External Financing of Social Protection – Opportunities and Risks

Background paper to the ERD 2010

Authors

Göran Holmqvist, Nordic Africa Institute, Uppsala/Sweden

Workshop/conference

Paper prepared for the Conference on “Promoting Resilience through Social Protection in Sub-Saharan Africa”, organised by the European Report of Development in Dakar, Senegal, 28-30 June, 2010.

Abstract

Social transfers have reached the policy agenda of low-income countries in Africa, where affordability is a key concern while aid dependency is high. In terms of magnitudes, aid could make a substantial difference in relaxing the affordability constraint. This paper addresses issues that arise as external financing of social transfers is contemplated, both risks as well as opportunities. External financing of social transfers would have to address three requirements: i) be politically supported by donor countries’ home constituencies, ii) be based upon a credible aid contract, where the permanent character of transfers has to be reconciled with time-bound aid, and iii) build on, and avoid disturbing, the political ownership in partner countries. Different aid modalities are considered in relation to these three requirements, viz. traditional project aid, general budget support and sector wide programmes. Cash on delivery aid (COD aid), is discussed as an alternative which could combine three attractive features: a) a credible burden-sharing formula over time that provides predictability for partner countries and an exit strategy for donors; b) a hands-off approach by donors that respect partner countries’ ownership over design and implementation; and c) clarity over which results aid money has paid for, which may be communicated to the donors’ home constituencies. Such an approach
would require a long-term engagement by donors, aligned with country-owned strategies, and harmonized around a joint financing mechanism.
The potential for external financing of social transfers in those cases where political ownership is lacking is discussed. Based upon the literature on political economy of aid and conditionality, the limitations of aid to induce permanent policy reforms and institutional changes are pointed out. Lesson number one for donors is to recognise these limitations and risks. To support partner countries to do more of good things that they are already doing, is a more realistic ambition than to bet on the potential of scaled-up external financing to re-shape political economies.

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