Corruption & DBS: Pros and cons of DBS

Corruption affects balance of arguments for and against budget support

A number of arguments have been advanced for providing budget support. The validity of some of these arguments are affected by the presence or possibility of corruption. This section shows how corruption can weaken some of the common rationales given for budget support. In doing so, the section also introduces some key concepts and ideas, to be explored in more detail on other parts of these pages.

The following is a list of standard arguments for providing budget support. The arguments significantly affected by corruption, are highlighted as links. By clicking on these links, you can find out how corruption affects each of these arguments:

• Budget support increases ownership
  
• Budget support increases accountability
  
• Budget support facilitates dialogue
  
• Aid is fungible, and project support costly
  
• Budget support facilitates donor coordination and harmonization
  
• Budget support builds institutional capacity and improves allocative efficiency in partner countries
  
• Budget support provides predictable development funding
  
• Budget support is flexible and quickly disbursable

There are also arguments against budget support. For a summary, see OECD/DAC: Good Practice Note on the Provision of Budgetary Support - A Public Financial Managment Prospective (DRAFT).

Budget support increases ownership - and discretion

One of the defining characteristics of budget support, is that funds are to be allocated through the budgetary procedures of the partner country. Budget support thus increases ownership of development policies by the partner country. Ownership can be important in and of itself, and/or in enhancing the effectiveness or sustainability of development efforts. However, in terms of corruption, increased ownership is problematic in two ways.

Firstly, the other side of the ownership coin, is increased discretion for government officials. We know from basic models of corruption that increased discretion for potentially corrupt agents, increases corrupt activities. In simple terms, the freer an agent is to make decisions, the higher payoffs can he extract from those affected by the decisions. Budget support increases the discretion of government officials in allocating funds, potentially increasing corruption in countries where control and sanctions of government officials are weak.

Secondly, we need to look at whose ownership is increased. Budget support basically promotes ownership by the central government of a country. Central governments can be more or less democratically elected, and more or less vulnerable to electoral competition. To the extent that budget support allows a government to monopolize allocative decisions over public funds, this can lead to an increase in corruption.

Budget support increases accountability - or does it?

Accountability reduces corruption. If someone can detect and sanction the misuse of public funds, it becomes less attractive. It is often argued that budget support makes a government more accountable to its people. Several mechanisms through which this would work have been suggested:

• budget support underscores the budget's role as the statement and tool of government policy
  
• budget support stresses the idea that the government is responsible for allocative decisions
  
• budget support brings aid on budget, promoting the contest between different expenditure categories, and leading to a more effective budget process

In some settings, however, these mechanisms may be insufficient for increased accountability. In countries where parliament or the people have little actual influence on allocative decisions, and do not have the power to sanction government misconduct, the above mechanisms will not have much bite. An evaluation of budget support to Mozambique, concludes that "the press, parliament, and civil society are no match for the government - they have a difficult time improving accountability or reducing corruption", a statement that extends to other African countries with centralistic political systems. In countries where other institutions are largely unable to hold a government to account, budget support will in itself have little effect on accountability. One can also argue that by filling central government coffers, budget support can in fact strengthen the power-hold of the central government, making it less accountable, a point explored here.

Budget support facilitates dialogue - or cheap talk?

Budget support involves a process of dialogue between donor and partner countries, to establish priorities on and expectations to development policies. Budget support is usually given with conditions attached that terms raised in the dialogue, are in fact met. Donor - partner country dialogue is important in dispelling uncertainty on goals and expectations on either side, and serves to coordinate the efforts of donors and partner country government. At the end of the day, however, whether what has been agreed through dialogue is actually implemented, is a question of whether it is in the interest of the parties involved to implement. Dialogue is therefore little more than cheap talk, useful to clarify ends and expectation and to coordinate efforts, but in itself insufficient to produce actions that are not in the interest of partner country governments.

In countries with corrupt governments, dialogue on anti-corruption measures is unlikely to result in concrete action, if the rents available to government officials are thereby reduced. Recent experience from Uganda suggests that corrupt high level officials will attempt to undermine effective anti-corruption reform, for instance by cutting funding to anti-corruption agencies. The effect of dialogue in corrupt countries is related to the effectiveness of conditionality, an issue explored further here.

Aid is fungible, and project support costly - but sometimes worth the costs?

If aid is completely fungible, it will result in the same set of development activities, whether given as project or as budget support. And if project support incurs greater transaction costs than budget support, through the formulation, implementation, and follow-up of a number of fragmented projects, perfect fungibility implies that aid should be given as budget support.

Though aid is fungible, and project support costly, it can in certain cases be in the interest of donor countries to provide project support to corrupt countries. Compare two partner countries, where country A has a corrupt government and country B a clean government:

If aid is fungible, both countries will reallocate aid funds according to its objectives.

However, while the government of country A reallocates funds to line its own pockets, the government of country B reallocates to meet other ends, for instance improving health or education. Donors may take a dimmer view of the reallocation in country A than in country B.

If aid is less than perfectly fungible, donors might then prefer to incur the higher transaction costs of project support in country A, to avoid the appropriation of a large part of the resources by corrupt officials.

Even if aid is (somewhat) fungible, and project aid costly, this might still be the preferred form of aid in countries with a corrupt government.