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Cash on delivery aid: changing the incentive mix
Author : Jean-Michel Severino
I recently came across a post by Nancy Birdsall on a new instrument promoted by the Center for Global Development, called ‘Cash on Delivery’ aid. In a way (Nancy, whose Center is a partner of ID4D, might wish to correct me if I am wrong, or complete if need be) it is conceptually close to ‘output-based aid’, except that governments rather than non-governmental actors are in charge of delivering the output, and that aid comes as a form of reward upon delivery rather than a direct payment of the costs incurred. The novel philosophy in this approach is that donors are as ‘hands-off’ as possible - leaving it up to recipient countries to find the most appropriate ways to reach given objectives. In a nutshell, under this type of program donors would commit ex ante to pay a specific amount for a specific measure of progress on a specific objective. In education, for example, donors could promise to pay 100€ or so for each additional child who completes primary school and takes a standardized competency test.
I find this concept appealing in three important ways:
- first, it is serious about ownership: by targeting a specific goal but not interfering in the policy choices, it leads governments to think through the most appropriate ways to reach this objective in their specific national context. Experience has shown that donors don’t always know best.
- second, it shifts incentives away from inputs (how much money do we give?) towards outputs (what concrete results do we achieve?), and clearly places the onus of results on governments. If pilot projects are set up, they will teach us important things about how public choices are made within governments, and to what extent they influence performance. For one thing, there is likely to be more public scrutiny and debate on the decisions made to ‘win’ the challenge - which may be a positive result in itself.
- this leads me to a third interesting dimension, which is the underlying ambition of changing the structure of the incentives. Cash on delivery works on supply-side incentives. Other initiatives (targeted at young girls in India, but also at public school students in Washington DC!) have worked on education through the demand-side, by paying children to attend and get good grades. Comparing the successes of demand-side and supply-side incentives in the field of education could teach us a lot on the determinants of progress.
Yet I also have my concerns (aside from obvious technical difficulties of finding agreed and verifiable benchmarks of ‘success’, which are important to think through but can probably be overcome):
- how will the governments attain results if aid isn’t there in the first place? This is a typical ‘chicken and egg’ problem: some countries do not have the budgetary space to ‘invest’ in the big push that would be needed to attain the objectives initially. These programmes would therefore need to be complementary to existing programs (such as the Fast Track initiative in education).
- secondly, Cash on delivery is a form of (ex-post) conditional aid. As a reward to good performers, it risks imposing a double penalty on populations whose governments are incapable of delivering. And by penalizing ‘poor performers’, it makes the implicit assumption that they are responsible for their bad results. Although this may be the case, it cannot be taken for granted. Like many good ideas, it should therefore probably be consumed moderately; we cannot hope to apply it uniformly and across the board.
In any case, this is interesting new stuff, which definitely merits to be discussed in the columns of this blog. Dear fellow blog members, guest commentators and readers, the floor is yours!
JMS
These few lines came to my mind after one of our Board of Directors’ meetings devoted, among other things, to a new participation in an important microfinance institution in Morocco - a country famous for its involvement in the sector. I have, for a long time, been an avid supporter of microfinance. And I am particularly proud of the important increase in the amount of investments made in this sector by my organization, AFD, over the past 20 years: through 60 projects and nearly 300 million euros invested, we have helped more than 1.5 million people make their way out of poverty. We now want to go further, encouraged in this by GCAP’s very positive evaluation of our involvement. I see microfinance as a powerful tool against exclusion; it allows people who have been traditionally excluded from the financial systems to have access to credit. Great tribute must be paid to the pioneers of this revolutionary approach.