Absorption, Effectiveness, and Sustainability of Donor Funds
In recent years, several new dimensions have emerged in the debate on international health financing, namely the effectiveness of large increases in DAH and the enormous costs of scaling up health and other social systems to meet the MDGs. Both the donor community and recipient countries have raised concerns pertaining to countries' absorptive capacity, aid effectiveness, and sustainability.
Countries' Absorptive Capacity
Large increases in DAH channeled to LICs have raised questions about whether countries can make effective use of these new aid flows. As table 12.3 shows, absorptive capacity has macroeconomic, budgetary management, and service delivery dimensions.
[Table .]
Increased aid has important macroeconomic implications given its potential effect on exchange rates, inflation, balance of trade, overall competitiveness, aid dependency, domestic revenue mobilization efforts, and future recurrent costs. Most studies indicate that the macroeconomic saturation point for aid lies somewhere between 15 and 45 percent of GDP, depending on the country's policy environment (Clemens, Radelet, and Bhavnani 2004; Collier and Dollar 1999; Collier and Hoeffler 2002; Foster 2003).
Aid can have a number of negative effects. If aid flows are not included in the recipient country's budget, they can result in corruption. Aid may substitute donors' priorities for countries' priorities. A country may have insufficient human resources, physical infrastructure, or managerial capacity to use funds effectively. Resources that may already be in short supply and that are critical for effective service delivery may be diverted from other important activities. New resources may overwhelm the system, and the donors' reporting and administrative requirements may impose additional burdens on countries.
Absorptive capacity problems may also result from demand-side constraints at the individual, household, or community levels, including lack of education, limited information, travel costs, and income loss (Ensor and Cooper 2004). Conditional cash transfers are among the demand-side innovations developed to improve the use of essential public health services by the poor that have been receiving increased attention. Such programs were initially developed in Latin America as part of social safety-net programs and provide direct cash payments to poor households contingent on certain behavior, such as completing a full set of prenatal visits or attending health education classes (Rawlings 2004). Conditional cash transfers are in effect negative user fees. Even though investigators have found that such programs are quite successful in MICs and have the potential to improve human capital and health outcomes and reduce poverty with relatively modest administrative costs, their applicability in LICs is still unresolved.
Health sector supply and demand constraints can also hinder countries' effective employment of large increases in health resources. As Mills, Rasheed, and Tollman point out in this book (chapter 3) and elsewhere, these constraints can occur at all levels of service delivery and governances (Oliviera-Cruz, Hanson, and Mills 2003). Additional funding alone does not create sufficient conditions for overcoming structural weaknesses, particularly in the short run. If aid is targeted to specific diseases or interventions, effective use of such aid may "consume" different amounts of a country's administrative capacity. Increased public funds may supplant private spending not only by the poor, but also by the nonpoor, resulting in limited marginal effects on the poor (Filmer and Pritchett 1999).
Aid Effectiveness
Given calls for increases in aid of anywhere between US$25 billion and US$75 billion a year, the question of aid effectiveness has taken on increased importance.2 A protracted debate has generated the following findings concerning aid (Burnside and Dollar 1997; Clemens and Radelet 2003; Clemens, Radelet, and Bhavnani 2004; Collier and Dollar 1999; Collier and Hoeffler 2002; Foster 2003; United Nations Millennium Project 2005; WHO 2001; World Bank 2004a):
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Aid has diminishing returns.
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Countries' absorptive capacity is limited.
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Aid is fungible overall and among sectors.
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Aid achieves better results in good policy environments.3
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Aid requires ownership by countries; for example, donor-imposed conditions rarely work.
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Aid is related to increased investment and growth.
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Debt repayments have a negative effect on economic growth.
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Aid has high transaction costs for countries.
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Aid makes governments accountable to donors as opposed to their citizens.
Serious overall and health sector-specific questions pertain to the levels, predictability, variability, fungibility, and sustainability of aid flows, and debate continues between those arguing for vertical disease-specific program assistance and those supporting broader health system reform changes (WHO 2001). As Mills, Rasheed, and Tollman show in this book (chapter 3), evidence on the effectiveness of both approaches is mixed. Aid unpredictability and uncertainty need to be addressed by aligning donors' disbursement and commitment cycles with those of recipient countries, strengthening countries' budgetary and financial management capacity, and fostering a more transparent and predictable implementation structure (World Bank 2004a).
The effect of the composition of aid on countries' efforts to mobilize domestic resources is also critical given the strong push by heavily indebted countries, several Group of Seven (G-7) countries, and the United Nations Millennium Project for grant assistance. Gupta and others (2004) find that increases in overall aid (net loans plus grants) result in a decline in total domestic revenues; however, the effects of loans were quite different from those of grants. Each 10.0 percent increase in loans was associated with a 2.3 percent increase in domestic revenues, whereas a 10.0 percent increase in grants was associated with a 2.8 percent decrease in domestic revenues. The same study also finds higher levels of corruption result in reduced domestic revenue-raising efforts.
Fiscal Sustainability
Fiscal sustainability is an often used but rarely defined term, though it has generally been defined in terms of self-sufficiency. In its broadest context, achieving sustainability means that, over a specific period, the managing entity will generate sufficient resources to fund the full costs of a particular program, sector, or economy, including the incremental service costs associated with new investments and the servicing and repayment of external debt.
Knowles, Leighton, and Stinson (1997, 39) define health system sustainability as the "capacity of the health system to replace withdrawn donor funds with funds from other, usually domestic, sources" and sustainability of an individual program as the "capacity of the grantee to mobilize the resources to fund the recurrent costs of a project once it has terminated." However, given the enormous unmet needs in the poorest countries, coupled with stagnant economic performance, some donors are now defining sustainability on the basis of the managing entity's commitment of a stable and fixed share of program costs (Brenzel and Rajkotia 2004; Kaddar, Lydon, and Levine 2003).
In light of criticisms leveled at the International Monetary Fund (IMF) regarding its structural adjustment programs and fiscal ceilings, IMF has recently paid increased attention to fiscal sustainability. However, evaluating a country's fiscal situation and defining sustainability are not easy matters (Croce and Juan-Ramon 2003; Dunaway and N'Diaye 2004; Hemming, Kell, and Schimmelpfennig 2003; Tanzi and Zee 2000). Work is under way to develop operational indicators of debt and fiscal sustainability and to define the concept of fiscal space (Dunaway and N'Diaye 2004; Heller 2005). Understanding the details of IMF fiscal programs and ensuring stable and predictable long-term DAH are important conditions for avoiding the macroeconomic distortions discussed earlier.
