1. 1 «Pity the Finance Minister» Comments on Peter Heller John Roberts ODI, 16 June 2005

2. 2 Peter Heller argues: Scaled-up aid inflows may aggravate underlying fiscal, budgetary and public expenditure management problems: –Dutch Disease –unpredictability of receipts  FE/fiscal reserves and monetary management policies. – upsetting macro-fiscal stability/sustainability –Expenditure prioritisation and planning - reducing discretionary space –Accountability Harmonisation & alignment per se don’t solve these problems

3. 3 Comments focus on: Aid or budget increase effects? Evidence: –Macro: Dutch Disease –Aid  Growth question –Micro: incremental costs Resource use planning: Millennium Project

4. 4 Aid Problem or Budget Problem? Aid not sui generis: similar to natural resource rent Issue is one of expanding budgets of LICs

5. 5 Scaling-up: Two Examples Uganda –Huge increase in aid post-1986 –REER under controlRecent concern about liquidity growth; use of sterilisation: worries about cost –Budgetary practice & PE management saw pioneering improvements: PAF, PEAP, M/LTEF, Output budgeting –Low effectiveness of expenditure programmes (roads, power) in early 1990s; 1998 education expansion initially mis-budgeted Ethiopia –Aid increases after both wars end (1990, 1995) –Macro & fiscal control maintained –Depreciating REER

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8. 8 Macroeconomic Issues: 1. Dutch Disease Two symptoms: –rising REER : less serious, reversible –rising share of non-traded sectors in GDP: more serious, structural Solutions: –trade liberalisation –labour market flexibility –restrain public sector employment growth

9. 9 Macroeconomic Issues: 2. Monetary Rise in liquidity may be normal monetary deepening Effect on liquidity depends on leakages into BOP Rise in domestic liquidity (Uganda): import liberalisation counteracts; preferable to sterilisation

10. 10 Macroeconomic Issues : 3. Aid & Growth More aid → higher growth because of : –Capacity building effect? or, –Expenditure multiplier effect? Declining effect of aid on growth? Is the growth function quadratic, logarithmic, logistic?

11. 11 Macroeconomic Issues: 4. Resource flow/re-entry Unpredictability of aid: serious threat to stability, given path dependency of public expenditure => Reserves management and borrowing strategy Unpredictability: effect on growth (Guillaumont) Life after 2015: –LTBF as well as MTBF –At least cover recurrent costs –Fiscal rules for fiscal sustainability (other than dual budgeting)?

12. 12 Microeconomic Issues: Programme Costs and Effectiveness Accelerating activity  ? rising unit costs => plan on basis of incremental costs The road to better - more efficient, more accountable - PEM practice is long: don’t lose the map!

13. 13 Ghana Primary Education → Rising Unit Costs Average cost/pupil: Cedis 19 000 – 33 000 Incremental cost: Cedis 60 000

14. 14 Postscript: Effect of Millennium Project Resource unconstrained planning encouraged (Big Push inspired Needs Assessments) Capacity constraints quickly surmountable Horizon 2015 => Tsunami expenditure profile Expenditure priorities set by MDGs

15. 15 Yemen: Assessed Investment Needs, Annualised

16. 16 After Scaling-up: View from the Top

17. 17 Scaling-up: View from the Top