REFORMING THE FORMULA: A Modest Proposal for Introducing Development Outcomes in IDA Allocation Procedures

This paper develops a modest proposal for introducing final outcome indicators in the IDA aid allocation formula. It starts with a review of the current formula and the rationale for it. It is argued that this formula, and in particular the Country Policy and Institutional Assessment (CPIA) part of it, implicitly relies too heavily on a uniform model of what works in development policy. Even if this model were valid "on average", the variations around the average make it an unreliable sole guide to the country-specific productivity of aid in achieving the final objectives of development. Rather, it is argued that changes in the actual outcomes on these final objectives could also be used as part of the allocation formula. A number of conceptual and operational objections to this position are considered and debated. The paper concludes that there is much to be gained by taking small steps in the direction of introducing outcome variables in the IDA formula, and assessing the experience of doing so in a few years' time. * T.H. Lee Professor of World Affairs, International Professor of Applied Economics and Management, and Professor of Economics, Cornell University. Paper for presentation at the AFD-EUDN conference, Paris, November 25-27, 2004. The ideas in this paper have been presented at seminars and panels at Princeton University, IFAD (Rome), IFPRI (Washington, DC), the World Bank (Panel on Lessons of the 1990s), the DPRU/TIPS/Cornell conference on African Development (Cape Town), and at DFID’s Conference on Reaching the Very Poorest (London). Parts of this paper draw on my contribution to the DFID conference, “What Change Does Attention to the Poorest Imply?” I am grateful to participants at these meetings for their helpful comments.