Should the World Bank and other development partners give money directly to developing countries or is it better to channel these resources to defined projects, for example, hospitals and schools?

Of all the World Bank's financing instruments, development policy financing (DPF) is probably the most debated. Unlike investment lending, which typically goes towards defined projects, development policy financing (or budget support) involves direct financing to governments. Improving economic management and strengthening public institutions are typically some of the purposes for which general budget support is provided.

Since the early 1980s, the World Bank has provided over $300 billion in budget support to governments around the world. Over the last decade, budget support averaged about a quarter of total World Bank financing.  Demand peaked during the global financial crisis, then declined, but has recently surged again, driven by the global economic slowdown and the impact of falling commodity prices. Ghana and Egypt recently signed large DPF loans with the World Bank ($550 million and $1 billion respectively --their largest ever).  And last month, Nigeria was reported in the Financial Times to be seeking $3.5 billion in emergency loans from the World Bank and African Development Bank to help fund a $15 billion deficit on the back of low oil prices and a government stimulus program. 

Development Policy Financing Commitments (1980 - present)

In contrast to the World Bank, many other development institutions and donor governments have either withdrawn or significantly curtailed their budget support contributions. These include Denmark (Danida) the European Community, France (AFD), and the United Kingdom (DFiD),

This shift has occurred over several years. In 2011 the former head of the Overseas Development Institute lamented that budget support had become an "endangered species". Gone is the optimism of the early 2000s and the Paris Declaration, which seemed to herald a new era of flexible, predictable, and country-owned financial aid.

A history of controversy

Arguments against budget support have varied over time but center around three concerns.

One is that budget support is inherently fungible, which means it can potentially be used for purposes donors would not support.

Secondly, critics argue that it is more susceptible to diversion towards corrupt purposes, given that many of the recipient countries have weak financial management practices. Put simply, budget support is viewed as "throwing good money after bad" - financing wasteful consumption or low valued-added activities. 

The third concern is that budget support is much harder to justify politically in the donor countries. Giving "cash for reform" is a much tougher sell than providing support for maternal and child health care or infrastructure. 

Proponents of budget support question these arguments and point to several attractive features, some for precisely the reasons others distrust it. 

First, budget support effectively puts the borrowing government in the driver's seat, enhancing ownership by relying on (and strengthening) national procurement, planning, and budgetary procedures.

Proponents further argue that while budget support undergoes more intensive scrutiny than general investment projects, it nevertheless tends to be a more efficient aid instrument. It generally costs less to prepare and supervise budget support per dollar loaned, disburses quickly, and is likely to get more into the economy for each dollar lent (less is likely to be spent on imports and foreign contracts).

Thirdly, it is argued that budget support is an important lever for policy reform. By supporting and influencing ("nudging") government policy, budget support contributes to how institutions operate and how business is done, with more far-reaching and fundamental impact than other forms of aid. 

What does the evidence show?

What is missing from this debate is objective evidence on what is being achieved with budget support. Such evidence should inform public decision making, particularly when it comes to allocating scarce public funds.  What is driving good and bad experience, and what is the evidence on results and impact?

How budget support works to achieve stated objectives is highly context specific. Recent studies by the Independent Evaluation Group and the European Commission, however, provide evidence of the positive and negative impacts of general budget support, as well as insights into what drives performance in different countries and contexts.  

IEG's own review of the World Bank's budget support/DPF programs showed that DPF performance is at levels equal to, or somewhat above, what is found in investment projects. 

Percentage of Word Bank's budget support and investment projects with at least moderately satisfactory evaluation rating

Source: World Bank Business Intelligence

IEG's research further looked at how design and execution of budget support can influence performance. Here are some initial take-aways from this work.

• Addressing DPF performance requires a longer term perspective than usual evaluations permit and is deeply context specific. 
• Analytic work is the bedrock of DPF design and coherence, and requires a deep understanding of multiple dimensions of policy influence and engagement. 
• The centerpiece of program coherence and strength is the DPF results framework. Good results frameworks have identifiable characteristics that drive the dialogue and government engagement.

In a series of forthcoming blogs we will address the evidence emerging on what works better or worse in budget support programs.  

Read the Reports:

Joint Evaluation of Budget Support to Uganda

Evaluation jointly managed by the European Commission (DG DEVCO Evaluation Unit) and the World Bank's Independent Evaluation Group (IEG) with the Government of Uganda (Ministry of Finance , Planning, and Economic Development, and Office of the Prime Minister), Ireland (Department of Foreign Affairs and Trade) and the UK (DFID)

Managing Environmental and Social Risks in Development Policy Financing