Money Can’t Buy You “Country Ownership”

Efforts to make aid more effective in the last two decades have given prominence to “country ownership”—the principle that countries receiving aid should be the primary drivers of how those funds are used (articulated formally in the Paris Accord). With true country ownership, aid is supposed to follow the priorities of recipient countries, rather than those of the funders. Yet funders have their priorities too. So recipients and funders have sought to resolve this potential conflict through policy dialogue and alignment of priorities.

Nevertheless, tensions remain. In 2016, my CGD colleagues researched this question empirically in the case of the US and its partner countries. I have taken a different tack, trying to understand the logical problem that results when recipients and funders are perfectly aligned in achieving a specific development objective, while still facing different opportunity costs, that is, the things they might have otherwise bought with those funds. My new paper “What is ‘Country Ownership’?” explores this basic problem using a formal model to unravel three interrelated factors affecting country ownership: aid modalities, accuracy in verifying spending or results, and the receiving country’s alternative use of funds. Though modalities and verification have their place, the alternative use of funds is really the critical factor for making country ownership real.

Aid modalities play a supporting role and the challenge of verification

Aid modalities have diversified over the last few decades, from conventional programs that reimburse expenses to other approaches like policy lending, conditionality, budget support, and paying for results. Each modality generates different options for the recipient depending on whether it simply increases the resources available to the recipient (an income effect) or alters the relative costs of different actions (a substitution effect). Formal models can show how these differences in design affect recipient’s choices and, in turn, lead to resource allocations that end up somewhere on a continuum between fully satisfying the funder’s priorities, or fully satisfying the recipient’s ones.

At one extreme, a lump sum grant increases the recipient’s income and allows it to spend funds solely according to its priorities. At the other extreme, a program that matches spending on a particular program in excess of baseline expenditure can shift the recipient’s domestic allocation choices in ways that are more favorable to the funder’s priorities. Yet, the funder’s ability to shift the relative costs faced by the recipient are constrained by their ability to observe and verify spending or outputs.

Debates over aid modalities can become preoccupied over these design features in relation to reaching the goals of a specific program. But what if the “other things” that a recipient purchases are really the key to assessing the feasibility of country ownership?

Alternative uses of funds are key

Taking the full range of development objectives into consideration, the tradeoff between the preferences of funders and recipients over the goals for a particular aid program becomes much less important than a broader understanding about spending as a whole. This is the fundamental insight underlying the initial moves toward budget support programs. To the degree that funders trust recipients to be spending domestic resources on things that they both value—whether or not those things are specifically promoted in an aid program—they are more likely to accept the domestic resource allocations made by recipients. In this case, the tension vanishes. It is when trust over the broad thrust of spending is lacking that the inherent inconsistencies in country ownership show up.

For example, if a country were to spend less than expected on an externally supported education project and more on, say, its health programs, many funders might accept that “diversion” of funds as an appropriate part of that country’s institutional development and political process. In such a situation, they might be best advised to reduce transaction costs and simply provide lump sum grants. Trust, in this case, means the recipient effectively sets priorities within a broader umbrella of favorably viewed activities.

Such trust gets tested if funds are redirected instead toward expenditures which, though legitimate, are viewed less favorably by funders, say for sports arenas or military spending. At the extreme, if the recipient’s alternative uses of funds are to benefit private interests through corruption, all bets are off.

The motivation for country ownership is varied. Some advocate for it because they believe it makes aid programs more effective; others because it is more consistent with our understanding of institutions, politics, and development; still others because it is considered an ethical imperative—treating recipients as the full equals of funders. Regardless of the motivation, country ownership won’t be real unless funders and recipients are aligned—not in terms of a specific development program’s objectives but most importantly in the recipient’s alternative uses of funds. It is that kind of trust that allows funders to accept the reallocations that invariably occur under conditions of uncertainty and poor information.

Interested in more? Read the full paper here.