World Bank Document

objective because it provides a larger net flow of Given that the economic objective of official
capital over the long run.
assistance is ultimately to improve the allocation of
There can also be a practical rationale for conces- resources and to increase the rate of economic
sional assistance. In low-income countries many of development, the form of assistance that will most
the direct beneficiaries of public investments and effectively promote this objective can vary signifiservices
(health and education are examples) are cantly among countries depending on the countoo
poor to pay their full cost-yet the economiy as try's specific economic situation. It will also be
a whole benefits. Since the benefits occur some- influenced by the capabilities and strengths of the
where in the economy, it might be argued that individual donor-of course, as the next section
governments should be able to capture a portion of discusses, other donor motivations also influence
them, through fees and taxes, in order to seivice the nature of assistance. From a development perborrowing
on market terms. However, the time spective the basic question is, What are the basic
period over which the returns accrue can be very constraints to economic growth and how can offilong,
thus producing a debt-servicing mismatch cial assistance help reduce or remove them? In
for commercial loans. In addition, it is often diffi- many countries in order for existing and future
cult for a government, for social, political, or investment to contribute effectively to increased
administrative reasons, to capture the benefits of economic growth, policy reforms are needed to
such investments, particularly those designed to remove economic distortions that prevent the effiincrease
the earning capacity and well-being of the cient allocation of resources. Such policy reforms,
poor. It has also been argued that in certain cases- however, generally take time to produce positive
for example, clean water supplies and immuniza- results while additional costs may arise very
tion programs-attempts to charge fully for the quickly. In such circumstances, nonproject assisservices
can substantially reduce their use by the tance can both encourage the undertaking of the
poor, thereby harming the economy and society as needed reform and provide rapidly disbursing
a whole.
resources needed during the transition process.
Another practical argument for concessional Similarly, when countries face severe balance of
assistance relates to the fact that to service external payments and domestic budget constraints, efforts
debt not only do domestic resources have to be that help stabilize the economy and lay the founincreased,
but they also have to be converted into dation for future growth and investment can be a
foreign exchange. Countries at early stages of critical component of a package of actions and prodevelopment-where
there is great need to under- grams designed to assist the country. Such efforts
take investments in social services and infrastruc- can include: the financing of the importation of
ture-often face institutional and other constraints intermediate inputs, which will permit the use of
that can reduce their capacity to increase export existing private and public sector idle capacity,
earnings rapidly. Since concessional flows do not thereby quickly increasing domestic supplies and
generate as large a debt-servicing and foreign exports; and the financing of the maintenance and
exchange burden as flows at market rates, they rehabilitation of existing investment. These types
increase the ability of these countries to make such of assistance have been particularly important in
needed investments.
many of the middle- and low-income countries,
The arguments for concessional assistance apply where the flow of private capital has typically
primarily to the low-income countries. Although declined with the onset of debt-servicing difficulmiddle-
and upper-income developing countries ties.
also need to invest in basic social infrastructure,
which has long gestation periods and externalities, Donors' objectives
their more developed economies provide a basis to
obtain increased levels of private capital and also Donors supply official assistance for many differto
generate the foreign exchange needed to service ent reasons: to assist the economic development of
commercial loans. However, even in many middle- the recipient; to further their own strategic, politiincome
countries, official assistance can play a cal, and commercial interests; to maintain historivaluable
role by providing not only long-term non- cal and cultural ties; and to express their humaniconcessional
capital, but also technical assistance tarian concern. This combination of objectives can
and policy advice. It can also be a catalyst to pri- affect the nature of official flows-and can serivate
flows, stimulating increased levels and ously reduce the effectiveness of such flows in proimproved
terms.
moting development. The level, growth, and rela-
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