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USAID is placing renewed emphasis on the use of rigorous economic analysis, in conjunction with evidence-based programming, structured project design, and rigorous evaluation of its programs. The Office of Economic Policy, within USAID’s Bureau for Economic Growth, Education and Environment (E3/EP), has taken the lead on developing and implementing both project-level analysis like cost benefit analysis (CBA) and country-level analysis such as inclusive growth diagnostics (IGDs). In simple terms, CBA is a systematic assessment of the costs and benefits of a development intervention intended to weigh whether expected benefits justify costs and to identify the key drivers of each. IGDs rely on a systematic investigation of economic conditions in a country to identify and prioritize a country’s binding constraints to private investment, the principal engine of growth. Since 2011, E3/EP has:
- Completed CBAs of USAID Feed the Future (FtF) agriculture and nutrition projects in six priority countries (Bangladesh, Ghana, Uganda, Rwanda, Tanzania and Haiti). Additional analysis is now taking place in 14 more countries. In a time of scarce resources, CBA is helping USAID manage for results, improve performance, and promote accountability. For example, in Haiti, the rural roads strategy sets a framework for choosing road segments that will have the highest socio-economic returns and gives particular emphasis to sustainability through the involvement of local communities in the maintenance of roads.
- Conducted an analysis of overall CBA results of FtF projects in the six countries which found that these investments will achieve a median economic rate of return of 22 percent – in other words, for each dollar invested in the project, society receives additional income of about 25 cents per year during 10 years.
- Completed five IGDs in the past year, i.e., for the Democratic Republic of the Congo, the Dominican Republic, Kosovo, Timor Leste, Moldova, and Tunisia. Seven diagnostics are currently underway--in Honduras, Indonesia, Kenya, Laos, Nepal, and South Africa and several more are in the early stages of planning. The 2011 growth diagnostic effort in El Salvador, as part of the Partnership for Growth, led to the realignment of USAID programming towards the identified priority areas. Undertaken with the active participation and support of other USG agencies (and the Government of El Salvador), the analysis also brought about significant realignments in the focus and responsibilities related to their assistance. Finally, El Salvador’s President Funes cited the El Salvador IGD as a foundation of his Administration’s plan for his remaining two years in office.
Strategy and Program Focus
Cost Benefit Analysis
Since 2011, USAID economists have been involved in an effort to strengthen the use of CBA in the Agency. In addition to carrying out CBA on FtF projects, the Agency has trained around 400 USAID officers in CBA techniques. In 2013, E3/EP will begin carrying out economic analysis in other sectors such as water, power, roads and Global Climate Change (GCC), where using CBA at the beginning of the project cycle can contribute to improved resource allocation. Finally, in support of USAID Forward, E3 has been working with mission staff on the design of in-depth courses for government counterparts in South Africa and Kenya.
Inclusive Growth Diagnostics
USAID is increasingly using growth diagnostics, which are rooted in and relevant to specific country contexts, in its strategy development process. The use of IGDs in developing strategies can be contrasted with the “Washington Consensus” approach, i.e., development planning driven by a uniform set of overarching principles applied in a one-size-fits-all way to most any country and pursued more or less simultaneously. Research on growth-oriented reforms has demonstrated that the range of potential reforms have widely-varying payoffs in different contexts. Moreover, the administrative capacity and political capital required for effective reform implementation are best concentrated on fewer priority reforms. 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.
USAID economists are continuing to mainstream and refine the application of growth diagnostic analysis at USAID. In 2012, USAID staff broke new methodological ground in developing novel approaches to enhance the focus in these diagnostics on the inclusive aspect of economic growth. Apart from these methodological advancements, these diagnostics have two significant near-term applications that enhance the focus on inclusive growth:
- At USAID, IGDs constitute a data-driven, sectorally cross-cutting foundation to inform programmatic priorities in CDCSs and subsequent strategic planning exercises, and
- Beyond USAID, partner governments (in particular, Ministries of Planning or Finance) as well as other donors may use these IGDs to inform their own decision making.
Public Financial Management
The ability of developing countries to apply their resources in an effective and accountable manner is essential for their long-term, sustainable development. Robust Public Financial Management systems (PFM) help to ensure that governments are responsive to the needs of their citizens. The Economic Policy Office (EP) provides thought leadership and technical assistance to USAID Missions in the design, monitoring and evaluation of PFM programs.
Domestic Resource Mobilization
Domestic resource mobilization (DRM) – including national and subnational taxes – enables partner countries to invest in their own development, poverty alleviation, and public services. With reductions in international donor aid, domestic resources are becoming increasingly important for sustainable development. The benefits extend beyond just closing resource gaps. Taxation establishes a state-citizen social contract that provides citizens the means to demand public accountability and transparent management of resources. The office works to ensure that partner countries establish effective, transparent and accountable systems for DRM.
DRM along with PFM are important to ensure sustainability of development gains. 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. For information, please click here.
Bureau for Economic Growth, Education and Environment (E3)’s Role
E3 economists provide expert advice and analysis to help USAID Missions make, smart, evidence-based program decisions on how to help developing countries make the reforms needed for sustainable growth. E3 takes the lead in convening teams and contributing staff for CBA and IGD analyses. It is also responsible for cross-cutting support for these analytical products, including managing information and data resources essential to undertaking these analyses, developing methodologies and implementing quality control to support these efforts, and maintaining contacts in the wider community of practice for these techniques. Such community includes other U.S Government agencies, multilateral development banks, implementing partners, and the academic community.
E3 economists closely collaborate across the Agency with economists and sector specialists in the Missions and Regional Bureaus to ensure that analytical results are properly integrated into Missions’ strategies and projects. In some instances, economists from partner country governments contribute to these efforts as co-authors and reviewers. This is an important step, naturally, in securing co-ownership of the analytical findings. In the course of these analyses, USAID teams routinely and widely consult and collaborate with the private sector, civil society, and other donors and international organizations.
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Last updated: January 16, 2015