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Key points:
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Lending from multilateral development banks to MICs is becoming more flexible in response to declining borrowing and low loan execution rates.
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‘Aid effectiveness’ principles and SWAps are part of the new lending framework to MICs, although the motivations are different from those found in LICs.
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Some aspects of the emerging aid relationship in MICs are relevant to LICs, particularly the blend of fiscal management and sector policy objectives linked to a results orientation.
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But the balance of interests found where aid dependency is low is an important aspect of effective aid which might not be replicable in aid-dependent countries.
Over the last few years, there has been renewed consideration of the position of middle-income countries (MICs) in the aid debate. This is not only because of the proportion of the poor that live in them (nearly 40% of the world’s poor living on less than US$ 2 per day, according to the World Bank’s definition), or the scale of aid that goes to them (about 36% of net concessional loans and grants), but also because of their emerging role as aid providers and their contribution to global public goods, including clean energy and environment protection, international financial stability and trade integration.
MICs make up a highly diverse group. They include a wide range of income levels and aid dependency ratios, developing and transitional economies with and without access to capital markets, small islands as well as the world’s largest and most populated countries (Table 1).
MICs are different from low-income countries (LICs) in several ways which make the nature of the relationship between donor/lending agency and recipient quite distinct. They are generally less aid dependent (despite large variations) and have more access to capital markets. Bilateral agencies are present on a smaller scale and, unlike in LICs, aid fragmentation and lack of coordination between agencies are not usually significant problems. Furthermore, most MIC governments do not suffer from critical shortages of human and financial resources and management capacity. Nevertheless, the aid effectiveness principles (as laid out in the 2005 Paris Declaration: country ownership, alignment with country systems, harmonisation, management for results and mutual accountability1), or at least some of them, have relevance to the management of aid relations in these countries. This paper explains why this is the case. It draws on the Brazilian experience with Sector Wide Approaches (SWAps) to illustrate differences in the aid relationship in MICs and discusses implications for the understanding of aid effectiveness.
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