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Economic growth is essential to achieve sustainable development. It is critical for creating quality livelihoods and fostering a sense of stability. As economies grow, so does a country’s ability to provide for the needs of its people – such as basic education, clean drinking water and quality health care.
E3’s Office of Economic Policy (E3/EP) collaborates closely with USAID Missions and Regional Bureaus to ensure that country strategies and projects include well-researched economic interventions that address key constraints to growth and maximize development returns. These activities are intended to help countries to transition from being donor dependent to self-sufficiency.
In addition, E3/EP is called upon to contribute to or manage a broad array of issues related to economics, such as poverty’s definition, measurement and solutions.
Strategy and Program Focus
Cost Benefit Analysis
Development professionals and policymakers ask the fundamental question: Is a project worth the investment? For a broad range of development interventions, cost-benefit analysis (CBA) answers this question.
CBA blends smart design with data-driven evidence to determine if an activity makes sense for the people USAID serves. Before a project starts, analysts examine the incentives facing multiple stakeholders, including forecasting prices, profits, and losses over a long period of time. These models can also account for inherent uncertainties and volatility such as food price fluctuations over time and natural disasters. USAID uses this information to determine who is likely to win or lose as a result of a project, and by how much.
CBAs have been completed for over 40 projects in 23 USAID countries. Projects that have utilized CBA are typically more cost-effective and have a greater value for money. USAID Missions have made decisions to reprogram over $220 million following CBAs that have shown how USAID assistance could be more effectively invested.
Inclusive Growth Diagnostics
USAID increasingly looks to inclusive growth diagnostics (IGD) to sharpen its strategy development process. A tool that relies on a country’s systemic investigation of economic conditions to identify and prioritize those specific constraints to private investment, IGDs do not conform to a one-size-fits-all planning process.
For these reasons, the focus and prioritization inherent in the IGD approach lend a discipline to the process of strategy development that pays off both in terms of impact and feasibility of development interventions.
To date the Agency has completed IGDs in 20 countries, encompassing every geographic region where it works. In many instances, USAID economists from Washington, D.C. and the field have worked jointly with other partner agencies (e.g. African Development Bank, UK Department for International Development, Millennium Challenge Corporation) to leverage expertise and impact. With the 2015 Quadrennial Diplomacy and Development Review's emphasis on enhancing the use of economic diagnostic tools, USAID will continue to expand its production of IGDs.
Domestic Resource Mobilization
Domestic Resource Mobilization (DRM) — the process in which countries transparently raise and spend their own funds to provide for their people – is the long-term path to sustainable development finance. DRM doesn’t have to mean new taxes or higher tax rates — governments often see their revenues rise through improved audits or simplified filing processes. Improvements in tax compliance and revenues can, and often do, enable countries to lower tax rates.
DRM along with Public Financial Management (PFM) are essential for ensuring the sustainability of development gains. E3/EP provides technical expertise, support mechanisms, and training to help Missions develop and implement tax policy and tax administration projects across all sectors of their portfolios.
Successful DRM programs are extremely cost-effective; they return many times what is invested in them — with revenue increases often amounting to $20 or more for every assistance dollar invested. Recent experience of USAID and other donors in Georgia, El Salvador, Rwanda, Tanzania, and Bulgaria suggest that similar, large increases are feasible elsewhere — if political will by the partner country and robust assistance efforts of a donor program can be combined and sustained.
USAID currently spends approximately $20 million per year on DRM assistance in around 11 countries. Meanwhile, the United Kingdom, Germany, the Netherlands and several other partner nations are considering an expanded effort to strengthen revenue systems in low- and lower middle-income countries that demonstrate a commitment to build capacity in their tax administrations.
Public Financial Management
To deliver the essential services needed to end extreme poverty, developing country governments must spend their resources in an effective, transparent and accountable manner. In doing so, these governments can address the issues that are essential to foster sustainable, broad-based economic growth, while supporting just, democratic societies. E3/EP’s PFM advisors often serve as a bridge for these governments to develop these skills.
Governments perform several key functions including developing macro-fiscal frameworks, formulating and executing budgets, and reporting to oversight institutions and the public at large. Despite progress in recent decades, many developing countries continue to lack the capacity to deliver the core functions of government affecting public service delivery.
Bureau for Economic Growth, Education and Environment (E3)’s Role
E3 economists provide expert advice and analysis to help USAID Missions make smart program decisions on how developing countries can make the reforms needed for sustainable growth. E3 takes the lead in convening teams and contributing staff for CBA, IGD, DRM and PFM analyses.
E3 economists closely collaborate across the Agency with other economists and sector specialists in the Missions and Regional Bureaus to ensure that analytical results are properly integrated into Missions’ strategies and projects. This is an important step in securing co-ownership of the analytical findings.
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Last updated: August 26, 2015