Guillaumont Patrick

Guillaumont-Jeanneney Sylviane

English

Research Papers in Economics

A f r i c a n   D e v e l o p m e n t   B a n k
September Number 12
EDRE
Development Research
Department 
Office of the Chief Economist, ECON
FONDS AFRICAIN DE DEVELOPPEMENT
AFRICAN DEVELOPMENT FUND
BANQUE AFRICAINE DE DEVELOPPEMENT
AFRICAN DEVELOPMENT BANK AfDB
Accounting for Vulnerability 
of African Countries 
in Performance Based Aid 
Allocation
Development Research Brief 
L
ike other Multilateral Development
Banks,  the  African  Development
Bank (AfDB) Group allocates some of its
aid through a performance-based allo-
cation (PBA) formula which is primarily
based on the quality of economic policies
and  governance  in  each  beneficiary
country. Governance plays a major role in
the PBA formula and its weight is equal
to more than double that of economic
policy1. During times when many regional
member countries of the Bank are facing
severe liquidity problems because of the
current economic and financial crisis, it is
useful to consider whether the PBA pe-
nalizes countries which are most in need
of resources.
1.2 During the 2006 African Econo-
mic Conference, Professor Guillaumont
of the Université d’Auvergne argued that
African countries have characteris-
tics which should be better ac-
counted for in the aid allocation pro-
cess.  The  AfDB  research
department has subsequently tea-
med up with Professor Guillaumont to
address this issue. This study is the
outcome of this joint work and considers
three amendments to the PBA formula
used for allocating African Development
Fund (ADF) resources:
(i) Adding an economic vulnerability cri-
terion to the performance criteria,
(ii) Introducing a human capital indicator
in the performance criteria, and
(iii) Reducing the weight given to popu-
lation.
The main proposal of the study involves
the use of the Economic Vulnerability In-
dex (EVI) which was developed by the
United Nations for understanding the
economic vulnerability of low-income
countries.
Introduction
2009
Patrick Guillaumont and Sylviane Guillaumont-Jeanneney*
1 For example, in the current formula, if the performance assessment of a country, measured by its Country Performance Assessment (CPA), increases from 3
to 3.5, its allocation would increase by about two-thirds.A f r i c a n   D e v e l o p m e n t   B a n k
2
The predominance of the governance
criteria in the PBA is subject to criticism.
Its weight is deemed by many to be too
high in relation to the characteristics of
the Bank’s regional member countries
(RMCs) for a number of reasons:
a) The performance measure is subjec-
tive.
b) The uncertainty on the indicator of
good policy generates great instabi-
lity. It contributes to the uncertainty of
allocations which, though calculated
for a three-year period, are adjusted
each year.
c) The analytical basis for the weight gi-
ven to governance is questionable.
Aid effectiveness in terms of economic
growth is not only a function of economic
policy. It also depends on shocks which
countries are subject to. Such shocks in-
clude terms of trade shocks, notably be-
cause of changes in prices of primary
commodities, as well as weather shocks
or other natural disasters. Economic vul-
nerability, which depends on geography,
history, and international environment,
makes it more difficult to design econo-
mic policy or for countries to meet their
development  goals.  These  shocks,
which on the one hand, lead to lower
economic growth, do on the other hand,
mean higher aid effectiveness2. Indeed,
in countries which are subject to shocks,
aid can help prevent an economic slow-
down, as well as the cumulative decline
that often follows. Although aid is not al-
ways counter-cyclical, it remains stabili-
zing.
Weaknesses in the PBA formula have
resulted in many factors being conside-
red outside the formula. Indeed, the di-
rect application of the formula would lead
to  less  aid  being  allocated  to  post-
conflict or post-crisis countries while they
are the ones which are in particular need
of help. Another issue is related to coun-
try size. A small size can be crippling for
economic development, especially if the
country is landlocked. In addition, it is
desirable to avoid the concentration of
funds on a few large countries. However,
applying thresholds and caps at various
stages  of  the  computation  generate
complications and inconsistencies.
The limits of the current aid allocation formula
Preliminary results of this study show
that introducing the economic vulnerabi-
lity index in the PBA formula would in-
crease the transparency of aid alloca-
tion. In fact, a direct application of the
amended formula indicates that fragile
states would receive an allocation close
to the one based on the PBA formula, in-
cluding the amount originating from the
Fragile States Facility. The introduction of
1 Guillaumont, P. and L. Chauvet (2001) “Aid and Performance: a Reassessment”, Journal of Development Studies, 37, 66-92.
Preliminary lessonsA f r i c a n   D e v e l o p m e n t   B a n k
3
the economic vulnerability index in the
PBA formula would also favor countries
subject to shocks, or likely to suffer from
social or political instability.
As economic instability due to external
shocks is often the cause of social un-
rest, civil wars and crises, this amounts
to adopting an approach that is not only
curative but also preventive in dealing
with the needs of fragile states. As amen-
ded, the formula would reinforce the sta-
bilizing effect of the African Development
Fund by avoiding an excessive reduction
of aid flows when countries face difficul-
ties caused by external shocks, such as
the current financial crisis, which trans-
lates into poorer country performance
ratings. 
However, it is worth noting that if the en-
dowment of the African Development
Fund is held constant, the increased aid
allocated to countries with a high eco-
nomic vulnerability index comes at the
expense of countries which benefit cur-
rently from good performances. 
It is now critical that donors share the
same views on the desirability of incor-
porating a measure of economic vulne-
rability in the aid allocation formula for
African countries. Being the first and only
development financing institution to have
undertaken this exercise, the Bank could
assume a leadership role in this issue.A f r i c a n   D e v e l o p m e n t   B a n k
Comments and suggestions can be sent to: 
Leonce Ndikumana
Abdul B. Kamara
Development Research Department
African Development Bank
BP 323, 1002 Tunis Belvedere, Tunisia – Tel.: +216 71 102 876 – Fax: +216 71 103 779 – E-mail: economic-research@afdb.org – Web: www.afdb.org
The views expressed in the Development Research Brief are those of the authors and do not necessarily represent the views
of the African Development Bank, the Board of Governors, the Board of Directors or the Governments they represent. 
*Patrick Guillaumont and Sylviane Guillaumont-Jeanneney are Professors of Economics at the Centre d’Etudes et de Recherches
sur le Développement International (CERDI), CNRS, and Université d’Auvergne (Clermont-Ferrand, France). Désiré Vencatachellum, Lead Economist 
in the Development Research Department of the African Development Bank, served as Task Manager of this study in the Bank.
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Development Research Briefs - Accounting for Vulnerability of African Countries in Performance Based Aid Allocation

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Development Research Briefs - Accounting for Vulnerability of African Countries in Performance Based Aid Allocation

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