How Decentralization and International Aid Reduce Inequality in Ethiopia

In 2017, foreign aid from official donors totaled over $146.6 billion. The bulk of this aid went to decentralizing or decentralized countries, in which regional or local governments are granted powers and resources. Localized governments are believed to be more accountable to voters because they are “downward-looking” and need to address the demands of local constituencies. Yet, by receiving foreign aid, local governments also find themselves accountable to higher levels of government and to donors, which may put their funding accountability in direct tension with their governing accountability. This tension leads to the question: does foreign aid undermine a decentralized system and diminish the voices of local people? Or, does a decentralized system prevent effective foreign aid delivery?

Qaiser Khan, Jean-Paul Faguet, and Alemayehu Ambel (2017) examine these questions in the context of Ethiopia, a diverse country in East Africa of about 100 million people and 98 different ethnic groups. Since 1991, Ethiopia has had a highly decentralized political system. The central government allocates Intergovernmental Fiscal Transfers (IGFT) or block grants to regional, city, and woreda (district) level governments. Allocations are determined based on poverty level, infrastructure gap, population, and other criteria. In 2006, donors including the World Bank, the African Development Bank, and the UK Department for International Development (DFID) began contributing to the block grants system in an effort to improve basic service delivery, though the DFID has since concluded its support for the program.

Khan et al. utilize data from the Poverty and Social Impact Assessment (PSIA) database to analyze the impact of this program by comparing poverty rates and aggregated results across different woredas. They also use data from the Ethiopia Demographic Health Survey (DHS) for 2000-2014 to assess the impact on beneficiary households and individuals grouped by income levels. They focus on several education and health services including contraceptive use, prenatal care, delivery by skilled birth attendants, and school enrollment.

The study finds that, overall, Ethiopia’s block grant system administered by local governments with financial assistance from international donors is indeed narrowing the gap between lagging and better-off woredas, as well as between poorer and wealthier households. Per capita spending for targeted woredas is associated with improved outcomes, especially in the poorest 20 percent of woredas. Specifically, accounting for gender, mother’s education, age, and whether the student lived in rural or urban areas, the study finds that school enrollment has increased significantly, especially in the bottom 20 percent of woredas and households. A one-dollar increase in per capita spending is associated with a 38 percent increase in net school enrollment at the national level, compared to a 42 percent increase in net enrollment in the poorest 20 percent of woredas. Similar results are seen for contraception use, prenatal doctor visits, and utilization of a skilled birth attendant.

The authors suggest that the positive trend observed in these indicators may be due to the observation that despite decentralization, strong clientelistic relations still remain between local parties and centralized parties, undermining governments’ downward accountability to voters. There is also a strong sense of upward accountability in the Ethiopian government and thus, no contradiction with the directional flow of accountability associated with foreign aid.

At the same time, the Ethiopian central government has implemented a number of strategies to enhance citizen engagement at the local level. For example, there are structured social accountability tools such as community score cards, citizen report cards, and grievance redress mechanisms. Over 90 percent of woreda and city administrations post information publicly to promote transparency. Central government leaders are also highly sensitive to public complaints about local government performance, and corrupt leaders are swiftly removed. Perhaps the central government recognizes that political legitimacy rests on sustaining rapid development.

As the authors note, “Ethiopia’s blend of upward accountability with downward engagement resolves the instrumental dissonance implicit in aid-funded programs to combat inequality in a federal context.” Additionally, though local officials are often upward looking to align with the central government, grassroots engagement allows for local input and has facilitated the provision and delivery of basic services funded by foreign aid.

The caveat of this study is that it focuses on service delivery rather than on outcomes. For instance, though there is an uptick in net enrollment, it is not clear whether these efforts have led to keeping students in school. The scope of the study does not cover quality of service provision. Nonetheless, given how much is spent in foreign aid each year across the world and in decentralized countries, this study shows how donor aid can complement rather than hinder decentralization and vice versa.

Article source: Khan, Qaiser, Jean-Paul Faguet & Alemayehu Ambel. “Blending Top-Down Federalism with Bottom-Up Engagement to Reduce Inequality in Ethiopia,” World Development, Vol. 96 (Aug. 2017): 326–342.

Featured photo: cc/(miroslav_1, photo ID: 477827402, from iStock by Getty Images)