Creating a market for outcomes: shopping for solutions

Abstract

This article suggests that interactions between development agencies and recipient governments are mostly about inputs deemed (but not known) to contribute to improvements in living standards in recipient countries, rather than outcomes. We argue that the development marketplace is beset by market imperfections because of externalities, principal–agent problems and decision-making under uncertainty, which not only makes it difficult to achieve the right outcomes, but also takes away incentives to learn about outcomes. A fundamental rethink of responsibilities and accountabilities in the development business would make sure that development outcomes are traded in the development marketplace. It would put recipient countries in charge of contracting development agencies to provide these outcomes. Development agencies would commit to, and be held financially accountable for, outcomes, that is, real improvements in welfare indicators. We describe the role of the evaluation function in aligning incentives with the ultimate goal of improving lives, and provide examples of emerging solutions.

Keywords:

• market failure
• principal–agent
• development outcomes
• evaluation function
• externalities

Acknowledgements

The authors thank Howard White, Vibecke Dixon, Cheryl Gray, Emanuel Jimenez and Soniya Carvalho for comments on previous drafts of this article.

Notes

1. By development agencies we mean single-government institutions such as the Department for International Development in the UK, Norad in Norway and so forth, and multilateral development banks, including the World Bank and the Inter-American Development Bank.

2. If fuel prices go up, some people may decide to use public transport, thereby leading to a decrease in congestion and travel time even without any road improvements.

3. IEG (2014).

4. Pigou (1920), Samuelson (1954), Akerlof (1970), Spence (1973), and Stiglitz (1976, 1987).

5. Bartsch and Müller (2000).

6. Spence and Zeckhauser (1971), Holmstrom (1979), Shavell (1979), Stiglitz (1974), Mirrlees 1999), Holmstrom (1979), Shavell (1979), and Rees (1985a, 1985b).

7. Martens et al. (2001).

8. Norad (2013).

9. Bartsch (1998, 2006).

10. We do not find the argument very persuasive, as the loan was taken up in the first place to address a development issue. The fact that the loan becomes ‘cheaper’ does not mean that it carries zero costs, and hence the desired development outcome remains the purpose of incurring the cost.

11. CGD (2010).

12. Gaarder (2012).

13. Whether the recipient country becomes the agent responsible for providing specified outcomes, or the development agency, it is clear that incentives align between the country and the development agency to put in place an M&E system to verify the achievement of the desired outcomes. It also needs to be able to give clear insights into how much it should cost to obtain certain development outcomes based on previous evaluations in similar circumstances, and hence be able to calibrate ex ante the payments for the expected outcomes.

14. http://www.oecd.org/dac/effectiveness/parisdeclarationandaccraagendaforaction.htm

15. Birdsall and Savedoff (2010).

16. Gaarder and Bartsch (2014), Gray (2014), OVE (2010, 2013), IDB (2010), and DFID (2011, 2014).