Lia Quartapelle Procopio
Master in Economics Programmes with reference to Africa
164164
Dissertation
General Budget Support as Conditional Aid. The Case of Mozambique.
This dissertation is submitted in partial fulfilment of the requirements for the degree MSc
Economics Programmes with reference to Africa of the School of Oriental and African
Studies (University of London). Thursday, 15th of September 2005.
I have read and understood regulation 17.9 (Regulations for Students of SOAS)
concerning plagiarism. I undertake that all material presented for examination is my own
work and has not been written for me, in whole or in part, by any other person(s). I also
undertake that any quotation or paraphrase from the published or unpublished work of
another person has been duly acknowledged in the work which I present for examination.
I give permission for a copy of my dissertation to be held at the School’s discretion,
following final examination, to be made available for reference.
Word Count: 8781
Table of contents
Abstract
1. Introduction
2. Budget Support in context: the failure of aid
4
5
7
2.1 Aid effectiveness disputed
7
2.2 Aid modalities disputed
8
2.2.1 The failure of conditionality
10
2.3 Consequences of the debate on the current practice of aid
11
3. The shift to Budget Support
12
3.1 Definition of Budget Support
12
3.2 Why a shift to supporting the budget
12
3.3 The flows to Budget Support
14
4. General Budget Support in Mozambique
17
4.1 Why Mozambique?
17
4.1.1 Donors-government relationship
17
4.1.2 Poverty in Mozambique as factor towards Budget Support
19
4.1.3 “O Plano de Acção para a Reducção da Pobreza Absoluta”
20
4.2 How General Budget Support is carried out in Mozambique
22
4.3 Aid flows to General Budget Support in Mozambique
23
5. The model
27
5.1 Actors and choices
28
5.2 Interactions and outcomes: a repeated game
33
6. Application of the model to General Budget Support in Mozambique 36
6.1 Assessing the model
36
6.1.1 Strengths
36
6.1.2 Weaknesses
37
6.2 Reasons underlying the limitations of the model
38
6.3 Further implications of the model
40
7. Conclusion
42
References
44
List of tables and figures
Figure 1. Aid and growth in Africa
Figure 2. Budget Support by Sectors for DFID
Figure 3. Total GBS and BoP support to Mozambique 2003-2006
Figure 4. GBS and BoP support over the years for PAPs
Figure 5. Share of DBS and BoP support by donors in 2005
Figure 6. The function h
Figure 7. The game tree
Figure 8. The pay-off matrix
Table 1. Commitment to BS and SWAps
Table 2. Mozambique position with the Fund
1
7
15
24
25
26
29
32
33
15
17
Abstract
The paper investigates the recourse to General Budget Support (GBS) within the debate
on ownership and conditionality, using a game theoretic approach. The model built to
represent the power relationship between a generic group of donors and a recipient
government shows that this form of aid is more conditional for the recipient, since GBS
reduces the defection pay-off open to the recipient. The model is then assessed against a
case-study, Mozambique. The analysis on the implementation of GBS in this country
highlights that GBS is not as a conditional form of aid as modellised, since the
Government of Mozambique has been allowed some slippage in the past. It is suggested
that the model could be modified to include a more complex view of compliance and a
more precise representation of the equilibria characterising the donor-recipient
relationship.
1. Introduction
The history of aid-giving is characterised by recurring cycles of dissatisfaction with aid
doctrines and modalities. The ‘90s have seen an increasingly pessimistic approach to aid
disbursements. Budget Support (BS) is the current solution proposed to contrast what the
debate of the ‘90s has identified as the double failure of conditional aid: low coercion
exercised through conditionality and the lack of recipient ownership of the policies tied to
aid.
My research aims to assess the effects and consequences of the recourse to BS. I intend
to respond to the question “How ‘conditional’ General Budget Support is compared to
policy-based lending?” My hypothesis is that while the rhetoric suggests that BS promotes
country ownership, it was in fact devised in order to increase donors’ bargaining power on
the destination of aid vis-à-vis the recipient’s ability to use the funds for its own intentional
purposes.
The research will employ a simple game-theoretic approach. Policy-based lending has
been extensively studied game theoretically and this offers a good starting point for
comparison. The study will be conducted against the experience of Mozambique, which
has become the showcase for BS.
Through the model I have found that BS is a more conditional form of aid in so far as it
encourages the recipient government to stick to the conditions attached to the
disbursements. However, the comparison of the model with what occurs in the practice of
BS in Mozambique identifies that this aid modality gives the Government of Mozambique
some space for outmanoeuvring the donors. This is in part determined by specific country
characteristics, and partly by the fact that BS as an aid modality creates a situation akin to
a nuclear threat. The analysis suggests the recourse to BS might encourage collusion.
The paper will be structured as follows: section 2 provides a background of the literature
reviewing policy-based aid and contributing to the shift of the aid doctrine towards BS. Part
3 defines BS, identifies its characteristics responding to the shortages outlined in Part 2
and quantifies the aid flows disbursed through BS. Part 4 outlines the context of the case
study, Mozambique. Part 5 presents an extensive form game model that re-elaborates the
2
hypotheses of analogous models of aid relationships and represents the interactions
between donors and a recipient government under BS. Part 6 assesses the findings of our
model against the contingency of BS implementation in Mozambique. Part 7 concludes.
2. Budget Support in context: the failure of aid
The shift to BS can be seen as a response to the aid doctrine characterising the second
half of the ‘90s (Kanbur, 2003). This period sees an ensuing aid fatigue on the donors’
side1 accompanied by a generalised dissatisfaction with the concept and practice of aidgranting, the main questions concerning the interrelated assessments of the effectiveness
of aid and the appropriateness of the modality of disbursements.
2.1 Aid effectiveness disputed
The mid-‘90s aid fatigue is seen as a response to the disturbing relationship between aid
and growth in Figure 1.
Figure 1. Aid and growth in Africa (10 year moving average).
Source: Easterly (2002:11).
As a tentative explanation to this relationship, a part of the academia developed a debate
on aid effectiveness. The 1997 paper by Burnside and Dollar (BD) for the World Bank, is
the most controversial contribution to the debate. BD claim aid to be ineffective for growth
but for in a “good policy” environment, defined as a mixture of fiscal, monetary and trade
policies. Collier and Dollar (1999) extend these findings to a poverty-efficient allocation of
aid. Besides the serious challenges that BD have faced, regarding the employment of
econometric techniques (Rajan and Subramanian, 2005), the choice of data and
specification (Roodman, 2003; Easterly et al, 2003), the paper is noteworthy because it
identifies policies as the key determinant of aid effectiveness. This conclusion has
influenced the behaviours of bilateral donors, that now base their disbursements on
selectivity.
1
According to Round and Odedokun (2003), aid volumes in real terms in the years 1990-99 have decreased
by 4.4% with respect to the previous decade.
3
The pessimistic outlook on aid effectiveness is challenged by some academics, the most
prominent being Jeffrey Sachs. Sachs (2001) argues, along an established tradition, that
certain countries are blocked in a poverty trap that can be broken only by a generous and
immediate surge in aid. To evaluate Sachs’ ideas it is important to consider that large aid
inflows generally bring about distortions on the recipient economy2. Sachs seem to neglect
these concerns; his position is therefore to be considered more cautiously.
2.2 Aid modalities disputed
The debate on aid effectiveness is closely linked to that on the effectiveness of the
disbursing mechanisms of the ‘80s and ‘90s, project aid and financial programming. This
second debate stems from the recognition that a part of aid ineffectiveness was a
consequence of the mechanisms of disbursement.
The criticism to project aid was fairly shared amongst academia. Project aid was criticised 3
because it “contributed to the fragmentation of development assistance” (Zoomers,
2005:1): the recipient country was flooded with uncoordinated donor projects, that hardly
corresponded to the recipient preferences and priorities. Projects would address only
specific areas and prevented the development of an integrated strategy, thus not tackling
the problems with policies that many, especially within the “Washington consensus”,
regarded as the chief obstacle to development. Project administrative requirements
burdened the recipient administration which was so overwhelmed to avoid developing an
internal capacity to design and implement autonomous interventions. Finally, projects
lacked sustainability and promoted corruption.
Financial programming was even more extensively under review, both from the left and the
right, for its content and the consequences of its modus operandi. The critiques from the
right focussed on the excessive number of conditionality and on the excessively broad
operational field of the IFIs. The critiques from the left were two-folded. On the one side,
the inadequacies of the economic and technical contents of financial programming were
pointed out. Under review were: the disregard of side-effects (Cornia et al, 1987), the lack
of an analysis of the structural differences characterising the economy of developing
countries (Taylor, 1997) and the absence of serious concerns with poverty issues (Fine
and Hailu, 2002). On the other side, the way financial programming was forced upon
recipient countries and the consequences of this mechanism were considered. Under
review were the political economy of implementation of the recipient country (van de
Walle, 2001), the relationship between donors and recipients (Mosley et al, 1995), the
mechanism of conditionality (Collier et al, 1997) and the related issue of ownership
(Helleiner, 2000a).
2.2.1 The failure of conditionality
One particular aspect of financial programming that was extensively analysed and that has
an important role on the design of Budget Support is conditionality. Conditionality was
devised as a compulsive instrument to enforce the recipient government in adopting
policies that, from the donors’ perspective, would make the repayment of the development
loan more likely. Conditionality then became a device used to force the adoption of policies
that the lender saw as beneficial for the borrower (Mosley et al, 1995).
2
These can be exchange rate appreciation, Dutch disease effects, disincentives for the fiscal system,
promotion of corruption, aid dependence, fungibility.
3 Project aid had already been reviewed and in part substituted within the multilaterals at the time of the debt
crisis of the ‘80s and the shift to financial programme assistance (Mosley and Eeckhout, 2000).
4
The literature has analysed thoroughly both the policy content of conditionality 4 and the
effectiveness of this instrument as a coercive device (Drazen, 2000 for a literature review).
While some authors argue that conditionality is an instrument owned equally by donors
and recipients, the reality of the implementation of conditionality tells us a different story:
the World Bank itself (in Mosley et al, 1995) recognises that only about 60% of the
conditionality attached to its loans have been implemented. This inadequacy has been
explained with exogenous factors5, the nature of conditionality6, the low level of recipient
ownership of policy reforms (Killick et al, 1998), the interaction with debt overhang (Sachs,
1989), the presence of a third party interests (Kanbur, 2000; Villanger, 2003), the system
of incentives on the recipient side (Svensson, 2000b).
The literature suggests that conditionality fails because donors and recipients have
diverging aims that create a conflict of interests (Killick, 1997; 1998, Mosley et al, 1995;
White and Morrissey, 1997). In particular, donors are torn between the necessity to “push
aid out of the door” (Drazen, 2000; Easterly, 2002; Mosley et al, 1995) and the need to
spend it efficiently, while recipients are constrained by their political economy, internal
divisions (Mosley, 1992) and rent seeking appetites of the elites (Svensson, 2000a).
2.3 Consequences of the debate on the current practice of aid
The aid doctrine of the ‘90s suggests that aid ineffectiveness is connected to the failure of
conditionality in promoting good policies and sustaining their virtuous interaction with aid
disbursements. Conditionality in particular failed because the diverging aims of donors and
recipients lowered their coercive power. These findings motivated the rethinking of the
mechanisms of disbursements.
The new aid modality devised is Budget Support, which combines efficiency in
disbursements and a more substantial form of conditionality. On the one side, BS is linked
to the Poverty Reduction Strategy Papers (PRSPs), which strengthen the recipient’s
commitment to policies and donors’ command over these policies. On the other side, BS
includes strict mechanisms of expenditure reviews which should ensure a more effective
control on the efficiency of aid expenditures. BS is chosen since it buys donors ‘a seat at
the policy table’, aligning recipient policies and practices to donors’ preferences.
3. The shift to Budget Support
3.1 Definition of Budget Support
According to the definition given by OPM and ODI in their 2002 report “Direct Budget
Support refers to the channelling of donor funds to a partner government using its own
allocation, procurement and accounting systems”. Direct Budget Support (DBS) can be
carried out in three ways: Sector Budget Support (SBS), General Budget Support (GBS)
and BS using the resources resulting from debt forgiveness (Mosley and Eeckhout, 2000).
Some definitions do not include this last element in DBS, while some others differ in how
they consider SBS.
4
Kanbur (2003) argues that the contents of the policies at the basis of conditionality depend directly on the
state of the development doctrine.
5 Part of the conditionality were not implemented because the country suffered from external shocks or
unforeseen events that changed its economic situation completely.
6 As explained by Mosley et al (1995) and by Kanbur (2003) conditionality can be possible or impossible to
implement, and pro forma and correspondingly its implementation can be easier or more difficult.
5
This research, being concerned specifically with the relationship between donors and
recipient, will concentrate on GBS7. GBS is financial assistance provided directly to the
overall state budget and administered by the Ministry of Finance. GBS disbursements are
connected to the preparation of a PRSP, to be approved by the donors.
3.2 Why a shift to supporting the budget
It should be noted that GBS is not a completely innovative mechanism: it is the new
generation form of financial programme assistance (FPA), whose defining inputs are funds
and policy dialogue (White, 1999). FPA started off with IMF stabilisation and WB structural
adjustment packages. Bilateral donors did not use as much FPA but they often linked their
disbursements to the satisfaction of IFIs criteria and sometimes they added the surplus of
their yearly budget to the BWIs funds. The first modality of BS to be elaborated as a
response to the shortcomings of the ‘80s FPA was SBS, to be followed by GBS.
GBS and SBS are the latest incarnation of FPA and are very similar to its previous forms,
since they are all a way to provide forex to the recipient government 8. However, this
similarity is limited, since BS focuses on “fiscal behaviour and budgetary mechanisms”
(White, 1999:31). This allows an increase in government empowerment, ownership and
accountability, in the predictability of funding and state effectiveness (ODI and OPM 2002)
compared to other forms of FPA and bilateral assistance. GBS also reduces transactions
costs and enhances donor coordination. The recipient benefits from being in a partnership
with the donors (Axelrod, 2001) and from being able to reduce the administrative burden
(Killick et al, 2005). Finally, GBS is linked to the PRSP mechanism which helps
considerably the recipient to take more immediate, organic and strategic actions for
poverty reduction than macroeconomic adjustment (Healey and Killick, 2000).
Despite the fact that GBS implies a high fiduciary risk and that most studies commissioned
by donor organisations outline the advantages accruing especially to the recipient
government, there are advantages accruing to the donors as well. This modality was
chosen by donors with the specific intent of bypassing the main problem with
conditionality: that of not being able to influence adequately the policies of the recipient
government. Considering GBS from the viewpoint of donors’ practice rather than the
rhetoric (Helleiner, 2000b), it is clear that many elements of GBS correspond to donors’
preferences: the focus on poverty disguises the strictly orthodox content of the
macroeconomic measures contained in the PRSP, the selectivity of the PRSP mechanism
represents a stronger way to enforce donors’ priorities and wishes while the innovative
mechanism reduces recipient alternative strategies for funding, thus increasing its
dependence from a block of like-minded donors. This is further confirmed by Cordella and
Dell’Ariccia (2003) who suggest that, under certain conditions, donors are more effective in
promoting their idea of development through GBS rather than project aid.
This is confirmed by several donor studies which show that reaching the ‘rhetoric aims’ of
increasing ownership, targeting the poor and empowering the government is not a
straightforward process, once GBS is in place. There is need for additional measures
geared to those aims, yet to be put in place. This is an indication that the shift from
conditionality to partnership is not yet completed because of donors’ priorities.
3.3 The flows to Budget Support
7
SBS, being an intermediate step from project assistance to GBS, is not considered, since it seems that
donors are oriented to move their funding from SBS to GBS.
8 This similarity is clear in the data given by the Programme Aid Partnership for Mozambique, which register
all the funds going to GBS and BoP under the same entry.
6
BS is being adopted by an increasing number of donors and applied to different countries.
The donor groups for BS comprise on average eight donors, sometimes including the WB,
but not the IMF, that can nonetheless be an observer (Driscoll et al, 2005). Usually, BS
contributes to 15-20% of total government expenditures for the recipient9.
Table 1 shows the commitment to BS and sector approach for the EU countries. It is clear
from the table that almost the totality of donors uses sector approach and that there is a
move towards BS: the more ‘progressive’ donors, which provide the highest share of ODA,
are highly committed to this modality. It should be noted that internal factors can influence
the choice over the disbursing form (as described by White (1999) for Sweden). This
suggests that some countries in the table could be restrained from moving to BS by
internal reasons.
Table 1. Commitment to Budget Support and Sector Approach
for the European countries in 2003.
Country
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
Sweden
UK
EU
Net ODA/ EU ODA
1,9
3,4
5,8
1,5
17,2
18,3
0,9
1,2
7
0,5
11,6
1,1
6,1
6,5
16,9
na
Commitment to BS
Low
Low
High
High
High
Low
…
High
Low
Low
High
Low
Low
High
High
High
Support to sector approach
yes
yes
yes
yes
yes
yes
yes
yes
yes
yes
yes
no
yes
yes
yes
yes
Source: EU Donor Atlas (2004). Author’s elaboration.
Figure 2 shows how for a donor committed to programme assistance, as DFID, the share
of GBS (the economic sector of BS) has increased vis-à-vis the other sectors of PA.
9
Mozambique, Malawi, and Uganda are an exception because they receive around 30% of the government
spending.
7
Figure 2. Budget Support by Sectors for DFID.
Source, www.dfid.gov.uk.
The data provided illustrate that donors are increasingly more committed to BS and that
within the shift to this form of FPA donors are increasingly adopting GBS. This is motivated
by the comparative advantages of BS and GBS that offset the high fiduciary risk and
fungibility. The donors’ main reason for shifting to this aid modality is the belief it
constitutes a more effective way of employing funds within a fruitful policy dialogue.
4. General Budget Support in Mozambique
4.1 Why Mozambique?
Budget Support is a form of aid which is applied selectively to certain countries, since it is
connected with a high fiduciary risk and requires the country to be eligible for the
Enhanced HIPC Initiative and to have prepared a sound PRSP that would guarantee an
efficient use of resources for poverty reduction. This chapter reviews and describes the
characteristics that make Mozambique eligible for GBS.
4.1.1 Donors-government relationship
The relationship between donors and the Government of Mozambique (GoM) is long and
trustful. Mozambique entered the IMF in 1984, started borrowing from the IFIs in 1987 and
since then the relationship has been continuative.
8
Table 2. Mozambique position with the Fund.
Poverty Reduction and Growth Facility/
Enhanced Structural Adjustment
Facility
Structural Adjustment Facility/Trust
Fund
General Resources Account
Year
Purchases
Loans
Charges
Paid
Disbursements Repurchases
Disbursements Repayments
Total
Purchases and Loans
Interest
Paid
Disbursements Repayments
Charges
and
Interest
Paid
2005
0
0
0
1,620,000
8,400,000
309,263
1,620,000
8,400,000
309,263
2004
0
0
0
1,620,000
15,330,000
675,645
1,620,000
15,330,000
675,645
2003
0
0
0
8,400,000
14,810,000
728,323
8,400,000
14,810,000
728,323
2002
0
0
0
8,400,000
17,130,000
768,698
8,400,000
17,130,000
768,698
2001
0
0
0
8,400,000
20,975,000
810,727
8,400,000
20,975,000
810,727
2000
0
0
0
45,200,000
22,155,000
821,600
45,200,000
22,155,000
821,600
1999
0
0
0
21,000,000
22,820,000 1,122,137
21,000,000
22,820,000 1,122,137
1998
0
0
0
25,200,000
18,067,926
355,908
25,200,000
18,067,926
355,908
1997
0
0
0
25,200,000
10,980,000
693,651
25,200,000
10,980,000
693,651
1996
0
0
0
12,600,000
22,497,074 1,028,497
12,600,000
22,497,074 1,028,497
1995
0
0
0
0
9,455,000
729,087
0
9,455,000
729,087
1994
0
0
0
14,700,000
7,320,000
682,907
14,700,000
7,320,000
682,907
1993
0
0
0
15,250,000
4,270,000
601,201
15,250,000
4,270,000
601,201
1992
0
0
0
45,750,000
1,220,000
211,418
45,750,000
1,220,000
211,418
1991
0
0
0
30,500,000
0
463,896
30,500,000
0
463,896
1990
0
0
0
9,150,000
0
215,506
9,150,000
0
215,506
1989
0
0
0
12,200,000
0
166,538
12,200,000
0
166,538
1988
0
0
0
18,300,000
0
52,084
18,300,000
0
52,084
1987
0
0
0
12,200,000
0
34,094
12,200,000
0
34,094
Source: http://www.imf.org/external/country/MOZ/index.htm.
Bilateral relations had started earlier but it is from the opening towards the IFIs that they
got under way: in 1987 the abandonment of the Marxist way towards capitalism brought a
surge in disbursements that since would be generally generous and prompt. In fact,
disbursements to Mozambique, in the face of the situation determined by the civil war and
of general compliance10 with IFIs criteria (World Bank, 1994), have generally been
punctual, apart from the IMF in 1995 (Hanlon, 1996), which shows the trustfulness of the
rapport. For example, recently disbursements have only once been withheld for a few
months, during the 2002 bank scandal, which got a rapid and, from the donors’ viewpoint,
satisfactory response.
The quick response that the GoM has been able to give to any change in donors priorities,
together with the mostly honest use of funds (Hanlon, 2002), the commitment to the
programmes signed and the good results in terms of growth have managed to build the
reputation of Mozambique as a star performer.
10
The World Bank 1994 Report on adjustment in Africa argues that Mozambique is a very poor performer for
what concerns macroeconomic policies and civil sector reforms. Instead, it is a good performer on market
liberalisation and on state enterprise divestiture.
9
This reputation is closely intertwined with the essential role donors have played in certain
important times of the life of the country, such as during the civil war, in the delicate stages
of the reconstruction after the war and after the devastating 2000-2001 floods. All these
successful interventions have legitimised the credibility of donors actions: Mozambique is
one of the few cases of a satisfactory intervention of peace-building and, together with
Uganda and few other countries in Sub-Saharan Africa, is an example of how the donors
are crucial for the success of poverty reduction actions.
The relationships with donors, despite that they have generally been easy and by and
large satisfactory for both sides, have been extensively criticised as a form of imperialism
(Hanlon, 1991). While the GoM attempted to demonstrate its independence by
implementing autonomously some reforms, as it did with the structural adjustment
packages in 1984 and 1987, and in 1999 with the PARPA (Plano de Acção para a
Reducção da Pobreza Absoluta, GoM 2001), the fact these were all immediately approved
and financed by the IFIs, suggests that the writing up was closely followed by the IFIs
(Fozzard, 2002). Therefore, it can be said that the relationship between the two has been
trouble-free given the weak bargaining power of the GoM. This could motivate the
easiness behind the donors decision to enter BS with Mozambique.
Hanlon (2002) argues that the good GoM-donors relationship can be explained also with
the fact that “Mozambique has become a donor playground, and the Mozambican elite has
become highly skilled at giving the donors what they want”: while the donors believe to
have captured the Mozambican state, the Mozambican elite has played on this sense of
security in order to obtain concessions from the donors over slippages on the use of aid.
This hypothesis has acquired further consistency during the bank scandal (Fauvet and
Mosse, 2003).
4.1.2 Poverty in Mozambique as factor towards Budget Support
The actions of the international community in Mozambique are determined by the difficult
conditions of the country. Ravaged by a bloody war that ended in 1994, Mozambique
begun a process of economic growth temporarily halted by the 2000-2001 floods.
Notwithstanding the important progresses, 53.6% of the population live below the poverty
line (INE 2004) while the GDP per capita is 210 dollars (WB, 2004a). The constant and
high rate of GDP growth, at around 7% between 1993 and 2003, suggests an
improvement of these conditions. However, these promising data hide a substantial
regional disparity. For example in the region around Maputo, the 1999 GDP per capita was
around 1189 dollars, while in the Northern regions, as Zambezia, the GDP per capita was
96 dollars (UNDP, in Hanlon, 2002).
An analysis of the social indicators for Mozambique shows an important governmental
effort towards meeting the Millennium Development Goals. The enrolment ratios for both
sexes are increasing at every level: between 2002 and 2003, for primary school it
increased by 6.9%, for secondary school by 17.4% (Source MINED, RoM 2004). However,
the literacy rate in 2002 was 62.3% for males and 31.4% for females (WB 2005), showing
that action is needed also to tackle the gender issue. Equally, life expectancy is still really
low, at 40.7 years in 2003 (WB 2005), also given the effect of the HIV/AIDS epidemic,
despite a 3.2% increase in the number of health care facilities between 2002 and 2003
(Source MISAU, quoted in RoM 20054).
4.1.3 “O Plano de Acção para a Reducção da Pobreza Absoluta”
10
As shown by the data above, the GoM is making a huge effort to improve the living
conditions of Mozambicans. Its commitment towards poverty reduction and its strategy are
stated in the PARPA, which is the Mozambican PRSP.
The PARPA was elaborated just before the launch of the PRSP format and it is supposed
to be more “authentic” than other PRSPs, even if it was written by a handful civil servants
inside the MPF, in consultation with the IFIs, and it was submitted to the decentralised
level and to a participatory forum only at a later stage (Fozzard, 2002). It identifies six core
areas of intervention for poverty reduction: health, education, infrastructure, rural
development, macroeconomic and financial policies and good governance. The PARPA
identifies the main problems in each of these areas, the resources, competencies and
institutional tools to be used and sets the priority targets and the actions to be undertaken.
The PARPA is complemented on the operational side by the Performance Assessment
Framework (PAF), “which is a multi-annual matrix of priority targets and indicators based
on the PARPA, […] agreed through cross-governmental dialogue” (GoM and PAPs). The
PAF is used by the GoM to direct its actions towards poverty reduction and by the
Programme Assistance Partners (PAPs) to evaluate the efficiency of aid spending by the
GoM for refinancing. The PARPA is a document elaborated entirely by the GoM, while the
PAF stems from the policy dialogue with donors.
The present donors-GoM relationship in GBS revolves around the PARPA and the PAF.
GBS tranches are released every year after a Joint Donor Review (JR) of the progress
over the PAF targets negotiated the previous year following the PARPA strategy.
However, despite the long-standing and trustful GoM-donors relationship and the GoM
commitment to poverty reduction, the donors-GoM relationships over the PAF and PARPA
are not entirely harmonious. Given the evaluation by Fozzard (2002) on the IFIs influence
during the PARPA elaboration and given the way the PAF targets are negotiated every
year (Hanlon, 2005), the ownership rhetoric used to describe the PRSP process is slightly
far-fetched. More appropriately, the relationship seems to be characterised by a conflict of
interest between the GoM and the donors. In chapter 5 this conflict of interest will be
modelled in order to understand whether GBS is more conditional than policy-based aid.
4.2 How General Budget Support is carried out in Mozambique
This section draws on Borgarello et al (2004). GBS to Mozambique dates back to bilateral
disbursements of the early ‘90s. Recently, these supports were harmonized and carried
out through the Joint Donor Macro-Financial Aid Programme (JP) which is the programme
used co-ordinately by the donors to provide aid directly to the Mozambican State Budget.
The JP was started in 2000 by a group of nine donors, that have now become
seventeen11. These are called the Programme Aid Partners (PAPs), and together with the
GoM form the G1812 which is joined by the IMF, USA, Japan, UNDP and the African
11
The donors currently in the group are: Belgium, Canada, Denmark, the European Commission, Finland,
France, Germany, Ireland, Italy, Norway, Portugal, Spain, Sweden, Switzerland, The Netherlands, United
Kingdom, the World Bank. The World Bank takes part in the JP through a Poverty Reduction Strategy Credit
(PRSC) approved in 2004 (WB 2004b). Its participation is extraordinary. The number of seventeen of the
donors is taken by the official site of the Programme Aid Partnership, which lists 17 donors that have given
an indicative commitment for 2005 and 2006. Hanlon (2005) lists only 16 donors, excluding probably
Denmark, while Killick at al (2005) and the MoU refer to 16 donors, excluding Spain, that joined the G18 only
after the Joint Donor Review (JR) in May 2005.
12 Some documents refer to the PAPs as the G17, while others include the GoM in the G-group. In order to
make things as clear as possible, I will refer to the group composed only of donors (and observers) as the
PAPs, while the G18 is the PAPs plus the GoM (and observers).
11
Development Bank as observers. The JP is provided upon the strategy in the PARPA and
conditional to the targets in the PAF.
Due to space constraints, I will analyse only the workings of the JP, disregarding the
mechanisms that regulate harmonisation, the access and the relationship with the GoM, as
well as the budgeting and planning tools. There are two moments characteristic of the JP:
collaboration amongst the PAPs and dialogue between the PAPs and the GoM. The PAPs
meet periodically in different groups at various levels13, with the aim to analyse, discuss
and evaluate technically and politically in itinere the JP. This process of evaluation
amongst the PAPs is instrumental for the second stage of the JP dialogue, that with the
GoM. The dialogue with the GoM revolves around the level of implementation of the PRSP
and the use of funds. The monitoring of the effectiveness and efficiency in the use of funds
is carried out using mainly the PAF and other instruments (an external audit, a
Mozambican audit). Despite being a partnership, if the conditions underlying GBS are not
met at all, that is if the PARPA strategy and PAF targets are worryingly disattended, the
PAPs can decide to withhold a tranche. This last resort move was employed only once, in
2002, when GBS was suspended for a few months following the bank scandal.
The G18 dialogue is characterised by the fact that the PAPs have agreed a common
behaviour towards the GoM. This mechanism is a novelty with respect to what happened
under policy-based lending, when recipients could employ strategies of playing one donor
against the other (Mosley et al 1995). Thus, under GBS, the recipient bargaining power is
weaker because it has to confront a cohesive group of donors that act co-ordinately.
4.3 Aid flows to General Budget Support in Mozambique
Donors bargaining strength is enhanced under GBS also by the extent of aid flows. This
aid modality can in fact be suspended more easily and the suspension can be linked more
clearly to a government action than under project aid. In order to assess the relative
strength of donors in Mozambique, it is thus important to analyse whether and to what
extent they are moving towards this form of aid and to what degree the GoM is directly
dependent on GBS.
Mozambique is one of the countries most dependent on external aid in the world 14.
Government finances heavily depend on aid: in 2003, the GoM fiscal revenues amounted
to 14.3% of GDP while expenditures equalled 29.4% of GDP. Grants contributed to almost
30% of the state budget, constituting 10.6% of GDP (Hodges and Tibana, 2004). This data
is even more worrying given the unaccounted share of aid that bypass the state budget.
Furthermore, the mechanism of GBS, which in 2004 constituted one-fifth of the state
budget and one-third of overall aid flows (Hanlon, 2005), make the state directly
dependent on the aid released which is increasing, as shown in Figure 3.
13
Four groups characterise the PAPs dialogue: Heads of Mission group, Heads of Cooperation group,
Economists Working group and a Troika (GoM and PAPs, 2004a).
14 According to DAC, the net ODA/GNI ratio was 25.2% in 2003, 60.3% in 2002 as a consequence of the aid
for the floods and 29.8% in 2001.
12
The increased recurrence to GBS as aid modality interests most donors, notably the likeminded donors, as shown in Figure 4. While looking at the figure it should considered that
aid commitments are generally made every 3 years thus some donors might present
peaking surges corresponding to this. Moreover, data for 2005 and 2006 are indicative
support and therefore they might be understated.
Figure 4. GBS and BoP support over the years for PAPs.
80.000.000
Financial Contributions in U SD
70.000.000
60.000.000
50.000.000
40.000.000
2003
30.000.000
2004
2005
20.000.000
2006
10.000.000
W
B
UK
nd
er
la
en
Sw
itz
Sw
ed
ain
Sp
al
rtu
g
Po
s
he
rla
Th
e
Ne
t
Ire
No
rw
ay
nd
ly
Ita
lan
d
y
ce
m
an
Ge
r
Fr
an
an
d
Fi
nl
EC
ar
k
De
nm
da
Ca
na
Be
lgi
u
m
0
Source: Programme Aid Partnership. Author's elaboration.
The quickly increasing number of donors entering the PAPs and their increasing commitment
suggest that most donors are interested in influencing directly the GoM on its policy choices.
The satisfaction with GBS as an aid modality fulfilling donors aims, chiefly that of ‘gaining a
seat at the policy table’, is further confirmed by the fact that some PAPs 15 intend to further
increase their contribution, while others (Canada and Germany) might do so in the future
(Killick et al, 2005). Therefore the GoM direct dependence on GBS will increase, as the
donors need to disburse GBS whatever the performance. This possible urge to ‘push aid out
15
These are Belgium, Finland, Netherlands, Sweden, Switzerland and the UK.
13
of the door’ will be felt more by those donors that, as DFID, the Netherlands and the Nordic
countries, are shifting to GBS. The share of GBS given by these countries amount to 42% of
the total in 2005, as shown in Figure 5.
Figure 5. Share of DBS and BoP support by donors in 2005.
1% 1%
Belgium
Canada
EC
Finland
22%
France
21%
Germany
Ireland
Italy
The Netherlands
2%
2%
2%
3%
2%
21%
Norway
Portugal
Sweden
Switzerland
UK
WB
9%
3%
6%
1% 4%
Source: Programme Aid Partnership. Author’s elaboration.
The aid flows analysis highlights that the move to BS, motivated by the country
characteristics described in 4.1 and following the modality explained in 4.2, is increasing
both GoM and major donors interests in punctual and quick disbursements.
5. The model
This chapter intends to build a general model of an extensive form game in order to
portray the interactions between donors and a government under GBS conditions. This will
be carried out by adjusting some assumptions of previous game-theoretic models to the
GBS conditions. While here I describe a general model of the interactions between
unspecified donors and the recipient government, in part 6 I will adapt the model to the
Mozambican situation.
The use of game theory is not new to the study of donor-recipient relationship, and has
been extensively employed in modelling behaviour under conditional aid. The gametheoretic approach, as summarized by Mosley et al (1995), is particularly appropriate for
this task since the interaction of donors and recipient under conditionality can be seen as
a game in the sense of being a relationship in which the two parties have (at least partly) opposed
interests which they pursue by taking note of each other’s likely behaviour, and in which the outcome
depends on the strategies pursued by each party.
As explained in the previous chapters, there are differences between BS and ‘older’ forms
of aid, which could make it difficult to reconcile this analysis and the novelty of BS. In fact,
rhetorically, the PRSPs, which GBS is connected to, are a shared form of conditionality
and should not present the same conflicting interests as conditional aid. However, given
14
firstly that donors enter this relationship to ‘gain a seat at the policy table’ (Driscoll et al,
2005), secondly that PRSPs are a ‘superconditionality’ (Booth, 2001) and that there is an
unfavourable overall judgement over the novelty of the process (UNCTAD, 2002, Mosley
and Booth, 2003), GBS relationship exhibits elements of the conflict of interests
characteristic of conditional aid and therefore the use of a game-theoretic approach is still
appropriate.
5.1 Actors and choices
The model portrays the interactions between two players. On the one side, there are the
donors that give aid in support to the budget, acting jointly as one individual; this group will
be referred to as the groups of donors16. On the other side, there is the recipient
government. The two actors display different and sometimes conflicting aims and choices,
captured by an analysis of their utility functions.
I assume that the group of donors utility UD is the sum of their individual and homogeneous
utility functions. It can be hypothesized that the relationships between the donors within
the donor group are to a certain extent structured along a form that is more easily
described by game theory than by straightforward aggregation. However, if we were to
formalise these interactions, we would obtain a model that would not contribute to our
analysis of the power relationship between donors and recipient.
I define the elements of the donors group utility function UD as:
h a function of the quantity of aid and slippages
a a variable for the quantity of aid
s a binary variable referring to whether there is slippage or not
t a parameter measuring donors satisfaction when granting aid.
The donor utility function has been represented both as depending positively (Easterly,
2002, Mosley et al, 1995) and negatively (Lundborg, 1998) on the amount of aid
disbursed. Drawing on Villanger (2003) and on the recent debate on aid effectiveness, I
assume that UD is positively linked to disbursement of aid through GBS once the
conditions to which it is attached are fulfilled and it is negatively linked to disbursements
once the conditions are not fulfilled. That is, UD is dependent on h=h(a;s) which is a
function of aid (a) and slippages (s). In our case, UD increases when no slippage occurs
(s=0), all the aid resources are spent in pursuit of their intended aim17 and are not diverted
for patronage, fund misappropriation by elites, etc. UD instead decreases when the
Boolean variable s=1, which occurs when there are slippages and donors are still
disbursing. I assume that donors prefer to disburse aid and to influence recipient
behaviours rather than not to.
16
17
In the case of Mozambique, the group of donors is the PAPs.
The aim is set accordingly to what stated in the PRSP.
15
Figure 6. The function h.
h
h(a,s0)
h0
h(a,s1)
h1
a
a*
Based on Villanger (2003).
The UD depends also on a parameter t, that measures donors’ happiness and satisfaction
when grating aid, determined by the fulfilment of their strategic interests linked to the
concession of funds. This element is generally not considered in the game theoretic
literature on aid, where the assumption on donors’ motives is simplistically that of donor
altruism (Svensson, 2000b, Federico, 2001). In fact, the assumption of donor altruism has
been widely debated (Kanbur 2003). The more recent literature that analyses specifically
donor motives, both from an econometric perspective (Alesina and Dollar, 2000) and from
a political economy one (Lundborg, 1998; Harrigan et al, 2004) shows that donors grant
aid for egoistic reasons. Integrating these findings in the envisaged model, through the
parameter t, instead of assuming donors’ altruism, does not mean that I consider donors
efforts towards poverty reduction as a by-product of a concern over other interests. In
certain cases donors are sincerely committed to poverty reduction, and at the same time
this commitment corresponds to a political strategic behaviour: that of securing political
support internally.
The group of donors’ utility function can be formalized as:
UD=UD(h(a;s),t).
The recipient government utility is UR. My hypothesis is that the recipient government acts
as a coherent actor. This is a heuristic simplification. As outlined by Van de Walle (2005),
the recipient behaviour is often divided along the lines of the differing behaviours of the
legislative versus the executive. Considering the recipient actions as coherent implies also
to disregard the effects the flow of aid might have on the government equilibria: Kanbur
(2000) outlines that often aid strengthens the reformist factions within the government.
I define the elements of the recipient government utility function UR as:
a the variable for the quantity of aid
s a binary variable referring to whether there is slippage or not
r a new parameter measuring the relationship between the absence
of slippage in the first period with a disbursement in the second.
Most models (Svensson, 2000a, 2000b and 2003, Murshed and Sen, 1995, Mosley, 1992
and Mosley et al, 1995) see UR as depending positively on the quantity of aid received and
negatively on the tightness of conditionality. These assumptions can be slightly modified to
suit GBS conditions: on the one side, the UR increases with an increase in the aid (a)
disbursed. On the other side, UR increases if the recipient manages to make a slippage
16
(s=1), either on the PRSP targets that do not correspond to its own political agenda
(Mosley et al, 1995) or on diverting a part of aid for the ruling elites (Svensson, 2000a).
However, since the recipient government has entered the PRSP process leading to BS,
and is to an extent committed to poverty reduction, I assume that it prefers to comply and
receive aid, rather than the opposite. Finally, since we are analysing GBS, where donors
and recipient are in a continuative partnership, it is legitimate to include a parameter r,
-1>r>1, that captures the relationship between the absence of slippage in period one with
the extent of aid flow in period two. When in period one s=0, r>0, the recipient utility
increases because, given the continuative relationship, the recipient expects a higher flow
of aid in period two. The recipient government utility can be formalized as
UR=UR (a;s,r(s))
+ +
where + indicates that UR is directly dependent on the variables a and r.
The choices open to the actors can be summarised in a game tree, where the donors
group has two strategies, that of disbursing or not, while the recipient can either make a
slippage or not. The donor is the first mover, since, GBS and PRSP processes are
ultimately donor-driven, even if formally it is the government approaching the donors for
financial support.
Figure 7. The game tree.
Donors group
Disburse BS
Do not disburse BS
Recipient
No slippage
Recipient
Slippage
Donors group
No slippage
Donors group
Disburse
Not
Not
1
2
3
Slippage
Donors group
Disburse
4
Donors group
Disburse
Not
5
6
Not
7
Disburse
8
Based on Villanger (2003) and Mosley et al (1995).
Leaving aside momentarily that the game under GBS conditions is a repeated game and
thus does not end after the third stage, we can employ the game tree to rank the
desirability of each option for the players according to their utility. For the donors group,
outcome 1 is the most desirable, since they have disbursed aid in the face of full
compliance, while outcome 4 is the less desirable one. The desirability of the other options
depend on whether donors prefer to disburse rather than see their strategic interests
fulfilled and whether t expresses satisfaction of foreign policy interests rather than internal
public opinion concerns over development issues. I will assume that donors in the GBS
group strategically enter GBS in order to show their generosity to their public opinion. Thus
outcome 3 is preferred over 4 and 5 over 6. For the recipient, the best outcome is 4, since
17
it gets aid while being allowed a slippage, while the least desirable is 6. The rankings of
the other outcomes depend on what Axelrod, 2001, calls the ‘shadow of the future’ 18.
5.2 Interactions and outcomes: a repeated game
As anticipated, this game-theoretic model differs from most models of conditional aid
(Svensson, 2003; Azam and Laffont, 2003) which assume the interaction between donors
and recipient to be a one-shot game. The GBS situation is similar to the repeated game
developed by Mosley et al (1995) and Mosley (1992) in the event of a refinancing decision,
since the donors group and the recipient are in a partnership (Axelrod, 2001).
Following Axelrod’s suggestion, the analysis of how the game will proceed will be carried
out using a payoff matrix referring to each stage of an iterated Prisoner’s dilemma game.
The matrix identifies four outcomes: they are the two choices open to donor and recipient
in the game tree. The matrix can be extended to include the representation of further
ramifications of choices characterising a partnership, but I limit the description, given the
parameter r and the assumption that the players will act rationally in response to the
choices already taken by the counterpart19.
Figure 8. The pay-off matrix.
DONOR
Cooperate
Defect
UR (a; s0, r)
+
+
UR (a0; s0, r)
+
UD (h(a; s0) t)
+
+
UD (h(a0; s0) t)
++
-
OUTCOME ONE
OUTCOME THREE
UR (a; s1, r)
+
-
UR (a0; s1, r)
-
UD (h(a; s1) t)
+
UD (h(a0; s1) t)
+
-
OUTCOME TWO
OUTCOME FOUR
Cooperate
RECIPIENT
Defect
Based on Axelrod (2001).
In outcome one, the donor and recipient utility are at their highest: the donor is disbursing
aid in the face of no slippage and it is satisfied in its strategic aim, while the recipient
receives aid and, given its decision not to make slippages, receives also the promise for
future aid. Generally, given that GBS scheme presupposes continuity in the relationship
and a certain degree of direct aid dependence, the recipient utility is highest in outcome
one than in two, since the shadow of the future is large enough. The donor utility in
outcome two is lower, given that it disburses aid when a slippage is made but it keeps a
good reputation for its generosity in the eyes of its public opinion. Outcome three, which is
quite unlikely, sees recipient utility at its immediate lowest, with no gain in the present
Axelrod (2001: 5) suggests that “the potential for mutual cooperation depends on the ‘shadow of the
future’”, that is the rate at which the advantage coming from the next move is discounted relative to the
present. If the shadow of the future is large enough, a stable cooperation can be established.
19 The parameter r together with the rationality assumption imply the further steps of the game under a
partnership.
18
18
period and r acting as a bonus for the future, while the donors, satisfied with the fact that
they do not disburse aid and see no slippage, are penalised by their public opinion. Finally,
in outcome four, the recipient immediately gains by making a slippage, while the donors
withhold aid and their public opinion sanctions them.
It is evident from the matrix that GBS mechanism reduces the payoff of the temptation to
defect for the recipient. The temptation payoff for the recipient is further reduced by the
fact that GBS increases direct aid dependence and that it creates a cohesive groups of
donors, thus decreasing the strategies for alternative sources of financing the recipient
might find (Mosley et al, 1995). The incentives on the recipient side, in the form of present
aid flows and promises of future disbursement, all act in favour of a cooperative behaviour.
This is contrary to what happens in the Prisoner’s Dilemma, where the incentives make the
payoff for unilateral defection the first best for the recipient. For the donors group, while the
utility deriving from unilateral defection, even if lowered by public opinion sanctions, is high
and constitutes a good incentive for defection, it is quite unlikely that in the face of no
slippage they decide to exit the aid granting relationship. Therefore, the most likely
outcome is a cooperative equilibrium, contrary to the findings of most papers on
conditional aid that generally forecast Nash equilibria.
Axelrod (2001) suggests that mutual cooperation is best sustained if the players employ a
Tit for Tat strategy20 which, it can be shown21, is the likely strategy employed by the
players under GBS.
By modelling the donors’ group-recipient relationship I show that under GBS a cooperative
equilibrium is reached and is rendered stable by the likely employment of a Tit for Tat
strategy. I also show that the GBS mechanism has managed to reduce the choices of
defection open to the recipient, partially solving some of the problems linked to the failure
of conditionality. The donor-recipient relationship under GBS, therefore, seems to be
characterised by a relative weakness of the recipient. Therefore, it can be said that by
reducing the bargaining power of the recipient, GBS is a more conditional form of aid. The
recipient weakness however is directly connected to the donors group provocability and to
its willingness to retaliate, that are closely linked to the parameter t of the UD. These issues
will be taken up analytically in the following part.
“Tit for Tat cooperates on the first move, and then does whatever the other side did on the previous move.
[…] Tit for Tat’s robust success was due to its being nice, provocable, and forgiving. Its niceness means that
it was never the first to defect. Not being the first to defect prevented it from getting into unnecessary trouble.
Its provocability meant that it retaliated when the other side defected. By cooperating again as soon as the
other player did, the forgiveness of Tit for Tat helped restore mutual cooperation”. Axelrod, 2001, 5-6.
21 In fact, the recipient tends to cooperate on the first move and maintain this posture. If it defects, the group
of donors’ retaliation is a potent threat to reinsure cooperation. The donors group might not comply on the
first move. If it cooperates from the start, then a stable cooperative equilibrium sets in. If it defects, which is
quite unlikely especially in a repeated game, they end up in outcome 4, where their utility is very low and
they have more incentives (in t and h1) to start cooperating.
20
19
6. Application of the model to General Budget Support in Mozambique
Parts 2 and 3 have introduced GBS as an aid modality, part 4 has analysed how GBS is
implemented in the case study, Mozambique, while part 5 has modelled the relationship
between donors and recipient. This part will use the information regarding Mozambique
provided in part 4 to assess the heuristic power of the model presented in part 5.
6.1 Assessing the model
6.1.1 Strengths
The detailed yearly process of review of the GBS to the GoM confirms most of what
assumed by the model: the establishment of a stable cooperative equilibrium between the
donors and the recipient in which there is close adherence between donors policies
priorities and recipient decisions. According to the JR 2005 (PAPs, 2005), the “overall
performance has been satisfactory”, particularly in the areas of macroeconomic
management, poverty reduction, service delivery, agriculture development and
infrastructure delivery. The PAPs performance is similarly “good and improving” (Killick et
al, 2005). The good health and stability of the existing partnership is further confirmed
firstly by the punctual yearly decisions of refinancing taken by the PAPs, secondly by the
increasing share of aid flows some PAPs destine to GBS and thirdly by the donors that
continuously join the PAPs.
The heuristic power of the model emerges also from the empirical validation of most
assumptions. First of all, the periodical increase in aid inflows, documented in 4.3,
confirms the assumption that donors tend to link disbursements and their utility in
disbursing with conditionality compliance and extent of aid. These are the assumptions on
which the function h(a;s) is based. Equally, the GoM satisfactory compliance along the
years confirms that UR is determined by the extent of present and future aid flows 22 and
that the existence of a partnership creates a virtuous trade-off between slippages and
future disbursements. Finally, an analysis of the use of Mozambique as showcase in the
international forums and media23 confirms that aid to this country is granted in response to
the donors’ strategic aim (t) to show their generosity and ability to the internal public
opinion. These elements support the inclusion of the parameter t.
6.1.2 Weaknesses
The accuracy of the model, however, is limited. Its prediction of a pure cooperative
solution with no slippage on the GoM side and entire collaboration by the PAPs is
contrasted by certain elements. In fact, both the GoM and PAPs performance is not
completely satisfactory, as can be understood from the review reports. In particular, the
GoM performance has been particularly poor with regard to the governance, justice and
corruption targets (PAPs 2005). Worryingly, the performance doesn’t seem to be set in the
context of an improvement, as it is for the PAPs. Neither it seems a one-off occurrence,
linked to particular contingencies or to over-ambitious targets, but an episode of a long
series. Hanlon (2002; 2005) suggests that the behaviour of the GoM has been steadily
deteriorating for what concerns the adherence to good governance standards. He also
highlights the disturbing increase in corruption that characterises most levels of the
22
23
These are described by the variable a and the parameter r in the UR function.
See for example, The Guardian 11/03/05 or La Repubblica 03/07/05.
20
political life and public administration. His observations are confirmed by other authors
(Hodges and Tibana, 2004; Fozzard, 2002).
The findings of the model are to be further reconsidered in the face of the 2001 bank
scandal and the connected assassinations24. Then, it clearly emerged the widespread
corruption of certain high-ranking members of the governing party, the Frelimo, as well as
the extent of mismanagement and diversion of public funds. These behaviours were not
sanctioned at all by the donors and there is enough evidence to believe that they have
surfaced also during the land redistribution currently under way. Thus, it seems the
relationships between donors and recipient do not follow the slippage-retaliate modality
forecasted by the model.
This brief assessment shows that the findings of the model are not entirely correct: we are
not in the presence of a pure cooperative solution. It seems that on the one side the
recipient-donors relations follow a less mechanistic path than forecasted, while on the
other side there is a certain extent of slippages, that some authors see as continuously
increasing, matched by a steady increase in disbursements. Thus it seems that in the case
of Mozambique GBS is a less conditional form than predicted. The model must be
reconsidered taking these elements into account properly.
6.2 Reasons underlying the limitations of the model
The model is to an extent faulty because it is based on the doctrine assumptions about the
comparative advantages of GBS. The aid doctrine tends to be too general: it condenses
the complexity of certain country characteristics and its treatment of certain variables is
exaggeratedly abstract and simplistic.
First of all, the doctrine backing GBS avoids any country-specific consideration,
maintaining that GBS is a universally good aid modality. This evaluation is particularly
incompatible with what happens in Mozambique. There, the introduction of GBS and the
reputation of the country as the showcase for this aid modality have radically modified the
terms of the donors-recipient relationship as generally portrayed in the model. For the
donors in fact it is difficult to behave as clear-cut as represented in the game tree. It is
more likely that they would tend to be forgiving towards the GoM and avoid denouncing
minor slippages by their exemplar partner. Similarly, as suggested by Hanlon (2002), the
long-standing relationship between donors and the GoM has trained the Mozambican
elites in “giving donors what they want” while at the same time “creating large spaces for
predation and state capture”. Time and familiarity have changed the nature of the donorsrecipient interactions and have expanded their domain beyond what represented in the
model.
The disregard of country-specific considerations promoted by the literature has an
influence on the model and specifically on the parameter t, that is unable to represent
properly the ambiguity in donors motives for disbursing to Mozambique. In our case
donors motives for disbursing are mixed and influence donors utility in opposite directions.
On the one side they are forced to disburse (Easterly, 2001): Mozambique is a showcase
and there are often specific spending lines for the country, as shown in 4.3 (Killick et al,
2005) that need to be fully used. On the other side donors are increasingly scrutinised by
their public opinion which is more attentive to the situation in the country.
24
An account of the events can be found in Hanlon (2002) or Fauvet and Mosse (2003).
21
Thirdly, the binary variable s, which indicates the presence of slippages, is inadequate.
The Boolean variable was chosen according to what postulated by the aid doctrine
referring to selectivity and aid effectiveness: there are either good or bad performers that
comply or make a slippage. In fact slippages on conditionality can not be represented
univocally through a binary variable: given at least exogenous factors, complete
compliance is quite unlikely, which means that s=0 rarely occurs. Often the donorsrecipient partnership continues when there are slippages and the performance of the
partner is deemed satisfactory. The evaluation on compliance is a combination of quantity
and quality of the conditions that are not respected. This binary vision drawn from the
doctrine and embodied in the Boolean variable to represent this complex cut-off point is
misleading and overlooks the complexity of the donors-recipient relationship.
Gunning (2005:10) suggests that the binary vision at the basis of GBS pictured in the
game tree is akin to a nuclear threat: “if the only options are doing nothing or imposing
enormous damage the threat to “go nuclear” for any, possibly minor, infringement is not
credible”. This explains why some slippages are allowed in a system that is constructed to
be more conditional than policy-based lending. The nuclear analogy should not mislead us
into thinking that no amount of slippages would trigger the withholding of a tranche. The
recent events in Uganda show that it is possible to withhold aid beyond a certain extent of
slippages which corresponds to more than predicted in our model.
6.3 Further implications of the model
The assessment of the model through a country case study has shown that the findings of
the model are not as clear-cut. In particular, while technically it seems that GBS is a more
conditional form of aid, in practice a certain extent of slippage occurs. If we analyse it, it
seems that the overall performance of Mozambique has been satisfactory for those
targets, poverty reduction and Millennium Development Goals, linked to donors immediate
motive for giving aid: that of rallying internal support and legitimacy as generous and
effective institutions. This assessment suggests one possible development of the model:
GBS can be studied as an aid modality that fosters collusion between donors and
recipient. In fact, the donors-recipient relationship in the countries where GBS is employed
are generally familiar and long. This makes the partners aware of the declared and hidden
aims one of the other and their bargaining revolves around these. So, the GoM knows that
it would be allowed to make some slippages given that it is a showcase, while the donors
allow some slippages from the GoM given that it performs well on certain areas that are
donors’ priorities.
A second development of the model would regard the variable s. In order to represent the
analysed process regarding the extent of the slippage, the variable s should be
represented as a continuous variable including a threshold value that indicates the level of
slippage to be considered as non compliance. This device would allow the model to be
more representative of the cooperation and collusion relationship that links the donors and
recipient, as described in 6.1.2 and 6.2.
22
7. Conclusion
This paper has presented the issues regarding the adoption of General Budget Support as
an aid modality. In particular, the paper has intended to respond to the question “How
‘conditional’ General Budget Support is compared to policy-based lending?”.
GBS was elaborated at the end of the ‘90s as the solution to the problems connected with
the effectiveness of project assistance and conditional aid. In particular, the main problem
that prompted this elaboration concerns conditionality and its low coercive power given by
the conflict of interests between donors’ and recipient’s aims. GBS is seen as the solution
to this and to donors fragmentation, disorganic planning and implementation, state
unaccountability and ownership that are consequences of project aid and financial
programming. GBS in fact provides aid within a framework that promotes a close and
frequent policy dialogue between donors and the recipient, aligns donors priorities to that
of the recipient, favours donor harmonisation and strengthens state capacity and
accountability. Given these comparative advantages, GBS is amongst the favoured aid
instruments for many donors.
The assumption that GBS represents a stronger form of conditionality is then modelled
through game theory. The model is an innovative attempt to apply previous research
referring to other forms of aid to the new version of FPA. The model suggests that GBS is
a more conditional form of aid since it decreases the defection pay-off for the recipient,
given that aid is locked in a continuative partnership, it is administered through a cohesive
group of donors and that aid flows are increasingly disbursed through this channel.
The model is then assessed against a case-study, Mozambique. The country
characteristics that motivate the recourse to GBS, together with GBS flows and
mechanisms of implementation, are analysed. This analysis is instrumental to an
assessment of the soundness of the assumptions of the model. This assessment shows
that for GBS in Mozambique the donors-recipient relationship is not as conditional as
suggested by the model, since the GoM has been allowed some continuative slippages.
The predictions of the model are to an extent faulty since the model is built around a too
general aid doctrine that disregards the importance of country factors and simplifies the
representation of certain variables and interactions. Certain amendments to the model are
put forward in order to expand it to a more precise analysis of compliance and of GBS as
promoting a certain degree of collusion between donors and the recipient. The model and
these suggestions are an innovative attempt to consider and understand GBS from a
theoretical point of view rather than from the implementation side, which is the preferred
perspective of most studies.
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