From Pushing Reforms to Pulling Reforms: The Role of Challenge Programs in Foreign Aid Policy

Abstract

Most donors deliver aid in very similar ways across recipient countries even though recipients vary widely in the quality of their governance, commitment to strong development policies, degree of political stability, and level of institutional capacity. Aid effectiveness could be improved if donor systems were designed to take into account key differences in recipient countries. Proponents of country selectivity argue that donors should provide more aid to countries with better policies and stronger institutions because they are likely to achieve better results. But country selectivity could be used to influence more than the amount of aid. It could also influence the way aid is delivered, including the extent to which recipient countries set priorities and design activities, the mix of project versus program aid, the breadth of aid-financed activities, the length of donor commitments, and the distribution of aid to governments, NGOs, and other groups. Donors could employ a differentiated strategy for aid delivery based on a country's quality of governance and commitment to development. This approach would create incentives that would challenge recipients to strengthen institutions and policies. The pull or reward for demonstrating stronger governance would be greater national policy ownership, more flexible and attractive aid modalities, and larger, more predictable and longer term resource commitments. This approach differs significantly from traditional aid programs in which donors countries to reform by negotiating aid disbursements in return for specific policy changes (sometimes known as buying reforms). This chapter considers what role pull instruments or challenge programs (such as the World Bank's Poverty Reduction Support Credits or the United States' Millennium Challenge Account) could play within the overall framework of foreign aid, asking how they could be designed to function as effective and efficient incentive instruments and how they could best complement other aid modalities. It looks first at how challenge programs differ from more conventional aid approaches, taking the Millennium Challenge Account as an example, and shows how challenge programs fall conceptually within the pull rather than push incentives type. It then develops an argument for differentiated aid strategies across countries based on key characteristics of recipient countries.