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Budget support

A double-edged sword

by Cecilia Alemany, Mónica Mongabure
The European Commission (EC) favours budget support as an innovative aid modality. The approach can certainly boost endogenous development, but there are concerns that it may become a new way of imposing donor conditionalities. Nicaragua is facing suspension of EC aid, because the EC questions the legitimacy of recent municipal elections. But it is doubtful that blocking aid will strengthen democracy. [ By Cecilia Alemany and Mónica Mongabure ]

In Latin America, Nicaragua was the first country where the European Commission (EC) implemented general budget support (GBS). The expectations of the EC (2007) were to
- have greater impact,
- lower transaction costs,
- reduce fragmentation of activities,
- help tackle the root of problems – including corruption and low institutionalisation –, and
- improve ownership and dialogue between stakeholders, the government and the donor community.

On its website, the EC lists three main requirements for GBS. They are
- appropriate policies in place or under implementation,
- a stability-oriented macroeconomic framework, and
- a reform programme in public-finance management.

These requirements are in line with the Paris Declaration on Aid Effectiveness (PD), which was passed by an OECD-organised High-Level Meeting in 2005. The idea is that budget decisions reflect a government’s priorities (and thus its “ownership”) and that disbursing funds through a country’s agencies (“alignment”) will strengthen those institutions.

The EC conceives GBS as a means to improve country systems, delivery of public services and public-finance management. However, the instrument used to evaluate these matters is the World Bank’s “Country Policy and Institutional Assessment”, which is a much-disputed tool (see for instance Steets and Thomsen in D+C/E+Z March 2009, p. 120ff). Donors continue to debate what levels of fiduciary risk in the recipient countries they consider “manageable” and acceptable.

For people in developing countries, however, the big issue is whether budget support actually helps to improve the performance of democratic governments, or whether it serves other purposes. While results do not look bad in Bolivia, Ecuador and Uruguay (see box), Nicaragua is certainly not a success story for the proponents of budget support.

Nicaraguan experience

Nicaragua is one of the poorest countries in Latin America. It is highly dependant on foreign aid and remittances. In 2000, Nicaragua became part of the Heavily Indebted Poor Countries (HIPC) initiative led by the World Bank, and reached the HIPC completion point in 2004.

According to Eduardo Acevedo, a member of Nicaragua’s Economic Commission and a member of the Coordinadora Civil – Nicaragua, a non-governmental body, aid and international loans represent 10.6 % of Nicaragua’s gross domestic product (GDP) and 33 % of the total cost of the public sector. No other country in Latin America receives as much aid from the EC as Nicaragua. Besides high poverty levels, this is due to European countries’ willingness to consolidate democracy and engage in substantial political dialogue. Together, the EC and the EU member states supply more than 50 % of all Ni­ca­raguan aid.

The Budget Support Group in Nicaragua is composed of nine donors: the EC, the UK, Finland, Switzerland, Germany, the Netherlands, Norway, the Inter-American Development Bank and the World Bank. This group has jointly negotiated the terms of budget support with the Nicaraguan government. Last year, it disbursed only $ 21 million of almost
$ 122 million planned.

The reason was dissatisfaction with the government in Managua because of untransparent use of funds from Venezuela. Hugo Chávez, that country’s president, is a close ally of Daniel Ortega, Nicaragua’s head of state. Moreover, several international actors denounced fraud in Nicaragua’s municipal elections held in November. They include the Organisation of American States, the USA and Transparency International among others.

According to the EC, the local elections were marred, and democratic freedoms have deteriorated in the country. Therefore the EC suspended budget support for 2009. That decision was reaffirmed in March by the EC’s Directorate General for External Relations (DG Relex) which mentioned the violation of “the right to free and just elections”.
Nicaraguans now wonder whether Venezuela will give their country the money it needs after this cut to the national budget for 2009. President Ortega has confirmed that the Venezuelan Government has agreed to provide enough funds to fill the gap caused by the EC and will buy additional Nicaraguan treasury bonds.

The EC based its decision on worries about the municipal elections, but there is no reason to believe that the suspension of budget support will strengthen democratic governance in Nicaragua.
- First of all, it seems problematic how much weight is given to governance indicators in GBS framework and who measures them. The World Bank’s assessment tool is highly controversial.
- Second, stopping aid to the national budget is no way to improve people’s lives. In cases of crisis, governments tend to cut spending on social services. In this case, the impact of the global economic crisis on Nicaragua’s national budget is being compounded by the EC decision to suspend GBS.
- Finally, the EC decision, though based on democracy concerns, will probably only strengthen the Ortega-Chávez alliance, rather than lead to a meaningful national debate on how to improve democratic governance.

General concerns

GBS is supposed to be a mechanism to reduce transaction cost of the EC bureaucracy as well as to strengthen developing country systems. However, its practice is fraught with contradictions:
- Because several donors team up and harmonise their actions, they are concentrating their power and thereby reducing that of the government of the recipient country, which has to negotiate with several bilateral and multilateral donors at once.
- Some conditions for GBS are related to governance standards as defined and measured by the World Bank rather than by the citizens and civil society organisations immediately concerned.
- When donors suspend budget support, the people concerned are negatively affected, whereas the respective government may not modify its policies. It is the government, after all, that decides what kind of spending it will cut.

When GBS is applied in countries with no conflict of interest or no sensitive governance situation from the European perspective, it can be a tool to promote national ownership. But, when GBS is applied in situations like the Nicaraguan, where the EC views the national politics critically, it becomes a tool for interfering in those politics, stopping the execution and flow of the national budget. In this sense, national policy space and decision-making on public spending and investments is now more circumscribed by donors than ever before. Earlier, donor decisions would only affect projects and programmes. Today, a nation’s budget is at stake.

It is crucial to promote further understanding and analysis of GBS and the results of channelling international aid by making developing countries’ governments responsible for routine management of funds and testing country systems. In countries that do not depend on aid, like Uruguay, GBS is a sensible tool that can improve governmental actions and lead to better development results.

In countries with a polarised society and heated political debate, where democratic institutions and procedures need to be strengthened, GBS can be used as a donors’ tool to impose their governance vision or even human-rights conditionalities. This use of GBS or any other aid instrument undermines national ownership, and thus cannot be accepted from the civil society perspective. If the EC decision to block aid to Nicaragua translates into a stronger role for Chávez’ funds in the country, the Ortega administration will not necessarily become more accountable to the public and civil society in his country.

Direct flows to the national budget are a double-edged sword. They can boost a country’s policy space, but it can also serve to impose donors’ priorities. From the civil-society perspective, the lack of information (ex ante and ex post) is troublesome. If the aim is to promote national ownership, citizens and civil society organisations must not only be informed, but also involved in all decisions concerning development cooperation and the monitoring of all relevant processes.