1 What Happens when Aid Rises and Public Expenditure Increases? John Roberts 13 May 2004

2 Context Post Monterrey prospects of US$12+ billion p.a. rise in net ODA by 2008 (more if IFF) Most aid will finance public expenditure Allocation, efficiency and effectiveness of existing public expenditure often questionable Major gaps in provision for the poor could be, but are not, filled from existing budgets PRSPs improve allocation, but press less hard on technical efficiency and effectiveness

3 Hypothesis Short-term marginal (and average) returns to public expenditure fall as the rate of increase in outlays rises – and vice versa Short impacts on productivity are offset in the medium-long term by reforms which increase output and reduce unit costs In sector ‘x’: O x = f(G x, dG x /dt; Z x )

4 Rationale for falling marginal productivity of public expenditure Short term Administration capacity inadequate Deficient budgeting and PEM Programmes unprepared Time-lag for staff recruitment, training Longer term Higher cost of servicing outlying areas –Salary incentives –Logistics Absence of complementary factors, beneficiary need etc.

5 It Could Not Happen Here, Could It? Output vol. grew by 11%; input vol. by 14% [Economic Trends July 2003]... except in prisons, which confirms the hypothesis Productivity fall coincided with real expenditure rise HMG concern about measure of Govt. productivity Atkinson report due July

6

7

8

9

10 Outline of Research Proposal Select small sample of countries which: –are heavy aid users –have experienced episodes of steep increase in aid receipts Collect and analyse trends in ratios of: –physical inputs/expenditure (=economy) –outputs/inputs (=efficiency) Identify local factors which offset/exacerbate falling marginal productivity Sectors? measurability greatest in education, infrastructure

11 Related research Major World Bank programme on Costing the MDGs in Ethiopia (Country Tean + DEC) Estimation of MDG production functions for Education, Health No apparent formal time dimension to coefficients on PE and input variables Major constraint is shortage of professional staff at current salaries Effects on wages and labour markets will be considered