectors, in particular the private sector, but at the cost of higher wages and lost output as labour exits the private sector.
Revenue efforts may not be maintained as aid levels increase, although the case is difficult to argue. Indeed, existing tax instruments might be expected to enhance revenue collection as growth and domestic demand accelerate, unless aid-financed activities are treated differently.

There are four broad implications for scaling up aid:

First, a focus on improving growth performance in tandem with strengthening service delivery is essential. Growth performance depends to a significant extent on improving the quality and access of households and businesses to core infrastructure services – transport, power, water and communications.
Second, the macroeconomic impact of large aid flows on the competitiveness of the tradables sector (Dutch disease) can be serious, resulting in a significant decline in the share of exports in the economy. Strategic investments to boost productivity and address trade constraints are important for avoiding adverse macro effects, and the potential tradeoffs need to be carefully weighted.
Third, sequencing of investments is important for minimising the costs of reaching the MDGs, particularly in the light of skilled labour demand for scaling up service delivery and short-run labour supply limitations. Skilled labour supply can only be expanded with a lag, requiring sequencing together with investment in complementary inputs and infrastructure.
Fourth, improvements in the underlying governance and institutional structures should help to secure broad productivity improvements in public service delivery, and should underpin development strategies.

Access full text: available online

Source: Bourguignon, F. and Sundberg, M., 2006, 'Constraints to Achieving the MDGs with Scaled-Up Aid', UNDESA Working Paper, no. 15, United Nations Department of Economic and Social Affairs, New York
Author: Mark Sundberg , msundberg@worldbank.org
United Nations Department of Economic and Social Affairs (UNDESA), http://www.un.org/esa/desa/