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Budget support

“Openness and democracy”

by Karin Kortmann
In absolute figures, Germany is number two among donors, but has been a rather reserved partner in terms of budget support. Germany’s Ministry for Economic Cooperation and Development (BMZ) believes this instrument offers a wealth of opportunities, as Parliamentary State Secretary Karin Kortmann explained in an interview with Hans Dembowski. [ Interview with Karin Kortmann ]

It is donor consensus that budget support can only be given where the necessary responsible “ownership” is guaranteed in the target country. Vietnam receives budget support from Germany, but is not a democracy. How is this to be understood?
Vietnam has established an excellent finance architecture – including the finance ministry, a national audit office, administrative decentralisation and a budget committee in parliament. Budget funding supports this reform course, including towards more openness and democratisation. Vietnam is on a positive course.

But its government does not respect fundamental democratic rights.
No, but budget support is not an instrument to fundamentally call one-party rule into question. It is an instrument to support reforms in the right direction, and Vietnam is making progress at many levels. Basically, five preconditions have to be met for Germany to provide budget support:
- The partner country has to fight poverty with sustainable policies.
- Progress in human rights is a criterion.
- Democracy and the rule of law play a role, though there can definitely also be a sense of legal certainty in places where there is no democratic freedom yet.
- The state has to be capable enough to use budget support constructively; among other factors, this relates to a stable financial architecture and fiduciary risks.
- The country must act constructively within the international community.

So you honour successes in regard to social and economic human rights in Vietnam, which are undisputed despite a lack of democratic freedoms. In that sense, Vietnam is similar to China.
In Vietnam, the political determination to reduce poverty is quite evident. Last year, the country achieved economic growth of 7.5%, and the people benefited. Moreover, Vietnam is diligently tackling social, economic and environmental issues. And in areas where we notice governance deficits, multi- and bilateral dialogue in the context of budget support allows us to discuss these deficits at any time. When I was there in March, I told our partners in clear words that press freedom is essential for transparency and public control, and that civil-society initiatives must be allowed to organise and speak out freely. Budget support offers donors opportunities for discussing such sensitive issues.

Discussions are important, but has there been any actual progress in regard to participation?
In a small Vietnamese town that wants a new road, I witnessed negotiations with the central government. These talks proved that people are demanding transparency in budget issues. When one government officer suggested to the local assembly to split the costs 50:50, participants asked in a quite self-confident manner: “What does that mean in specific terms? Where is the cost schedule? What would happen if we brought in our own workforce; would our share be reduced?” That was remarkable in a country shaped by the tradition of a strong central government.

Can one make generalisations about that sort of thing?
Budget support touches upon a basis of democracy. It is the classic right of parliaments to adopt their nations’ budgets. In rich countries, the media sometimes disregard this fact, presenting budget issues as dry, technocratic, hardly comprehensible matters. Our partners in the developing world see things quite differently. Members of the parliamentary budgetary committees who deal with budget support are pleased that they are finally gaining an insight into what the international community is providing to their countries. They now have the knowledge to confront members of the cabinet. In this sense, budget support systematically contributes to transparency and democracy.

Normally, a parliament’s democratic right to control the budget goes along with the citizens’ duty to pay taxes. But as budget support comes from outside, it takes the pressure off a government to generate domestic funds, at least to some extent.
That impression is wrong. Budget-support programmes always take account of the total budget, not only the expenditure but also the revenue. Of course, sound public-finance management will always include a fully operational tax system. And that issue figures in budget-support talks and the reform agendas agreed. I recall a billboard in Kigali, the capital of Rwanda, with the statement: “Be proud to be a tax payer.” The government, one of the recipients of budget support, is telling the people that it needs money to serve the public. It is also commendable that Rwanda has set up two financial authorities: one for revenue and the other for expenditure.

Could it be that budget support strengthens capacities in public-finance management at the expense of other state tasks?
There is no competition between them at all. Without secure funding, ministries of education, health or infrastructure won’t make any progress. If we want a well-performing political system, it makes sense for donors to support the establishment of such a system. Doing so does not contradict the goal of higher school enrolment or better health statistics. To the contrary, it is a condition for achieving the Millennium Development Goals.

It has been said occasionally that budget support leads to the recipient government feeling increasingly accountable to donors, with the power of the finance ministry increasing disproportionately to other departments.
This is the first time I have heard that. If that was in fact the case somewhere, it would of course raise serious questions about how that government is run. In Ghana, however, the finance ministry’s communication and coordination with line ministries has improved. Results include procedural progress, more coherence and more transparency.

I am familiar with the argument thanks to journalists from developing countries. They say things like: “Our health minister does not like budget support because he is no longer negotiating independently with the donors and can no longer play them off against one another.”
Yes, and that statement shows precisely how important it is for donors to use budget support as a means to coordinate their action. The idea is to support sensible and coherent policies in the partner countries. Ghana, for example, has a national poverty reduction strategy which binds all departments and tackles issues from commerce to the environment and domestic security. If such a policy promises progress at many levels, as it does in Ghana, it makes sense to support the government on this course. After all, there is no point in 20 different donors and various agencies dissipating their energies, calling the administration of the partner country to account permanently and putting officers under constant pressure to negotiate. Instead, the government drafts policy, and the donors support it as effectively as possible. Budget support boosts national ownership, in Ghana as elsewhere.

So the “whole of government” principle takes effect.
Exactly – and that means that we check, among other things, how much money a country allocates to its military, and how much to fighting poverty. Incidentally, experience shows that, if a country receives budget support, it also invests more of its own financial means in social programmes. Furthermore, it is noteworthy that it is comparatively difficult to abuse, for favouratism purposes, an item that was budgeted by parliament. It is much easier to treat a particular target group through individual projects and programmes.

But isn’t there, so to speak, a risk of a government taking its people hostage? If donors know that budget support flows into social sectors, that makes it difficult to reduce, suspend or even cancel such allocations should basic conditions no longer be met. Consider Nicaragua, for example.
Nicaragua is a clear case. At the time of the negotiations, the country was on a dynamic course towards reform. Since then, sadly, democratic principles and the rule of law were breached in the registration of political parties and local elections. Germany announced in 2007 that we would opt out of budget support, and the European Commission did so in January.

But don’t those decisions mean that donors are abandoning people in need?
No, it does not. We stay in talks with the government. We are considering what we can still achieve for the people through projects and programmes. In Nicaragua, President Daniel Ortega is obviously on his way to establishing an authoritarian presidential system. We cannot support that. On the other hand, there are still areas, such as healthcare or education, for example, where it makes sense to cooperate with him. Budget support, however, has become counterproductive. It is supposed to strengthen reform programmes, not the state in itself.

For decades, donor governments have been stressing the importance of macroeconomic policies geared towards stability. Today, their financial crisis is rocking the world economy. Humanity now needs governments that are capable of action – and not only in rich nations. Does it follow that donors should increase budget support?
We should do so wherever we can. Growth rates are dropping everywhere, and some national economies are even shrinking. Tax revenue is falling, income from tourism is down, and the private sector is hardly granting any loans – and if it does, the conditions are tough. The International Monetary Fund forecast zero growth this year for Vietnam, to consider only one country. As mentioned earlier, that economy grew by 7.5 % last year. The setback is dramatic; we must not forget that, in times of difficulty, many people in poor countries have to struggle for survival.

So does the global economic crisis play a role in negotiations about budget support?
We talk about the global economic situation with all recipients of budget support. A concept to benefit from the opportunities of the world market is part of every comprehensive poverty-reduction strategy. Naturally, the regional development banks are also interested in these matters. As governor of these multilateral institutions, I should know. We are currently discussing recapitalising the Asian Development Bank; and the Inter-American and African Development Banks are also calling for such steps to be taken.

Are the public and parliaments of the rich nations prepared to put more money into official development assistance (ODA)?
Our economic stimulus package has set aside an additional €100 million so that the World Bank can support infrastructure programmes in developing countries. The Bundestag and the Federal Government are aware that the global crisis requires global responses. It is not enough to put up protective shields in the rich world. But we cannot simply pledge money without concern for what will be done under what conditions.

What role does Germany play within the group of budget-support donors?
In absolute figures we are number two among donors after the USA, but we are not a major donor as far as budget support is concerned. The British, Scandinavians and also the European Commission and the World Bank have been engaged in this field for a longer time and with larger sums. In 2006, for example, Mozambique received budget support amounting to a total of € 300 million. The British contributed 20 %, the World Bank 15 % and Germany 4 %. We are particularly careful, but we certainly see the opportunities the instrument presents.

Where has Germany assumed a leading role among budget-support donors?
Germany is typically engaged as the lead donor in sectors where our agencies are strong in terms of bilateral cooperation. An example is leading donors on supporting Mozambique’s national education policy. Moreover, Germany and the World Bank jointly acted as lead donors for budget support in Ghana, and in that time, Germany’s voice in dialogue with the government in Accra was particularly strong.

Conservative critics argue that the system of budget support blurs responsibilities because no one is individually answerable for the policies that are negotiated – neither the national government concerned nor any single donor.
Current practice is such that a donor takes on a leading role and routinely holds negotiations with the partner government. In a similar way, there is a lead donor for every individual sector too. In this way, a common policy is agreed, and the government in the recipient country is spoken to with one voice. This approach not only makes sense from the partners’ view, it also helps donors to understand and use the instrument of budget support better.

So who calls whom to account?
For good reason, the High-Level Forums on Aid Effectiveness in Accra and Paris emphasised mutual responsibility. Perhaps budget support was practised too much as an intergovernmental matter at first. However, the final document in Accra explicitly stressed that ownership is not simply exercised by a central government. Rather, ownership requires broad participation, including parliaments, local governments, civil-society organisations and the media. And in this respect, experience with budget support in many countries is positive. Understanding for budget issues is growing – and there is increased public debate about them. Even occasional reports about cases of corruption must not be misunderstood. Public scandals prove, among other things, that those responsible no longer get away with every scam.

Does consultation about budget support take place between the capital cities of the donors or in the capital cities of the target countries?
Locally: in Hanoi, in Kigali, in Accra. Vietnam is different from Rwanda, and Rwanda is different from Ghana. Budget support has to do justice to the specific challenges in each country. And it is also structured differently. As an especially poor country, Burkina Faso receives our budget support as a grant. By contrast, Ghana receives loans at especially favourable IDA conditions, and Namibia is granted normal financial-cooperation loans. There are all sorts of other differences over and above this, which the experts from the implementing agencies in developing countries have to negotiate.

Is budget support the key instrument to boost aid effectiveness, as the European Commission sometimes suggests?
From our point of view, budget support is an important addition to the existing tool set, but it does not compete with tried and tested methods. After all, it is about overcoming weaknesses – and in many cases, technical cooperation and relevant projects will be necessary to achieve that.