Donors Are Adopting
Strategies to Improve
Effectiveness in Light of
Long-term Aid
Dependence and Trade-
offs
Strategies That Promote Good
Governance

meet 98 percent of its educational operating expenses, according to a
November 2000 ADB report on a proposed loan to the FSM.1 Officials at
Interior said the Compact economic assistance was expected to pay for
recurring expenses as well as program expenses and capital
improvements. To address their concerns, Australia and New Zealand
adopted a joint policy in 1992 to define acceptable and unacceptable uses
of assistance for recurring expenses. In addition, USAID has a policy on
recurrent cost problems, which calls for funding of recurrent costs under
narrow conditions, such as having a carefully phased plan for shifting the
cost burden to the recipient government.
The major donors are exploring or have adopted assistance strategies
designed to improve aid effectiveness while reacting to the context of
providing aid in the Pacific region-long-term aid dependence; trade-offs
among multiple motivations for assistance; and trade-offs to balance cost,
effectiveness, and accountability.
Australia, Japan, New Zealand, the United Kingdom, and the ADB have
adopted strategies that promote the development of good governance
policies in the recipient countries. This emphasis follows the widely
accepted principle that aid is more effective in countries with good policy
environments in place.7 According to the Australian Agency for
International Development, "good governance" means competent
management of a country's resources and affairs in a manner that is open,
transparent, accountable, equitable, and responsive to people's needs.
Australia, for example, supports efforts to develop a rule of law. The New
Zealand Ministry of Foreign Affairs and Trade believes that good
governance is critical to dealing with such issues as drug trafficking,
money laundering, Internet scams, and migratory diseases. The ADB, as
one example of a donor that embraces this principle, shifted its strategy in
1995 to focus on economic policy and good governance issues. Between
l6Report and Recommendation of the President to the Board of Directors on a Proposed
Loan to the Federated States of Micronesia for the Basic Social Services Project (Manila,
Philippines: Asian Development Bank, Nov. 2000).
'7According to a World Bank study, Assessing Aid-What Works, What Doesn't, and Why
(Washington, D.C.: World Bank, Nov. 1998), where there is sound country management, an
additional 1 percent of gross domestic product in aid translates into a 1-percent decline in
poverty and a similar decline in infant mortality. In the absence of good policies, aid had no
positive effect on growth.

GAO-01-808 Pacific Development Assistance Strategies

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