MDG COST ESTIMATES: THE LIMITS OF EXPERT KNOWLEDGE

1. MDG COST ESTIMATES: THE LIMITS OFEXPERT KNOWLEDGE Rathin Roy and Antoine Heuty UNDP Public Resource Management Training, New Delhi, March 30th- April 3rd

2. COURSE OUTLINE • SESSION 1: GLOBAL & SECTORAL ESTIMATES • SESSION 2: COUNTRY LEVEL MDG COSTING • SESSION 3: AN ALTERNATIVE APPROACH TO MDG COSTING

3. Course Objectives • Warning: This Course does NOT aim to provide a one-size fits all recipe for MDG costing. • MDG Cost estimates are important but existing methodologies are highly unreliable. • Unreliable cost estimates will make it more difficult to achieve the MDGs. • An alternative approach, recognizing the limits of expert knowledge, exists: an Institutionalized Financing and Learning Mechanism (IFLM).

4. Introduction • Definition: The Millennium Development Goals (MDGs) are a set of eight specific (in many instances, quantitative) objectives for the betterment of the human condition. • The MDGs aim to: • ‘Eradicate’ Extreme Poverty And Hunger • Achieve Universal Primary Education • Promote Gender Equality And Empower Women • Reduce Child Mortality • Improve Maternal Health • Combat HIV/ AIDS, Malaria And Other Diseases • Ensure Environmental Sustainability • Develop a Global Partnership For Development

5. MDGs: History • ORIGINS • UN social development conferences and global summit meetings of the 1990s; • Millennium Declaration (2000). • 2001: UN General Assembly approves the MDGs as part of the UN Secretary General’s report A Road Map Towards the Implementation of the United Nations Millennium Declaration. • 2002: Monterrey Conference on Financing for Development

6. I/ GLOBAL MDG COST ESTIMATES • Why are Cost estimates useful? • Choice of objective (normative rationale) • Planning (operational reason) • Existing Global Cost Estimates • The divergence of global estimates • Case Study: methodological issues with goal 1 • Main Methodological limits • Unjustified assumptions • Data weaknesses • Unpredictable future shocks

7. Rationale for estimating the cost of achieving the MDGs • Why is it necessary to estimate the cost of achieving the MDGs? • A normative question: • Should an end be pursued ? • An operational question: • How should an end best be pursued?

8. Aggregate cost estimates and choice between objectives • The feasibility of achieving the MDGs, given a sufficient application of resources in the context of adequate policy and institutional reform , is not generally in doubt. • However , the discussion implicitly supposes that the commitment to achieving the MDGs is not total. • An implicit rationale: Convincing developing countries and donors that the MDGs can be achieved without undue sacrifice of other objectives.

9. Aggregate cost estimates and planning • How best to achieve the MDGs? • Budget Planning • Resource gap identification; • Budgeting process “stickiness” (irreversibilities, cost of planning). • This ‘budgeting’ rationale for producing realistic aggregate cost estimates may be relevant at both the global and the national level.

10. Disaggregated cost estimates and planning • What is the most cost efficient approach to achieving the goals? • Global cost estimates are of no inherent interest from this standpoint. • The MDGs have been widely interpreted as to be achieved on a country-by-country basis. • Within-country cost information is indispensable to developing an effective country-specific plan for achieving the MDGs.

11. Global cost estimate 1 – Zedillo Report • Zedillo Report: “The cost of achieving the 2015 goals would probably be on the order of an extra $50 billion a year”. • Calculations derive from adding the costs of achieving individual goals that were identified in secondary sources and ad hoc estimates of its own. • An “order of magnitude” of the additional funds required to achieve the MDGs.

12. Global cost estimate 2 – The World Bank • Goal 1: US $ 54 - 62 billion a year. • Ad hoc assumptions: ‘poverty reduction elasticities of growth’, capital-output ratios, national savings rates, and ‘absorption constraints’. • Other MDGs: US $ 35 - $ 76 billion per year. • These two sets of figures should not be aggregated, in order to avoid ‘double-counting’.

13. Global Cost Estimate 3 – Background Paper for HDR 2003 • Pettifor and Greenhill draw on similar sector estimates to those used in the Zedillo Report • Goal 1: The approach centers on the investments required to generate poverty-reducing increases in output in developing countries. • The total estimate of the cost (to donors) is US$ 76 billion per year, significantly higher than the Zedillo report and in the upper range of the World Bank’s estimates.

14. Goal One – unreliability and meaninglessness of the data • Data on Goal 1 lacks in credibility and is such that monitoring it over time is greatly difficult. • Large fluctuations in poverty estimates arise due to irrelevant factors. • PPP conversion factors are both inappropriate and often based on an inadequate evidence base. • Estimates of “$1 per day” poverty do not provide a basis for meaningful comparisons of absolute poverty across time or space. • The “$1 per day” criterion fails meaningfully to capture extreme poverty. In a majority of poor countries, national poverty lines are substantially above the “$1 per day” line.

15. Poverty Reduction estimates in China

16. Goal One – Lack of credible estimates of ‘poverty reduction elasticities’ • The “poverty reduction elasticities of growth” used in exiting methodologies are based on existing ‘$1 per day’ estimates and are lacking in credibility. • “Poverty reduction elasticities of growth” differ substantially from country to country and change over time in any given country.

17. Main methodological problems - Choice of Assumptions • Existing national and global cost estimates are not robust to the choice of assumptions. • Examples: • Constant unit costs; • “Absorptive capacity“; • Aid ineffectiveness and "good policies" ; • Complementarities between the distinct MDGs, Studies vary widely in their (ad hoc and perhaps overly optimistic assumptions); • Assumptions concerning future growth rates, future tax/GDP ratios, and the balance of public and private financing of expenditure that may reasonably be expected.

18. Main methodological problems - Data Weaknesses • Data for baseline scenario of the MDGs and monitoring are severely deficient. • As a result, it is often not possible meaningfully to judge either the extent of progress required or the costs of achieving progress. • Data on unit costs are rare, and where available are produced using methodologies that are most often both inadequately specified and idiosyncratic. • Confusion average / marginal costs • Absence of clear distinction between capital costs and recurrent costs. • Unclear cost concept

19. Main methodological problems - Unpredictable Future Shocks • Unpredictable future shocks are sure eventually to undermine the accuracy of MDG cost estimates. • Examples: • Diseases (such as HIV/AIDS); • Climatic events (such as El Niño and global warming); • Civil and regional wars (e.g. that in the Great Lakes region). • Shocks to terms of trade and global demand may influence the share of overall MDG costs that will have to be borne by developed countries.

20. II/ COUNTRY LEVEL MDG COST ESTIMATES • UNDP Country Studies • Overview of methodology • Limits for policy decision making and resource mobilization • World Bank Initiative • Results Summary • Critique of the “absorptive constraint” approach • Good vs. Bad Policies • The Millennium Project • Presentation of the methodology • Methodological limits of the MP model • Economies of scale and scope • The limits of expert knowledge

21. Introduction: A Benchmark for MDG cost estimates • What does an accurate estimate require? • Accurate identification of the baseline scenario. • Accurate identification of the cost function: • Cost function specification. • Identification of the appropriate cost concept.

22. UNDP Country Studies • In preparation for the Monterrey Conference, a pilot project to estimate the cost of attaining the MDGs in six countries (Cameroon, Egypt, Malawi, Uganda, Tanzania and the Philippines). • The reports focused on 6 MDG targets: income poverty, primary education, child mortality, maternal health, HIV/AIDS and water. • Limitations are very similar to global cost estimates (data weaknesses, complementarities, uncertainty, choice of assumptions). • Recent MDG costing reports (Nepal, for instance) mitigate but do not overcome most methodological issues.

23. Development Committee Results, based on the World Bank estimates • The World Bank approach gives priority to the Poverty Reduction Strategy (PRS) previously defined by each country, and asks how, giving priority to the objectives and strategy of the PRS, the MDGs can best be achieved. • PRSPs prominently feature macroeconomic policy objectives that are not directly referred to among the MDGs.

24. Critique of the ‘absorptive capacity’ approach • World Bank estimates rely heavily on the notion that there exist “absorption constraints” that limit countries’ capacity to use resources effectively. • Beyond a “saturation point”, additional resources have zero impact. Moreover, this “saturation point” is said to vary with the quality and nature of a country’s policies and institutions. • The notion of an “absorption constraint” is ill-defined. It is unclear what would in practice constitute an absorption constraint of this kind, however.

25. Results of the World Bank Initiative Source: Supporting sound policies with adequate and appropriate financing, Development Committee, page 10

26. “Good” vs. “Bad” Policies • A Popular view: Policy revisions can by itself substantially contribute to the achievement of the first MDG • A country is identified as having “good” policies if it receives a high score on the World Bank Country Policy and Institutional Assessment (CPIA) through subjective assessments by Bank “country experts”. • Example of CPIA criteria: presence of a “Competitive Environment for the Private Sector” and “Property Rights and Rule-based Governance”. • However, there is no universal agreement either on how to classify policies as “good” and “bad” nor on the impact that the policies classified as “good” have on growth, or indeed on any other desired outcome.

27. The Millennium Project (MP) • The Millennium Project focuses on the totalcosts of achieving allofthe Millennium Development Goals at the country level. • Good governance is necessary but not sufficient to achieve the MDGs. • A massive and long term public finance investment program is paramount to the achievement of the MDGs.

28. Millennium Project Methodology

29. Inflexible and Unrealistic Assumptions • Important methodological issues undermine the MP approach to MDG costing. • Choice of assumptions: • Poverty reduction elasticities of growth • Growth projections • Resource mobilization

30. Policy vs. Intervention Costing • The MP methodology establishes a comprehensive list of interventions required to meet each of the goals. • Policy and institutional framework is not modeled nor discussed. • The technocratic bias: a list of interventions cannot provide an adequately sound framework for determining the best strategies to achieve the MDGs.

31. Unit cost: inaccuracy and discrepancies • Generalization of unit cost lead to unreliable estimates. • Recent country studies from different sources have made unit cost estimates for the extension of particular services that vary widely. • Table: Unit costs of Extending Primary Education in Uganda

32. (Dis)Economies of scale and scope • Economies of scale: • Diseconomies of scale: beneficiaries of relevant services may be those who are most difficult to reach, for geographical or social reasons. • Economies of scale: higher levels of service provision enable the cost of delivery infrastructure to be spread over more persons, increased achievements enhance individual knowledge and bring about transformations in social norms. • Economies of scope (complementarities between distinct MDGs): • Diseconomies of Scope: reductions in infant mortality will make it costlier to achieve a specified percentage increase in primary enrolments. • Economies of Scope: greater access to safe drinking water and to literacy both improve health

33. (Dis)Economies of scale and scope • Table: Total (tuberculosis treatment and malaria diagnosis) health costs in billions of (2002) dollars under different assumptions concerning economies of scale and scope.

34. The limits of expert knowledge • EXPERT DRIVEN APPROACH • RIGID FRAMEWORK • ABSTRACT INTERVENTION COSTING • ASYMMETRY INCORRECT MDG COST ESTIMATES LONG TERM DAMAGE FOR MDG COUNTRY STRATEGY

35. III/ AN ALTERNATIVE APPROACH TO MDG COST ESTIMATION • Rationale for a MDG Institutionalized Financing and Learning Mechanism (IFLM) • The importance of learning and flexibility • A “needs & capacities” based system • A Peer & Partner Review Mechanism to estimate the MDGs • Concept and use of peer review mechanism • Actors, functions and procedures • Criteria and principles of evaluation • Localizing and operating the MDGs through the IFLM • Making IFLM work for the poor • From technocratic to democratic MDG costing

36. Rationale for an MDG Institutionalized Financing and Learning Mechanism (IFLM) • What is the most sensible way to determine countries’ needs and allocate resources? • Cost estimates are necessary but insufficient and imperfect. • A flexible and comprehensive approach: MDG Institutionalized Financing and Learning Mechanism (IFLM). • Purpose of the IFLM: a realistic, effective, and flexible approach to planning and financing at both the country and global level.

37. Empirical ideas underlying the MDG IFLM • The IFLM is motivated by two core empirical ideas: • The importance of learning: It cannot be known in advance how the MDGs can be best achieved. As a result, it is necessary to foster individual and collective learning and lesson-sharing. • The importance of flexibility: It cannot be known in advance what it will cost to achieve the MDGs. As a result, it is necessary periodically to reassess these costs (and associated resource gaps) on the basis of new information.

38. Normative ideals underlying the MDG IFLM • The IFLM approach is further underpinned by two core normative principles directly reflected in the “Monterrey Consensus”: • A need principle: Countries ought to have access to the resources they need to meet the MDGs. • A capacity principle: Countries ought to provide the resources required to meet the MDGs to the extent of their capacities.

39. Overview of the IFLM Proposal • A Peer Review Mechanism, through which each country’s efforts toward the MDGs will be assessed by a committee containing representatives from North and South, from within a region and from beyond it, and from civil society as well as states. • A flexible instrument to identify: • Resource requirements to achieve the MDGs in each country; • Resource availability to achieve the MDGs in each country (domestic resource generation and policy reorientation). • Periodic assessments on a voluntary basis to identify bona fide resource gaps. • A global inventory of resource gaps will be assembled by the central secretariat of the IFLM.

40. A Peer Review Mechanism for the MDGs: Definition • A peer review mechanism involves “the systematic examination and assessment of the performance of a State by other States, with the ultimate goal of helping the reviewed State improve its policy making, adopt best practices, and comply with established standards and principles” (OECD) • Objective of a MDG peer review system: • Assess rich and poor countries governments’ current efforts toward the goals; • Identify bona fide resource gaps and opportunities for new resource generation, reallocation of effort, and policy reorientation. • Motivations of an MDG peer review mechanism: • Identify relevant facts in a transparent manner, and to foster exchange of information and rapid collective learning concerning effective policies and actions; • Provide a system for identifying bona fide resource gaps and for filling them.

41. History and practice of peer review mechanisms • Peer review mechanism is closely associated with the OECD. • UN bodies and specialized agencies also use peer review to evaluate national policies in various sectors. • The peer review systems recently developed by the Development Assistance Committee of the OECD for evaluating development cooperation efforts and the African Peer Review Mechanism within the NEPAD are sources of inspiration for the proposed IFLM, and may be integrated in to it.

42. Actors & Functions of the MDG peer review mechanism • The frequency of the reviews would depend on practical judgments concerning the most effective planning horizon and the capacities of participants. • The IFLM Secretariat organizes and drives the peer review process. Its missions are to: • Assist the review process; • Organize missions and meetings; • Maintain the quality and the continuity of the process; • Disseminate the results of the reviews to the public. • The members: Any country wishing to undergo an MDG-related peer review process may do so.

43. Procedures of the MDG peer review mechanism • Finally the MDG peer review process shall follow certain procedures to ensure the transparency, credibility and focus of its work: • Preparatory phase: Background analysis and some form of self-evaluation by the country under review. • Consultation: The peer review committee and the Secretariat conduct their evaluation. • Assessment: Final report of the peer review committee , which shall seek consensus consensus but leave an opportunity for members of the committee to file dissenting comments on the majority report for the public record. • Communication: The final report shall be followed by a press release supervised by the Secretariat with a summary of the main issues addressed and findings. • Incorporation into resource generation mechanisms.

44. Size, Scope and Coverage • Developing countries will have an incentive to participate in the peer review process so as to attract additional resources, improve their capacities, and highlight their commitment to the MDGs. • Developed countries will be invited to submit evidence concerning their commitment to the MDGs to peer review. • In all instances, participation will be voluntary.

45. Principles and criteria of MDG peer reviews • A set of common criteria and indicators for a fair, credible and internationally comparable review process. • Criteria , identified by the IFLM secretariat should be based on the following principles: • Incorporation of MDG costing estimations with due emphasis on their respective limitations. • Estimate additional resources with which to build institutional capacities and relax “absorptive capacity” constraints. • National MDG efforts (measured for instance by the pattern and level of public expenditures and the transparency of the administration) and assessed on the basis of national MDG reports. • All considerations shall be weighed against a country’s economic, political and social conditions.

46. Making the IFLM work for the Poor • The IFLM is potentially compatible with PRSP: • MDGs and PRSP objectives are different • PRSP shall recognize the MDGs as legitimate long-term objectives. • PRSP conditionality is at odds with the IFLM • For the rich countries, the peer review mechanism will provide a basis for assessing their commitment to the MDGs both in terms of aid and policy practices. • In the developing world, the peer review process will: • identify the bona fide resource requirements to achieve the MDGs; • evaluate their commitment and capacities to reach the goals; • suggest relevant policy reorientations. • A global report drawing attention to the balance between global needs and global resources shall be prepared periodically by the central secretariat of the IFLM.

47. EXISTING MDG COSTING EXPERT DRIVEN APPROACH RIGID FRAMEWORK ABSTRACT INTERVENTION COSTING ASYMMETRY PROPOSED MECHANISM COUNTRY DRIVEN FLEXIBLE PROCESS EVIDENCE BASED POLICY MAKING EQUITY FROM TECHNOCRATIC TO DEMOCRATIC MDG COSTING

48. ANNEXES

49. (Dis)Economies of Scale • We define a cost function for improvements in achievement. It is assumed that the unit cost of c is correct for the last (observed) unit (1%) of coverage attained. For the next unit (1%) of coverage produced, we have: • A positive value of beta implies rising marginal costs, and a negative value of beta implies falling marginal costs.

50. (Dis)Economies of Scope • Note that