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This thesis examines the relationship between foreign aid and development in Moldova from 2004-2012. It begins with conceptual frameworks that define key terms like development and foreign aid. It then reviews literature on the relationship between foreign aid and development, which can be positive, negative, or conditional. The thesis will analyze the amounts and types of foreign aid Moldova received, and assess if it correlated with and promoted Moldova's own development priorities. It will consider factors that may have constrained the effectiveness of foreign aid on development. The goal is to determine if foreign aid in Moldova has truly promoted development as intended, or has other motivations as a foreign policy tool for donor countries.
Originalbeschreibung:
Similarly with the other social sciences, the development concept has evolved as a highly contested
discipline combining different approaches and points of view about the meanings purposes and
ways of development. Currently, we assist in a long debate whether the development countries
constitute or not “special case” exception from the general rules guiding economic activity, are the
causes of failures originating from “government” or “market”, or maybe development is just a
system of knowledge originated in the West to impose a set of values, beliefs over the rest of the
world and not designed to bring any positive changes. What are the development paradigms
guiding the development and are these capable to improve the lives of people in poor countries?
Accordingly, the instrument of foreign aid designed to produce these changes in recipient countries
is assessed in terms of its effectiveness and purposes.
Originaltitel
Foreign Aid and Development. Success or failure in promoting Moldova`s Development?
This thesis examines the relationship between foreign aid and development in Moldova from 2004-2012. It begins with conceptual frameworks that define key terms like development and foreign aid. It then reviews literature on the relationship between foreign aid and development, which can be positive, negative, or conditional. The thesis will analyze the amounts and types of foreign aid Moldova received, and assess if it correlated with and promoted Moldova's own development priorities. It will consider factors that may have constrained the effectiveness of foreign aid on development. The goal is to determine if foreign aid in Moldova has truly promoted development as intended, or has other motivations as a foreign policy tool for donor countries.
This thesis examines the relationship between foreign aid and development in Moldova from 2004-2012. It begins with conceptual frameworks that define key terms like development and foreign aid. It then reviews literature on the relationship between foreign aid and development, which can be positive, negative, or conditional. The thesis will analyze the amounts and types of foreign aid Moldova received, and assess if it correlated with and promoted Moldova's own development priorities. It will consider factors that may have constrained the effectiveness of foreign aid on development. The goal is to determine if foreign aid in Moldova has truly promoted development as intended, or has other motivations as a foreign policy tool for donor countries.
Foreign aid and development: Success or failure in promoting Moldova`s development?
Presented by Valentin Lozovanu 31254320 valentin.lozovanu@student.uni-kassel.de
Supervisor: Prof. Dr. Aram Ziai Prof. Dr. Christa Wichterich
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Statutory Declaration I herewith formally declare that I have written the submitted dissertation independently. I did not use any outside support except for the quoted literature and other sources mentioned in the paper. I clearly marked and separately listed all of the literature and all of the other sources which I employed when producing this academic work, either literally or in content. I am aware that the violation of this regulation will lead to failure of the thesis.
Valentin Lozovanu x Students name Students signature
31254320 15.01.2014 Matriculation number Kassel, date
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Contents List of abbreviations 3 Chapter 1 1.1 Introduction 4 1.2 Conceptual framework 1.2.1 What is development? .............................................................................................................7 1.2.2 What is foreign aid? ..12 1.3 Literature review about foreign aid-development relation 1.3.1 Foreign aid as development cooperation (aid effectiveness) .14 1.3.1.1 Positive foreign aid development relationship .15 1.3.1.2 Negative foreign aid development relationship ...17 1.3.1.3 Conditional foreign aid development relationship ..19 1.3.2 Foreign aid as diplomacy ..21 Chapter 2 2.1. The overall context of intervention. Macroeconomic situation and development indicators for the period studied ...27 2.2. Government`s development priorities .30 2.3. Donor`s assistance priorities ...34 2.4. The institutional framework of foreign aid management 43 Chapter 3 3.1. Analysis of foreign aid offered to Moldova (2004-2012) 49 3.2. The correlation of foreign aid with Moldova`s development priorities. Does aid promote Moldova`s development? ..53 3.3. What are the constraints? 59 4. Conclusion ....68 5. Annexes .72 6. References .78 3
List of abbreviations
ADA Austrian Development Agency ATU Gagauzia Autonomous Territorial Unit Gagauzia (Moldova) CIB Comprehensive Institution Building CIS - Commonwealth of Independent States CEB Council of Europe Development Bank CBC Cross Border Cooperation CSP Country Strategy Paper CEFTA - Central European Free Trade Agreement CPIA - Country Policy and Institutional Assessment (CPIA) DCFTA Deep and Comprehensive Trade Agreement DFID - Department for International Development (UK) ENPI - European Neighborhood Partnership Instrument EBRD European bank for Reconstruction and Development EUBAM - European Union Border Assistance Mission EIDHR - European Initiative for Democracy and Human Rights EGPRS Economic Growth and Poverty Reduction Strategy ECA Europe and Central Asia region ESRP Economic Stabilization and Recovery Programme ENPAP - European Neighborhood Policy Action EIB European Investment Bank FP7 - Framework Programme 7 (EU) GIZ - Deutsche Gesellschaft fr Internationale Zusammenarbeit (German Society for International Cooperation, Ltd) INOGATE - Interstate Oil and Gas Transport to EuropeDAC OECD Development Assistance Committee of the Organization for Economic Cooperation and Development IFI International Financial Institutions INTERREG - Community initiative which aims to stimulate interregional cooperation IDA International Development Agency IFAD International Fund for Agriculture Development HDI Human Development Index MDG`s Millennium Development Goals MTEF - Medium-term budgetary framework MCC Millennium Challenge Corporation NCU National Coordination Unit NIP - National Indicative Programmes PRSP Poverty Reduction Strategy Paper PPP - Purchasing Power Parity PPIP - Partnership Principles Implementation Plan PIU`s - Project Implementation Unit PBA`s Programme Based Approach PCA Partnership Cooperation Agreement (EU) SDC Swiss Development Agency SIGMA - Support for Improvement in Governance and Management SWAP`s Sector Wide Approach Programmes ODA - Official Development Assistance UNICEF United Nations Children's Fund UNDP United Nations Development Programme UNSC United Nations Security Council UNCTAD - United Nations Conference on Trade and Development UNDAF - United Nations Development Assistance Framework UNDESA - United Nations Department of Economic and Social Affairs USAID - U.S. Agency for International Development TACIS - Technical Aid to the Commonwealth of Independent States TRACECA - Transport Corridor Europe-Caucasus-Asia TAIEX - Technical Assistance Information Exchange Twinning - Secondment of experts from the European Union institutions to a member state TIKA - Trk Isbirligi ve Kalkinma Idaresi Baskanligi (Turkish Cooperation and Development Agency) TTSIB - EU project Support to the State Chancellery Moldova KfW - Kreditanstalt Fr Wiederaufbau (German Development Bank) WTO World Trade Organization
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Introduction Similarly with the other social sciences, the development concept has evolved as a highly contested discipline combining different approaches and points of view about the meanings purposes and ways of development. Currently, we assist in a long debate whether the development countries constitute or not special case exception from the general rules guiding economic activity, are the causes of failures originating from government or market, or maybe development is just a system of knowledge originated in the West to impose a set of values, beliefs over the rest of the world and not designed to bring any positive changes. What are the development paradigms guiding the development and are these capable to improve the lives of people in poor countries? Accordingly, the instrument of foreign aid designed to produce these changes in recipient countries is assessed in terms of its effectiveness and purposes. The persisting gap between the declared goals and present achievements during the decades of development since its inauguration 1 raises contrasting opinions about the effects of the foreign aid on development. Though there are many cross country analysis trying to establish the effects of foreign aid on development, these are often inaccurate given the variety of factors influencing the process of development, but also different history and local circumstances which make each country`s development story different. Therefore, I intend to examine the particular case of Moldova, taking into consideration all these factors, define and explain both concepts of foreign aid and development, institutional setting, specific approach followed by different donors and measure whether foreign aid promotes development of Moldova. Is the disbursement of foreign aid tied directly to country needs and follows developmental purposes? Or, contrarily, it is tied to the interests of the donor countries and should be treated as a foreign policy instrument, or maybe it is something in between? Moldova is not selected as a random case study. Despite the fact that it had benefited already 22 years from Official Development Assistance (ODA) to support its development, its results are doubtful. Although it had the highest per capita income in the Soviet Union, during independence years since 1991 it has ended up with the lowest per capita in Europe 23 .This situation has
1 President Truman 1949 Inauguration speech http://www.youtube.com/watch?v=PXE-u4WanMI 2 http://www.globalpropertyguide.com/Europe/gdp-per-capita Moldova in 1994 had the highest domestic investment (55.8%) as a percentage of GDP (23.65% in 2010), and its HDI index in 1995 was 0.7 (in 2010 0.64). Source National Statistical Bureau and Human Development Index of Moldova publications. 3 This call into question both the effectiveness of the development efforts undertaken by both international donor community and Government`s. However, I will focus mostly on the analysis of foreign aid contribution for promotion of development efforts of Moldova fixed in its strategic planning documents. 5
incited many development actors to extend their programs in Moldova and the level of their assistance, but the question remain open: what effects does this assistance have for country`s development given the questionable results from the previous rounds? Despite the growing amounts of foreign aid, this field is mostly ignored by the academic scholarship in Moldova. The works analyzing foreign aid are focused mostly on assessing it individually, in terms of international aid effectiveness targets MDG`s (UN institutions), macroeconomic indicators fixed in economic growth and poverty reduction (PRSPs of the WB, Memorandum of economic and financial policies of IMF) or addressing the correlation of foreign aid with donor`s priorities (bilateral aid), rather than assessing how overall the donor assistance is promoting the country`s development strategy goals. No comprehensive assessment of how foreign aid promotes national development priorities for a longer period (at least one decade) was done 4 . Moreover, the growing international literature conclusions in this respect are divided and cannot alone provide answers as there can be no one size fits all findings. It does not take into account the diversity of social, political and historical contexts which makes each country development process story different. Besides changing paradigms of development during different periods, there are also various motivations guiding donor`s assistance for every case apart. The above-mentioned gaps lead to the conclusion that foreign aid requires an examination for a better understanding of its contribution to Moldova`s development process. Therefore, focusing on the particular case of Moldova, I want to take into account all these particularities and reveal the role which it has for development of Moldova. The literature treats foreign aid differently by analyzing it mostly from the point of view of foreign policy purposes or in terms of its effectiveness as a promoter of development. I intend to build a common analytical framework which will examine both dimensions using Moldova as a specific case. Given the participatory process through which the national development strategy is adopted, it reflects not only the nationally agreed objectives but also Moldova`s international commitments
4 A first evaluation study published by a national think tank IDIS Viitorul only in 2010 http://www.viitorul.org/doc.php?l=en&idc=294&id=3525&t=/IDIS-Studies/Economy/Evaluation-of- Moldovasabsorption-capacity-of-external-assistance , two evaluation reports prepared by State Chancellery for 2011 and 2012 http://www.ncu.moldova.md/lib.php?l=en&idc=423 and periodical UN monitoring in accordance with aid efficiency DAC criteria (the last effectuated in 2010 http://www.un.md/donors/meetings/ . One chapter by Maia Sandu (pp. 311- 328) dedicated to foreign aid from Governance priorities 2009 http://www.e- democracy.md/files/prioritati-guvernare-2009.pdf (in Romanian). 6
such as MDG`s 5 , European integration agreements of Moldova, IMF`s Memorandums and WB`s Poverty reduction papers. At least formally, at the stage of commitments, donors are following country`s development priorities due to ownership principles. Therefore, both of them - foreign aid priorities and development paradigms of the donors and recipient will be examined. However, given the limitation of research, I will focus on foreign aid alignment with development priorities rather than the quality of the development strategies adopted. Using a qualitative approach I analyze foreign aid for the last 10 years. I will examine foreign aid contribution by the extent to which it has supported during the period the national priorities identified from 3 development strategies - Economic growth and poverty reduction (20042006), National development strategy (2008-2011), National development strategy Moldova 2020 (20122020) and priorities from Government activity programme 2011-2014. My working hypothesis is a) Foreign aid promotes the development priorities identified in these documents and b) Aid reflects rather donor`s foreign concerns and therefore has moderate achievements in addressing country`s development constraints. The theoretical framework research is based on assumptions and conclusions advanced by different theories in respect to foreign aid. I use the realist theory, as it is especially useful for analysis of foreign policy concerns attached to bilateral aid and liberal theory, when assessing the economic dimension attached to the principle of aid effectiveness. I divide the work in three chapters each with 2-3 subchapters. In the first chapter, I begin with explanation of the method used, clarification of the concepts and the literature review about foreign aid and development. In the second, I will provide an analysis of the macroeconomic situation and development indicators, donor`s priorities and aid management institutional setting. The third will assess amounts of foreign aid allocated for Moldova with data about sectors assisted, terms of aid (credit/grant) and how the donor`s aid promotes development targets in the national planning documents, the existing constraints for both donors and Government. I will try to identify which aid is producing desirable changes and promotes development, or seems reflecting mostly donor`s foreign policy objectives. Conclusion will summarize and connect the findings from the previous chapters and will provide an answer to the research question.
5 The internationally development objectives to which Moldova has committed such as MDGs and the commitments taken within EU integration, or IMF`s Memorandum and World Bank Poverty reduction documents are taken into consideration at the moment when the national development strategy is adopted. 7
K: Are you redoing the African thing? L: Yes. We had a version which is in the front office and we are redoing it some more. You can look at what you have or wait for what is in the typewriter now. It will not be tremendously different. We gave you a draft about two days which was bounced back. K: It was not much. L: We don't have much of a policy. K: What would be a policy? L: That it is, I think, it is a sober, restrained. K: I don't mind giving them what our intentions are. It is not always possible to do a hell of a lot L: Right. It is our lowest priority, but it cannot say that. But it is a fact of life. K: We can say something about forthcoming aspirations. L: You mean for development? K: Right 6 .
1.2. Conceptual framework 1.2.1. What is development? Nowadays perhaps no policy maker would not be so cynical about the phenomenon of development. However, despite the increased significance of the development process during the last decades, as this excerpt illustrates, the notion is far from being as unambiguous. It can have different perceptions and serve various purposes. There are different meanings attached by various authors to the notion of development. I will refer to the most important paradigms of development having influenced the concept and how these have changed during time. The analysis of the value of the notion of development can be differentiated in three broad categories. The first one is a historical arguably relatively value free and long term systemic vision of development (major societal shift from traditional to modern characteristics). The second a short to medium term policy evaluative value of judgment (development as PRSP, MDGs). The third group is constituted from post-modernist approaches focusing on the analysis of the ideological content of development discourse and looking for alternative system of values (Sumner and Tribe 2008, p.11). Other approaches focus their attention on the means to attain economic development and oppose different instruments of how to achieve it. The agency is developmental state using active government policies to guide economic forces by treating market failures and
6 Kissinger: when you dont have a foreign policy, talk about development! A transcript of a 1975 telephone call between Henry Kissinger and his long-time aide Winston Lord on the knotty problem of what to say about Africa in an upcoming speech http://www.globaldashboard.org/2013/08/09/kissinger-when-you-dont-have-a-foreign- policy-talk-about-development/ . 8
lifting the standards of life of peoples. Or using the neoliberal view, it can be the market. In this case, the state interferences in the economy must be limited, as these are believed to produce government failures (Gilpin 2001, pp. 305-312). These conceptualizations of development evolved in different periods of time with a considerable influence on the meaning of development and have reflected largely the changes occurred in social sciences as economics, political science etc. It was a response to different necessities of society such as problems of economic development, addressing the problems generated by progress, overpopulation, urban squalor, job loss etc. later translated into necessity of political and social modernization, colonial economics, human development or more radical approaches as dependency and post-development theories (Pieterse 2010, pp. 5-8). Development encompasses continuous change in a variety of aspects of human society and its dimensions are multiple: economic, legal, politic and institutional structures, technologies, environment, religion, arts and culture (Sumner and Tribe 2008, p. 11). The majority of works designate development as a continuous change in various aspects of the human society for better, although the notion of good change raises many questions. There is no univocal answer about what is good and what kind of changes are needed, (Sumner and Tribe 2008, p. 11) or moving towards which modernity? (Pieterse 2010, p.1) From the very beginning, the focus of development was on the economic meaning. In the first instance, the concept of development appeared with the works of the classics Adam Smith and Karl Marx preoccupied with addressing the problems of economic development envisaging structural long term transformation of the society. The meaning of development was focused on a long term process of historical change, through industrialization, shifts of economy from rural agricultural to urban industrialized society producing a transition from traditional to modern society and involving structural changes such as capital accumulation regimes and propriety over the means of production (Sumner and Tribe 2008, p. 12). In 19th century, economic development has characterized the efforts of the latecomers (US, Japan, Germany) catching up strategies to converge with developed world. In modern times, it has evolved into 1950-60 Big Push theory of economic growth embraced by post-war decolonized world, as part of efforts to provide better lives for their citizens and need to consolidate economic independence to their newly won political freedom. The Keynesian economics emerged from deep Depression of 1920-21 were predominant at that time, as states were preoccupied with postwar efforts to promote economic growth and social welfare. Development was perceived as the agency of state in the process of modernization 9
of society and rise of its income (Rapley 2007, pp. 1-4). The Lewis model, as one of the elements of the Big Push plan, represented an economic growth based on a transfer of resources out of traditional sector to a more performing through increasing investments in it. The main features of this model in 1950-1960 were industrialization and import substitution with Government playing the central role (Stern 2002, pp. 44-47). The least developed countries have used import substitution strategies to stimulate the technological progress of their economies, as part of their attempts to raise the value of their exports and avoid the primary resources export trap which dominated their economies since colonial times. In their efforts, they have been guided by dependency theory considerations to escape dependent accumulation, or development of underdevelopment (Pieterse 2010, p. 6). Postwar developmentalism relied on national accumulation (auto centric development) and the conviction that the less developed countries were different from more advanced industrialized and their economies were functioning according to different principles - represent a special case. By late 1970, the Keynesian economics entered in crisis after a number of severe debt crises (oil shock 1973, Mexican crisis 1976 and 1982). The neoclassical economics (neoliberalism) became more popular and prevailed in academic and policy circles with the exception of several least developed countries and some organizations (such as UNCTAD). The neoliberal theory has neglected the premises of developmentalist state as special case and has instead insisted on reliance on market mechanisms. The state is not anymore seen as an active actor in economic development, but rather this function is entrusted to market forces. An active government intervention in this case means market distortion (Pieterse 2010, p. 7).The paradigm shifted in late 1970 to microeconomic principles and to measurements of poverty and inequality dimension. Then after, in 1980 attention was brought to structural adjustment and debt reducing and in the 1990 focus shifted to institutions development especially those in charge of rule of law and financial system. Social cohesion was seen as an important basis for sound policies and growth. It was recognized that financing gaps is not working because the progress was hindered by inadequate institutions and policy framework. The reform of these constraints was a complex contingent upon more elaborate process than simple making foreign aid conditional on concrete policy measures. Given that it was recognized that conditionality could not be forced upon Governments, except when these policies could be accepted by them as necessary, ownership principle emerged with the recognition that country must be in the driver seat, if the reform are to succeed. Thus, must efforts of the foreign aid turned on building institution capacity as prerequisites for development. (Stern 2002, pp. 44-47). 10
Another approach, human development paradigm 7 emerged in 1980` aims to expand the freedoms and incapacitate the people. It`s is based on removal of different types of unfreedoms which hinder the empowerment of people to exercise their agency (Sen 2000, p. 13). This concept is more general than those pursuing some narrower views of development such as gross national product, rise in personal incomes, industrialization, technological progress or social development. All this particular aspects can be useful for development growth of incomes will expand the freedoms enjoyed by particulars of society, but nevertheless, the whole process will depend also on other factors such as social economic arrangements (access to education, health care etc.), political and civil rights (liberty of participation in public discussion), industrialization and technological progress etc. Therefore, if freedom is what development advances than it is important to concentrate rather on this major objective than on particular means of advancement of development (idem, p. 5). A different view has the post developmental theory which rejects the concept of development itself. Post-development thinking represents a different more radical thinking opposed to structural theories of transformation of society, development itself, which is considered as a constructed reality that does not exists outside of discourse. Post development criticizes the ahistorical model of change of developmentalism which created the construct of Third world and the West that doesn`t have a basis in historical reality, as the modernization paths followed by western countries (early, late industrializers) differed according to periods and contexts from the ideology of development (Pieterse 2010, p. 29). Development is a discourse which shapes and frames the reality and power relations by valuing certain aspects over the others (Sumner and Tribe 2008, p.10). Development was equated to modernity and with this it has constructed a discourse of superiority. By constructing the term of developed and developing countries and the concept of modernity this created a rationale for the interventions of the first into the affairs of the second group (Pieterse 2010, pp.1-9). One of the reasons of this more pessimistic view about aid is due to the fact that the struggle against poverty (which was the mantra of the development strategies), elimination of social disparities and environmental degradation and others which were supposed to be addressed with the help of aid to promote development has not succeeded. In many respects, the situation is even worse in the countries of the South (with the exception of Southeast Asia) than before when this assistance did not exist (Rist 2008, p. 239). By making poverty elimination
7 A paradigm on which MDGs are based and which guides the activity of such organizations as UN agencies 11
their main goal the development agencies emphasize good governance principles, as a more effective measure to achieve pro poor strategies of growth and eradicate poverty than just pooling more and more resources. However, only by addressing the effects of poverty and not of its causes they perpetuate the problem, proliferate the rationale and legitimize their intervention in every domain of social life. For this reason, the problem is not the poverty but development itself which is getting involved in all aspects of the life of society (Rist 2008, pp. 232-233, Peet 2009, pp. 229- 230). Hence, development studies can be seen as a crisis prone science, a field of struggle which is a subject to rethinking for alternative solutions and as an intellectual activity guided by political and social forces (ibid., pp. 1-2). The question about the concept of development remains one of high controversy and the academic debates most probably will continue in their quest for better understanding the field and to propose improved or alternative solutions. A more precise definition for reconciliation of different approaches is development as the organized intervention in collective affairs according to a standard of improvement. (Pieterse 2010, p. 3). It is this definition of the concept of development which I will use in my analysis, in particular the standards of improvement fixed in the development strategies (EGPRS 2004-2006, NDS 2008-2011, NDS Moldova 2012-2020, Government Activity Program European Integration: Freedom, Democracy, Welfare, 2011-2014) which included the national priorities and international development commitments undertaken by the Government of Moldova (EU- Moldova Action Plan 2005-2008, WB PRSP`s, IMF`s Memorandum of economic and financial policies, MDG`s). Nowadays, development strategies followed by countries and donors doesn`t follow a unique approach towards development, rather these can include several development paradigms at the same time 8 . These aspects I will address in separate chapters describing Government development and donor`s assistance priorities.
8 The donors compete advocating their agenda to be included in the country`s NDS (WB/IMF from one hand with a more economic growth and poverty reduction concept and UN family institutions pleading for human development centered approaches. 12
1.2.2. What is foreign aid? Foreign aid can have different forms and definitions. According to OECD foreign aid 9 is delivered through official bilateral and multilateral channels. The definition provided by the Development Assistance Committee (DAC) of the Organization for Economic Cooperation and Development (OECD) is Flows of official financing administered with the promotion of the economic development and welfare of developing countries as the main objective, and which are concessional 10 in character with a grant element of at least 25 percent (using a fixed 10 percent rate of discount). By convention, ODA flows comprise disbursements by bilateral donors and to multilateral institutions. ODA receipts comprise disbursements by bilateral donors and multilateral institutions 11 . ODA is considered as the amount of grants and loans offered to recipient countries which satisfy these conditions. From different categories of aid technical assistance is considered ODA while funds accorded for military, private transfers for individuals, donations from international civil society organizations, commercial funds and foreign direct investments are not. The purposes of aid are very diverse ranging from macro-financial stability, policy and institutional capacity building support (good governance), civil society, private sector development, sector support such as environmental, education, health, etc. or infrastructure building and humanitarian emergencies (Tarp 2006, pp. 13-44). Further, in my analysis I will use the meaning provided by OECD for ODA when describing foreign aid. The official reasons for giving aid are developmental. Foreign aid is used to address a number of constraints for the economic growth such low level of savings and investment, insufficient amounts of foreign exchange or because of both. Foreign aid is considered to fill this gap by supplementing the domestic savings and foreign exchanges which in turn increase investments and spur growth. Therefore, after a period of help the economies of recipient countries would register growth and the need for foreign aid would disappear. This approach was known as two gap model of aid similar with the Harrod Domar growth model (Addison et all 2005, p. 1). The beginning of the development theory emphasized the economic growth as contingent on capital formation and large scale infrastructure building (Lewis, Nurkse). Later, it has evolved and aid was seen as
9 The criticism of foreign aid assistance has led to its rebranding into development cooperation (Pieterse 2010, p. 60). 10 Concessional loan - These are loans that are extended on terms substantially more generous than market loans. The concessionality is achieved either through interest rates below those available on the market or by grace periods, or a combination of these. Concessional loans typically have long grace periods. 11 OECD Glossary of terms http://www.oecd.org/site/dacsmpd11/glossary.htm, http://stats.oecd.org/glossary/detail.asp?ID=6043 13
providing the necessary capital to fill the savings and foreign exchange gap and push the economy into self-sustaining development (Harrod-Domar gap growth model). The model assumes that there is an excess of labor, low levels of productivity and capital. In order for an economy to grow, savings are necessary, a constraint which foreign aid can fix to produce higher investment, productivity, savings and growth. Additionally, foreign aid can fill the gap created by insufficient level of foreign exchange because of the low export earnings required for the import of capital for investment. A third gap is the low fiscal capacity to collect the revenues to cover the required level of investment. Therefore, aid is seen as capable to fill the gap in savings, foreign exchange and domestic revenues which will result in higher level of savings, investment and growth. (Radelet 2006, p. 9). In many cases, official donors required that recipient countries pursue reforms or policies that the donors consider should promote economic growth. In the case of multilateral organizations such as WB, IMF the requirements are known as stabilization and adjustment conditions. Some researchers affirm that the policy reforms suggested by these institutions have been counterproductive and caused economic and social decline rather than growth. Others, insist on the idea that the main causes of inefficiencies are laying in the bad implementation of reforms and deficient governance of these countries unwilling to adopt the right approaches. However, as the practice of aid has revealed later, the reform of these constraints was a complex process contingent on a more elaborate process than simple making foreign aid conditional on a number of policy measures (Tarp 2006, pp. 13-27). Various ideas and motivations have led foreign aid especially as the changing conditions and development paradigms evolved over time. Development is only one of its aims (Lancaster 2007, p 2). Foreign aid was also often used to serve donor`s countries political interests by assisting beneficiary policy and legal framework reforms or commercial as a modality to penetrate markets and access resources (Tarp 2006, pp. 25-27). As Morgenthau has coined the famous expression of the seeming and real innovations which the modern age has introduced into the practice of foreign policy, none has proven more baffling to both understanding and action than foreign aid (Morgenthau 1962, p 301).
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1.3 Literature review Different theories gave diverse interpretations of the phenomenon of foreign aid. The realist theory focuses on the purposes of aid as it sees as an instrument of diplomacy. Given its initial assumption of states behaving in an anarchic environment, the realists see foreign aid as an instrument used to ensure state security, protection of its political and economic interests. Therefore, taking into consideration that aid in this case is given having donor`s interests at the core of motivation, its capability to achieve developmental purposes are meagre. The Marxists school of thought and postmodern tradition sees foreign aid through a dependency relationship between a group of wealthy capital rich core and poor periphery countries. The first group of countries use their position of dominance to control and exploit the resources of the second tying aid to policies, services and goods for gaining access to markets and resources. The liberal strand of thought concentrates on its economic dimension, in particular the effectiveness of development cooperation to address the problems of globalization and interdependency such as environmental, health etc. The constructivist theory interpret foreign aid as guided by normative principles, ideas of humanity about the moral obligation of more affluent countries to help the poorer. Only in this conditions an international order could prosper, when it is based on generosity and readiness to cooperate in the interest of humanity (Lancaster 2007, pp. 3-4). Nowadays, the debate in the literature about foreign aid is divided in two parts. One examines the purposes of foreign aid and another focuses on the effectiveness of aid to achieve development. During the last decades, the aid effectiveness aspect was more researched while the study of the purposes of foreign aid was less prominent. Even after decades of study, currently, there is no widely accepted consensus about the effects of foreign aid on development. The large literature on this subject has not progressed in offering any hard conclusions. I will start with the examination of the literature describing foreign aid as development cooperation (aid effectiveness) which can be divided in several camps: positive, negative, and conditional relationships with development. The first assumes that the allocation of aid will produce and sustain the rates of growth. Foreign aid supplements the savings that a developing country is lacking due to the poverty trap resources which invested lead to increasing savings and higher growth. The long period and amounts of aid offered have not solved the problems of poverty and underdevelopment and this has raised further questions about the effectiveness of this approach. The second strand of thought findings are that aid is either displaced, has no impact on growth or even harms fueling adverse processes. The third was introduced by the World Bank report 15
Assessing Aid: What Works, What Doesnt and Why adding much controversy over the impact of aid on growth as contingent on the policy regime of the country. It has been challenged by other studies and now, the aid literature is split between those who consider that aid impact on growth is depending on policy regime and those who contest this conclusion (Addison et all 2005, pp. 1- 2). This strand of literature is added by another studying foreign aid purposes, considering aid as representing an instrument of foreign policy. Bellow, I intend to present the literature explaining the relationship of foreign aid with development, before I will proceed to the second chapter, where I will analyze the macroeconomic situation of intervention and measure the development indicators, present the donor`s and Government development priorities and the institutional framework for aid management of Moldova. 1.3.1.1 Positive foreign aid-development relationships. One of the main advocates of aid Jeffrey Sachs, campaigning for increasing financing of MDGs finds that foreign aid helps to start capital accumulation, spurs economic growth, rise the incomes of households and breaks the poverty trap in which the poor countries are caught. It can contribute through three channels: a small part of it goes to households as humanitarian aid, the other finance budgets to sustain public investments and private business through microfinance programs to supply capital for small businesses. Where foreign aid is substantial and lasts enough it lifts the revenues of households and break the poverty trap creating conditions for a self-sustaining growth (Sachs 2005, p. 246). Hansen and Tarp consider that cross-country analyses have failed to produce enough statistical clarity of the relationship between aid and growth. However, the author argues that most studies have produced the conclusion of a positive relationship between aid and growth. Foreign aid is offered for many purposes and ways and the dilemma of aid is not whether aid works or not, but how and when varied instrument can be made to work better in different country circumstances (Hansen and Tarp 2000, pp. 19-20). The study of Minoiu and Reddy argues that aid matters for growth and it can contribute significantly, but only specific kinds of aid have this clear cut impact on growth and only in a long term. Overall, foreign aid has a significant effect in those cases when it ranks high in the aid quality index while geopolitical aid has been found with zero or negative effect on growth. Their measurements did not show that aid is more effective in better policy environments, that there are diminishing returns or income thresholds for the ability to use aid productively. Foreign aid matters 16
for growth and a change in composition of it (developmental rather than geopolitical) and an increase of ODA will seemingly have substantial effects on the future growth of developing countries (Minoiu and Reddy 2007, pp. 20-21). Another study of Tarp argues that the cross country macroeconomic analysis shows positive effects of aid on growth when longer time is taken into consideration. That does not imply that there are no negative side effects or it can be inefficient, but that more work must be done in order to improve it. Foreign aid effects are not as large as supposed initially and appear after a considerable period of time 30 years of more. Therefore, alone, it cannot constitute itself a solution to poverty (Tarp 2009, p.1). Tarp also considers that there are different purposes for which aid has been given and the political motives guides the form and size of aid. If the priority of donor is not growth it is obvious that the link between aid and growth will be weak. In addition, aid effectiveness factors such as the lack of coordination between donors, conflicting assistance priorities, reduce the impact of aid on growth (ibid., pp. 17-18). Similarly, Radelet finds that the most important determinants of growth are foreign policy and political relationships. Donors have a variety of motives to give aid and only some of them are related to development. The bilateral aid is designed at least partially to serve the economic interests of the donor countries (for example tied aid - to support certain objectives that support specific groups in donors countries). Multilateral is less biased in this respect, although, it cannot be judged immune to influences. However, overall, donors provide most of the concessional aid to poorest countries. There was no simple relationship between aid and growth. Some countries which received aid grew, others have had recorded slow or even negative results. Generally, aid has a positive relationship with growth across countries, but not in each country and presents diminishing results as the volume increases (Radelet 2006, pp. 6-8). A study of Clemens at all points that the effects of aid on average are positive across countries, but are limited in comparison with other factors of growth and negative in some countries. However, on average, it has moderate positive effects on growth. To determine the correlation between aid and growth it needs to be measured for a longer period of time and for those elements of aid which can produce growth for this period (pp. 593-594). In this way, the divergence in findings of the debate about the effects of aid might be solved and their findings might show a positive modest effect of aid on growth. In addition, aid does not work everywhere and there are also countries which have accomplished growth with relatively little aid (Clemens et all 2011, pp. 591-614). 17
The first strand of literature seems to suggest that when it is allocated for developmental purposes, assessed for a longer period of time and in sufficient amounts, using varied instruments and of good quality (addressing the coordination problems, harmonization of procedures etc. ensuring its efficiency) aid can promote development.
1.3.1.2 Negative foreign aid development relationship Contradictory with the works mentioned above, this section identified that aid has a negative impact on recipient countries and fuels corruption, stagnation and dependency. One of the most ardent critics of aid Dambisa Moyo considers that foreign aid given to elites encourage rent seeking behavior (because aid is fungible), hinder reforms and spurs corruption. It interferes in the rule of law, the work of institutions and deteriorates the respect of civil rights which makes country unattractive for domestic and foreign investments. Fewer investments reduce growth and increase poverty levels and given the pressure to lend, donors allocate more aid which is diverted, so that the process is continuing in the same vicious circle. It establishes a dependency, encourages corruption which has repercussions for growth and perpetuates underdevelopment (Moyo 2009, p. 49). There are other bad practices of aid which impedes development in recipient countries (Africa) such as: the pressure to lend, unambiguous criteria and decisions regarding the level of corruptibility when financing should stop, lack of accountability, weakening the capabilities of local institutions by attracting the best and brightest to work for donor`s agencies, rising local rivalry for the access to it, putting pressures on local prices, unproductive use of loans because of low absorption capacity, large unproductive public sector and country ownership (ibid., pp. 54-67). Another critical work written by Easterly finds that the goal of development is too broad and it seems unattainable so far. It is a reason which makes difficult the task to hold aid agencies accountable and process any feedback. Easterly suggests that interventions should be more focused on specific tasks. Aid might be used to attain development specific targets by solving specific tasks where there is big demand such as reducing the incidence of malaria by providing access to water, building roads, providing scholarships etc. In other words to transform poor individuals rather than poor societies. Easterly is a proponent of bottom up process for a focused effort which could solve each problem separately, rather than within a more general framework of development assistance at the macro level. He argues that development has not stopped from just happening in its own 18
way without much involvement of experts or contribution by foreign aid in places like China, India, Turkey, Chile, Vietnam etc. (Easterly 2012, pp. 8-10). The study of Doucouliagos and Paldam showed that foreign aid has no significant importance, as on average, aggregate development and aid flows are ineffective to generate growth. Moreover, their analysis shows a pattern in the correlation between foreign aid and growth which keeps declining. Aid effectiveness has not increased despite the declared donor`s goal in this respect and the marginal contribution of additional aid on growth estimate is minimal. That does not mean that aid is never effective but that total aid does not generate growth. Moreover, aid seems to have considerable fungibility, so that projects financed by aid are different from projects caused by aid. If aid is at the discretion of the recipient government, the latter can feel free to seek rents from these funds (Doucouliagos and Paldam 2011, p. 16). The work of Bauer and Yamey (1982) affirms that foreign aid is likely to hinder development. This is because the economic results depend on the conduct of people and their governments efforts and the slow progress of these societies cannot be overcome by foreign aid, but rather will reinforce it. They argue that foreign aid`s monopoly on compassion, so that nobody can criticize these transfers of resources as ineffective or damaging, allows them to claim that poor results are due to insufficiency of aid. During decades, sufficient amounts have flowed towards recipient governments which did not performed well and created perverse incentives. The access to aid of recipients has absolved them from the necessity to create necessary conditions for external inflows of capital. The tax revenues are kept low, because of availability of aid money extends the power of the existing political status quo and their control over the society which results in its politicization. It inhibits private enterprise and therefore the inflow of foreign investments, creates overvalued exchange rates, increases domestic money supply and inflation, balance of payments difficulties and produces deficient fiscal policies. Foreign aid also creates perverse incentives such as pauperization of the countries in order to be eligible for aid, de-skilling and increases of dependency of these societies on donors (Bauer and Yamey 1982, pp. 302-310). Moreover, the work of Djankov et al (2006) concludes that foreign aid has a negative impact on economic growth and democratic achievements of developing countries, because it reduces investment and increases spending. The effectiveness of aid is affected by the type of aid disbursed grants or loans. Contrary with some opinions (such as Sachs) that more aid should be given as grants, it is suggested that loans are a more effective measure to ensure the effectiveness of aid (Djankov et all 2006, p. 2). The argument is that if aid comes as loans, there are stronger incentives 19
to use these resources efficiently. The recipient country will take care to obtain a good return on the investment in order to pay back the loan. In the case of grants, these are mostly increasing public consumption. Their research has shown that increasing ODA has no effect on investment, but it has a significant effect on government consumption. Foreign aid has positive effects if the ratio of grants in aid is small enough (ibid., p. 17). A latest study (2013) which measured the degree of achievement of MDGs (in support of which foreign aid is mobilized by UN organizations) has revealed that cross country analysis of data does not support the hypothesis of a causal linkage between the initiation and the acceleration of progress of MDGs indicators. The universal acceleration of MDG indicators happened in 2000, or earlier which means that this could not have been caused by the MDG declaration. The study has found a significant acceleration in 7 from 19 MDG indicators and from these 7 indicators only 1 had changed in 2011 or later. Only total debt indicator has indicated considerable acceleration in progress after 2000 indicating that activities to debt financing by MDGs were successful. This might happen because countries were already focusing on these indicators (such as health), prior to their adoption and attempts to improve them (Friedman 2013, pp. 27-37). This part of literature indicates that foreign aid is unable to eliminate the systemic constraints for development, but rather reinforces these introducing various distortions in the recipient countries. The role of aid compared with other factors is actually not so significant. Various authors described different causes such as: approach followed is deficient (a micro is preferred), aid is fungible and its role and contribution for growth is minimal, it does not generate growth and the type of aid spurs rather consumption than investment. 1.3.1.3 Conditional foreign aid development relationship This group of studies agree that foreign aid can produce development, but it is contingent on local policy environment and for this to succeed a set of conditions must be fulfilled. One of the most influential work in this respect, the Assessing aid report findings are that foreign aid works well, but only in good government environment. At various time and places aid has manifested differently from effective to ineffective or somewhere between (Dollar and Pritchett 1998, p. 2). Aid agencies work in difficult environments and the early development thinking suggested that bringing more capital will help to promote development. Nevertheless, as the evidence has demonstrated this was not the case. Support must be directed to spur reforms, rather than just allocate resources. These resources need to be given to reformers with long term vision to support 20
more systemic transformation than just pockets of reforms or project success which will not be easy to extrapolate at the national level (ibid., p. 117). Similarly, the study of Burnside and Dollar says that aid has positive effects on growth in good policy environment. Strategic interests of donors plays a significant importance in their decisions for allocation of aid, whereas commercial are not so important. The most biased channels are bilateral aid, while multilateral is considered as being oriented to alleviate poverty and achieve growth (pp. 31 - 32). On average, aid has little impact on growth, but when offered for countries with good policy environment, it proved to have a positive effect on growth. Given that bilateral aid is often offered with donor`s paying more attention to achieve its purposes rather than promote the growth of the recipient country economy, it is positively correlated with government consumption which can explain why its impact on growth is not more positive (Burnside and Dollar 1999, p. 37). In his analysis McGillivray concludes that aid works, but it depends on the policy environments in different countries. The effectiveness of aid in promoting development is contingent on factors such as conflict, political stability, and governance. The best situations, where foreign aid seems to work, are post conflict and structurally vulnerable countries, as well as politically stable regimes with good governance results. It can have negative returns when aid inflows reach from 15 and 45 per cent of GDP, the limit indicating limited absorption capacity. The allocation of aid, even if not always, become increasingly more development oriented. Foreign aid is associated with increased expenditures and fungibility, but nevertheless, it helps to diminish poverty through pro-poor expenditures (McGillivray 2003, pp. 5-10). The analysis of Roodman (2004) alleges that foreign aid is probably not as decisive for development as are domestic savings, inequality or governance. Some aid finances investments, but this is done in an environment influenced by domestic policies, governance, external conditions and other factors which influence productivity of investment. It is not homogeneous, has different purposes and forms, and much of it is poorly used. Cross-country are not able to produce robust, valid generalizations about when and whether aid works (Roodman 2004, pp. 274-275). Finally, the study of Peter Boone (1995) argues that aid does not contribute to a significant rise in investment, growth and human development indicators improvement, but it does increase government consumption. Donor`s aid is highly variable, fungible and considerably politically motivated. The efficiency of aid mechanisms depends on political regimes. Most of aid, in all regimes, finance government spending and transfers to political supporters. However, in more 21
democratic regimes aid is more equally distributed within population because of people ability to influence and mobilize support which depends on such factors as education, health and capacity to organize. The main factors driving foreign aid are donor`s interests, rather than recipient needs. Given the lack of correlation between increasing of aid and health sector indicators improvement, the author concludes that aid does not introduce incentives to improve human development indicators and that financing is not the main constraint for development. Foreign aid can be effective when it is offered conditional on policy reforms and it is non-fungible. If reformist regimes stay long enough in power to promote better education, health care, this can empower the poor in the political system so that it could be self-sustaining (Boone 1995, pp. 1-28). The last group of aid effectiveness studies affirm that the simple allocation of aid is not capable to eliminate the constraints for development, that reforms must be carried to strengthen institutions to allow efficient use of it. For this, foreign aid must have concrete conditionality contingent on the policy environment, together with provision of more development oriented aid (multilateral institutions are given as an example).
1.3.2 Foreign aid as diplomacy This strand of literature is dominated by realist assumptions which considers foreign aid as an instrument of foreign policy and has a more pessimistic view about its developmental potential. It identifies different interests which guide donor`s policies of aid giving such as: geopolitical, economic/commercial, humanitarian etc. As the work of Finn Tarp (2009) acknowledges foreign aid is not just a transfer of resources, it has often attached besides economic also policy strings. The effectiveness principle supposes that the conditions tied to aid are for developmental purpose, but it also can contain commercial interests of the donor. Bilateral aid is considered more biased in favor of donor`s interests than multilateral. For multilateral aid such as WB and IMF the conditionality known as stabilization and macroeconomic criteria has occasionally proved as counterproductive resulting in social and economic distress, rather than progress in development. One cause why it might not be successful is that it is given often in accordance with donor`s interest (Tarp 2009, p. 4). The classic work of Hans Morgenthau indicates that foreign aid is by no way different than diplomatic or military policy or propaganda. It is an instrument of the state interest. The expertise is economic, but formulation and execution is political. In fact, development process depends on internal factors such as existing intellectual, moral and political precondition and not so much on 22
the possibility of external manipulation to bring it. Its potential for successful change is much more modest than generally accepted. Morgenthau distinguishes six policies which are pursued using foreign aid: humanitarian, subsistence, military, bribery, prestige and economic development. From all this types of policies only humanitarian is offered on non-political premises, but when needed, it can also be used having diplomatic reasons. The economic development became an ideology which legitimizes and rationalize the transfer of resources using an elaborate aid apparatus. For instance, when subsistence aid is offered to purchase political favors or to help maintain a status quo in the recipient country, it is always given as an assistance for economic development, even if its real purposes are different. It is used to eliminate the deficit in the budget of the recipient country, as an attempt to ensure stability, rather than promote some changes via reforms. Similarly, prestige aid is made available using the same appearance that it intends to improve economic situation of the recipient, even if it has other purposes. Usually, it is a piece propagating recipient`s symbol of development to meet high expectations of the population and serve a propagandistic role for elites. This kind of assistance is cheaper, faster and offers political dividends for both donor and recipient. However, sometimes it is hardly distinguishable for donor or recipient and produces errors in understanding what recipient actually needs, or what are the real intentions of the donors. Therefore, in order to use it better, one must differentiate these 6 types of aid, choose the appropriate type of aid quantity and quality for each situation apart and treat it as an integral part of political process (Morgenthau 1962, pp. 301-309). Another work that of Berthlemy, analyzes foreign aid according to three variables: self-interests of donors, recipient needs and their merits. The first is geopolitical or commercial and is specific for bilateral donors. The estimation of the second is more complex, but most measure it by per capita income of the recipient. The third, is a more general definition full of ambiguities and its widely accepted as good governance criteria. The self-interest pursued by donors can reflect several concerns such as geopolitical provided for political alliance, reflecting historical or geographical factors (colonial past, proximity), or commercial (oriented to trade partners). The author calculations showed that commercial interests have a big role in aid allocations in bilateral aid which suggests that the motives of aid are rather egoistic than altruistic. Moreover, trade linkages seem to matter more than geopolitical linkages. Bilateral donors do not behave similarly and at least partially some of their aid is correlated with multilateral. The Nordic countries are those who are least selfish from bilateral donors, but their aid constitutes rather an exception from the general rule. Multilateral aid which is considered to follow more closely the principle of aid 23
effectiveness and that of EU is found to be influenced by commercial interests of US and Britain, and also in a more limited extent by Japan. Recipient merits (governance) are only in the third place after geopolitical, commercial interests and recipient needs, and it seems that it does not have significant influence in donor allocation (Berthlemy 2006, pp. 79-99). The study of Dreher et al (2008) finds a positive correlation between the status of non-permanent member of UN Security Council and participation within IMF programs, even after accounting for other influencing variables such as economic, political and country specific factors. The international institutions seem to reflect the interests of the most powerful of its constituents and the distribution of power within these reinforce the dominance of the key countries. The reason of it is that using the institutions brings more legitimacy and lower costs than unilateral policy. Therefore, besides economic variables guiding IMF policies politics matter as well. The non- permanent members of UNSC in exchange of legitimacy are more likely to receive IMF loans and with more favorable conditions than other countries (Dreher et al pp. 1-23). Similarly, an analysis of Wittkopf (1973) says that states attempt to coerce one another to support their positions in the UN under a threat of reducing foreign aid and this attempts are mostly characteristic to great powers (Wittkopf 1973, pp. 869). Finally, a study of Kuziemko and Werker (2006) argues that there is a large and positive effect of Security Council membership status on the foreign aid receipts. An increase of approximately 59% in total aid from US and 8% from UN. Aid payments sharply increase in the year in which a country is elected to the Security Council. These can get significantly large especially during the key diplomatic years and recedes returning to previous levels after the completion of the mandate. From UN agencies UNICEF and in a lesser extent UNDP are those who allocate more aid after the countries from UNSC voted favorably for US decision. Donor countries use aid strategically and do not prioritize humanitarian concerns when designing their aid allocations (Kuziemko and Werker 2006, pp. 905-923). For Mesquita and Alastair (2007) aid giving is a transaction in which donors purchase policy support in exchange that parts of aid will be used to secure the recipient elites in power. It cannot be expected from the leaders from developing countries to engage themselves in reforms, but rather to follow a quid pro quo arrangement to back donors policy in exchange for aid sufficient for their survival. Their selectorate theory says that the decisions of leaders with restricted exclusive coalition are not to support the improvement of the welfare of the people. Only in a more broad inclusive coalitions enhancing leader`s survival also means promoting public welfare (p. 225). Foreign aid is more likely to favor big nations at the expense of small ones. Donors are more 24
induced to give aid for geographically proximal countries, than distant ones, although, the result of measurements are not significant in this respect (de Mesquita and Alastair 2007, pp. 225 - 275). Akram (2003) points out that the pattern of disbursements does not seem to have any ties with the needs in developing and transitional economies (p. 1351). The level of per capita income in a country is not decisive factor for the decisions of donor. Therefore, he concludes that the flow of aid is not oriented to those countries with the most urgent need. This misalignment between human needs and actual allocations raise some doubts about the real interests of donors and efficacy of international aid regime (Akram 2003, pp. 1351-1356). The findings of the Nielsen`s (2010) assessment of need orientation of donors suggests that aid is more responsive in countries that donor find strategically important. The norms and ideas matter in allocation of aid in the same way, as the recipient needs, however, donors tend to meet them when it is also in their interest. Nielsen asserts that the current debate is divided between the constructivists and realist strand of thought. The first one believes that in countries with strong traditions of domestic redistribution and poverty reduction, domestic norms dictate the necessity to allocate more aid to developing countries for economic redistribution and poverty alleviation. The second, assumes that foreign aid is just an instrument of foreign policy. He resumes that between these two opinions there is a middle ground emphasized by strategic development of (Bermeo model) which consider that donors have interest to maximize both diplomacy and development. The need orientation is a strategic choice by donors, rather than evidence of norms and domestic considerations regarding poverty reduction in donor countries. This is because the economic development of strategic important allies represents a goal for donors and it must be effective. This indicates to a softer realism, humanitarianism with instrumental reasons attached to it (Nielsen 2010, pp.3-26). A study of Dreher et al (2013) describes foreign aid as significantly less effective when aid has been granted for political reasons. Given that it is granted for political reasons, other than developmental when the donor is not so much concerned about how the recipient uses aid, it results in meagre outcomes. However, there are cases when politically motivated aid can have remarkable results such as Marshall Plan for European countries, South Korea and Japan. In this case, it might not only curry favor but also help allies recover economically. Foreign aid granted for short-term geopolitical motives is less effective. In this respect, the aid committed during the time when a country gets a non-permanent membership in the UNSC is not effective in terms of helping to spur economic growth (Dreher et all 2013, pp. 5-35). 25
Bermeo (2010) developed the concept of strategic development which implies that foreign aid is targeted to countries were the benefits for donors are high. These are not necessary the states that are most in need, but rather those which are important for donor countries due to such factors as proximity, historical ties, and economic interconnectedness between a particular industrialized- and developing country. In an increasingly interdependent world wealthy countries are forced to pursue development abroad. Thus, a developed country interested to improve its own welfare will concentrate its efforts in poorer countries where the degree of interdependence between them are high. Strategic interventions also respond to humanitarian goals although not always as it also depends on the importance of a country for donor. Strategic development concept also gives an interpretation of different approaches for aid giving. Poorly governed countries receive a greater percentage of their aid in the form of technical assistance and through non-governmental organizations. Additionally, in these countries donors focus more on providing humanitarian assistance and aid for social services. The better governed countries receive more in form of cash transfers for infrastructure. The more marginalized countries, some of which already suffer from poverty, are in this way excluded (Bermeo 2010, pp. 1-4). Nye (2011) analyzed foreign aid and describes it as soft and hard power in the hands of states. The first category includes the transfer of money, services, ideas, concessional loans 12 and grants which have the capacity to attract and enforce the dependency of one state on the other. The hard power represents the use of foreign aid enacted when it is withdrawn, asking the repayment of debts (after a generous period of giving) or harshening the conditions of aid. It contains an element of coercion based on asymmetric relation of dependence between the recipient and donor. The purposes for aid giving by donors are different. For instance US is seen as offering aid for Egypt and Israel, Pakistan and Afghanistan for security reasons. China increases its aid in Africa to get access to vast reserves of natural resources and ties its assistance to concession contracts. The new bilateral donors (China in particular, India, Brazil, Russia) do not follow the OECD aid effectiveness principles to which the traditional donors have subscribed. Nye doesn`t exclude such cases when foreign aid can follow humanitarian purposes if it is properly managed and the donors have the
12 To qualify as ODA, a flow must among other things be concessional in character. It must also convey a grant element of at least 25 per cent (calculated at a rate of discount of 10 per cent). When interest rates are low, it is easy to satisfy the grant element test. http://search.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=DCD/DAC(2013)2&docLanguage=En 26
interest to provide such kind of help. It must be gradual, to involve participation and allow time for results to appear (Nye 2011, pp. 32-33). Finally to conclude, Gilpin`s work (2011) gives a more general explanation of the purposes of foreign aid. He also finds that foreign aid is given for national security or economic interests, rather than humanitarian reasons. According to him Robert Keohane and Joseph Nye`s analysis of political power and aspects of economic interdependence distinguishes two forms of dependency sensitivity and vulnerability. The first one refers for example to changes in the interest rate in one country to influence interest rate in another one. The second to the possibility of political exploitation of market interdependencies. Individual states can have preferences to decrease their dependence from other states through trade protection and industrial policies, or increase other state`s dependence using foreign aid and trade concessions. Therefore, international economic relations are never pure economics, it implies consequences for economic autonomy and political independence of national societies (Gilpin 2001, pp. 81-93).
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Chapter 2 2.1. The overall context of intervention. Macroeconomic situation and development indicators for the period studied Since its independence in 1991 from the Soviet Union, Moldova has confronted with a conflict at its eastern borders when a number of rayons 13 from the region (known as Transnistria) have auto- proclaimed as an independent state. This conflict had a profound impact on Moldova, from both political and economic dimensions, as Transnistria held approximately a third of total industrial production of Moldova and accounted for almost its entire energy production at the time of breakup. The conflict has also delayed economic reforms, increased the political vulnerability and internal instability of the country. It amplified the already difficult situation in which Moldova found itself after the collapse of the Soviet Union to which Moldova`s economy was increasingly connected, producing a large economic recession that worsened social indicators and raised the level of poverty (Government 2012, p. 10). Besides the negative effects enumerated above, the economic crisis in Russia from 1998 has affected severely the economy of Moldova, because its exports were dominated by agricultural products increasingly dependent on Russia`s market. Therefore, between 1991 until 2000 due to different factors such as deficient transition from state planned to market economy model, delay in reforms, vulnerability of Moldovan economy and complex geopolitical context, it was registered a reduction of GDP by two thirds. The transformation in which Moldova has engaged also included a series of deep and socially costly reforms. The liberalization, privatization and stabilization of the economy was marked with political instability and deep economic recession. Moldova has a small economy which is vulnerable to external shocks and climate factors because of its poor diversification of exports and high portion of agriculture in its economy. Between 2001-2005 period Moldova registered high economic growth with approximately 7% of GDP. In 2005-2006 the country suffered from a commercial ban from Russia on vegetables and wine. These negative effects have been complemented by an increase of the prices on natural gas that led to a contraction in growth. By 2008, benefitting from increasing inflows of remittances, its economy grew by more than 8%. But the progress has been reversed in 2009 when the economic crisis has affected the economy of the destination countries for Moldovan exports, reduced employment opportunities for workers abroad and decreased remittance inflows. In 2011 and 2012 efforts were made to stabilize the economy and reduce budget deficits (Bassiouni et al 2011, p. 1).
13 Administrative unit in some countries from the former URSS 28
The country remains one of the poorest countries in Europe in terms of GDP per capita (PPP) with 3,368 (USD) in 2012 (Table nr. 1 of the Annex). The implementation of national MDG`s has been a challenging development agenda for Moldova. After it has committed in 2000 to Millennium Declaration, the country has registered progresses in meeting most of the MDG`s targets (21 out of the 27 national targets are on track). The most important improvement was the reducing of the infant and child mortality, while other targets remained unmet in such areas as education, gender equality, combatting HIV/AIDS and TB, better access to improved water sources and sewage (Government 2012 p. 10). There is a risk that the remaining unmet targets could not be achieved by 2015. The Gini coefficient has registered a slight improvement between the years 2004 - 2010 from 36 to 33 (in a range between 0 and 100). 14
The HDI prospective of Moldova is that it is one of the least advanced in terms of human development in Europe and among transition countries. It has registered a decreasing level of human development (HDI) compared with 1990 (0,650), only in 2010 it has registered a moderate growth to 0,660 (Government 2010, p. 5). In terms of poverty reduction, basing on the ECA regional poverty line of USD 5/day at PPP, 94% of the population was poor in 2002, but their number declined to 55% by 2011. The incidence of extreme poverty (based on the ECA poverty line of USD 2.5/day at PPP) has been significantly reduced in the same period from 57 to 10%. The national poverty rate fell from 30.2% in 2006 to 17.5% in 2011. The observed poverty reduction has been produced by growth derived from increasing transfers such as remittances, better employment opportunities and earnings (WB 2013, pp. 13-14). Given its European integration aspirations (the signature of Association Agreement) and the closeness to European Union borders, Moldova can benefit from opportunities emanating from this new enabling environment, but it also needs to undertake important efforts to manage the external factor risks which it is confronting due to its vulnerabilities. The involvement of EU in the resolution of Transnistrian conflict has increased during the last years, particularly after the EU-Moldova neighborhood policy action plan was adopted. However, the slow progress in solving the Transnistrian conflict continues to pose a silent threat for further stability and development of Moldova (UNDAF 2011, p. 1).
14 WDI (WB) data set http://databank.worldbank.org/data/views/reports/tableview.aspx# . For 2011 and 2012 data are not available. 29
During the 2004-2012 period Moldova has promoted active foreign economic relations. It has concluded free trade agreements with most of the member countries of the Commonwealth of Independent States (CIS), it is a member of WTO from 2001, joined CEFTA in 2007, and benefitted from EU`s autonomous trade preferences. In 2013 Moldova and EU sealed the Association agreement which is expected to be signed at the end of the next year. However, despite liberalization of the trade regime, the slow pace of reforms has not produced also a viable and diversified economic structure which would allow it to benefit from opportunities on the new markets. For the whole period 1991-2012 the imports prevailed over the exports worsening the trade balance, current account and ration of savings (Table nr. 1 of the Annex). The global economic crisis has affected Moldovan economy reducing the inflows of remittances, exports, FDI and ODA, revealing its unsustainable fiscal situation. The resulted unemployment and the pre- electoral spending in 2009 campaign has only increased the large fiscal gap created. The 2008 crisis has shown the necessity for fiscal consolidation and structural reform on both dimensions: public revenues and expenditures. Therefore, the efforts of the authorities have concentrated on improving the taxation administration and rationalization of the expenditures, to redirect more funds to finance investments and fulfil increasing demands for social assistance (Quehaja 2012, pp. 3-4). As a consequence, the general government's fiscal deficit decreased from 6.3 % of GDP in 2009 to 2.1% in 2012 (WB 2013, p. 11). Moldova has recovered from 2008-2009 financial crisis, severe drought in 2007 and a ban from Russia in 2006 and is approaching the level of middle income country status with 6, 4 % of growth in 2011. However, this tendency is not sustainable as in 2012 growth has slowed down to -1 because of lower external demand for its exports and decreasing remittances 15 . The low amounts of foreign investment in 2008 (12% of GDP) continued the downward trend from 4% (2011) to 2, 2% of GDP in 2012, while the current account improved in 2012 from 11, 3% of GDP to 7%. Recently, the authorities have undertaken efforts to improve the business environment and to make country more attractive for foreign investments. The Global Competitiveness report for 2012-2013 has reflected a better ranking for Moldova (87 position from 144 states assessed). In 2008-2009 Moldova was ranked 103rd out of 181 countries in the World Bank Doing Business ranking and for 2014 the rank shows an improvement of 8 positions from 86 (2013) to 78. At the same time, the CPIA average measured by WB reflecting the quality of institutions has improved from 3 in 2005 to 4 in 2012 from 6 16 . The remittances will continue to
15 WDI (WB) http://databank.worldbank.org/data/views/reports/tableview.aspx 16 Data taken from WDI (WB) dataset http://databank.worldbank.org/data/views/reports/tableview.aspx# 30
play a significant role (approximately 1, 2 billion in 2012), especially considering their effects for poverty reduction and a source of foreign currency for the state. Improvements in fiscal performance and growth in 2010-2011 have reduced public and publicly-guaranteed debt from 31 % of GDP in 2009 to 28% in 2011 and in 2012 constituted 23.8% of GDP. The debt percentage is expected to continue to decrease (State Chancellery 2012, pp. 9-10, State Chancellery 2013, pp. 12-14, EU 2013, pp. 13-14). It is lower than the standard threshold and so far there are no signs for concerns regarding the debt sustainability. Nevertheless, it should be managed careful, because Moldova`s public debt servicing remains low. The situation with the private debt is more fragile, as it was around 44% of GDP in 2009 2011 and is projected to grow over the medium term, mostly as short term debt (European Commission 2013, pp. 33-34). As the NDS Moldova 2020 reveals, without a concerted effort to change the development paradigm, the potential of growth for the next 10 years is limited at maximum 4, 5%-5% annually. This scenario is based on such assumptions that the labor outflows will be stopped and remittances will remain at the current levels which cannot be guaranteed at all. Besides the fact that the inflows of remittances are expected to diminish in the next decade, predictions show this increase is not sufficient to converge with the comparable countries, even less European levels. Moldova is penultimate country ranked with countries in the region in terms of GDP per capita at PPP after Kirgizstan. Another paradigm of development based on exports and investment is necessary which would allow Moldovan economy to continue to grow (NDS Moldova 2020 p. 6).
2.2. Government`s development priorities In 2004 the first Poverty Reduction Strategy Paper was succeeded by a strategy for economic growth and poverty reduction paper. It was built on three pillars: sustainable economic growth, human development and social protection and inclusion. Deriving from these, the medium-term objectives were focused on sustainable and inclusive economic growth, poverty and inequality reduction, increased participation of the poor in economic development and human resources development (Picard et al 2012, p. 18). The EGPRS was preceded by the signature in 2005 of the EU Moldova Action Plan which gave a start for reforms to bring Moldova economically and politically closer to EU. The EU Moldova Action Plan provides the basis for economic integration contributing to adoption of economic and trade rules and standards to enhance trade, investment and growth. It has also the objective to support development policies via social cohesion, poverty reduction and protection of environment. There was a synergy between these two documents. 31
EGPRS reflected European integration priority and was the main planning document, while EU Moldova Action Plan was seen as guiding more closely the relations between Moldova and the European community. Before the adoption of EGPRS, the planning process was considerably complicated by a high number of sectorial level strategies, when Government found itself in a situation to monitor and report simultaneously on approximately 50 various strategies. By adoption of EGPRS, it was achieved a more coherent and strategic approach towards development. For Moldova it was the first experience to elaborate such a development strategy and this caused some difficulties. The mid-term expenditures framework did not manage to reflect fully the EGPRS priorities, the progress indicators were broad and the weak administrative capacities have precluded from obtaining better results in the sectorial level. Also, because of the lack of more precise progress indicators, it was difficult to monitor more closely the progress and control the efficiency of spending (Government 2012, pp. 13-15). As a consequence, the EGPRS monitoring was sporadic, politicized and the results of the EGPRS did not achieve what was proposed. The program contained an amalgam of different objectives and priority domains which has denaturized the principle of priority 17 (Sandu 2009 p, 317) 18 . There were lessons to be drawn from this experience for the next development strategy (NDS 2008-2011). when Government learned to focus more on cross cutting issues, rather than on policy sector priorities (Government 2012 pp. 13-15). In addition, given the country`s European integration aspirations, it was considered necessary that the next strategy would incorporate the objectives of the EU-Moldova Plan in a more holistic way (PPIP p. 2). Therefore, in 2007, the work on the elaboration of the new development strategy was completed with the adoption of the National Development Strategy (NDS) for the period 2008-2011. The NDS has contained practically the same main priorities such as EU integration, reintegration of the country and socio economic development (long term priorities) and also served as a planning framework for implementation of the poverty reduction agenda. It highlights several prerequisites: the macro-economic stability and efficient public administration which are crucial for pursuing other medium term objectives such as democracy and rule of law, conflict resolution and
17 European integration, economic and social modernization, poverty reduction, territorial integrity, rule of law and democracy consolidation, private propriety guaranty and stimulation of entrepreneurial activity, stimulation and improvement of the investment climate, adjustment of the fiscal budgetary, monetary and lending policies with the norms and standards of the European Community, respect of minority rights, ensuring the individual rights and liberties, equality of chances and increase the family and citizen security etc. 18 Maia Sandu, from 2012 Minister of Education was the person in charge at that time within the Ministry of Economy for the process of elaboration of the EGPRSP 2004-2006. 32
reintegration of the country, competitiveness improvement, development of human capital, inclusion and improvement of employment level and regional development. NDS was made operational through action plans developed by line ministries and consolidated by State Chancellery into a single Annual action plan besides Government`s activity and economic stabilization and recovery plan (elaborated after 2008 crisis). An MTEF is developed for financial planning which connects it with the annual Government budget (PPIP 2010, p. 2). NDS did not include any reference about industrial policy as the previous EGPRS 19 has done, or a mention of development bank, export promotion and import substitution which is a sign of a more developmentalist approach of the Government. It has resumed economic development to efforts to remove the constraints for private sector activity such as rule of law, building the necessary infrastructure, ensure the access to finance and markets, support for development of SMEs, improve the quality of human capital etc. which leads to the conclusion that it does not give any solution for a timely economic catch-up of Moldova, rather this process is entrusted to the market forces (Girbu 2010, p. 18). NDS was criticized also that it did not include climate and environmental changes within its priorities, despite the environmental challenges which it is confronting periodically (the most severe drought in the last decades occurred in 2007), with significant negative impact for economic and social development of the country. The budgetary processes improved and NDS was better assessed in terms of costs of implementation than EGPRS. However, its quality suffered from weak administrative capacities to formulate priorities and conduct their cost benefit analyses. Additionally, the proper implementation of the strategy was impeded by the severe consequences of the economic crisis and the political instability from 2009 to 2012. For successful implementation, it had to survive political changes in the Government in order to have a significant impact on development. However, despite the fact that the new coalition endorsed the NDS, it has not undertaken concrete steps to fully implement it 20 . The new Government activity plan 21 and Economic Stabilization and Recover Programme (ESRP) for the period 2009-2011 guided most of activities of the new political leadership, until the new national development strategy was adopted in 2012 (Government 2012, pp. 13-15). The ESRP
19 EGPRS pp. 81-86 20 As in the case of EGPRSP there is no final evaluation of NDS for the whole period 2008-2011 and monitoring was carried only to track the achieving the progress indicators for the first and the last year of implementation. No attempts were to assess the results of its overall implementation in terms of development. 21 Activity Program Government of the Republic of Moldova European Integration: Freedom, Democracy, Welfare 2011-2014. 33
appeared as a measure to address the consequences of the economic crisis, to stabilize and optimize public finance, economic recovery and ensure social protection schemes. It derives its priorities from NDS, selecting specific objectives namely reducing government expenditures, ensuring efficient public spending and increased revenues to create conditions for implementation of structural reforms. These reforms constitute the basis for a long term policy framework aiming modernization. Giving the limited resources for the wide range of interventions, it required a prioritization to receive an external support and therefore, another document was formulated Rethink Moldova 2010-2013 and presented to donors in March 2010 in Bruxelles. It is based on five pillars: European integration, economic recovery, rule of law, administrative and fiscal decentralization, and the reunification of the country. The priorities reflected those already fixed in several planning documents such as Government program 22 , ESRP, NDS, EU Moldova Action Plan and PCA. The costs were estimated at 3, 6 billion of which 1, 1 were already committed by donors leaving a gap of 2, 5 billion (PPIP 2010, pp. 5-6). Moreover, after the finalization of the EU-Moldova Action Plan, new steps to establish a new cooperation framework with EU have been undertaken, and only in January 2010 Moldova and EU negotiated the Association Agreement sealed in November 2013 (which contains visa liberalization regime and Deep and comprehensive free trade area (DCFTA). This new agreement establishes a higher level of cooperation for a longer period of EU integration agenda. Another long term development target to which Moldova has committed, MDGs, were included in all its development strategies. The progress targets have been fixed for 2006, 2010 and 2015. The periodical monitoring reporting of the indicators was carried biannually and after 2007, once in two years, a national MDGs report was elaborated. An evaluation of the costs has been made to assess the human and financial resources necessary to implement MDGs which allowed the Government to allocate its resources and to attract external support for their realization (Government 2010, p. 6). In 2011 the Government has elaborated a new development strategy Moldova 2020 National Development Strategy. The Strategy prioritize state interventions to achieve the goal of qualitative economic development and poverty reduction. The NDS includes measures to reduce inequality and address crosscutting issues such as social inclusion and gender equality, environmental preservation, climate change and disaster events, and reintegration of localities from the left bank
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of the Nistru River (Transnistria) (WB 2013, p. 8). It has 7 priorities: aligning the education system to labor market needs, increasing public investments in the national and local road infrastructure, reducing the financing costs by increasing competition in the financial sector and developing risk management tools, improving the business climate by streamlining the regulatory framework and applying information technologies in public services, reducing the energy consumption by increasing energy efficiency and using renewable energy sources, ensuring financial sustainability of the pension system and increasing the quality and efficiency of justice and fighting corruption (Government 2012, pp. 13-15). As in previous cases, the strategy addresses major constraints revealed by cost-analysis exercise 23 . Given that most of them were not eliminated, it has reformulated priorities, although slightly changed to a new context, for continuing the work done and adopted adjustments in strategic views that occurred. For the new NDS, the major leftover is agriculture which continues to play a significant role in the Moldovan economy (its share in exports is 50%) and were Moldova retains some comparative advantages. Moreover, it is a first such long term strategy intended at the conception phase to align the budgetary and policy framework with that of EU`s. Therefore, it relies heavily on external financial support and is dependent to changes in political landscape. This aspect complicates a consistent planning of costs associated with the implementation of policy priorities. Moreover, there is no guarantee that a change in political leadership will not preclude its further realization, as it happened with previous NDS. Given that this strategy has been enacted only in 2012, the results of the implementation of the policies and the degree of alignment of foreign aid are not available yet. Thus, I will use as a landmark the previous strategic documents adopted.
2.3. Donor`s assistance priorities The last decade has witnessed a significant increase of the number of donors active in Moldova which now exceeds thirty 24 (State Chancellery 2013, p. 16). The priorities of foreign aid can differ depending on the degree of specialization, mandate of activity and donors foreign policy interests (bilateral donor). There are various agencies and institutions, multilateral such as IMF, WB, UN
23 The first constraints analysis for economic growth was carried by MCC Moldova http://www.hks.harvard.edu/fs/drodrik/Growth%20diagnostics%20papers/Moldova%20CA_Bozu,Caragia&Gotisan .pdf and since then, it provides a guidance for the adoption of each major national development strategy. For NDS Moldova 2020 - http://www.mec.gov.md/docs_news/report-on-analysis-of-constraints-to-economic-growth.pdf 24 At the same time, some donors have resumed their activities. One example in this respect is DFID which phased out its activities after 2009. It is expected that with increasing of the income per capita and/or foreign policy shifts others will follow (such as USAID, Netherlands etc.). 35
institutions, IFAD, EU, international/regional banks EIB, CEB, EBRD or bilateral actors like Sida, USAID, MCC, China, ADA, SDC, Romania and others. However, despite of an apparent diversity in priorities, there is a particularity which makes their approach to have something in common. A program with IMF (Memorandum of Economic and Financial Policies) and adoption of Poverty Reduction Strategy Paper (PRSP) of WB 25 is a prerequisite for beneficiary country in order to obtain increased support from other donors 26 . In spite of different priorities for their activities dictated by various interests, most of donor`s aid is related with the adoption by developing country of these two documents 27 . The IMF Memorandum focuses on policies to address fiscal imbalances for macroeconomic stability and introduce necessary structural adjustment, while WB PRSP poverty reduction efforts are oriented to ensure a market oriented economic growth based on production and trade and establishing sustainable social programs (social protection, education, health system etc.). The loans under this programs are conditional on accomplishment of a series of policies reflected in IMF Memorandum and PRSP with concrete action plans (IMF, WB policy matrix). Other documents which guide the activities of the EU member countries aid and influence other donors agenda are the agreements with EU (Partnership and Cooperation Agreement, EU- Moldova Action Plan and recently sealed Association Agreement with EU). In this respect, the Government is implementing the policy conditionality fixed in special Action Plans reflecting the objectives from the Agreements, before receiving the tranche according to a certain financial schedule 28 . Moreover, another document to which Moldova has committed are MDG`s, reflected both in the national development strategies and donor`s (especially in the UN agencies priorities centered on the human development concept). Currently, there are many disputes to what extent the reform agenda is actually owned by beneficiary country and it is not introduced from outside
25 Washington Consensus institutions are well described by Dani Rodrik`s work Goodbye Washington Consensus, Hello Washington Confusion? http://www.hks.harvard.edu/fs/drodrik/Research%20papers/Lessons%20of%20the%201990s%20review%20_JEL_. pdf 26 Moldova seems to opt for a stand by relation with IMF and does not need any more funds from IMF. This arrangement will allow to continue to receive foreign aid from other donors http://unimedia.info/stiri/moldova-- pe-stand-by-in-relatia-cu-fmi-leanca-ne-descurcam-deja-si-fara-sprijin-financiar-63289.html , http://unimedia.info/stiri/filat-cifrele-arata-ca-nu-mai-avem-nevoie-de-finantarea-fmi-54485.html 27 This type of information is unofficial. Nowhere it is specified in donor`s strategies that they condition their support with entering into program with IMF and WB. This observation is based on my own experience in aid coordination at Ministry of Economy and State Chancellery. Moreover, it is also confirmed by the record of the 2002-2003 years when Moldova has interrupted its relations with these institutions (IMF assistance and budget support from WB) and by the recent declarations of the Prime ministers Vlad Filat and later Iurie Leanca (the articles above are in Romanian)
36
by means of donor`s agencies. Given the precarious situation of the many developing countries which are running a constant budget deficit and have a constant need of aid injection in their budget, and the weak donor driven civil society 29 (which otherwise should play the role of a watchdog 30 ), the donor organization are advantaged in their negotiations with the developing countries. The support of many donors is constantly mentioned in donor`s and Government reports as well aligned with the country development strategy. However, this does not take into account that the national strategic planning document can be influenced at the design stage and that donors could choose to support only those activities which are in line with their own priorities, leaving other sectors without attention (so-called orphan sectors). For instance, the World Bank is given as an example of support which was best aligned with PRSP priorities, but this perhaps can also be a consequence of the fact that the national development strategy was developed being influenced by WB`s PRSP approach specially to guide the Bank's assistance in Moldova (Sandu 2009, p. 318) 31 . A short description about the aid priorities of the major donors active in Moldova fixed in their development cooperation strategies (where is the case country strategy papers), or otherwise in agreements, protocols and/or the facto activities under implementation in Moldova, will provide more details about the specific of their work. The EU is the major donor and is also performing the most complex set of aid activities in Moldova. EU`s assistance has increased by 5 times in the last 6 years from 25 million in 2006 to 122 million Euro in 2012 and represents the highest level of support for a country in the European neighborhood (State Chancellery 2012, pp. 10-12). The legal framework for cooperation was established in 1994, when Moldova signed with EU for an initial period of 10 years a Partnership and Cooperation Agreement (PCA) entering into force in 1998. The PCA provided a general framework for development of economic and political relations, trade and investment social and cultural cooperation. The 2004 enlargement led to a reconsideration of the EU foreign policy which became more engaged in its neighborhood. Another agreement EU Moldova Action Plan (2005- 2008) was concluded and provided a framework for EU activities in Moldova. In 2007, EU elaborated a special policy towards neighborhood countries European Neighborhood Policy (ENP)
29 USAID country development cooperation strategy 2013-17 p. 15 http://www.usaid.gov/results-and- data/planning/country-strategies-cdcs 30 Orysia Lutsevych, How to Finish a Revolution: Civil Society and Democracy in Georgia, Moldova and Ukraine pp. 3-6 http://www.chathamhouse.org/publications/papers/view/188407 31 I will refer more thoroughly about this in the chapter regarding alignment of the donor`s aid to national priorities 37
and an Action Plan. The ENP was developed with the objective to avoid dividing lines in the continent and contribute to security, stability and prosperity. The ENPAP defines more concrete areas of cooperation such as political dialogue and reform, settlement of the Transnistrian conflict, economic, social, market and regulatory reforms, cooperation in justice and home affairs and trade, transport, energy and environment, people to people contacts related issues. Even if at the first sight it seems that its focus is development cooperation, in fact, it can serve also other purposes. ENP is a key EU foreign policy strategic for addressing the objectives fixed in its Security Strategy (Spruds et al 2008, pp. 4-9). The Country Strategy Programme (CSP) objectives for the period 2007-2013 are to tighten the relationship between the EU and Moldova, contribute to resolution of the conflict in Transnistria, and to promote economic growth and poverty reduction in accordance with PCA, EU Moldova Action Plan and ENPI (NIP 2011-2013, pp. 4-5). In addition to this, the National Indicative Programme (NIP) (2011-2013) has an envelope of 273.14 million Euro assistance 32 and will focus on such areas as good governance, rule of law and fundamental freedoms 33 (ibid, p. 12). During the period 2004-2012, besides the ENPAP instrument providing annual sector budget support, other assistance priorities of EU in Moldova also included the global thematic Food Security Programme (FSP) (from 2002 - 2006 around 30 million Euros) which allocated budget support grants to improve government capacity to formulate and implement reforms, to reduce poverty and ensure food security. The budget support was complemented by technical assistance to improve the administrative capacities. The allocations of budget support were conditioned by progress in adopting structural adjustments and social system sector reforms (Pot et al 2010, p. 36). Another humanitarian programme was an aid of 3 million Euro in 2007 under Drought recovery, project focused on most affected regions. The macro-financial assistance programme compensated the increase of energy prices (2007-2008) comprised 90 million Euro was used also to mitigate the negative effects of financial crisis (2011-2012). The multi-country EU cooperation instrument TACIS grants 34 and from 2007 CBCs 35 involved interventions scaled at national
32 Mainly technical assistance and budget support grants. Technical assistance, budget support, macro-financial and humanitarian assistance represents grants. 33 71% for rule of law, human rights and security, public administration reform, facilitation of new EU-Moldova Agreement), social and human development (11% for social protection, health system reform, labour market reform and education) and trade and sustainable development (18% for facilitation of DCFTA, regional and local development, environment and energy efficiency/renewable energy and diversification. 34 Mainly technical assistance for national for regional and cross-border components 35 Technical assistance and investment projects 38
regional, sub regional or cross border level to complement national development cooperation strategies. It has supported institutional, legal and administrative reform, the private sector and assistance for economic development and addressed the social consequences of transition. The issues aimed under this instrument have a trans-border character such as border management and trafficking, environmental, transportation issues and energy corridors. The regional cooperation was enabled in three domains: networks (INOGATE oil and gas infrastructure, TRACECA (technical assistance and investment in railroads, roads and ports), environment (education and awareness rising and policy making support in water, biodiversity, forests, climate change issues) and justice and home affairs (JHA border management for preventing drugs, smuggling, crime and terrorism, migration and asylum). Another priority for EU development cooperation represents the Transnistrian conflict. The most significant support in this respect is EU Border Assistance Mission (EUBAM), EIDIHR instrument to support the civil society organizations work in the areas of justice, freedom and security, economic development (CSP 2007-2013 p. 11, MacKellar et al 2007, pp. 138-148). Recently another programme developed was Democracy support and confidence-building measures (Instrument for Stability) with a budget of 18 million Euro committed and 28 million Euro planned 36 . Other forms of assistance included efforts to increase institution`s capacities using Twinning projects 37 , TAIEX 38 , while SIGMA supported central public administration reform, modernization of public procurement and public internal control systems. The European financial instruments EBRD 39 , EIB and CEB are providing support in loans for infrastructure 40 , technical assistance, financing sustainable energy (20 million EBRD), finance credit lines for private sector (34 million EBRD), rehabilitation of power networks 41 and social infrastructure 42 (State Chancellery 2012 pp. 10-12, State Chancellery 2013, pp. 25-29).
36 EU - Moldova relations: basic facts http://eeas.europa.eu/delegations/moldova/eu_moldova/index_en.htm 37 8 in implementation in 2012; 3 completed in 2012, 4 launched and 5 projects in the preparation stage 38 87 events for 1244 civil servants 39 A brief on EBRD activities can be found here http://www.ebrd.com/downloads/research/factsheets/moldova.pdf 40 Roads rehabilitation, maintenance and building 75 million Euro (EBRD), municipal infrastructure of 11 million Euro by EBRD 41 SA Moldelectrica EBRD/EIB 52,6 million Euro 42 Rehabilitation of the Republican Hospital and housing project for socially vulnerable people 33, 7 million Euro financed by (13, 4 million Euro by CEB), Neighborhood Investment Facility (NIF) and own sources (Government). 39
Since 1993, Moldova had had a series of agreements with IMF for economic adjustment programs 43 . After the Government has submitted to IMF and WB the elaborated EGPRS (2006) a 3 year IMF Poverty Reduction and Growth Facility was agreed. The main objective of the programme was to maintain macroeconomic stability and improve the performance of financial sector. Its implementation was reviewed 4 times and expired without disbursement of the 5th tranche. After the financial crisis, Moldova has confronted with a difficult situation of worsening of the fiscal situation and lack of access to international capital markets. Therefore, in 2010, a loan was approved under the Extended Credit Facility and the Extended Fund Facility (ECF/EFF) with a combined financial assistance of around 574.4 million USD to support the countrys economic program. An amount equivalent to 60 million USD was made available immediately, while the rest of funds was contingent to semiannual reviews (Qehaja 2012, pp. 19-23). The World Bank's Country Assistance Strategy (CAS) for 2005-2008 focused on 3 priorities: reducing poverty by promoting economic stability, growth, and employment, improving access to social services and minimizing environmental risks, and improving governance and fighting corruption. The CAS budget was between 90 million and 137 million USD (European Commission 2013, pp. 35-36). From 2009 2012, the WB has offered concessional lending around 123 million Euro with a disbursement of 84 million Euro and additional 19, 5 million were provided by Trust Funds administered by WB. The three major areas of support intended an improvement of economic competitiveness, minimizing social and environmental risks and building human capital and promoting social inclusion and improving public sector governance (European Commission 2012 pp. 28-29). It also established a support for localities from both banks of the Nistru River (WB 2013, p. 8). The CPS 2014 2017 will help Moldova to benefit from the openness and integration in EU and in the global market. The first priority aims to increase competitiveness through continued institutional reforms for friendly environment business and governance, access to finance and transparency in the financial sector and improved competitiveness. The second refers to improvement of human capital and minimizing the social risks. It envisages also a support for improvement of education and health sector outcomes and strengthening the social protection schemes. The third will promote a green agenda and improve natural resources management and
43 Compensatory and Contingency Financing Facility (CCFF), Systemic Transformation Facility (STF), Stand-by arrangements (SBA), Extended Fund Facilities (EFF), Poverty Reduction and Growth Facilities (PRGF), and (after 2009) Extended Credit Facility (ECF). 40
ensure sustainable development (ibid, p. 18). The World Bank portfolio 44 was broad, covering almost every sector with demonstrated highest concentration in infrastructure, human development and rural development. Additionally, WB has administered around 70 million USD multi-donor Trust Fund portfolio which provided co-financing for IDA activities in areas like GEF and carbon operations, Regional Development TF and Public Administration reform. (State Chancellery 2012 pp. 10-12, State Chancellery 2013, pp. 25-29). The UN Development Assistance Framework (UNDAF) (2013-17) guiding the assistance of all UN institutions active in Moldova 45 focuses on three broad thematic pillars: democratic governance, justice, equality and human rights, human development and social inclusion, and environment, climate change and disaster risk management. The first envisages to strengthen the institutional capacities on both central and local levels (regional development) for good governance by attracting international expertise to assist them. The second promotes principles such as human rights and democracy, ensure equity by improving the social services delivery and advocating for more inclusive opportunities for people. The third aims to ensure sustainable development, help authorities to better manage the risk hazards and adapt to climate change (UNDAF 2013-17 pp. 12-13). The current UNDAF main priorities do not differ significantly from the last one 46 (2007-2011) (State Chancellery 2013, pp. 25-29). The U.S. Government has a regional approach towards countries in Eastern Europe (Joint Regional Strategy (JRS) 2014-2016 for Europe and Eurasia) with a declared goal to contribute at the consolidation of peace and stability. The main objectives in this respect to help to achieve this outcome are more effective and accountable democratic governance and increased broad based trade and investment. Traditionally, US Government was a significant donor for Moldova providing one of the largest share of bilateral aid which Moldova receives. US assistance is delivered through programs implemented by the US Embassy in Chisinau, USAID, distinct agencies and state institutions and MCC. The US Embassy and USAID grant assistance supported democratization, rule of law, corruption fighting, trafficking, media and non-governmental organizations development, improving the business climate in Moldova and helping the country diversify its export (State Chancellery 2012 pp. 10-12, State Chancellery 2012, pp. 25-29). Derived
44 WB portfolio has around 12 projects with commitments at around 300 million USD in the period 2011-2012 45 Mostly technical assistance 46 In 2011 contribution of UN agencies totaled 23 projects with an estimated budget of 63.8 million USD and increased to a number of 98 projects amounting to about 50.5 million USD. The UN institutions are implementing donors and most of their funds are fundraised from such donors as EU, Sweden, Denmark and Romania etc. 41
from its regional approach, the USAID country strategy (2013-17) asserts that that democratic and economic gains are closely and inextricably related. Thus, the first objective intends to develop more effective and accountable democratic governance by improving judiciary and law enforcement bodies, increasing local government capacity and capacity of civil society to deliver high quality public services, transparency in policy formulation and building the capacities of governmental institutions to react on increasing social and economic pressures. The second objective aims to increase investment and trade in targeted sectors by helping to diversify the export and increase the investment base, introducing structural, regulatory, policy-level necessary to ensure friendly environment for business, increasing foreign and domestic investment and of its competitiveness focusing on the most promising economic sectors. The improved economic opportunities are expected to grow incomes, provide more jobs and increase the quality of life (USAID CDS 2013-2017, pp. 10-12). MCC provided grant assistance for agriculture development (transition to high value agriculture project) and road rehabilitation. Before to be eligible for MCC full-fledged Compact grant assistance, Moldova has undertaken reforms under the Treshold programme supporting policy and institutional reforms. During 2011-2012 year, an overall number of 25 grant projects financed by US Government were under implementation with a budget of around 280 million Euro in such sectors as agriculture and rural development, health, governance and civil society, justice, private sector development, education, etc. (State Chancellery 2012, pp. 10-12, State Chancellery 2013, pp. 25-29). Other most significant donors include Sweden which is the largest European bilateral donor to Moldova and provides around 100 million SEK in grants per year (in 2012 it has increased with 10% to 110 million SEK). Sweden`s implementing agency is Sida with priority activities that include democracy, human rights and gender equality (strengthening civil society and public administration capacities, transparency, accountability and anti-discrimination), sustainable infrastructure (energy efficiency and the spread of sustainable energy alternatives, where it is the lead donor) and confidence-building measures that target Transnistrian conflict resolution. Sida is also providing technical expertise to support institutions to harmonize national legislation with EU`s in the energy sector, implement environmental standards (sewage treatment and waste management) and market development by supporting transition of micro enterprises to new EU regulations (Sweden SDC 2011-2014, pp. 4-8, State Chancellery 2012 pp. 10-12, State Chancellery 2013, pp. 25-29). Germany is offering through GIZ technical assistance grants for structural reforms (consultancy at the central level), improvement of local infrastructure in 42
Moldova and financial assistance for private sector (KfW). The other areas of intervention are agriculture, education and regional development with 5 projects amounting to about 12.9 million Euro in 2012. The German development cooperation has a tendency to increase. In 2013 it has totaled about 19 million Euros in technical assistance allocated for implementation of infrastructure projects in the countrys development regions (divided in North, Center and South) and Transnistria. Austria`s development agency (ADA) and Government of Switzerland through SDC allocate grant assistance for infrastructure water and sanitation (ADA, SDC) and social services such as: vocational training in rural areas, capacity building in public administration, conflict prevention and reintegration of returning migrants (ADA), public health (ADA, SDC) with around 10 projects of 16, 6 million Euro and 3 projects of 14 million Euro. Denmark provides assistance for young entrepreneurs in rural areas (4, 5 million) and makes financial contributions to Trust funds managed by Sida and UN agencies (State Chancellery 2013, pp. 25-29, State Chancellery 2012 pp. 10-12). Another bilateral donor is Romania, which besides its bilateral assistance of around 1 million (grants for agriculture, health, good governance, education and media) and allocations offered using the UN system (for local development, social protection, civil society development and human rights), has committed to offer Moldova in 2010 47 a grant of 100 million Euro 4849 . The education sector (schools and kindergartens) will receive 20 million 50 . In the recent period China emerged as a donor for Moldova allocating grants for specific domains chosen by Government on annual basis (through signed protocols). The Chinese aid is tied to goods and services and reflect both parties commercial interests. China is interested in commercial opportunities for its investments which Moldova offer having access to both EU and CIS markets. Moldova relies on Chinese market for export of its agricultural products (especially wine) attracted by the growing potential of it. A loan offer of around 1 billion was declined 51 . Later another credit
47 Romania to grant Moldova 100 million euros http://www.allmoldova.com/en/moldova- news/economics/1249046149.html 48 The pledge was not honored with the exception of 7 million Euro humanitarian aid offered for mitigations of floods consequences in 2010. Only recently, new arrangements were signed to extend the effect of the grant agreement and to decide the destination of the remaining funds. 49 Valentin Lozovanu ODA cooperation between Romania and R. of Moldova http://www.crpe.ro/en/the- acceleration-of-delayed-cooperation-analysis-of-the-relationship-regarding-development-assistance-between- romania-and-moldova/ ; http://www.crpe.ro/wp-content/uploads/2012/09/Policy-Brief-nr.-8-mai11-Romania- Moldova.Accelerarea-unei-cooperari-intarziate.-Analiza-cadrului-relatiilor-de-asistenta-pentru-dexvoltarea-dintre- Romania-si-Republica-Moldova.pdf 50 http://www.gov.md/libview.php?l=en&id=7142&idc=436 51 Valentin Lozovanu China becomes a new player on the Moldovan stage http://www.isn.ethz.ch/Digital- Library/Publications/Detail/?ots591=0c54e3b3-1e9c-be1e-2c24-a6a8c7060233&lng=en&id=121699 43
agreement of around 62 million USD for road rehabilitation 52 has been agreed. In 2011 Moldova and China have signed a grant agreement on economic and technical cooperation of 9.5 million USD for a domain which will be identified during further negotiations. Other 6, 6 million Euro were allocated in 2012 for equipment and IT for traffic monitoring system (State Chancellery 2013, pp. 25-29, State Chancellery 2012 pp. 10-12). Other smaller contributions from bilateral donors include grants offered directly or using other donor systems (Trust funds managed by WB or UN programs) by Japan, Poland, Slovakia, Hungary, Czech Republic, Holland, Liechtenstein, TIKA, Norway, Latvia, Estonia etc.
2.4. The institutional framework of foreign aid management The institutional framework has a significant role as it determines how efficient and optimal national institutional framework is to implement projects financed with the support from donors. Historically the planning coordination and evidence of external assistance was divided between the Ministry of economy (technical assistance) and Ministry of finance (financial assistance), and occasionally Ministry of Foreign Affairs. This arrangement was characterized by a series of deficiencies: poor evidence of the assistance (especially technical assistance), uncoordinated support requests from authorities, weak linkages with national planning strategies. In 2005 the national institutional framework has been modified. A national Committee for external assistance under the leadership of Prime-minister was established together with a section for aid coordination within the Government Apparatus. The Committee was charged with strategic policy functions in coordination, planning, monitoring and evaluation of foreign aid including the ability to approve and send requests for assistance. The technical and financial coordination has remained at the level of these two ministries (MoE and MoF). The sector level involved a dialogue with the donor organization through special ministerial committee meetings. The new arrangement has solved only partially the deficiencies in coordination, because the delimitation of functions between these 3 institutions continued to be ambiguous, while the capacities of the aid coordination unit created were limited. 53 After the inauguration of the new Government in 2008, a new structure was approved which has combined the functions of policy coordination with foreign aid. All policy
52 Tadeusz Iwaski Ukraine, Belarus and Moldova and the Chinese economic expansion in Eastern Europe http://www.isn.ethz.ch/Digital-Library/Publications/Detail?lng=en&id=144470 53 Until 2008 this unit had only 3 persons. Later it was extended to 5 and only in 2012 after reorganization the Division`s personnel has significantly increased. 44
responsibilities regarding aid coordination were transferred at the level of Government Apparatus. At the same time, the ministries were left only with sector coordination or in the case of the Ministry of Finance financial aid management. This fusion intended to ensure a better alignment of the foreign assistance with national priorities. During this time, the technical capacities of the strategic planning policy and aid coordination division increased, but still were not enough to increase its effectiveness and alignment with the national policies. Moreover, the increasing calls for accountability, transparency and national ownership of foreign aid led to attempts to bring more stakeholders in the policy process. Despite this, the pursuit to combine the functions of the National committee of foreign assistance with those of the National participation council have failed and the involvement of the civil society in the dialog concerning foreign aid was quite limited. Moreover, the national aid coordination system was plagued by excessive centralization. The purpose of establishing of the new division was to improve the external and internal coordination mechanisms, determine the necessities at the macro level and promote the harmonization agenda, but not to replace the work of the ministries and specialized agencies. The overview over the degree of efficiency of the projects, their coordination and alignment with sector priorities can be best performed only at the level of ministries and relevant governmental agencies. Therefore, the increasing of capacities in these institutions will be essential for an improvement of the efficiency and efficacy of foreign aid. In order to improve the donors` coordination and inspired by global initiatives related with aid effectiveness, a group of donors has signed with Government a Partnership Framework for development in 2006. An action plan was elaborated and a Secretariat for supporting the implementation of the document was created 54 . Nevertheless, its implementation was not realized and the Secretariat financed by UNDP has been active only several months (Sandu 2009, pp. 324-325). From 2010, the normative framework and institutional setting for aid coordination was ensured by the Regulation regarding the institutional framework for coordination of the external assistance provided by international organizations and donors for Republic of Moldova 55 . The Government Decision establishes a high political forum the Common Partnership Council for coordination of
54 The Action Plan required elaboration of a mechanism of data collection about the foreign aid, exchange of information between Government and donors and improvement of the normative basis, elaboration of Sector Wide Approaches Programs and common programs, projects and programs TORs, audit standards, trainings, and dissemination of information and analytical reports. 55 G.D. #12 on 19 January 2010 regarding the institutional framework and mechanism of coordination of external assistance given to Moldova by international organizations and donor countries (version available in Romanian and Russian) http://lex.justice.md/index.php?action=view&view=doc&lang=1&id=333522 45
aid effectiveness and sector councils of external assistance which is an advisory body that reflects the partnership between government, civil society, private sector and development partners. (OECD/UNDESA 2010, pp. 3-4). Another body, the Inter-ministerial Committee for strategic planning was enacted with functions of coordination of policy and resources planning with the involvement of all national stakeholders (State Chancellery 2012, p. 87). The State Chancellery 56 is the main authority for coordination of external assistance. The Department of coordination of policies, external assistance and central public administration reform is performing the functions of national coordination unit and is responsible for elaboration of strategic programmes and policies, and coordination of all the external assistance on behalf of the Government of Moldova. The NCU`s main mission is to ensure that foreign aid is aligned with the national priorities and to monitor and evaluate the effectiveness and efficiency of received aid. Other functions include efforts to improve transparency, ensure record keeping, coordinate with other national institutions and donors in order to improve aid coordination and improve the absorption capacity (ibid, p. 47, State Chancellery 2013, p. 10). Additionally, NCU provides necessary support for efficient operation of the Inter-ministerial Committee for Foreign Assistance Coordination; carries negotiations with the donor community; provides support in elaboration and negotiations of the sector government contracts; identifies new financing resources, provides assistance for formulation of the new projects by national authorities, or participates at the elaboration of the design of future operations of donors when it is involved by donor etc. (Gaibu et al 2011, pp. 34-35). In 2010, the Government following a consultative process with development organizations agreed a Development Partnership Framework for Coordination and Harmonization of Government and Donor practices of aid effectiveness in Moldova. This initiative was influenced by global processes concerning the efficiency of aid 57 was quite similar with the first one and provided a set of rules to guide donors and Government activity. Twenty one donors have signed the Partnership Principles with its Implementation Plan based on five principles highlighted by Paris Declaration: ownership, alignment, harmonization, results and mutual accountability. The PPIP is organized around four key issues: strategic planning and alignment with national priorities, improving national systems and increase use of these by donors, improving coordination and harmonization
56 Former Government Apparatus, in 2009 it was renamed in State Chancellery 57 Monterrey Consensus (2002), High Level Forum on Harmonization from Rome (2003), Paris Declaration (2005), Accra (2008) and the adoption by European Union countries of the EU Consensus for Development and a Code of Conduct on the Division of Labor in Development Policy in 2007. 46
between donors and Government and improving communication, transparency and information sharing (PPIP 2010, pp. 9-10). The realization of activities from PPIP was expected to improve the efficiency of use of resources for realization of the Government priorities and development targets set in the NDS for 2008-2011 and ESRP for 2009 - 2011. However, the PPIP emphasis is placed mainly on the modality of cooperation between the Government and development partners and does not specify a set of specific development results. Moreover, there are no strong time limits for PPIP (though there might be some timeframe objectives). PPIP will be reviewed regularly by all of the stakeholders (OECD/UNDESA 2010, p. 2). Another document guiding the EU institutions and member countries aid is the EU Code of Conduct in providing Development aid which intends to introduce a better coordination of donor`s work through complementarity and division of labor between EU donor countries, including the EU`s own assistance. It also attributes different roles that Development Partners might play in one sector lead, active or silent partner. Moldova has been selected to be a pilot project for the exercise of fast track donor`s division of labor and an operational framework was elaborated. The adoption of Code is to avoid duplication of donor`s missions, concentration of donors in the same sector (leaving orphan domains), harmonization of donor`s requirements, conditions, procedures, avoid duplication and lower the transaction costs which are limiting the impact of aid. A matrix with an Action plan was added with progress indicators for monitoring by a special forum of donors and Government Harmonization group. The EU Code of Conduct suggests that donors should focus on no more than two sectors and no more than 3 donors per sector. However, despite that it has been already for some time in place, there is no assessment of the progress of the implementation of its principles. Moreover, as the mapping exercise of donor`s activity against NDS strategy priorities has shown in 2010, many partners are involved in more sectors than the Code indicates (PPIP 2010, pp. 3-27). As the evaluation report of external assistance 2012 of the State Chancellery shows, the presence of the donors is still fragmented across sectors (UN 9, EU 8, WB, Germany - 6). This situation is posing difficulties for efficient coordination and achievement of specific results (State Chancellery 2013 p. 17). Besides the more formal mechanism of coordination there are also regular monthly donors meetings. The secretariat of the donor`s meeting is exercised by UN and the key purpose is the information sharing. Another coordination mechanism exists between the EU countries chaired by the EU Delegation (PPIP 47
2010, pp. 3-27). Another more technical level was established at the sector 58 level, where ministries monitor, evaluate and coordinate the process and supply with proposals the Inter- ministerial strategic planning Committee and Common Partnership Council. The Sector foreign assistance boards (also called sector coordination boards), include an advisory body with representatives from Government, donors and civil society (including the private sector) (PPIP 2010, p. 24). At the regional or local level, institutional framework of aid management is exercised by the Ministry of Regional Development and Constructions, as the authority in charge with elaboration and implementation of the regional development policy. Regional development agencies were established (North, Center, South and other to be set in Chisinau, ATU Gagauzia, and Transnistria) to manage regional and local development and attract and coordinate support from foreign aid. A National Fund for Regional Development (NFRD) is financed from internal resources (1% of the state budget revenues) and external funds provided by some donors such as DFID, GIZ (Gaibu et al 2011, pp. 30-31). Despite the changes in the mechanism of aid coordination introduced by the new GD, the functional division of labor between technical assistance (State Chancellery) and loans (MoF) remained largely unchanged. The distinction between the aid coordination functions performed by State Chancellery and MoF has involved a division between programing and negotiations (State Chancellery and MoF) and implementation issues (line Ministries / Sector Coordination Councils) but, this as it will be explained in the chapter regarding the constraints, is more apparent than real. For instance, currently, the humanitarian aid is managed by the respective division from the Ministry of Labour Social Policy and Family. The Ministry of Foreign Affairs and European Integration is responsible for the negotiations related to the initiation of the Community programmes in the framework of the Association Agreement, while aid related with regional or thematic programmes is coordinated by respective ministries (CBC/INTERREG, Black sea synergy), regional and horizontal programmes (Ministry of Transport and Roads Infrastructure for TRACECA, Academy of Science for FP7 etc.). In spite of the efforts to ensure a clear division of roles in donor coordination, it is becoming ever more problematic to avoid further fragmentation of responsibilities which affects overall the effectiveness of aid. The changes in volumes, types of aid and delivery mechanisms used by donors continue to pose pressures on the management
58 Or programme/project level for instance the Roads Sector Investment Programme 48
capacities of the national institutions and require some changes in the institutional setting (State Chancellery-TTSIB 2012, pp. 19-20).
49
Chapter 3 3.1. Analysis of foreign aid offered to Moldova (2004-2012) There are two types of foreign aid (or ODA): financial and technical assistance which represent grants and loans. Financial assistance involves budget support grants/loans to cover state deficit and investment projects 59 or support for maintenance of the states balance of payments. Technical assistance is a transfer of knowledge for training, human resource development or research and covers the costs associated with this. This can involve different social projects, central and local authorities` capacity building and civil society projects or support for preparation and implementation of different investment projects etc. Throughout 2004-2011, the Republic of Moldova has benefited from external assistance of around 2.99 billion USD 60 , 2.10 billion USD of which are grants (71%) and 888.8 million USD (29%) loans 61 (Table nr. 3 of the Annex). The distribution between the years is irregular but shows a clear tendency of ODA flows to grow over time. Before the adoption of PRSP (2003-2004) the Government had difficulties in negotiating policies with international financial organizations (IMF and WB) which resulted in a decrease of the volume of assistance. The cooperation programs of IMF and WB were suspended due to insufficient progress in reforms and only the volume of technical assistance was maintained at the same level as in previous years. The period 2005-2007 was marked by the increase of the volume of aid determined by growing assistance from EU and international financial institutions (IMF, WB) (Table nr. 7 of the Annex) (Sandu 2009, pp. 311-312). For 2012 the State Chancellery report estimated the aid provided by donors to be about 474 million Euros (around 645 million USD 62 ).
59 With the exception of IMF support which aims to address balance of payments needs and thus goes to the central bank
61 The data are based on calculation of data taken from OECD and State Chancellery. Currently there isn`t a single database which would collect all the data from donor`s and Government and present the information about ODA from the 1992 or at least for the last decade. Moreover, the data which donors are publishing on their websites are not complete (most of the time is not updated), are not sufficiently detailed or comparable. For instance the information published by OECD often can differ from other donor`s organization making public data about aid (WB) or State Chancellery. 62 These are the estimates of the State Chancellery comprising also non OECD donor`s contributions (OECD gives 476.55 million USD) which differ from those recorded by OECD. It is not uncommon that the data recorded by recipient and OECD (based on OECD donors reporting) are varying. However, I have tried to stick mostly to one source OECD as it has more detailed data and occasionally WB`s WDI and State Chancellery when the data from OECD were missing. 50
The share of aid disbursed in 2012 in GDP is about 8.26% of GDP 63 and 21.65% of the current National Public Budget. About 109.4 million Euros (148.8 million USD) were received in the form of grants and 97.1 million Euros (132.07 million USD) in the form of loans (EBRD, EIB, and WB) which represents a grant loan parity of 53% and 47% of aid received in 2012 (State Chancellery 2013, pp. 15-25). To estimate the capacity of national authorities to attract aid and the degree to which a country's development level determines the degree of donor support, the data on Moldova will be compared with a number of countries with a similar level in terms of level of for 2004-2011 64 (Table nr. 5 of the Annex). According to OECD estimates Moldova has received a net volume of aid 476.55 million USD in 2012 with a level lower than Georgia and Kosovo and almost the same as Kirgizstan but the average and total volume are lower than most of the countries from the group (Table nr. 4 of the Annex). With a net value of 131.79 USD of foreign aid per capita in 2011 it is the second in the group after Kosovo and had almost the same level of support as Georgia. However, on average with 79,24 USD per capita it is ahead only of Tajikistan, Kirghizstan and Azerbaijan while Kosovo, Georgia, Albania, Armenia and Macedonia benefited from significantly higher volumes of assistance. At the same time, comparing the percentage of foreign aid flows in the GNI in 2011 Moldova was the third in the group after Kosovo and Kirghizstan (Table nr. 6 of the Annex). Nevertheless, on average, the percentage of aid in GNI was significantly lower than that of Kosovo, Kirgizstan, Tajikistan, close to that of Georgia and higher than Albania, Armenia, Azerbaijan and Macedonia. It is interesting that countries with higher levels of GNI per capita (Table nr. 2 of the Annex) have received more aid than Moldova which in 2011 was the third with lowest ratio net ODA per GNI in the group after Tajikistan and Kirgizstan. 65 Tajikistan and Kirghizstan can be classified in the group of countries with low levels of income and Moldova in the low middle income level 66 while the others are upper middle income level countries. In conclusion, overall Moldova has received less aid than other countries with comparable or even higher income levels.
63 It has constantly risen from 1.6% in 2006, 2.9% in 2007, 2.3% in 2008, 2.6% in 2009 and 6.3% in 2010, 6.6 % in 2011 (data based on calculations from WB WDI and the study of Gaibu et al 2011, p. 26). 64 For 2012 data could not be found for the whole group of countries (OECD or World Development Indicators). 65 This situation can be explained that due to difficulties in negotiation with IFI`s in 2002-2003 Moldova has received less financial aid. Unfortunately, the aid statistics generated by OECD, WB, UN or national authorities does not offer data about the distribution in the volumes of aid across countries of financial and technical assistance for the whole period 66 The OECD, classifies beneficiary countries in 4 groups: (I) Least developed countries (II) countries with low levels of income (GNI per capita < 825 USD); (III) countries with low middle income level (GNI per capita 826 3.255 USD), and (IV) countries with upper middle income level (GNI per capita 3.256 10.068 USD). 51
One explanation might be the low level of financial aid received due to difficulties in negotiations with IFI`s during 2002-2003 years, low level of absorption and donors' priorities. However, in the last years the volume has increased due to growing financial aid in the form of budget support and investment projects. One explanation is the change in donor priorities (especially EU), improved dialogue with Government and strengthened country institutions and financial and procurement system. In 2006 67 , in order to increase the support from donors the Government has convened a Donors' consultative meeting for Moldova. One of the reasons was the negative effects of external shocks which required significant additional funds to cover the financial deficit of an average estimated by IMF at 61 million USD for 2007 and 57.5 million USD for 2008. The donors have expressed their willingness to support the Government and made a pledge of around 1.2 billion USD for the period between 2007-2009, 25% of which were for budget support and balance of payment. The new commitments represented only 43% of the pledge; the rest of funds were money for the projects already approved (Sandu 2009, p. 313). After 2009, the Republic of Moldova has engaged in a more firm course towards European integration. In addition, the resumption of the IMF program signaled the authorities efforts to manage the macroeconomic instability problems and counter the effects of the economic crisis. The international community has reacted and supported authorities reforms reflected in the Rethink Moldova 68 document at the Consultative Group meeting in March 2010 with a pledge of around 2.6 billion USD or 1.84 billion Euros (0.96 billion in grants (52%) and 0.88 billion in loans (48%) over 2010-2014. Most of this support was foreseen as budget support (873.28 million Euro or 1.19 billion USD around 45%) (Qehaja 2012, pp. 19-23, State Chancellery 2013, p. 15). Foreign aid, and especially financial aid is given to countries with limited access to external financial resources. Until 2006, the amount of FDI in Moldova was almost the same as the foreign aid. In 2007 and 2008 FDI levels even surpassed the volume of aid but in 2009 it has fallen and never recovered. The volume of FDI in 2012 was 4 times less than that of aid. At the same time, the volume of remittances has increased fast and has exceeded by 2-3 times the volumes of ODA and FDI combined (Figure nr. 2 of the Annex). These flows became an important source for
67 Donor`s meetings represent a good modality for mobilization and coordination of aid. This sort of meetings are taking place usually once in 3-4 years when a new national development program is launched. 68 Rethink Moldova represents a mid-term complementary document elaborated to simplify and actualize for donor financing the priorities already fixed in NDS (2008-2011) and the Economic Stabilization and Recovery Program of the Republic of Moldova for the years 2009-2011 and Government Programme. 52
compensating the trade balance deficit, reducing the pressure to contract loans for the balance of payments support. The growing GDP per capita and easier access to external capital should decrease the volume of foreign aid. However, given the previous low levels of financing and recent commitments of donors in the mid-term, the volume of aid will most probably increase 69 (Sandu 2009, p. 314). Financial assistance 70 is reflected in the national budget and can have two destinations as budgetary support and means for investment projects implementation 71 . Budget support is given to assist the implementation of Government policies for poverty reduction and economic growth and is transferred using national financial and procurement systems. In this respect, the use of money is a subject of negotiations with donors, together with policy conditionality attached to aid. However, when aid is used for implementation of investment projects, most of the times, the donor`s own or other organization`s 72 financial and procurement systems are employed bypassing the national systems. This modality was criticized because of increasing transaction costs, weakening the national institutions by creating parallel implementation units and making coordination, monitoring and evaluation difficult. According to the 2012 State Chancellery report on foreign assistance, the implementation of projects in 2012 accounts 75%, channeled as budget support (17%), and the remaining volume is technical assistance and maintenance of the states balance of payments (State Chancellery 2013, p. 15). The international aid effectiveness initiatives highlight the increasing importance of the use of national systems for channeling foreign aid. Given that budget support is becoming the preferred modality of support for the major donors, financial assistance share will increase in the total aid.
69 The volume of aid will increase in the mid-term due to assistance from EU and MCC (US). Nevertheless, in the long term aid is expected to decrease. Several donors have announced that they will gradually diminish the volumes of assistance given the reasons expressed above. DFID has already withdrawn. However, due perhaps to geopolitical reasons, EU integration course of Moldova and/or worsening macroeconomic and social indicators for a while some donors continue to increase their assistance (USAID, Germany, EU, Sweden etc.) despite the fact that many of them have shown before opposite signals. 70 Unfortunately, no data is available which could give any hint about the volume of financial and technical assistance as percentage of total aid. The old Government database of the NCU (IDEA) was not able to generate such information (besides other technical parameters for generation of information) and therefore it was replaced with another one (Development Gateway) which soon will be launched. OECD and WB database also lack this information. 71 The strict delimitation between financial and technical assistance is difficult because investment projects often contain components of technical assistance which are not counted separately. Moreover, the diversity of aid operation often include mixed forms of aid instruments (regional, cross-border, thematic projects and programmes etc.) 72 In particular cases the financing donors use other donor`s implementing systems (implementing donors). For example EU aid is given using UN institutions which are implementing EU financed projects and programmes. 53
Together with this, the state capacity and responsibility to use aid efficiently (strengthen financial and procurement systems) need to be adjusted. Since 2008 Moldova`s financial and procurement systems have improved and were evaluated as presenting moderate risks and corresponding with the basic criteria of efficient systems of financial management and public procurement (Gaibu et al 2011, p. 36). For the first period after 2004, despite the fact that the volume of financial aid has increased, the net flux of resources 73 was negative, reflecting a higher value for the repayments of the external debt which was accessed before 74 . This situation has changed only in 2007 when Moldova became eligible for IDA (WB) and IMF concessional loans and the share of concessional loans and direct budget support has increased. Technical assistance has comprised around 20% 75 of total aid in 2010 and even if its share out of total aid is less than before and 70% of it (91 million USD) was reported as a coordinated technical cooperation, a fragmentary tendency in capacity building actions 76 is still maintained in 2010. The problem is that it tends not to be reflected in the national public budget, which makes it difficult to monitor against the NDS and other sector strategies and objectives. The national authorities cannot efficiently monitor technical assistance delivered using an enormous number of projects - over 200 in 2010 77 , for a consolidated assistance approach. Therefore, the efforts for coordination and monitoring of implementation of these projects impose higher transaction costs for donors and pressure on Government capacities than in the case of financial assistance. A capacity building assistance program can be considered only when it is harmonized with the sector strategies, with concrete measures for identified needs (OECD 2011, p. 5). The aspect regarding the objectives financed by foreign aid is discussed in the next chapter where donors' contribution is assessed in terms of national development priorities.
73 Moldova had to repay the debt accumulated during 90` which volumes were higher than the financial aid allocated by donors per year. 74 This situation is due to higher levels of indebtedness from previous decade. From 1999 WB and IMF is offering concessional loans. However with increasing GDP per capita Moldova will soon graduate IDA conditions and will be eligible again only for non-concessional IBRD and other organization loans. 75 It should be taken into account that the lower level of technical assistance is due to increased budget support from WB and EU rather than a significant change of other donors approach. 76 There is no capacity building strategy and donors allocate technical assistance using small projects for a wide range of sectors. 77 In 2014 the number is even higher 365 projects 54
3.2. The correlation of foreign aid with Moldova`s development priorities. Does aid promote Moldova`s development? Besides aid volumes, questions regarding the quality and relevance of aid for a country`s needs are even more important. Both variables are difficult to evaluate because of quality of data 78 , the fragmented donors' approach, absence of regular monitoring and evaluation reports of the Government and donors on aid effectiveness and the contribution of donor`s aid in the realization of priorities 79 . Foreign aid tends to rather reflect donor`s individual approach (regional and/or country strategies) which is not always designed with the participation of the Government and other actors such as civil society from recipient country. The requirement for alignment with the country`s priorities is a recent response to global aid effectiveness initiatives. It appeared as a feedback to accusations from developing countries that the donors' programmes are imposed 80 . Aid is offered on the basis of the PRSP document adopted at the initiative of IMF and WB, whose approach was later incorporated into EGPRS (2004) and NDS (2008) and served as a holistic development framework to guide both Government and donors efforts. The first EGPRS strategy offered a large range of priorities which haven`t determined significant changes in donor`s assistance strategies. The only exception is perhaps road infrastructure, presented as a priority and has attracted the increased support from donors (WB, EBRD, EIB and MCC). Another document, the Government programme Modernization of the country welfare of the people for 2005-2009 81 has broadly formulated the same priorities as EGPRS. In addition to EGPRS it has also highlighted public administration reform as a priority determining a growing in the volume of donor`s support (DFID, Sida, UNDP) (Sandu 2009, pp. 316-317). For the period of implementation of EGPRS the sectors receiving most of the attention from donors were infrastructure, public sector, private sector and agriculture. Less support was allocated for environment protection and regional development (perhaps given that regional development policy did not exist at that time) while industrial sector or research and development have not received any support from donors. Considerable differences were registered between committed
78 There is a lack of disaggregated data about aid per priorities and sub priorities from national development strategies 79 There are few evaluation reports published on the websites of donors. The Government own assessment about the aid effectiveness and contribution for country`s development can be found only for the last two years. There are no assessments of a longer period than several years. 80 In other words donors decide what to finance ignoring the priorities expressed by recipient countries. 81 It was replaced in 2009 by the new Government activity program 55
funds and actual disbursements. The causes of this gap can be attributed to both donors' interests and constraints and the low capacity of the authorities to estimate the costs of EGPRS in the initial elaboration phase. The estimated costs of the EGPRS, which didn't have financial coverage, were around 430.7 million USD and the aid provided by donors was estimated at 81.5 million USD covering around 18% of necessities. Most funds were directed to such sectors as (Table nr. 8 in the Annex) private sector (7%), agriculture and rural development (7%), public sector (5%), energy(5%), justice (3%), social protection (3%), education (3%), water and sanitation (3%), health (3%), social infrastructure (2%) (Sandu 2009, p. 318, Government of Moldova 2007, pp. 220-221). The impression at first sight is that foreign aid was aligned with the EGPRS priorities even if the distribution between sectors was unequal. However, in order to give a precise appreciation, a more thorough study of the connection between foreign aid and activities planned under EGPRS is needed. Given the week linkage between the strategy and the action plan and the modest Government engagement for their implementation, the alignment of donors on more concrete activities would be difficult anyway (Sandu 2009, p. 319). The NDS (2008-2011) also offers a wide framework for activity. Compared to the EGPRS, it has a detailed action plan with a more strong linkage with the MTEF and thus, gives a better estimate about the financing needs per activity. The Paris and Accra rounds on aid effectiveness in 2005 and 2008 incited donor`s community to resume efforts to establish a Partnership Principles Implementation Plan agreement between donors and Government. In preparation of PPIP an analytic work on donor`s activity mapping exercise has been carried in 2009 to improve the coordination of aid support. The exercise gave a comprehensive view of the distribution of aid across sectors 82 from 2005 until 2009 and revealed the trends for fragmentation and increased volumes of aid spent per sector (Country Programmable Aid) 83 . The NDS mapping has revealed that in 2008 and 2009 period 84 (see the Figure nr. 3 in the Annex) most allocations addressed macroeconomic stability 85 , democracy/human rights 86 , social policies, central public administration. Significant changes in allocations between years have been registered in the case
82 According to OECD classification of sectors http://www.oecd.org/dac/stats/dacandcrscodelists.htm 83 More data can be found at http://www.un.md/donors/meetings/ from June 24, 2010 file (ODA by NDS Objective and Donors mapping) 84 2010, 2011 and 2012 amounts are only estimative projections and will not be counted from this Table. 85 Exchange rate from 07/01/2009 of National Central Bank of 100 MDL = 7,68 http://www.bnm.md/en/rate_convertor 86 Perhaps because of the April 7 2009 events which have resulted an increased number of human rights violations. 56
of border management 87 and anti-corruption 88 . Some aid has been allocated for purposes other than those from NDS 89 . Less aid or no assistance at all, have received: Transninstrian conflict demilitarization, assistance for financial crises effects mitigation, physical infrastructure, development of towns, R&D, agricultural efficiency and SME development. Overall, the donor`s mapping (Table nr. 9 in the Annex) shows overcrowding of aid in particular sectors (strengthening of public administration capacity and democracy, the rule of law and human rights, social protection) but also orphan sectors (enhancing competitiveness of the national economy), increased fragmentation with donors scattered across various domains (the most fragmented are technical assistance projects). This can be explained by specialization of some donors (comparative advantage in providing assistance for specific sectors) and/or donor`s foreign policy interests. The Government reports on the efficiency of aid for 2011 and 2012 years 90 give a positive assessment of the results of aid support. In 2011, 40 % of projects had a substantial impact on sector development and 95% of the aid was considered compatible with NDS objectives (State Chancellery 2012, p. 5). Most of the projects (225) addressed such sectors as governance and civil society (62), social infrastructure and services (33), education (23), multisector/cross-cutting (21), agriculture (17), environment (11), energy generation and supply (10) and 8 private sector development (State Chancellery 2012, p. 9). An analysis has shown that aid has tended to concentrate in specific areas such as governance, social infrastructure, education, agriculture 91
(Chancellery 2012, p. 51). In 2012 the distribution of foreign aid has followed the same tendency of crowding in particular sectors. Foreign aid has concentrated in specific areas such as accountable and efficient administration, foreign policy, country reintegration, environment protection. Less aid has been provided for culture policies, youth policies, education and research, economic and financial
87 Due to increasing interest of EU for securing the eastern borders (Transinstria). 88 Related with the expiration of the US Treshold Programme. Moldova has graduated and became eligible for Compact programme assistance. 89 13.24 million USD in 2008 or 5% from total aid and 6.96 million USD in 2009 or 2% from total aid 90 The 2012 report has given an assessment in accordance with NDS priorities while 2013 report has assessed aid in correlation with the Government Action Program "European Integration: Freedom, Democracy, and Welfare, 2009- 2013 (NDS expired in 2012 and was replaced in 2013 by NDS Moldova 2020). 91 The allocations across sectors have maintained the same pattern with the exception of agriculture which benefitted starting with 2009 year from Compact programme assistance (Transition to High-Value Agriculture project - USD 101.70 million) 57
policies etc. (State Chancellery 2013, p. 31). According to a survey carried out by the report team, in 2012 aid was appreciated by beneficiaries as in-line with government policies. However, in two sectors - economic and financial policies and the environment, there were major difficulties in aligning the donor assistance with the sector policies. Other two areas of intervention - rule of law and other sectors 92 also presented complications but less severe. Most of the authorities were involved in project design, even though 5 of them have declared that they did not participate in the project design phase or had some problems. The building of rule of law, economic and financial policies, accountable and efficient public administration, public health, and environmental protection were among these (State Chancellery 2013, p. 47-48). The evaluation of external assistance provided to Moldova versus the Government Action Plan found that only 40% of the actions laid down in the latter have aid support for implementation. This means that the other actions are funded from the Governments budget (ibid 2013, p. 30). Alignment means not only national priorities but also institutions and systems. In line with the Paris and Busan aid effectiveness declarations, several parameters are used to determine the degree of relevance of aid to country systems: existence of reliable national financial and procurement management systems and use of them by donors, the degree of reflection of aid in public budget and implementation of the projects within the existing institutional system. Measured as contribution to the state budget, foreign aid is aligned in proportion of 70% in 2005, only 57% in 2007 and 92% in 2010 which is 7% above the target 93 (Sandu 2009, p. 320, OECD 2011, p. 5, OECD 2008, p. 4, OECD 2006, p. 3). The national public finance management system (budget execution, financial and audit reporting) was scored by 2011 OECD aid effectiveness report at 3, 5 in 2006, 3, 8 in 2008 and 4, 0 for 2010 (from 6 points) reaching the target set. The national procurement system, though no specific target was set in 2006, has improved, receiving C grade. As a result, 71% of aid now makes use of Moldovas national procurement system, a substantial increase from the 25% recorded in 2005 and 39% in 2008. The use of country financial systems has increased from 25 % in 2006 and 41% in 2008, to 70% in 2011, which is a progress of 20% above the target 94 .
92 Other sectors category as classified by the survey 93 However 32 million USD (mostly technical assistance) were still not aligned with national systems. 94 Five donors use Moldovas PFM system for over 60% of their funds in 2010. The use of the country public financial management systems by the majority of donors still remains a challenge. Several donors (IMF, EU Institutions, DFID, World Bank) only use Moldovas PFM systems for direct budget support with the rest of their support still outside the country public financial management systems OECD 2011, p. 9. 58
However, as the OECD 2011 report mentions for both financial and procurement systems, this is a result of increased budget support from 2-3 major donors who traditionally make use of it rather than a change in approach from the donor communities regarding the use of country systems. Moreover, as the OECD aid effectiveness reports show from 2006 until 2011, the usage of the national systems was limited only to cases when aid was provided using direct budget support instrument. Most of the donors except EU, WB and IMF continue to use their own financial and procurement systems (OECD 2006, p. 3, OECD 2008, p. 3, OECD 2011, pp. 5-9, Sandu 2009, p. 320). Another aspect pertaining to the alignment is the implementation of the assistance programmes within the existing institutional framework. Given the weak institutional capacities when Moldova started to benefit from donor`s programmes, it was established that temporary project implementation units will be created to assist the implementation of donor funded programmes. However, after 15 years and 3 successive OECD aid effectiveness monitoring exercises (2006, 2008, 2011), these units still exist (43 parallel PIU`s in 2006, 59 in 2008 and 18 in 2011 which is 4 more than the target). In 2011, UN agencies had the most PIU`s, followed by Switzerland and UK. The donor traditionally having the most PIU`s, the World Bank, has reported 0, however Government claims that their real number is diminished (together with other donor financed PIU`s their real number is 18). The existence of these structures is undermining institutions and the degree of involvement of public authorities in the process of monitoring and implementation of the projects. The institutionalization of the functions of these units will be possible only when the donors will be ready to use national systems (OECD 2008, p. 5, OECD 2008, p. 8, OECD 2011, p. 11, Sandu 2009, p. 321). Most of the donor`s evaluation reports consulted affirm that aid was aligned with the country`s development strategy, European aspirations of Moldova and MDG`s (IEG 2013, p. 1, Picard et al 2012, p.9, Bassiouni et al 2011, p. 13, UNDP 2011, p. 13). However, there are contrasting tendencies in some aspects. For some reason, for instance, the authors of the UNDAF evaluation report are complaining that the Government is not using UNDAF as a reference for measuring effectiveness, which undermines its strategic place in Moldova`s planning priorities (Bassiouni et al 2011, pp. 34-41). It is strange how UN can affirm that it aligns its strategy with the beneficiary 59
priorities and at the same time, require that it should include UNDAF within its strategic planning process 95 . In addition, one should also take into consideration that for some international organizations (UN institutions) which have fewer resources at their disposal and are specializing as implementing donors providing technical assistance, the objective to increase the level of usage of national systems is contrary to their own policy. Furthermore, the specific of their activity (providing technical assistance) is sometimes conflicting with the objectives pursued by them as implementing donors to support capacity building within Government institutions. Therefore, the decision to use or not the national systems mostly have to do with the donor`s interest rather than the soundness and reliability of country systems. Otherwise, one cannot explain why under the same conditions, some donors prefer to use country systems while others opt for alternative modalities. During recent years, increased efforts have been undertaken to improve the alignment of foreign aid with national priorities. National authorities have improved the institutional setting concerning aid coordination, the country`s financial and public procurement systems and the overall strategic planning documents which demonstrate a better connection between policies and budget. The NDS 2008-2011 and NDS Moldova 2020 offer a better framework for guiding aid. The donor`s community, inspired by international initiatives, demonstrated more openness during the design phase of their strategies for cooperation. Nevertheless, the progress in terms of alignment to country`s systems remains modest. The fragmentation across sectors, overcrowding or leaving orphan sectors, slow progress towards use of country financial and procurement systems and issues concerning sustainability of projects and improvement of beneficiary capacities denotes that despite some progresses, the approach in aid delivery remained largely donor driven. A possible explanation of reported donor`s alignment to country`s priorities with overcrowding/orphan sectors, fragmentation and parallel implementation units is that donors have their own individual approach regarding development which does not always coincide with that of the Government`s. Whereas the major`s donors (EU, IMF, WB) preferred approach is budget support (loans/grant) conditioned by policies adopted by the recipient (which gives them capacity to influence recipient policy making), the other donor`s modalities (implementing UN institutions or bilateral) are more selective in alignment. They pick up specific sectors relevant for their interest/comparative
95 No doubt that there is a competition between donors 60
advantage and expertise and avoid allocation of aid using Government`s financial and procurement systems. 3.3 What are the constraints? As mentioned above, the problem of aid efficiency is as important as alignment to country priorities and perhaps even more difficult to appreciate. It can be measured individually per programmes and projects or based on projects performance in the sector. In Moldova, despite the efforts to improve aid coordination, it continues to be deficient primarily in areas dealing with institutional setting of aid management, excessive centralization of aid management, fragmentation of donor`s work, uncoordinated work and missions, untying, weak M&E mutual accountability and predictability of aid flows. There are two main actors involved in the process and their actions determine the effectiveness and efficiency of aid. From one side, it is the Government which sets the policy and institutional framework for coordination of donor`s activity and oversight over the implementation, monitoring and evaluation. On the other side, the donors elaborate their own country or regional strategies and use different instruments of aid (programmes, projects) and M&E systems to assist the Government development agenda. One of the Government constraints refers to issues such as providing clear, strategic guidance. Currently there are several strategies guiding donor`s interventions and the Government needs to ensure a closer linkage between NDS Moldova 2020, Government Programme, European Integration aspirations, a formal public investment programme, to guide donor`s multi-annual allocations and foreign aid whether in the form of loans or grants. The Inter-Ministerial Committee for Strategic Planning needs to be transformed into a more active structure to ensure coordination and guidance for the whole process (State Chancellery TTSIB 2012, p.4). Another constraint is the programming phase of aid delivery which is heavily centralized. Currently, the NCU establishes the extent to which the proposed project is going to address the problems in the sector, which is not optimal due that the responsibility in the sector should be primarily in the competency of the ministry/specialized agency and can be adjusted only within the ICSP framework. In the current Regulation 96 there is a confusion created between the state and
96 Government Decision nr. 12 from 19.01.2010 about Regulation regarding the institutional framework and coordination mechanism of foreign assistance received by Moldova from the international organizations and donor countries http://lex.justice.md/index.php?action=view&view=doc&lang=1&id=333522 61
sectorial contracts. The first is as an agreement concluded with the donor at the state level, Government, ministry or other central public authorities. Despite the fact that it is mentioned in the text of Regulation, there is no definition to explain what a sectorial contract is. This introduces certain incoherencies and inefficiencies which reduce the ownership and autonomy of the sector authorities in the management of their sector. The original role of the NCU to provide assistance for elaboration of state contracts, negotiation and policy guidance, is transformed into a decision- making role for the sector authority at the programming phase, leaving implementation entirely as the responsibility of the latter. Therefore, the role of the authority responsible for the sector which also has the most expertise in this field is transformed from one of coordination to implementation, which is not desirable. An option would be to transfer the responsibility for carrying out negotiations of the state contracts (concerning the sector) to the sectorial authority (with the participation of NCU) which will submit these proposals for final approval to the Inter-ministerial committee for strategic planning. The NCU will continue to provide technical expertise and ensure that these proposals correspond to development priorities derived from strategies (Gaibu et al 2011, p. 43). The recent modifications operated in the management of aid were intended to bring a better coordination and reduce fragmentation. However, given the changed donor`s delivery instruments after the Paris Declaration and the inclusion in the ENPI, it is more likely that it will not be possible under the current setting to remove these constraints. One reason why the current institutional setting represents a rather high level of centralization is due to the willingness of donors to have a unit with high political clout in the Government and the efforts of the executive to reduce uncoordinated requests, increase the alignment of aid with the national priorities and reduce fragmented implementation across the ministries and other state agencies. Moreover, internal political matters make it important for the chief of the executive to control the aid allocations in order to exclude internal competition for foreign aid money. Nowadays, the changing realities of the aid industry require a much more sophisticated system of aid management, which the current NCU, based on division of aid in technical and financial assistance, cannot provide. The emphasis is on more varied aid delivery instruments such as sector and budget support, sector wide approach (SWAPs), use of technical assistance (Twinning, TAIEX, and CIB), more involvement of civil society in the implementation of the aid projects. Also, the types of allocations are more mixed as the development banks (WB, EIB, and EBRD) combine loans and grants (financial with technical assistance). The mixed and diversified forms of aid delivery is posing difficulties for the State 62
Chancellery aid management unit (NCU) given the existing framework of division of labour between the State Chancellery, MoF, line Ministries and state agencies implementing aid projects. It is not possible anymore to divide aid into technical and financial assistance and the corresponding institutional framework must be reviewed to address the changes in delivery of aid. In spite of their different perspectives, the Government and donor views coincide that the assistance co-ordination process remains confused and largely ineffective. The Government has the perception that aid is largely donor led and that more emphasis should be given to partnership and alignment with the national planning documents and systems. The donor`s predominant view is that national authorities do not have the necessary capacity to implement the projects and programmes. Although Government Decision nr. 12 from January 19th 2010 defines their competencies, it can only partially address the specifics of coordination between these institutions and departments. The Regulation has established the institutional framework but it does not bring clarity regarding the reporting and authority relations within the aid management framework. The only references in this respect in the Regulation are provisions that NCU provides proposals to Interministerial Committee for Strategic Planning within the programming phase for approval. At the same time, the sector coordination unit can submit projects to IMC for approval, by-passing the NCU. Moreover, it is not clear what IMC can do except for receiving, hearing and approving projects and why it does not have a more active role in developing the strategic focus, coordination, monitoring and evaluation (State Chancellery TTSIB 2012, pp. 21-37). Another major shortcoming is the fact that public authorities engaged in the management of foreign aid projects do not carry out evaluations of the degree of achievement of these projects in terms of efficiency in achieving country`s priorities. The current practice of the main authority responsible for aid coordination (NCU) is to carry out an annual monitoring of foreign aid. The ministries which are implementing aid projects also produce sector monitoring reports but these hardly resemble a monitoring exercise. Rather, it is a progress report which summarizes the achievement of each individual project summed up according to priorities but without trying to assess the degree of achievements on the sector level in accordance with the sector strategy and national development strategy priority (is at the level of sub priority and activities derived from this) 97 . Moreover, the Regulation does not stipulate which authority should examine the reports and draw conclusions, where these should be going, how will be introduced in subsequent policy
97 An example in this case is the 2011 OMS report of monitoring of ODA to the health sector in Moldova http://www.euro.who.int/__data/assets/pdf_file/0006/169836/e96623.pdf 63
making as adjustments or improvements and who is supposed to inform donors about revealed deficiencies. Without proper monitoring and evaluation, no lessons can be learned and interventions will tend to repeat the same mistakes. Recently, the Government began to measure the efficiency of aid delivered in accordance with national priorities. Unfortunately, these still retain the characteristics of a progress report summing up the results of the projects according to NDS (2011) and Government activity programme (2012) priorities in the reporting year. It does not measure the alignment of these with the sub-priorities/activities of the national development strategy, the financial contribution and results in achievement of sector objectives both annually (as monitoring exercise) and for the whole period of implementation of the strategy (as evaluation). Adding up together project`s results can provide a description of what has been done but will not produce a valid conclusion about the impact of aid. It also excludes the learning component from policy making, impossible to follow their implementation with the purpose of identifying major causes that lie at the basis of possible inefficiencies (Gaibu et al 2011, pp. 43-50, State Chancellery TTSIB 2012, pp. 64-65). Concerning the donor`s approach, it is noteworthy that the conclusions from the OECD country report on monitoring the Paris Declaration regarding the efficiency of ODA show that there are significant progresses in terms of increasing institutional capacities of the GoM. The majority of targets regarding country systems which are the responsibility of the Government were attained while, as the report mentions, there are unmet targets in the areas of primarily donor responsibility in alignment and harmonization such as PIUs, untying, predictability common arrangements and joint working (OECD 2011, p.1). The report calls for more efforts to be undertaken by donors to make use of country systems, common arrangements and reduce fragmentation of efforts. The problem of fragmentation of efforts is an impediment to country`s authorities which have to deal with a large number of donors and projects. If not taking into consideration the budget support which is provided traditionally by 2-3 donors (EU, WB, and IMF), most of the technical assistance is fragmented and dispersed across sectors. Nowadays, most of the donors' approach is exclusively focused on realization of their projects objectives but even when these projects are implemented successfully, it does not mean that these contribute to the achievement of the country`s development objectives. Such an outcome requires a common effort where from one side, donors provide support and from another, there is an effective and efficient coordination framework of a pro-active Government. 64
In reality, the Government cannot achieve effective coordination because of a great variety of procedures and rules used by donors. The lower the level of development of a recipient country, the more likely the donors will use their own financial management systems. However, the less developed a country is, the weaker is its capacity for cooperation with the donor`s community and the existence of numerous individual procedures reduces the quality of these discussions to zero. With some exceptions of traditional donor`s using budget support (EU, WB), most of the time the ODA offered by donors was given using their own systems. Though it is called development assistance, it is in fact humanitarian due to the characteristics of the instruments employed. Namely, the use of their own procedures expresses the opinion about limited capacities of the national authorities to manage the aid funds. Additionally, another argument often used is the necessity to undertake rapid interventions to mitigate problems which cannot wait until the corresponding Government capacities will be created. Besides the fact that implementation of this kind of individual projects reduces the capacity of coordination of the Government, the role of it is sometimes purely formal, to accept the received reports. Another aspect to note are additional pressures on the public budgets of the recipient countries, such as providing supplementary funding for some institution or activity supported previously by the donor`s projects as an attempt to institutionalize them but which were uncoordinated with the Government at the design phase 98 . This can severely affect the sustainability of the implemented projects, especially if these do not represent a major priority from the point of view of the Government for public expenditures. All the practices enumerated above impose higher costs for both Government during coordination and donors in terms of transaction costs. There are recent shifts towards programme approaches such as SWAP`s but so far, there are no assessments regarding the progresses in this direction. Moreover, the fragmentation of donor`s aid and use of a great variety of procedures represents a constraint on the Government which must coordinate donors support in implementing national development programmes, strategies and sector programmes. Even if the foreign aid supports a national programme, the use of national budgetary systems, reporting, financial management, and
98 One example in this respect is the project implemented by NGO`s IDIS Viitorul Community based monitoring of the impact of the Global Economic and Financial Crisis on Human Development and MDGs in the Republic of Moldova with financing from UNDP/UNICEF/UNWomen 06.09.2009 - 30.10.2010. After implementation, as an attempt to ensure its sustainability, it was proposed for institutionalization at local level early warning and grass roots instrument of gathering data. Given that it was not coordinated previously with the authorities at the designing phase, the authorities declined the offer as it was not seen priority for them. 65
procurement systems is limited. According to 2010 data, around 51% of aid to Moldova made use of PBAs. This is not enough to meet the 2010 target of 66%, but it represents a progress compared with previous measurements (16% in 2005, 30% in 2007). The bulk of donor`s aid using PBA`s is constituted by EU and WB with 34% and 30%. The majority of it is budget support or sector budget support (OECD 2011, p. 13). There is a significant number of implementing donors present in Moldova which implement projects using funds from other aid organizations and increase fragmentation. Currently there are 365 projects under implementation, most of them technical assistance projects financed by 31 donors (10 of which are implementing donors) and around 190 (52%) projects are implemented by donors or using international NGO`s, universities and private companies. Moreover, the number of parallel project implementing units (PIU`s) is still considerable (18) especially compared to the target for the year 2010 (0). Taking into consideration that it will not be possible to change the approach of some donors due to the specifics of their activity, specialization (technical assistance) and foreign policy interests, the harmonization of donor`s work around PBA`s, SWAP`s or pulled funds/trust funds is seen as a possible way to facilitate the work on the sectorial level. In this way, the fragmentation of donor`s activity and procedures could be addressed. The Government has expressed its preferred mechanism of delivery which is direct support. Besides that it can be useful for overcoming or avoiding the negative moments described above, it is also contributing to a decrease of the transactional costs. In this way, premises are created for putting in place an efficient monitoring and evaluation process of the delivered aid making best use of it together with all internal means which the recipient country possess. This can represent a new operational system for evaluation of the performances of aid at the level of the entire country. The change of approach of the donor`s community regarding the instrument used for assistance is a necessity. This implies a process of capacity building which can be achieved only if the development activities will be implemented by national authorities and not mostly by donors through individual projects. Besides issues concerning fragmentation and use of country systems, the number of uncoordinated missions of donors is quite high: in 2005 it was 20% from 201 missions, 14% from 229 mission in 2007 and 36% from a total of 187 mission in 2010 (the target remains unmet - 40%). The high number of missions represents a problem for the public administration because the public servants are required to dedicate significant time for these meetings. Another issue is the high number of uncoordinated analytic work 50% in 2005, 46% and 51% (target of 66% remained unmet) (OECD 2011, pp. 14-15, OECD 2008, p. 34-13, OECD 2007, p. 21-8, Sandu 2009, p. 325). 66
A constraint on efficiency is the status of aid untying to goods and services from donor countries. For 2005 and 2007, the tying indicator was 81% of aid which registered a minor setback in 2010 to 80%. The 2010 OECD country chapter reports findings are that most donors provide untied aid with the exception of the US, Spain Netherlands, Italy and Austria (OECD 2006, p.7, OECD 2008, p. 11, OECD 2011, p. 12). As the Aid Untying report (2012) notes, despite the fact that the majority of the countries report all or almost all of their aid untied, the accuracy of data can raise doubts (OECD 2012, pp. 3-9). A closer look at the Annex nr. 1 of the GD nr. 246 from April 8, 2010 99
reveals that from 114 projects representing bilateral aid, an approximately 45 (39%) are implemented with a different degree of involvement of contractors, NGO`s or institutions from the donor country. The numbers are more significant for bilateral donor technical assistance US (USAID, US Embassy and US Department), Germany, Austria, Slovak Republic, Czech Republic, Turkey. While this kind of information is far from conclusive, it gives some hints about possible hidden tying and worsening of the untying status of the projects 100 (OECD 2011, p. 12). The latest OECD aid effectiveness exercise has also shown that common arrangements concerning predictability of aid have increased. However, the Government has reported difficulties with the coordination of aid flows (for technical assistance) and also with the timing of aid disbursements. For example, in 2010, parts of anticipated budget support tranches were not provided which has exerted financial pressures on the Government plan for implementation of programs and public investment. Another aspect is policy conditionality which puts pressure on the Government to adopt EU rules and practices in a very short time. The unrealistic time schedule is also due to higher than projected costs for the implementation of the policy conditionality. Some conditionality which were adopted by the Government are accompanied by high administrative costs due to management constrains and/or being implemented by PIU`s (OECD 2011, p. 12, Gaibu et al 2011, pp. 42-43). The Paris and Busan declarations highlight monitoring and evaluation as instruments for determination of relevance and effectiveness degree of objectives realization, impact and
99 http://lex.justice.md/index.php?action=view&view=doc&lang=1&id=334259 100 It should be noted that if measured as a volume of aid implemented by contractors from the donor country the percentage of tied aid could be more significant. Only bilateral aid was considered, while it is not excluded that other donors such as EU`s (which is implemented mostly by implementers from EU not by national authorities or NGO`s) or MCC which has as main contractors US companies could also tie aid. It is not that the utility of involvement of foreign implementers is denied (as import of expertise) but rather the fact that the competition for contracts might be not fair (foreign contractors could be privileged) and the prices for services and goods could be higher. This question requires a separate research. 67
sustainability. In Moldova the evaluation of the donor`s programs is taking place periodically, at the end of year or when the country strategy is finalized. Donors, central public authorities and civil society organizations responsible for implementation of foreign aid projects are involved in these evaluations. Notwithstanding, overall, most of these evaluations are formal and do not contribute to the identification and solving of the projects problems, implemented with external support. Moreover, many donors still do not make public their evaluation reports (with few exceptions such as WB and occasionally EU, Sweden, UN institutions) or present narrative/progress internal reports which do not examine what was realized or not and why. Some donors enumerate the activities without carrying a serious evaluation or do not publish them at all. One example of a lesson not learned, which causes efficiency loss, are the projects for strengthening the public authorities capacities. The strengthening of the public authorities capacities represents an important desiderate for the country`s development agenda and an important number of projects have addressed this objective. However, the effects of these projects are doubtful. Due to competition from the donor`s funded projects in terms of remuneration, Government is facing high staff turnover. Therefore, the competition which usually comes from private sector in other developing countries, is exercised by donor`s projects. This phenomenon is more evident with the increasing number of projects. As a consequence, the initial role of donors to support Government in the process of economic development, in fact is altered. It is rather a hindrance to this process because the donor community, through individual projects, substitutes the Government and does not help it achieve the objectives set. This situation determines a decreased interest of public servants for particular positions. Despite this and a lack of tangible results, some donors continue to provide the same type of aid for the same institutions for a number of years. Often, the conclusions about the low level of effectiveness of a particular project can be deducted from the objective of the next project launched which repeats the previous in totality (Sandu 2009, p. 322). It is no wonder that the aspects concerning project sustainability and improvement of the capacities of beneficiaries have received unsatisfactory reviews in the last survey carried out for the annual report measuring aid effectiveness (State Chancellery 2012, p. 15).
68
Conclusion In the last years Moldova has received increasing volumes of aid. In 2012, it had a net volume and amount per capita which is resembling with that of other countries of similar level of development. However, both net volume and aid per capita levels are lower if compared with total aid for 2004- 2012 period and average volumes. Moreover, compared with other countries with higher levels of GNI per capita, it has received in 2011 less aid and was the third with lowest ratio of net ODA per GNI in the group after Tajikistan and Kirgizstan. The type of aid offered was mostly grants while the share of loans begun to increase in the last years. Thus, for the whole period, Moldova as a middle income level country received less aid than countries from the same group classified as upper middle income level countries. This aspect indicates that for donor countries the scale of poverty is not a decisive factor influencing aid allocations and the flow of aid is not oriented mainly to those countries with the most urgent needs. The increase of efficiency is not as obvious as the growth in the volumes of aid. Despite the efforts to improve aid coordination it continues to be deficient primarily in areas dealing with institutional setting, excessive centralization of aid management, fragmentation of donors work, uncoordinated work and missions, untying, the degree of alignment with country systems, weak M&E mutual accountability and predictability of aid flows. Another element of efficiency is transparency, which only in recent years has slightly improved as donors and Government start to produce and publish their monitoring reports about the effectiveness of aid delivered. However, not all of them are as qualitative and independent in their estimations. Most are focusing on monitoring and few conduct evaluations. The learning element and mutual accountability is a crucial element for eliminating the inefficiencies and exercising a more transparent control over the public funds. So far, the progress in making the data public is slow and the character of data about aid monitoring and evaluation, alignment and coordination which both donors and Government offer is limited. On the other hand, the capacity of civil society to exercise a control is weak, due to modest expertise in this field. Moreover, the specificity of its funding makes it increasingly sensitive to donor behest. The 2011 OECD monitoring report on aid effectiveness has shown that less than half of the targets set have not been met and most of them lie in the responsibility of donors. In particular, it is the limited degree of use of national financial and procurement systems. The Government has improved them and the average CPIA has increased, however, this has not lead to a significant improvement of the efficiency of aid. Moldova`s preferable aid delivery instrument is direct 69
budget support, which besides increasing the ownership, alignment, decreasing of fragmentation and overlapping and strengthening of the country`s capacities will help also reduce the transaction costs. The decision to use or not the national systems, in this case, most have to do with the donor`s interest rather than the soundness and reliability of country systems. Otherwise, one cannot explain why under the same conditions, some donors prefer to use country systems, while others opt for alternative modalities. This result indicates that foreign aid is oriented to satisfy first the donor`s interests and only after Moldova`s merits. Overall, the majority of donor`s aid can be considered aligned to country`s priorities. However, problems observed with overcrowding of donors in particular sectors leaving orphan sectors, the degree of fragmentation of projects (mostly technical assistance) and existence of parallel implementation units, indicate that alignment might be rather the result of a compromise of the interests of the donors and Government. Donors supported Government agenda mostly where it has coincided with their own priorities. Whereas the major`s donors (EU, IMF, WB) preferred approach is budget support (loans/grant) conditioned by policies adopted by the recipient (which gives them capacity to influence), the other donor`s modalities (implementing UN institutions or bilateral donors) is to follow a more selective alignment. They choose specific sectors relevant for their interest/comparative advantage and expertise, and avoid alignment with Government`s financial and procurement systems. The degree of alignment according to national priorities seems significant, but it is in fact, a selective engagement. This leads to conclusion that for majority of the developed countries foreign aid represents an instrument to satisfy their interests. Most active donors in Moldova (in particular bilateral donors) concentrate their efforts in those areas, where the degree of interdependence is higher. In particular, as it can be seen from the analysis, these include security issues aiming to increase stability at the borders and only in the last years overall country sustainability, as the borders in particular of EU moved closer (ensuring macroeconomic stability of the recipient country, improving governance, social services, migration, border management, transportation networks, energy, human trafficking/criminality, environment, conflict management etc.). The specific of aid instruments used has also suffered changes reflecting major donors interests. Starting with 2010, these rely more on increase of the volumes of aid with a combination of financial (budget support and investment projects) and technical aid (public administration reform, providing expertise) which has the potential to produce significant and more rapid changes in the 70
recipient country. This approach was preceded by Moldova`s adoption of the policies (IMF, WB, EU) which coincide with the major donors policy requirements and availability of strengthened institutions. It represents a more active donor approach. The previous approach was based on less generous allocations of technical assistance grants for improving governance/public administration reform, democracy and human rights, social protection, macro-financial support for stabilization and food security, humanitarian assistance budget support and represents an attempt to stabilize the situation and gradual improve the institutions, rather than a genuine desire to produce significant changes. Despite apparently economic dimension which foreign aid displays, in fact, the reasons and implications are political and it cannot be expected that countries do not act in their interests including also use of international institutions. Therefore, decisions concerning foreign aid are most of all political, while the principles in accordance to which it is implemented are economic. Taking into account the above mentioned aspects, I incline to second hypothesis of my research which says that foreign aid reflects rather donor`s foreign concerns and therefore, has more moderate achievements in addressing country`s development constraints. Beneficiary needs are addressed only in those areas, where it coincides with donor`s interests (reflected in priorities). This indicates to realist interpretation of the foreign aid, in particular strategic development proposed by Bermeo model. It is a softer version of realism admitting that foreign aid is targeted to countries were the benefits for donors are high, due to such factors as proximity, historical ties, and economic interconnectedness between a particular industrialized and developing country. For such countries, it will be more effective to supply not only grants and technical assistance for humanitarian reasons, but also to pursue economic development of strategic important allies to ensure a certain economic development which would buy a safer and stable neighborhood. Thus, donors have the interest to maximize both diplomacy and development. The modest level of donor`s progress in adopting aid effectiveness criteria in Moldova and their selective engagement in supporting EGPRS and NDS priorities demonstrates that quality of aid is affected by foreign policy purposes. Most obvious it is in the behavior of bilateral donors. It is more difficult to follow the degree to which multilateral organization represent the interests of some of its major constituents. However, it might be the case, especially with adoption of certain policy conditions which Moldova has to implement in order to obtain budget/macro financial support. The increased interest shown by EU after 2004 enlargement for Moldova (due to security reasons) comparing with other countries, the growing number of active bilateral donors and increasing EU 71
development banks allocations in Moldova, are just few examples in this respect. Soon, with the rising level of income per capita, Moldova is expected to graduate from the group of countries eligible for concessional loans from IDA. In view of Moldova`s European integration aspirations, the other donors already announced (WB, Sida, US) their support for integration agenda. Thus, EU will become the single important donor providing budget support and other kinds of aid which will gradually increase its leverage in Moldova. Foreign aid potential to promote development of Moldova is limited primarily by varying and different donor`s interests to pursue Government agenda which affects the effectiveness of delivered aid and to a less extent by its own institutional capacity constraints. Moldova should further strengthen the institutional framework for aid management, negotiation, M&E systems and absorption capacities to make good use of the available funds. Additionally, an independent strategy from foreign aid funds must be developed in time to allow a better financing of country`s development needs.
72
Annexes: Table nr. 1 Evolution of Moldovas Key Macroeconomic Indicators, 2004 2012 Note: * At year-end Sources: Ex-post Evaluation of the EUs Macro Financial Assistance to Moldova report (2013) World Development Indicators WB 2013 compiled data from IMF World Economic Outlook; World Bank, National Bank of Moldova.
2004 2005 2006 2007 2008 2009 2010 2011 2012 Real Sector Real GDP Growth (%) 7.4 7.5 4.8 3.0 7.8 -6.0 7.1 6.8 -0.8 Nominal GDP (USD billion) 2.6 3.0 3.4 4.4 6.1 5.4 5.8 7.0 7.2 GDP per capita (USD) 724 834 954 1234 1699 1527 1635 1971 2037 CPI average (% change) 12.4 11.8 12.7 12.4 12.7 0.0 7.4 7.6 4.7 Unemployment rate (%) 8.1 7.3 7.4 5.1 4.0 6.4 7.4 6.7 5.5 GDP per capita, PPP (USD) 2,124 2,362 2,558 2,713 2,986 2,883 3,073 3,336 3,368 Fiscal sector Government Revenues (% of GDP) 35.4 38.6 39.9 41.7 40.6 38.9 38.3 36.6 38.1 Total Government Expenditure (% of GDP) 34.6 37.0 39.8 42.0 41.6 45.2 40.8 39.1 39.4 Net Lending/Borrowing (% of GDP) 0.7 1.5 0.0 -0.2 -1.0 -6.4 -2.5 -2.4 -2.1 General Government Debt (% of GDP) 42.8 34.8 30.0 24.0 18.8 28.6 26.2 23.1 23.8 Monetary Sector Central Bank Base Rate (%) 14.5 12.5 14.5 16.0 14.0 5.0 7.0 9.5 6.5 Private Credit Growth (%) 21.2 30.7 38.4 60.1 16.5 -5.2 9.9 15.6 16 External Sector Current account balance (% of GDP) -1.8 -7.6 -11.3 -15 -16.1 -8.2 -7.8 -11.2 -6.8 Exports of goods and services (% of GDP) 51.0 50.3 44.8 45.5 41.1 36.8 39.4 45.0 43.6 Import of goods and services (% of GDP) 80.9 90.9 91.9 98.2 94.3 73.4 78.7 86.0 84.2 FDI (Net Inward) (% of GDP) 5.6 6.4 7.6 12.3 11.7 2.7 3.4 3.8 2.4 Personal remittances, received % of GDP 27 31 34 34 31 22 23 23 25 External and Debt Vulnerability External Public Debt (long-term; % of GDP) 30.7 24.4 24.6 20.6 15.4 20.2 22.5 21.1 23.8 Public Debt Service Ratio 7.4 4.3 4.5 3.1 2.5 3.4 2.4 - - Gross External Debt (% of GDP)* GDP) 72.4 69.5 73.0 75.4 67.4 79.6 81.3 76.6 82.7 Gross Reserves (Including Gold) (USD millions) 470 597 775 1334 1672 1480 1718 1965 2515 Import cover (months) 2.1 2.2 2.2 2.8 5.0 3.9 3.4 3.6 3.7 73
Table nr. 2 GNI per capita GNI per capita, Atlas method (current US$)
Table nr. 3 Foreign aid 2004-2012 in grants and loans
Figure nr. 1 Foreign aid flows for a group of countries
Source: OECD Stat extracts Year Other Grants mln USD Gross Loans mln USD 2004 118.97 25.86 2005 173.14 32.23 2006 168.6 110.04 2007 211.77 90.64 2008 238.08 79.82 2009 246.12 28.7 2010 316.16 204.26 2011 310.81 155.03 2012 319.88 162.27 Total 2103.53 888.85 Grants and loans total 2992.38 Source: WDI, State Chancellery (report of external assistance 2012), own calculations 74
Table nr. 4
Table nr. 5
Table Nr. 6
Net ODA received per capita (current US$ Country Name 2004 2005 2006 2007 2008 2009 2010 2011 Average Albania 93.2623219 99.85200852 101.202268 97.0209922 115.082392 113.278021 108.15382 110.578 104.8037 Armenia 83.7538488 56.4990678 71.7670287 117.068165 101.639368 177.204417 115.680939 127.586 106.3998 Azerbaijan 21.1593331 25.80003217 24.3253914 26.2442753 26.827487 25.904069 17.5728038 31.8563 24.96121 Georgia 72.5794873 66.97161462 80.9777171 86.5121684 202.497833 205.663243 140.403791 131.601 123.4009 Kosovo 443.645492 349.05501 366.854 386.5182 Kyrgyz Republic 51.2018336 51.88858327 59.510578 52.0936148 67.65375 58.2096484 69.8195635 94.8174 63.14937 Macedonia, FYR 126.306019 108.7536913 98.027463 95.7398098 97.5381283 91.6280341 89.0346187 91.5542 99.82275 Moldova 32.8835101 47.03795246 64.0715991 74.4470637 83.347642 68.3138308 132.049919 131.799 79.24381 Tajikistan 38.0286165 36.95456205 34.6882216 31.234597 39.6797252 54.8003624 57.2481103 45.3649 42.24989 Source: World Development Indicators (WB) *for 2012 data are not available Net ODA received (% of GNI) Country Name 2004 2005 2006 2007 2008 2009 2010 2011 Average Albania 3.92278825 3.73663067 3.44276144 2.79110009 2.76562098 2.97232442 2.89735277 2.70486045 3.15418 Armenia 6.87860135 3.38449233 3.26548992 3.69022396 2.49422961 5.96702737 3.57143896 3.53665731 4.09852 Azerbaijan 2.20250961 1.86663603 1.12770996 0.80518453 0.53938796 0.56844915 0.32184127 0.51810527 0.993728 Georgia 6.02242608 4.51223111 4.49357611 3.71869501 7.00072249 8.49462819 5.47645756 4.21073532 5.491184 Kosovo 14.0431549 10.8503688 9.92463621 11.60605 Kyrgyz Republic 12.3878725 11.2949655 11.1469847 7.31740994 7.25540197 6.96312319 8.54683799 9.22550446 9.267263 Macedonia, FYR 4.80820848 3.86784499 3.14170495 2.58323562 2.10731084 2.08499999 2.03115173 1.87633832 2.812599 Moldova 4.03813385 5.05258074 6.03104514 5.52594312 4.47229578 4.24173934 7.47021795 6.19139746 5.377919 Tajikistan 12.6737422 11.2589658 8.84027887 6.11266686 5.65106915 8.31721961 7.83738165 5.50424074 8.274446 Source: World Development Indicators (WB) *for 2012 data are not available Dataset: Aid (ODA) disbursements to countries and regions [DAC2a] Average Total Recipient Albania 299.95 319.14 321.78 307.19 363.27 356.96 340.7 350.75 341.62 333.48444 3001.36 Kosovo .. .. .. .. .. 781.47 619.81 657.02 567.68 656.495 2625.98 Macedonia, FYR 263.44 227.3 205.25 200.73 204.71 192.47 187.17 194.97 148.94 202.77556 1824.98 Moldova 118.51 169.11 229.73 266.29 297.56 243.58 470.37 460.59 476.55 303.58778 2732.29 Armenia 253.41 170.34 215.51 350.02 302.63 525.97 342.82 380.92 291.95 314.84111 2833.57 Azerbaijan 175.76 216.51 206.39 225.21 235.1 231.77 159.11 286.41 337.61 230.43 2073.87 Georgia 313.42 292.09 356.14 379.65 887.71 907.16 625.19 591.53 656.46 556.59444 5009.35 Kyrgyz Republic 261.37 267.88 310.55 274.45 359.83 313.36 380.37 525.03 472.91 351.75 3165.75 Tajikistan 253.42 251.5 241.24 222.11 288.68 408.12 436.65 347.51 393.91 315.90444 2843.14 data extracted on 01 Jan 2014 13:17 UTC (GMT) from OECD.Stat 2011 2012 Amount type Current Prices (USD millions) Year 2004 2005 2006 2007 2008 2009 2010 Donor All Donors, Total Part 1 : Part I - Developing Countries Aid type ODA: Total Net 75
Figure Nr. 2 Source: World Development Indicators (WB) and OECD stat extracts
Table nr. 7 101
Source: Driton Qehaja Fiscal Policy Response to External Crises: The Case of Moldova 1998-2010. IMF working paper 2012
101 The foreign aid numbers recorded in the budget often differ from funds which the donors are reporting for OECD. Some aid activities are implemented by other actors (for instance civil society) about which the Government does not have information. 118.51 169.11 229.73 266.29 297.56 243.58 470.37 460.59 476.55 87.69 190.7 258.68 536.02 726.61 135.15 201.51 276.42 184.94 705.23 915.08 1175.82 1491.26 1888.02 1198.63 1351.43 1600.4 1786.32 0 200 400 600 800 1000 1200 1400 1600 1800 2000 2004 2005 2006 2007 2008 2009 2010 2011 2012 Remmitances/FDI/ODA flows in Moldova 2004-2012 ODA FDI Remmitances 76
Table nr. 8 Foreign aid distributed according the EGPRS priorities 2005-2007, mil. USD Budg et supp ort Pub lic sect or Priv ate secto r Agricult ural sector Infrastruc ture Social protect ion Educat ion Heal th Regional develop ment Enviro nment WB 10,0 2,8 7,6 8,9 49,5 5,0 6,4 6,0 EU 73,0 14,5 2,7 4,7 6,0 2,9 2,9 US 13,7 20,0 24,0 2,0 0,7 4,5 Holland 3,5 4,0 2,0 1,0 Sida 6,0 5,2 1,8 6,4 0,8 0,2 0,2 Dfid 2,5 1,0 1,0 0,3 1,0 Japan 4,5 3,6 Switzerl and 0,1 1,6 0,2 4,0 3,2 0,2 Turkey 4,9 IFAD 6,8 UNDP 3,4 0,2 0,2 1,6 GEF 6,0 Total 89,0 45,8 36,4 40,9 64,2 19,3 17,8 19,0 5,9 7,0 Gap original EGPRS - 15 10,5 31,5 141 9,6 26 138 0 48,7 Source: EGPRS 2004-2006, Sandu Maia 2009, Asistena extern, in: Prioriti de Guvernare 2009, ADEPT report, pp. 311-328
Figure nr. 3 102
Source Donor`s mapping exercise 2009. The table with data can be found at http://www.un.md/donors/meetings/ meeting from June 24, 2010 file (ODA by NDS Objective) 103
102 At the exchange rate from 07/01/2009 1 MDL = 0,08 USD http://www.bnm.md/en/rate_convertor 103 It is an excel document which could not be placed here. 77
Table nr. 9
Source Donor`s mapping exercise 2009. http://www.un.md/donors/meetings/ meeting from June 24, 2010
NDS objectives being supported by Development Partners** Development Partner 2.1. 2.2. 3.1. 3.2. 3.3. 3.4. 4.1. 4.2. 4.3. 5.1. 5.2. 5.3 5.4. 5.5. 5.5.1 5.5.2 6.1. 6.2. 6.3. 6.4. 6.4.1 7.1. 7.2. 7.3. 7.4. 7.5. 7.5.1 ADA 9 Bul garia 1 Czech Republi c 0 DFID/UK 10 EC 9 Germany (GTZ, KfW) 5 Hungary 9 IFAD 1 ILO 3 IOM 9 Li echtenstei n 2 The Netherl ands 1 SDC 6 SIDA 16 TIKA 8 UNAIDS 2 UNDP 8 UNFPA 6 UNICEF 13 UNIFEM 1 USAID 10 WB 13 WHO 1 Total 3 10 7 12 5 4 5 6 1 5 5 3 1 2 0 1 2 8 11 8 7 3 4 1 9 1 3 5 3 2 4 **Source: Development Partner mapping Jul y 2009 and Ai d Coordi nati on Uni t data March 2009 P r i o r i t y
4
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