July 12, 2005
This paper focuses on key ways in which donors can improve the quality of foreign assistance and make it more effective in achieving the Millennium Development Goals (MDGs). The paper makes three central arguments. First, donors should be much more goal and results oriented in their assistance programs, and should work with low-income countries to ensure that poverty reduction strategies (PRSs) have specific, well-defined goals both in the short-run and long-run. PRSs should be expected to specifically refer to the MDGs, even if governments choose to adopt goals that do not exactly coincide with the MDGs. PRSs should provide both a "baseline scenario" with targets consistent with the most likely policy changes and levels of financing and a "high achievement" scenario with much more ambitious targets which lays out the additional policy, institutional, and financing changes needed to reach these goals. Second, donors must go beyond the rhetoric of "country selectivity" and actually begin to allocate aid more seriously to poorer countries with strong and moderate governance. Although there has been some improvement in aid allocation in recent years, much more can be done. Donors should establish basic rules for allocating aid based on the extent of poverty and the quality of governance, not to be dogmatic and rigid, but to provide some defenses against other forces that push aid allocations towards political and commercial considerations. Third, country selectivity should be conceived as much more than simply allocating more money to countries with stronger governance: it should change the way donors deliver aid to different countries. Well-governed countries should have a much greater say in designing aid programs, should receive more of their aid as program funding, and should receive longer-term commitments from the donor community. In these countries, foreign assistance should finance a broader set of activities, with most (but not all) of the funding channeled through the recipient government. Poorly governed countries should not only receive less money, they should receive more of it as project aid, it should come with a shorter time commitment, should be focused on a narrower set of activities, and much of it should be distributed through NGOs.
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