Journal Issue

Coordinating Aid to Developing Countries

International Monetary Fund. External Relations Dept.
Published Date:
June 1966
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David L. Gordon

THE LESS DEVELOPED COUNTRIES of the world are assisted in their economic progress by resources received through a bewildering variety of channels, large and small. This diversity has considerable value, as it permits flexibility and experimentation and sometimes taps resources that might not otherwise be available. But it entails serious problems for both the givers and the recipients of aid. Most of the former have the formidable tasks of reviewing the economic performance of a large number of diverse developing countries, assessing the needs of these countries, and determining their capacity to service debts; also, they must judge the merits of projects proposed for the countries and decide on priorities.

Only a few of the largest aid-givers can maintain staffs, either at headquarters or in the field, of the size required to ensure that aid is used effectively. Others, lacking the staffs needed for widespread activities, may concentrate their efforts in a small number of countries or projects; thus they run the risk of appearing to discriminate arbitrarily. Different aid-givers may find themselves competing or working at cross purposes because they do not have information about assistance being granted by others. Also, lacking adequate data about a country, they may inadvertently encourage it to assume a much greater debt burden than it can safely carry.

Ultimately, of course, the national government of the country receiving external assistance has the responsibility for adapting that assistance to the country’s development purposes and needs. In some countries, the responsible ministry or planning agency is sophisticated and has had considerable experience in analyzing different offers of aid, selecting among them, justifying the country’s needs and plans, and negotiating terms. But in most developing countries, the economic administration is inexperienced. Everywhere it is overburdened, and its task is not made easier by the need for attending to repeated missions of politicians, economists, and aid administrators from the several centers of financial power. And the problems of fitting into a rational development program all the variables of aid received from many sources—differing preferences and criteria of the aid-givers, diverse types of equipment from various sources, widely varying prices, interest rates, amortization terms, and so on—are often overwhelming.

Finally, aid-giving governments are under a political necessity to assure, and demonstrate to their peoples, that the assistance being paid for by their taxpayers is being used as effectively as possible to foster economic progress. Likewise, the recipient governments have to provide similar assurances to their peoples, who will eventually have to make available counterpart resources in money and manpower and, in some cases, reimbursement—at least in part—of the aid received. Thus, there is increasing recognition of the need for informed and objective evaluation of the developing countries’ programs, requirements, and use of aid—an evaluation that will carry real authority with the public at both ends of the aid pipeline.

As a result, more and more attention has been focused on the problem of “coordination” at two levels. One is concerned with global needs, problems, and conditions of aid and with “burden-sharing” among the aid-giving countries. The other is concerned with the needs and the use of assistance by the recipient countries. The two are obviously related, but I am here concerned primarily with the latter.

United Nations Technical Assistance

The first formal mechanisms for coordinating external assistance at the country level were set up in connection with the UN Expanded Program of Technical Assistance (EPTA). This program, currently running at about $66 million a year, includes the activities of 11 specialized agencies. Each of these agencies is largely autonomous; each has close ties with the national ministries or departments concerned with its particular functional specialty in its member countries; and many have their own programs in operation. The program proposals and claims on limited EPTA funds, put forward by each agency, have tended to reflect the inevitably parochial judgment of that agency, and its opposite numbers in national governments, as to the importance of their particular sector. The staff of the Technical Assistance Board (TAB) in New York, removed by thousands of miles and several administrative layers from firsthand knowledge of the situations in countries being aided, was until recently hardly in a position to judge the merits and priorities of the agencies’ proposals.

Aid to developing countries is provided through many channels:

  • World Bank and its affiliates, providing mainly capital financing but also considerable advisory and technical assistance;
  • International Monetary Fund, making available short-term financing, and technical assistance in fiscal and monetary matters;
  • Various United Nations agencies that provide technical assistance and relief—the specialized agencies in their several functional fields, the UN regional commissions and secretariats, the United Nations Children’s Fund (UNICEF), the United Nations Development Program, the World Food Program, the United Nations Relief and Works Agency for Palestine Refugees in the Near East, other refugee agencies, etc.;
  • Regional financing institutions, such as the Inter-American Development Bank, the Central American Bank for Economic Integration, the European Development Fund, the European Investment Bank, the African Development Bank and its Asian counterpart now being organized;
  • Bilateral programs of “Western” and Soviet bloc industrial nations, of mainland China, and of a few other countries, such as Yugoslavia and Israel, which offer credits or grants and a wide range of technical assistance;
  • Contractors and suppliers offering equipment or services on credit, usually guaranteed to some extent by their national governments;
  • Private investors;
  • Foundations and private relief or missionary organizations; and so on.

In late 1951/52, however, the TAB began to build up its network of field representatives, stationing Resident Representatives in countries or regions where technical assistance under TAB auspices was being provided on a substantial scale. The function of each Representative is to review technical assistance programs and projects proposed for his country by the several specialized agencies; to relate them to the country’s needs; and, in consultation with the national authorities, to put forward a technical assistance package designed to meet these needs within budgetary limits set by the headquarters of TAB in New York. He also reports to the Executive Chairman of the TAB on the progress of events and of the technical assistance program in his country; helps to resolve any problems that may arise in connection with the program; and provides administrative support to the technical assistance experts.

Following the creation of the UN Special Fund in 1961, to provide preinvestment assistance to developing countries, the Resident Representatives generally took on the additional duty of coordinating Special Fund programs in their countries. On January 1, 1966, the EPTA was formally merged with the Special Fund to form the UN Development Program; at that time, the two groups jointly had Resident Representatives in the field.

The responsibility of these Representatives covers only a fraction of the external assistance provided for economic development to the country in which they are resident. They have no voice in the allocation of resources provided by the various bilateral and private technical assistance programs nor by those of the World Bank or the International Monetary Fund (IMF). Nevertheless, through informal consultation with both providers and users of assistance from these other sources, they may be able to identify gaps or overlaps and either to modify the UN program or to suggest adjustments in the programs of others to correct the situation. They are not, of course, in a position to influence in any substantial way the aid provided for investment—which is far greater and involves more complex decisions and organizational problems, and larger political and commercial interests, than the programs of technical assistance.

Coordination of Investment Assistance

Partly because of these complications, measures for coordinating grants and credits for investment, provided from different sources, have evolved slowly. During the past year, however, the major aid-givers have given increasing attention to the need for such coordination.

The World Bank has defined the objectives of coordination measures as follows:

  • (a) to enable the recipient country and the several aid-giving governments and institutions interested in assisting that country jointly to consider its development program and needs in comprehensive, continuing fashion, rather than piecemeal, on the basis of competent, objective information and analysis;
  • (b) to facilitate the provision of external finance, technical assistance and advice from appropriate sources, and their efficient channelling to meet priority needs;
  • (c) to make it easier to adjust the character and terms of aid to the country’s special circumstances;
  • (d) to reduce confusion and disparity of criteria and terms of aid from various sources, and duplication of effort in the presentation and review of programs and projects;
  • (e) to provide opportunities for mitigating the problems associated with aid-tying and suppliers’ credits; and
  • (f) to help to highlight deficiencies or difficulties in the country’s economic performance and to influence or assist the taking of remedial actions.

These are ambitious aims, and progress toward their attainment has so far been limited and spotty.

The first major initiative toward attaining coordination was taken in India, in 1958. In that year India, midway through its Second Five-Year Plan, confronted a serious balance of payments crisis. The World Bank convened a meeting of the principal creditor countries (United States, United Kingdom, Federal Republic of Germany, Canada, and Japan), with the IMF participating as observer. The ad hoc nature and purpose of the group were reflected in its original title, Meeting on India’s Foreign Exchange Situation. But the participants soon recognized the value of continued consultation on development assistance to so important an aid recipient. Meetings of the Consortium, as it came to be called, were scheduled on a regular basis; and the group’s membership was expanded to include Austria, Belgium, France, Italy, and the Netherlands. At the start of the Third Five-Year Plan in April-May 1961, the Consortium undertook a comprehensive review of the Plan’s over-all foreign exchange requirements, and considered the additional amounts of aid which would have to be pledged for the first two years “in order both to provide immediate support for India’s balance of payments and to enable India to proceed in an orderly manner with the placing of new overseas orders for the Third Plan.” By June, the Consortium members had agreed to make available a total of $2,225 million of grants and long-term credits during these two years. Subsequent meetings, now usually held twice annually, have continued this pledging pattern.

A Consortium for Pakistan was organized in October 1960, two years after the initial Indian meeting, also under World Bank sponsorship. Its purpose from the start was to mobilize resources for Pakistan’s economic development, on a long-term, continuing basis; and its membership and mode of operation are virtually identical with those of the Indian group. Frequently, the meetings of the two consortia follow one another immediately.

In subsequent years, there have been discussions of possible coordination machinery for several other countries. Those on Nigeria were the first to bear fruit, in the shape of something called a consultative group (CG), in April 1962. Other CG’s have been organized for Colombia, the Sudan, and Tunisia—all, like that for Nigeria, sponsored by the World Bank—and for Ecuador under the auspices of the Inter-American Development Bank. Consortia, based generally on the Indian and Pakistan models, have been formed by the Organization for Economic Cooperation and Development (OECD), to coordinate assistance to two of its members, Greece and Turkey. Membership in these groups varies somewhat. The United States, Canada, the major Western European aid-givers, and Japan are included in most of them; the World Bank, and the International Development Association are members of all of them; and the IMF participates as an observer.

In 1965, the World Bank, at the urging of a number of its member countries, undertook to broaden and intensify its coordination activity. It proposed to give first priority to strengthening the groups already in existence, especially those dealing with Africa. It also expressed readiness to sponsor new CG’s “where it seems likely that our efforts will be helpful and insofar as our staff resources and other commitments will permit.”

Staff resources, indeed, constitute the crucial limitation, because the leadership of a CG requires elaborate preparation and sustained effort. The magnitude of the work load is suggested by the following summary of the responsibilities which the Bank considers it should be prepared to undertake in relation to a typical CG:

  • (a) making periodic comprehensive reports on the country’s development possibilities, problems, and performances as a basis for the group’s deliberations;
  • (b) commenting on the country’s estimate of its aid requirements, making recommendations as to the types and terms of aid appropriate for it, and highlighting any problems arising from unduly burdensome debt accumulation;
  • (c) helping the recipient government to prepare or revise a development program, or advising on problems of execution, where such assistance is desired;
  • (d) assisting the government, as may be necessary and desired, in identifying projects, in their preliminary screening, in arranging for feasibility studies, etc., and in relating other technical assistance to the needs and priorities of the investment program;
  • (e) advising the government and group members as to the sectors and, where adequate feasibility studies exist, the projects that deserve priority for external financing.

The Bank proposed, therefore, to sponsor not more than five or six new CG’s, at a maximum, during the fiscal year 1965/66. So far, it has committed itself in fact to undertaking these responsibilities for East Africa (comprising Kenya, Tanzania, and Uganda), Korea, Malaysia, Morocco, and Thailand, in addition to the groups established earlier. It has also expressed willingness, in principle, to take part in similar arrangements under the sponsorship of other international organizations, such as the Inter-American Development Bank.

Consultative Groups and Consortia

The essential difference between a consortium and a consultative group (CG) is that a consortium periodically undertakes a formal pledge, intended to provide for meeting an estimated investment or foreign exchange gap for the subsequent year (or perhaps two or more years in some cases), and then publicly announces the pledge. No such systematic pledging is called for in a CG. However, the group normally discusses the recipient country’s needs and absorptive capacity for aid, and the sectors and projects that are appropriate for receiving external financing. Members of the group may indicate what commitments they are prepared to make.

It is not surprising that most developing countries would like the consortium approach—which results in explicit, publicized, advance commitments of aid—to apply to them. And also it is not surprising that the aid-givers generally prefer the CG pattern; most of them strongly oppose the formation of any additional consortia. In fact, however, the difference is far less sharp than might appear. The pledges of the consortium take on real meaning only as specific objects and conditions of financing are agreed between the parties—and, even more, as funds are actually disbursed and goods delivered. However, the rhythm of project identification and appraisal, loan negotiation, the placing of orders, and the disbursement of funds usually has little relation to the rate of pledging. Unfortunately, the recipient country’s attention and efforts often tend to focus on the pledges rather than on the more meaningful (and less dramatic) process of getting them implemented; and when implementation lags, disillusionment results.

On the other hand, even without any advance pledge of financial aid, a CG, it is hoped, will encourage a larger and more assured flow of development resources to the country in question. This belief rests on three premises: first, that a CG relationship will increase the recipient country’s absorptive capacity, that is, its ability to make effective use of external aid; second, that the CG reports and discussions will enable its members to make a better assessment of the country’s needs and performance; and third, that in consequence the Group members will be more favorably disposed to respond to those needs and will find it politically and administratively easier to do so.

Fulfillment of these premises obviously requires a large measure of mutual confidence and good faith between the aid-givers and the recipient country. The consultative process that is envisaged must be a two-way street, in which the developing countries have effective opportunities to influence the attitude and decisions of individual aid-givers and lenders, as well as the other way round.

In this continuing, evolving relationship between aid-givers and recipients, the World Bank sees its role as that of information center for the CG members, and as guide, counselor, and friend to the developing country as well as an ardent advocate for the country’s legitimate needs and interests. The Bank would be engaged almost continuously in reviewing the country’s development program, consulting with the government on economic policies and measures, helping to identify and screen projects, bringing the more promising ones to the attention of the members of the consultative group, and checking on the effectiveness with which various development activities are carried out.

Relations with Other International Organizations

As has been suggested, the coordination of development aid is a matter of concern not only to the Bank and to the bilateral lenders and donors but also to certain other international organizations. Although the OECD has formed consortia for Turkey and Greece, it apparently does not intend to establish any formal machinery to deal specifically with other countries; however, its Development Assistance Committee (DAC) may from time to time review the effectiveness of coordination measures as part of its continuing concern with global aid policies and administration.

In Latin America, the Inter-American Committee for the Alliance for Progress (CIAP) is charged with the responsibility of reviewing national development programs and recommending appropriate aid policies—functions that correspond in part to the coordination role envisaged by the World Bank. Special arrangements have been agreed by which any CG’s sponsored by the Bank in Latin America would be tied in with CIAP’s machinery and responsibilities.

Relations with the International Monetary Fund, of course, are especially close. A number of the key issues of economic policy and tests of performance with which CG’s are concerned are within the Fund’s sphere of primary responsibility, and the Bank relies heavily on the Fund’s analyses and judgments. The Fund has agreed to participate actively in all CG’s organized by the Bank.

Other agencies are also invited to participate—particularly the UN Development Program, whose technical assistance and preinvestment programs provide a most useful underpinning for the capital flowing from CG members. Close working relations will be maintained with the UN Resident Representatives in countries for which CG’s are established.

To sum up, the World Bank does not see coordination measures as a cure-all. A consultative group is no substitute for an adequate flow of capital on suitable terms, nor for sensible economic policies on the part of a recipient country, nor for rigorous investigation of investment projects and careful supervision of their execution. An effective consultative group can, however, provide a framework in which the need for capital and the merits of economic policies and projects can be assessed more rationally and accurately than would otherwise be possible, and in which specific practical actions designed to further the shared development purposes of aid-givers and recipients can be discussed and, hopefully, agreed upon. It should have great potential value for improving both the psychological atmosphere and the operational efficiency of their collaboration. And the Bank has made clear its intention to devote its energies and staff resources, in increasing measure, toward realizing this potential.

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