i

News &Notices

#151996

for World Bank Watchers

TABLE OF CONTENTS

Quotes p. 1 I. Summary p. 2 II. Bank/Fund Annual Meeting Highlights p. 6 A. Governance: A Taboo Is Broken p. 6 1. Two Classes of Borrowers Emerge p. 6 2. Corruption p. 7 3. An NGO Perspective p. 8 4. Governance of the Bank and Fund p. 9 B. The Partnership for Capacity-Building in Africa p. 10 C. Other Annual Meeting Highlights p. 12 1. The World Bank Group p. 12 2. The Internatinal Monetrary Fund p. 12 3. Debt initiative: Sham or Historic Breakthrough? p. 14 III. Congress Fails to Cover US Arrearage to IDA p. 19 IV. Downsizing the World Bank p. 22 V. The World Bank's Ailing Poverty Reduction and Social Development Strategies p. 26 VI. Inching Beyond Orthodoxy: Report on an Extraordinary Conference at the Inter-American Development Bank (IDB) p. 30 Boxes: Box 1: Themes of Wolfensohn’s Annual Meeting Speech p. 18 Box 2: Washington Consensus and Amendments p. 30 Attachment: "Recommendations, Critique and Quotes from the Bank's Social Development Task Force Report” p.35

Contact: Globalization Challenge Initiative 7000-B Carroll Avenue Suite 101 Takoma Park, MD 20912 (301) 270-1000 FAX (301) 270-3600 E-mail: ncalexander@igc.org Bread for the World Institute 50 F Street, NW Suite 500 Washington, DC 20001 Phone: (202) 639-9400 FAX: (202) 639-9401

Note: This publication is prepared collaboratively by Nancy Alexander of the Globalization Challenge Initiative and the Bank Watchers’ Project at Bread for the World Institute with assistance from Ford Foundation and John D. & Catherine T. MacArthur Foundation.

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Quotes "It's good to be back from vacation. It's much more fun to be at work here, blocking reforms, flying my black helicopters, imposing global taxes, demoralizing my staff..."

—Boutrous Boutrous-Ghali, UN Secretary-General, The Washington Post, September 18, 1997

"Development economics used to teach that inequality was essential, because you needed rich people at the top to invest money. Now economists believe the reverse — that more equal distribution of land and credit is helpful. In the old days, too, the orthodoxy was the democracy was bad for growth; now World Bank experts say they see no correlation, one way or the other. If Western-style parliamentary democracy isn't essential, though, it now seems that good governance — the rule of law — is."

—Washington Post, "Rich and Poor Worldwide," October 2, 1996 "We could accept the concept of no corporate welfare if, in fact, it could be instituted worldwide."

—M. Nedelcovych, F.C. Shafer Corporation, CSIS Task Force, Capitol Hill Meeting, 9/26/96

"When stiff economic and political reforms were forced on Yugoslavia in return for continued International Monetary Fund support, the divisions between the six republics became fissures that began to widen...The market reforms, privatization, and slashed budgets demanded of an unstable country by foreign creditors and by Western governments virtually asked for political suicide."

—From a review of Susan Woodward's book Balkan Tragedy: Chaos and Dissolution After the Cold War,

The Brookings Institution, 1995 in Carnegie Quarterly, Winter, 1996.

"I would submit that the defining concern of international affairs in the decades ahead will be the struggle for equity: equity within nations, equity among nations, equity for future generations, equity between men and women."

—Gus Speth, Administrator, UNDP, speech to Foreign Policy Association,

"Time for a Reunion: The UN, the US, and Development Cooperation," 19 September 1996

From the 1997 UNDP Human Development Report:

��The wealth of 358 billionaires equals wealth of 2.3 billion poor people. ��If present trends continue, economic disparities between industrial and

developing countries will move from inequitable to inhuman. ��World GDP was $23 trillion in 1993; $18 trillion represents the output of

industrialized countries; $5 trillion represents the output of developing countries where 80% of people live.

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I. Summary

Annual Meeting Chairman, Chilean Finance Minister Eduardo Aninat asked the key question:

...Will the engine of progress become an instrument of vast integration and social enhancement, or, merely a vehicle to benefit the few?

What is the World Bank instrument for reducing poverty and fostering equity and participation? Answer: the Poverty Assessment. But the Bank's Social Development Task Force, commissioned by President Wolfensohn in March, 1996 and chaired by Vice President Javed Burki, found that the Poverty Assessments performed for every borrowing country are a hollow and almost useless exercise. The Task Force articulated a new mission for the Bank — social development — that, to our astonishment, is virtually budget neutral and requires no change in skill mix for a staff in which non-economic social scientists (NESSies) are outnumbered by economists, 28:1. (See "Social Development Task Force Recommendations, Critique and Quotes," in the Attachment) But poverty and social development were not the talk of the Annual Meeting. Special pleadings to the Annual Meeting are made by corporate presidents, such as Enron's, Kay Lay, not by poor people or their representatives. Below, in Section II. C. "Annual Meeting Outcomes," we describe Lay's allegation that Bank officials are blocking progress on providing guarantees to the private sector. Lay and other corporate representatives have also been pleading their case with the US Congress through a Task Force on the multilateral development banks chaired by Senator Bill Bradley and Representative John Kasich. The cadres representing private businesses may pull off a coup soon. They are wooing the Bank's Board of Executive Directors into using the Bank's net income to finance private sector guarantees for infrastructure in poor countries. Should a public institution, such as the World Bank, subsidize the private sector while, at the same time, lending to poor countries [through the Bank's soft loan arm, the International Development Association (IDA)] is in jeopardy? (See story below, III. "Congress fails to cover US arrearages to IDA.") Such questions were not hot topics at the Annual Meeting. There is a glib assumption that what is good for Northern-based corporations is good for poor people in borrowing countries. Like many half-truths, this is a dangerous assumption. In part, NGO support for IDA hinges on translating rhetoric about poverty reduction and participation into action. A World Bank Vice President conceded that Bank efforts to fight poverty have been mostly hot air. The Poverty Assessment, he noted, ignores the dynamics of inequity and discrimination that so often make and keep people poor. The findings of a recent report, Poverty Assessment: A Progress Review, were discussed at a Bank Board meeting. Many Board members were dismayed with the findings that Poverty Assessments are often of poor quality and have little influence

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on the Bank's Country Assistance Strategy (CAS) or its lending program. The Country Assistance Strategy (CAS) provides the framework for lending priorities for a country. (See story below, V. "The World Bank's Ailing Poverty and Social Development Strategies.") A recent Financial Times article quoted the report:

Bluntly put, a significant mismatch appears to exist between the ambition and specificity of [the operational directive on poverty] on the one hand and the performance of the Bank and its borrowing member countries in delivering on its provisions, on the other.

There is a special group in the Bank which had great potential for translating poverty-fighting rhetoric into action — the Social Development Task Force. In mid-November, the Board will have a seminar on the Report of the Task Force, which was charged with redefining a new mission — social development — for the Bank. (The report is discussed in Section V, below, and its recommendations are included in Attachment A.) The report has been a tremendous disappointment to Bank staff. For starters, the report is virtually budget neutral and mandates no change in the skill mix of the Bank. The ratio of economists to non-economic social scientists (NESSies) is 28:1. We hope that the Board sends the Task Force Report back to management with directives to:

(a) Recast all Poverty Assessments so that they involve poor people, meet high quality standards, and shape the entire Bank lending program (especially its economic reform program) and Country Assistance Strategy;

(b) Undergird floundering efforts to implement the gender action plan and the participation action plan. Such efforts are floundering for lack of money, staffing and leadership.

(c) Design a series of social policies. The World Bank is accountable for financing development operations which adhere to its one hundred and fifty Operational Policies (OPs). The Report does nothing to strengthen the Bank's weak and fragmented social policies. Indications are that these policies may be weakened.

(d) Perform initial stakeholder assessments for every Bank-supported project and program, which identify groups likely to benefit, or be penalized, by proposed operations.

(e) Revamp structural adjustment to benefit poor and vulnerable people; A borrowing country's performance is judged and rewarded based upon the rigor of its structural adjustment (especially privatization) program. In general, adjustment programs in low-income countries have failed and often, according to Bank reports, exacerbated inequalities. Yet formulators of the programs are climbing the ladders of career success at the World Bank and the fundamental assumptions of adjustment go largely unexamined. In section VI, "Inching Beyond Orthodoxy," we cite development expert Amartya Sen's proposed revisions to the "BLAST" (blood,

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sweat, and tears) approach to adjustment and development. The majority of Bank operations conform closely to Sen's description of BLAST. As the Bank downsizes (see Section IV), the survival of initiatives will depend on their consolidation and interrelatedness. However, the proliferation of unconnected initiatives at the Bank is breathtaking. On page __, the reader can see the initiatives which surround the World Bank's core programs, like satellites. Initiatives shaped by the central vice presidencies (now called "Technical Networks") are often seen as irrelevant public relations window-dressing by the rest of the Bank. Like the social development initiative, the new Partnership for Capacity-Building for Africa (see story, II. B), which Bank staff had a heavy hand in writing, does not acknowledge gender, participation, or social development commitments of the Bank. NGOs were unable to obtain the terms of reference for the "Partnership Strategy and Action Plan" during its evolution. Perhaps that is because the Report states that "...governments in the region do not as a rule consider civil society a partner in development." It is ironic that the lion's share of the World Bank's participatory projects are in Africa where the capacities of the governments are generally weak to implement traditional projects let alone those involving significant beneficiary participation. In the long run, African NGOs need to be partners with their government, not with the World Bank. Yet it is not yet evident how NGOs factor into the new Partnership for Africa. Just as alarming is the failure of Bank initiatives to acknowledge the existence and role of the United Nations. Social development is the raison d'etre of such UN agencies as the United Nations Development Program (UNDP) and the United Nations Children's Fund (UNICEF), something barely acknowledged by the World Bank report. The new Partnership Initiative of the World Bank and its African Governors does not even reference the United Nations Special Initiative for Africa [CHK title] launched on March 15, 1996. The UN Special Initiative is intended to coordinate all donor and creditor programs in support of African-led development activities. The Partnership Initiative of the World Bank and its African Governors has the same goal. The United Nations has, in many ways, fallen short of expectations. However, the development banks are not paradigms of excellence! The World Bank's own survey describes the institution's commitment to reducing poverty in Africa as "abysmal." Bank portfolio performance is not satisfactory [in no small measure because of the G-7 (especially US) need to supply its codependents (e.g., Mexico, Argentina, Venezuela, Russia) and its many debtors with foreign exchange]. The World Bank and International Monetary Fund (IMF) are specialized agencies of the United Nations, but you would never believe it to watch them. They work hard at ignoring one another and the rest of the United Nations. This needs to stop. If the United Nations Secretary-General were an American or if the industrialized countries held greater power in the UN, the American-led World Bank might not ignore the UN and threaten its jurisdiction. Regardless of the nationality or

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competence of the leaders of these institutions, there is no excuse for pitting them against one another. They are all we have globally — except for the World Trade Organization (WTO), which is independent of the UN system. The remoteness of the WTO combined its narrow mandate and its lack of accountability mechanisms make the United Nations and the Bretton Woods Institutions look good.

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II. Annual Meeting Highlights

...Among the most precious values cherished by people during this key epoch of mankind, is the achievement of social equity. The poor, the worse-off, the vulnerable groups in our societies are in need of key resources for their development. But these groups also have a deeply rooted hunger for voice and for finding an effective way of participating fully in the economic and civic lives of the community...will the engine of progress become an instrument of vast integration and social enhancement, or, merely a vehicle to benefit the few?... The characteristics of exclusion, of marginalization, of deprivation, should be left behind as shortcomings of the past.

—Annual Meeting Chair, Eduardo Aninat, Chilean Finance Minister

A. Governance: A Taboo is Broken 1. Two Classes of Borrowers Emerge. The Bank and Fund have broken historical taboos by signaling their intent to officially address governance issues. The mandates of both institutions forbid their political meddling in member country government affairs. However, it appears that "good governance" is officially being declared a "gray area" where the institutions can, in certain circumstances, intervene. In fact, the World Bank has increasingly dealt with governance matters in its routine lending operations, including attaching political conditions to loans. Poorer developing countries charge that intervention by the Bank and the Fund in the sovereign affairs of their governments is colonialism by the back door. Richer developing countries tend to charge that the institutions are serving their Western, not their global, clients. They resent the fact that Western ideologies permeate the policies of the Bank and Fund. The IMF's Interim Committee issued an 11-point charter on good economic governance, called euphemistically the "Declaration on Partnership for Sustainable Global Growth." The Chair of the Interim Committee Maystadt said that the Partnership:

Emphasizes the importance of promoting good governance in all its aspects including by ensuring the rule of law, improving the efficiency and accountability of the public sector and tackling corruption.

Members of the Group of 24 who represent developing countries in IMF negotiations on monetary affairs reacted strongly to the possibility of the Fund intervening in areas as sensitive as the rule of law and even human rights. The G-24 (formed at one time from the Group of 77 developing nations), which includes countries, such as Mexico, India, Iran, Egypt, Ethiopia, Zaire, Syria, Lebanon and Peru, is becoming more assertive with the Western-dominated Bank and Fund. The G-24 is alarmed at the possibility that conditions might be attached to loans which could influence or force political changes.

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The G-24 communiqué cautioned the Fund and Bank to "proceed with extreme caution." Its members warned that external ideological intervention by the Fund could create political backlash. One African official called encroachment by the Fund "an extension of mandate by stealth." An African Finance Minister said:

We would like to have seen the back of Mobutu years ago but he was being propped by the Americans and the French.

The clientele of the Bank and the Fund increasingly falls into two classes. The upper class [borrowing primarily from the market-based (IBRD) window at near-market terms] has enough access to alternative sources of finance to refuse to permit or comply with conditionality. The lower class [borrowing largely from IDA at concessional terms), dependent on the Bank and the Fund, is outwardly compliant and unwilling or unable to resist forms of loan conditionality (e.g. macroeconomic, environmental, and social) thrust upon them by the institutions. Conditionality has proliferated in recent years and rates of compliance are notoriously low. A US official emphasized the two classes of countries, which militates a double standard. He emphasized that "None of us are going to get into a competition to throw an 800-pound gorilla around." In this case, he meant that sanctions against the 800-pound gorilla of Nigeria were unlikely whereas one might not be as easily cowed by a weaker nation which lacked oil reserves. The Chilean Chair of the Annual Meeting, Eduardo Aninat said:

There is a growing awareness of the strong interrelation between political liberty and economic freedom. This interrelation implies that imperfections in either the political or the economic sphere lessen the impact that the other sphere exerts on the process of economic and social development.

While noting that good governance, as a condition, is "frontier territory," he said:

Under conditions of rapid integration we have to find ways to promote responsible and representative political structures, thereby lending legitimacy to the formulation of global economic strategies. In addition to the possibility of citizen participation, good governance also implies the development of effective administrative structures and transparency in the use of fiscal resources.

2. Corruption. The issue of corruption got special attention. Bank President Wolfensohn called the "cancer" of corruption an affront to the poor and recounted that:

In country after country, it is the people who are demanding action on this issue. They know that corruption diverts resources from the poor to the rich, increases the cost of running businesses, distorts public expenditures and deters foreign investors. They also know that it erodes the constituency for aid programs and humanitarian relief. And we all know that it is a major barrier to sound and equitable development.

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Ricardo Hausman, Chief Economist of the Inter-American Development Bank, echoed this sentiment when he commented that:

The Ministries of Trade and Industry were like Ali Baba and the 40 thieves...living off consumers and distorting production in the trade liberalization process.

Transparency International blamed the US, Japan and Germany as the "major and principal source of corruption in international business transactions." They also claimed that a third of all developing country debt has been created because of corruption and that up to 10% of capital flows to developing countries were in the form of bribes. Sven Sandstrom, Managing Director for Corporate Planning and Resource Management of the World Bank, says that the focus of the effort to rout out corruption will be the interface between public and private sector where bribes and other incentives can be at work. Sandstrom said that the bank wants to stamp out the "use of public office for private gain and to determine the ethics of the private sector vis-à-vis the public sector." He said that the Bank would work with the Organization of Economic Cooperation and Development (OECD) to enforce codes banning corporate corruption. The IMF will, among other things, be involved in areas such as large scale tax-exemptions and off-budget expenditures. Transparency International and Gottingen University have introduced an International Corruption Rating. According to the World Bank's newsletter on transition economies, Transition, the rating system tries to assess the degree to which public officials and politicians in particular countries are involved in corrupt practices (misusing public power for private gain, bribing public officials, taking kickbacks in public procurement). On a scale of 0 to 10, in which 0 signifies total corruption and 10 signifies that a country is clean, the US scores 7.66. Fifteen developed countries have a score higher than that of the US. Of the 54 countries rated, the 10 with the worst ratings were (in descending order): Philippines, Indonesia, India, Russia, Venezuela, Cameroon, China, Bangladesh, Kenya, Pakistan, and Nigeria. 3. An NGO Perspective. It is our view that good governance, broadly defined, is the cornerstone of equitable, sustainable and participatory development. Key governance questions include:

(1) Do governments have an obligation to engage affected communities in identifying and designing, or otherwise participating in, Bank-supported operations in cases where such participation is likely to enhance the quality of the country portfolio? There is considerable literature on the favorable impact of participation on portfolio quality.

(2) Sometimes the pursuit of political and economic goals (economic reform and political liberalization) are mutually reinforcing, but this is not always the case. Are there ways in which Bank-supported economic reforms undermine the potential for political liberalization? Strengthen the potential? World Bank client governments are so dissatisfied with the Bank's prescriptions on

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market liberalization, the Bank's Economic Development Institute (EDI) is beginning a study of the respective roles of public and private sectors.

(3) Bank-supported economic reforms, even including some measures which were supposed to reduce poverty, sometimes exacerbate inequity. Growing inequity and poverty are a dangerous combination which foster social and political unrest with the attendant political and security-related consequences. How should this be addressed given the fact that pursuit of equity is considered a political goal beyond the Bank's mandate? Isn't exacerbating inequity political as well? The Bank's recent (April, 1996) study of the social consequences of adjustment draws a relationship between adjustment and increased inequity.

The time for addressing questions, such as the above, is long overdue. However, it is our view that (a) the Bank and Fund are shining the spotlight on the governance of developing countries at the same time that the institutions, themselves, (and their major shareholders) often refuse to acknowledge their internal governance problems, for instance those related to transparency and accountability; and (b) that primary responsibility for good governance should lie in entities in which developing country governments, themselves, have clout — e.g. a Task Force of the Development Committee of the Bank and the Fund and the other organs of the United Nations system. The Bank and Fund would be wise to see that its activities do not undermine the promises made by the signatories to the Human Rights Declaration. The role of the United Nations is steadily being eroded by their two specialized agencies, the Bank and the Fund. For instance, strengthening the capacity for governance is a central theme of the United Nations Special Initiative on Africa, which was launched on March 15, 1996. The Bank is a part of the Special Initiative, which has pledged to support African capacity-building for transparent, responsible and effective governance. While the Bank/Fund effort will be global, not regional, it is critical to define how their effort relates to the role of the United Nations in Africa and elsewhere. 4. Governance of the Bank and Fund. With respect to transparency, in general, and information disclosure, in particular, the Bank — and especially the Fund, are far more secretive than necessitated by their confidential relationships with client governments. Accountability has a variety of meanings. It relates to the accountability of individual staff for the consequences of their decisions. It also relates to the responsibility borne by the institution for responsiveness to a variety of stakeholders: major shareholders, borrowers, groups affected by Bank-supported loan operations, private sector actors, other organizations of civil society including NGOs, other donor institutions including the United Nations system and so on. To a significant extent, the institutions' accountability to major shareholders (and their private sector actors) is a decisive factor which shapes the other relationships of accountability. While the entire UN system, including the Bretton Woods Institutions (the Bank and Fund are specialized agencies of the UN), is flawed in some respects, their division of responsibility should be respected. As donors, especially the US, have

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undermined the effectiveness of the UN for many years (e.g. by withholding dues payments or by using the institution in unilateral ways), the Bretton Woods Institutions are increasingly taking over UN "turf" — from conflict management, to social development, humanitarian relief, political governance, health, education, environment, and NGO law. It is axiomatic that the Fund — and especially the Bank — have power over developing countries, not their masters, the industrialized countries. Governance problems and corruption are as pervasive in parts of the Global North as they are in parts of the Global South. Inevitably, intervention in governance matters by the Bank and Fund spotlights problems of the poorer, rather than the wealthier members of the institutions. This implicit double standard is exacerbated by the often unilateral approach to foreign relations by the US government. While there is a place for unilateral approaches, much of the world sees the US as carrying unilateralism and insularity to an unhealthy extreme. (US cruise missile attacks against Iraqi air defenses are one recent example.) Those who hold the international organizations in contempt, including right-wing radio "shock jocks," have persuaded much of the US public that the US spends a big slice of its budget on US foreign aid, which is patently untrue. One observer stated the trend this way:

...`American exceptionalism' [is] the doctrine, fostered by conservatives, that the United States exists on a higher moral plane than the corrupt lands of Europe and Asia. And if the US media continue to encourage a hostile indifference to the outside world, no one should be surprised if US policy comes to seem increasingly self-centered and erratic.

B. The Partnership for Capacity-Building in Africa. At the recent Annual Meeting, six months after the United Nations launched its Special Initiative on Africa, the African Governors and Bank President Wolfensohn announced a new capacity-building initiative. The initiative would mobilize donors to create a Trust Fund for Capacity Building in Africa; an international Consultative Group for Capacity Building in Africa and national capacity-building secretariats for galvanizing progress in a range of areas:

�� Public sector reform �� Government policy analysis, monitoring and evaluation �� Auditing, accounting and financial management �� Legal systems �� Business promotion and development �� Civil society

Regional Centers of Excellence will be established to build skills and complement parallel efforts to improve education, revitalize universities, and speed up acquisition and use of information technology (Africalearning 2001).

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A new report, Partnership for Capacity-Building in Africa: Strategy and Program of Action, purports to synthesize the proposals arising from the Africa workshops, national capacity assessments and an evaluation of the impact of World Bank policies, methods and operations. Although the World Bank leads the financial mobilization for the UN Special Initiative for Africa (especially for education and health reform), its report does not reference the Initiative. Given the fact that the Bank is a member of the UN's Special Initiative on Africa, it is peculiar that the Bank would not link its Partnership to the Initiative, which is the largest coordinated action undertaken by the UN in its history. Preparation of the report by capacity-building chief Dunstan Wai was intensely controversial. While some claim that the initiative is crafted by and for Africans; others insist it was cooked up by Bank insiders using the same (tried and failed) approaches used in the past. Widespread internal objections to the approach taken to capacity-building were overruled. One Annual Meeting speaker, Ruairi Quinn, Irish Minister of Finance offered his view that the IMF and WB define jointly with the United Nations and the World Trade Organization a medium-term strategy for Africa, which could build on the Special Initiative on Africa launched by the UN Secretary-General on March 15 and propose coordinated action for the development of Africa and its integration into the world economy. Background: At the 1995 Annual Meeting, the African Governors asked for Bank assistance in a new program to build human and institutional capacity. The African Governors designated the African Executive Directors, led by Ali Bourhane, to work with World Bank staff. They held a number of consultations culminating in a meeting of stakeholders in Nairobi, Kenya in December, 1995. NGOs were underrepresented in most consultations. A paper, based on the meeting in Nairobi, was prepared for a meeting of African Finance Ministers with Mr. Wolfensohn in February, 1996. It was agreed that sub-regional workshops should be held to develop ways to address African capacity-building challenges. National Capacity Building Assessments were performed in twelve countries (Burkina Faso, Cote d'Ivoire, Comoros, Gabon, Ghana, Guinea-Bissau, Guinea, Kenya, Malawi, Tanzania, Uganda, and Zambia); they identified proposals for overcoming capacity-building problems. The Assessments which we have seen give short shrift to the role of civil society. Governance was identified as the major problem inhibiting capacity-building in both public and private sectors. The Working Party Report ("A Report of the Working Party on the Impact of BankPolicies, Instruments and Operational Practices on Capacity Building in Africa," June, 1996) found that the World Bank has tended to "exacerbate Africa's capacity problems through approaches that have been supply-driven and geared to satisfying internal institutional demands rather than the capacity building needs of the countries." The Bank is creating a secretariat to coordinate, help implement and monitor the initiative. In addition, the Bank will make major changes in its policies and approaches to working in Africa. As it has before, the Bank pledges to let Africans

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take the lead in their own development process. If the Bank intends to support those governments working actively with organizations of civil society (CSOs), we wish the Bank success in carrying through on its pledge. However, the Bank's commitment to pluralism is not evident from the plans we've seen on paper. C. Other Annual Meeting Highlights 1. The World Bank Group:

��The launch by the International Finance Corporation (IFC) of an "Extended Reach Initiative" — a $40 million fund — that will establish operations in 16 countries where the IFC has not worked before. The IFC has also announced that it is considering a major increase in its Russian portfolio worth $220 million. Specifically, it is working to fashion a package of $8 billion — $1 billion from the IFC and $7 billion from the private sector — to invest in manufacturing industries: petrochemicals, glass, paper and automotive engines.

��The call for an increase in the capital of the Multilateral Investment

Guarantee Agency (MIGA), which insures companies against political risks to their investments overseas. Examples of political risks include: war, expropriation of assets, non-convertibility of currencies, and failure or mismanagement of economic systems. MIGA's portfolio has more than doubled in two years to $2.3 billion in mid-1996.

��A strong call for the World Bank to get more active in the business of

providing guarantees to private businesses. Enron Corporation President Kenneth Lay accused World Bank officials of blocking development of its guarantee program. The World Bank only approved three guarantees in 1996 worth $275 million, but reportedly has over 40 in the works. The Bank's Board is also considering the idea of using IBRD net income to provide guarantees for IDA countries.

The Governor of Japan asked that, at the 1997 Annual Meetings in Hong Kong, the Bank Group might design ways (e.g. a Guarantee Facility) to promote private capital flows for infrastructure in the emerging economies. At this juncture, the European Investment Bank (EIB) is the biggest provider of infrastructure lending —financing $17 billion in such investments in 1995. The Chilean Chair of the Bank/Fund Annual Meetings, Mr. Aninat, joined the fray by calling for "new developments around the idea to create a Guarantee Facility which would issue guarantees against non-commercial risks, without requiring counter-guarantees from governments of member countries." 2. The International Monetary Fund

��The doubling of IMF resources [to 34 billion in special drawing rights (SDRs)] in order to handle emergency situations (e.g. the Mexican crisis). This was accomplished by the Group of 10 (G-10) under the so-called "New

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Arrangements to Borrow (NAB)." The Fund currently has lending programs with 30 developing countries that total $37 billion.

��The Fund's governing body (called the "Interim Committee") asked for

a one-time special allocation of SDRs, which requires an amendment of Fund's Articles of Agreement. The effect of the allocation will be to augment the quotas of the Newly Independent States (of Eastern Europe and the former Soviet Union) and to top off the quotas of other IMF members by providing increases up to a third of their quota. The Interim Committee also asked the IMF's Board to resume discussion of the Eleventh General Review of Quotas.

��The Fund launched a Special Data Dissemination Standard (SDDS)

which will improve the accuracy and timeliness of economic information provided to the Fund by its members. Improved disclosure under the SDDS will give capital markets information they seek. The electronic SDDS Bulletin Board is up and running.

��A stronger sense on the part of many IMF members that the Fund's

Extended Structural Adjustment Facility (ESAF) should be permanent. There has been strong opposition to the creation and continuance of ESAF from some quarters. For instance, Germany opposed IMF Managing Director Camdessus' championing ESAF so strongly that it initially fought his reappointment for a third five-year term. (Camdessus has since been unanimously appointed.) The Germans take the view, also held by many NGOs, that the IMF should stick to its mandate of providing short-term balance-of-payments support and not venture into the business of long-term development.

ESAF makes loans of up to 10 years at an interest rate of only 0.5% with extremely strict conditionality. ESAF would be financially self-sustaining if it weren't for a five year gap (1999 to 2004). Its current resources can last until 1999; then, in 2004, the reflows from debt servicing will sustain it. To stay afloat during the five-year hiatus, the Fund is seeking bilateral contributions from developed and developing countries (e.g. Cote d'Ivoire, Mauritius and Gabon) supplemented by the proceeds from the sale of some IMF gold. Requests by the Executive Branch of the US government for contributions to ESAF have been routinely slashed or denied by Congress. In fiscal year 1996, the Congress provided only $30 million of the $100 million requested.

�� “Baby step" taken towards openness. Economist Jeffrey Sachs told

Congress that the IMF is even more secretive than the US Central Intelligence Agency. Despite calls for the release of information about its agreements or even its assessments of country economic situations, the IMF remains tightly sealed.

Thus, it is helpful that Kenneth Clarke is the first UK Chancellor to publish the Concluding Statement of the IMF mission's review on the UK economy. This review, provided for all member governments annually is called an "Article IV" review. Clarke also intends to publish the Chair's summary of IMF Board

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discussions of Article IV reviews. Switzerland is the only government in the world that releases its Article IV reviews. The United States Government has not yet been convinced to follow suit. 3. Debt Initiative: Sham or Historic Breakthrough? The Annual Meeting approved a debt plan to benefit at best half of the 41 highly-indebted poor countries (HIPCs) which owe over $280 billion to their creditors. The ten to twenty countries which will be helped are defined as "stressed" or "possibly stressed" in terms of their ability to service debt. The debt relief will be channeled through:

�� The "Paris Club," which is a consortium of creditor governments; �� A donor Trust Fund, which is a pool of contributions from donor governments

and the multilateral development banks; �� The IMF and its arm, called the Extended Structural Adjustment Facility

(ESAF); and �� Commercial banks.

Relief is expected to amount to about $7 billion. So far, the Bank has contributed $500 million to the Trust Fund and may come up with another $1.5 billion. Opinions about the debt initiative vary wildly. Some call it a sham; others call it a historic breakthrough. An African IMF Executive Director conceded that the initiative wouldn't reduce much debt, but reminded us that "years ago, the issue [of multilateral debt reduction] was taboo." One Bank official says that the debt initiative is tragic insofar as it precludes the significant debt write-offs that are so urgently needed. He went on to say that the deal will mainly preclude the kind of arrears that could affect the institutions' bond ratings. (Sub-Saharan Africa's arrears to all of its creditors are $53 billion, more than a quarter of its total of $210 billion in debt.) In the same vein, a New Zealand official called the Trust Fund a "ruse to fool financial markets." Our analysis is that the framework of cooperation established by creditors has potential, but at present, the rules of the game ask debtors to sacrifice too dearly for "crumbs" of debt relief. Here are some positive and negative features of the initiative: a) Positive features: The new framework opens the door to:

i. Cooperation and coordination among the multilateral development banks, the IMF, individual creditor governments (many of which already collaborate in the "Paris Club"), and commercial bank creditors;

ii. Higher levels of debt relief on the part of the Paris Club creditors (80% of eligible debt will be treated, rather than the previous level of 67%);

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iii. Redefining the circumstances under which debtor countries qualify for relief. Previously, debtors were required to adhere to strict economic reform programs for a sustained period of time in order to qualify. Two things have changed: a debtor country's vulnerability (in terms of its dependence on revenues from the sale of certain commodities; its reserve coverage; whether it is emerging from war or conflict) can be taken into account. Also, if there is a break in a country's adherence to conditionality, that break will not necessarily disqualify a debtor. A debtor can receive credit for the duration of time — before and after the break — that it adheres to strict economic reform conditionality.

iv. Redefining "performance" by a debtor government to include not only macroeconomic performance, but also demonstrated commitment to poverty reduction (e.g. maintaining budgets for social services).

v. Providing some IDA resources to debtors as grants (currently IDA resources are loans that have an 80% grant component) and assurance by the Bank (not the Fund) that qualifying countries will receive net positive resource flows (now $2 of every $3 which IDA lends are returned as debt service).

The above, especially the increased relief provided by the Paris Club, represent modest progress. b) Negative features:

i. Overall, the rules of the game will only provide a 17.1% reduction of debt owed to bilateral creditors (Paris Club) and a 25% reduction in debt owed to both bilateral and multilateral creditors. Much debt is ineligible for Paris Club treatment.

ii. To qualify for treatment of multilateral debt, debtors must jump through numerous "fire-burning hoops." Although there will be some variation among debtors, in general, the process works as follows: The first three years: Countries that are eligible for Paris Club treatment will go through three years of rigorous structural adjustment at which time a "decision point" is reached with respect to whether a country's debt burden is sustainable. [A country's debt burden is defined as "sustainable" when its debt-to-exports ratio is less than the 200% to 250% range and its debt service-to-exports ratio of less than the 20% to 25% range. Sub-Saharan (excluding South Africa and Namibia) has a debt that is four times its export earnings.] The second three years: A country that has an unsustainable debt burden may have additional Paris Club debt treated as well as multilateral debt during another three years of rigorous adjustment. At the "completion point," after six years, the debtor's burden should be sustainable, according to the definition of the institutions.

iii. In general, structural adjustment programs have a mixed record of success in terms of generating the necessary "supply response" to boost exports and

16

earn foreign exchange. However, the record of adjustment in poor countries — those required to submit to sustained adjustment — is very poor. Adjustment has not only frequently failed to generate a supply response, but it has also created disproportionate hardship for the most vulnerable populations — including poor people, women and children — while exerting tremendous pressure on the natural resource base. Most NGOs oppose the duration and type of adjustment required of debtor countries to qualify for relief.

iv. The initiative does not take sufficient account of adverse terms of trade. African countries have increased their exports by 50% since 1985, but falling export prices have made servicing their debts more difficult. For instance, the loss of purchasing power of African exports amounted to $14.5 billion in 1992 alone. In other words, African producers need to export more just to earn the same amount of foreign exchange to service their debts. Thus, some Africans are in the situation of running faster and faster on the debt "treadmill" only to maintain their position. The Debt Crisis Network in London estimates that between 1990 and 1993, 57% of gross bilateral loans and grants to Africa were effectively diverted to service debt.

v. The IMF Role: Most NGOs oppose the IMF's failure to ante up its fair share of Trust Fund resources and, instead, rely on its Extended Structural Adjustment Facility (ESAF) as "in kind" contributions. NGOs oppose the IMF's reliance upon its ESAF for several reasons because: (1) the harsh conditionality imposed by ESAF often jeopardizes poor people and the environment; (2) it adds to a country's debt, albeit on softer terms; (3) it might condition ESAF relief on the willingness of donor governments to replenish ESAF; (4) ESAF could bind debtor governments to conditionality not only for the six years required by the initiative, but also to the debt repayment period; (5) the IMF is actively seeking resources from donor governments to support ESAF until it becomes self-financing in the year 2004. Most NGOs feel strongly that if additional donor resources are forthcoming, they should support debt relief by the African Development Bank, which lacks resources for these purposes. (6) ESAF is a long-term financing vehicle which broadens the IMF's mandate unacceptably. The IMF was created to provide short-term balance-of-payments support to its members, not to get into the long-term financing and development business.

The first countries likely to qualify for debt reduction under the new Paris Club terms are: Uganda, Ethiopia, and Mozambique. World Bank Managing Director Sven Sandstrom says that the first countries qualifying for multilateral debt reduction will be chosen by April 1997. These countries (perhaps Uganda, Bolivia, Ethiopia, and Guinea-Bissau) may experience some relief by the year 2000! The Debt Initiative signals the end of the state of denial by the multilateral institutions that the debt owed them is payable. It provides some increase relief offered by some creditor governments working through the Paris Club. (It remains to be seen how fully the US government can participate given the shortfall in funds

17

provided by Congress. Congress was asked for $23 million and provided only $14.5 million.) Rather than adopting uniform relief for all debtors which meet certain criteria, the initiative considers the circumstances of each debtor government on a case-by-case basis. Furthermore, the criteria for judging the eligibility of a government's debt and the adequacy of its economic performance are flexible. This case-by-case approach and flexibility could be an asset. On the other hand, it could lead to widespread obstructionism by those donor governments unwilling to cooperate. It could also lead to special difficulties and pariah status for debtor governments which lack a donor "patron," or advocate. The "menu" which the Debt Initiative offers to debtors provides more options for debt relief. But, as the saying goes, "where is the beef?" As the machinery of the initiative begins to work, we will see whether the "entrees" offered by this menu are mere crumbs (and expensive ones at that).

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Box 1

Themes of Wolfensohn's Annual Meeting Speech

On October 9, Wolfensohn wrote a letter to Bank staff thanking for them for their efforts to make the Annual Meeting a success. Below, we quote from his letter summarizing his Annual Meeting speech:

1. We will move forward with the IMF and our other partners to implement the Debt Initiative, beginning soon with the first few select countries. 2. We will also work with the IMF to build our capacity in helping our clients to strengthen their financial sectors, particularly to help address urgent problems in their banking systems. 3. We will work with any member country interested in designing national programs to address corruption. 4. We will intensify our efforts to better integrate the social, cultural and institutional issues that underlie development into our country programs and strategies. 5. We will implement a strategy to give higher priority to the rural areas that are home to 70 percent of the world's poor— a systemic approach that will address the interconnected dimensions of rural development. 6. We will work with others to build a global knowledge partnership, in which the Bank Group can play the role of "connector" — to capture and disseminate development expertise and experience for our clients and partners. 7. We will accelerate our program of renewal to focus on excellence and results.

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III. Congress Fails To Cover US Arrearage To IDA In final action, the 104th Congress maintained foreign aid spending levels for fiscal year 1997 at $12.125 billion, about the same as last year. The Clinton Administration plans to cut its international affairs budget by 27% over seven years (by the year 2002), which will intensify the competition among aid programs for resources. In particular, competition between multilateral (United Nations and development bank programs) and bilateral programs [e.g. the US Agency for International Development (USAID)] is expected to heat up. Congress approved $986 million for the multilateral development banks. Eighty-two percent (82%) of this total represents contributions to the soft loan arms of the multilateral development banks; 70% represents the contribution to IDA. This 70%, or $700 million is insufficient since the US owes $934 million in back payments to IDA.

Current LevelFY96

Final Level FY97

(Millions on Dollars)

World Bank Hard Loan Window

IDA-Soft Loan Window International Finance Corp. Global Environment Facility

23.0

700.060.935.0

N/A

700.0 6.7

35.0

Inter-American Development Bank Hard loan Window

FSO-Soft Loan Window Multilateral Investment Fund

N/A10.053.7

25.6

10.0 27.5

Asian Development Bank Hard Loan Window Soft Loan Window

N/A100.0

13.2

100.0 European Development Bank 70.0 11.9

North American Development Bank 56.2 56.0 TOTALS: $1108.8 $985.9

The significance of the US role in the decisions about lending to poor countries is diminishing. In 1996, the negotiations to forge an international agreement to fund the eleventh replenishment of IDA collapsed since the US could not assure other governments that it could pay its arrears, much less pledge future financial support. The other donor governments proceeded with an interim special fund to finance IDA lending during fiscal year 1997. The US is excluded from most decision-making by the fund and US companies are excluded from access to business opportunities arising from projects supported by the fund.

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The US contribution of $700 million (the down payment on US arrears) cannot be released until 3/1/97. Congress has instructed US Treasury Secretary Rubin to attempt to lift the embargo against US companies' participation in the interim fund and report back on that date on the outcome of this effort. In early August, there was controversy on the Bank's Board as it considered a proposal that $600 million of the $1.2 billion in net IBRD income earned in fiscal 1996 be invested in IDA. Some Executive Directors protested the transfer on the grounds that IBRD income from less prosperous countries is increasingly compensating for the financial delinquency of some of the Northern countries. In 1995, net income was $1.3 billion of which only $300 million was allocated to IDA. Recipients of IDA loans would be fortunate if the US was as diligent in urging the World Bank to achieve poverty reduction as it is in seeking access to procurement opportunities. Eveline Herfkens of the Netherlands, who was the dean of the executive directors of the World Bank, expresses the tremendous frustration other countries experience when the US cannot deliver on its financial promises:

How can we explain to the Netherlands taxpayers that they are bailing out the US? I find it very irritating that the Americans are always asking us to understand their special situation and be patient. They don't care about our domestic situation. Can't they think for once about someone else? Unemployment in Europe is much worse than in the US and our budgetary situations are just as bad. The American congress should understand that the elected representatives of the Netherlands, Britain and other countries don't understand why they should foot the bill for America which is a far richer country.

Herfkens went on to say:

The poorest countries in the world would receive not a penny less in aid if there was no IDA. Maybe it is time to say `Bye, Bye IDA.' We can use bilateral aid, European Development Fund, through the UN system and the NGOs....[But] the Americans would be throwing away the most fantastic aspect of their foreign policy. It offers the best use of their dollars, the most effective tool at their disposal for opening up markets and gaining the benefits of trade and influencing development of every country from Haiti to Russia.

Debt: Congress appropriated $27 million for debt reduction. Jordan will receive about half of this total (though it was promised more than $20 million), leaving about $14.5 million for poor countries, compared with $13 million provided last year. Overall aid levels: State Department. A conflict has erupted between the State Department and the US Government Accounting Office (GAO) over the downsizing of the Department. GAO is accusing the State Department of denying the inevitability of downsizing and failing to develop a plan for the process. The US has closed 30 embassies and

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consulates and has another 252 open overseas, which account for almost 70% of the Department's budget. GAO has proposed a variety of cost-saving measures, including the sale of the Department's $10 billion portfolio of foreign real estate. Bilateral aid levels were maintained at $1.68 bill. NGOs helped achieve increases for USAID, the Inter-American and African Development Foundations and for UN programs, but lost the effort to hold down narcotics control spending. Modest increases were achieved for the Peace Corps, non-proliferation of nuclear arms and disarmament. Levels of aid were slightly cut for: Russia and Eastern Europe, refugee aid, the Export-Import Bank and military aid.

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IV. Downsizing the World Bank The World Bank is dissolving its Central Vice Presidencies and, in their stead, creating four Technical Networks to serve the six departments (comprised of about 55 to 60 country departments) which correspond to six geographical regions of the world (Africa; East Asia & the Pacific; South Asia; Europe and Central Asia; Latin America & the Caribbean; and the Middle East & North Africa). A. What are the Technical Networks? The Networks will cover four areas:

�� Poverty Reduction and Economic Management, including public sector management, poverty and gender emphases;

�� Human Development, including population, health, nutrition, education; �� Private Sector and Infrastructure, including Private Sector Development

(business environment, small and medium-sized enterprises, and competitiveness);Financial Sector Development (Banking and Capital Markets); Infrastructure (Telecommunications, Informatics, Transportation, Water and Urban Development); Energy and Mining (Oil and Gas, Mining and Power)

�� Environment, Rural and Social Development (including participation, NGOs, and post-conflict work)

B. What problems will the Networks overcome? Technical Networks will link Bank-wide communities of staff working in the same field to one another and to organizations and partners outside the Bank. They are intended to help the Bank overcome key problems: skills erosion, fragmentation of technical expertise, and limited transfer of knowledge and experience across organizational boundaries and with external partners. C. What are the Networks expected to achieve? The Managing Directors issued a bulletin to all staff on September 16, which described the benefits of the Network system:

�� Global Knowledge: Networks will help put the best knowledge on development in the hands of each task team by making it easier to get the right information quickly — from both inside and outside the Bank— and by having staff contribute to the Bank's global knowledge base more systematically than is the case today. It should be easier to draw lessons across countries and regions and to bring global best practices to bear on country-specific situations.

�� Enhanced Skills: Networks will help enhance the skills of our staff. Sector leaders from the regions and will collectively play an enhanced role in professional development: including clearance in recruitment and senior appointments, clarifying and strengthening professional standards, and guiding individual staff development.

�� Shared Strategies: Networks will help regional and central units to develop a common sector agenda and ensure that skills are deployed effectively across the entire network. In particular, the network's leadership will assume responsibility for global programs, sector strategy development and

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evaluation, strategic partnerships, and budgets for learning and dissemination.

�� Best Teams and Best Products: Networks will improve our flexibility and mobility in building stronger task teams and delivering higher quality products to our clients — including by enabling and rewarding task teams for drawing upon and contributing to the work of colleagues in other divisions or departments.

The global knowledge system should be constructed over the next four years at a cost of approximately $20 million per year. Technical Networks are pools of experts employed by the Bank to be made available to country teams for specific tasks. This is also the role of consulting companies in borrowing and donor countries. It might be more efficient if these pools of expertise were tapped from the market. That way, the Bank could be lean and efficient. (It may already be mean.) It is unclear whether any rational justification exists for employing so many thousands of experts full-time in the reorganized Bank! D. How will the Technical Networks be governed? According to the Managing Directors: "The top network managers from each region will form a team called a Council, which will lead the network. The council will set the overall agenda for the network and will promote the effective deployment of skills across network units; it will be chaired by a network head, who will be the top manager in the network." So, for instance, the key managers in the Human Development Network that work in each of the Regional Departments would constitute a Council. The sectors included in the Human Development Network — population, health, nutrition, and education — would each have a Sector Board. Sector Boards may meet weekly to discuss key challenges and the Board staff may handle a particularly difficult project. The Council and Sector Boards will be supported by a central unit, led by the network head, which will be an "anchor" point that provides servicing for the network in areas, such as: career development and training. In the Environment, Rural and Social Development Network, there is currently a controversy because of the Bank's unwillingness to create a Sector Board for Social Development. It is amazing that the huge amount of time and resources invested in developing a strategy for social development has failed to generate enough political will to create a Sector Board. (See report on the Social Development Task Force in Section V.) E. How will the restructured Bank work? The chart on page 25 shows how the Bank is expected to work. Staff in the four technical networks will essentially be contractors available on demand for the country departments, which comprise each of the six regional departments. Country departments will select Task Team Leaders (formerly called Task Managers) for each project or program to assemble a team from either the technical networks or through outside consultants (including local, in country, hires) with the skills required to accomplish the specified objectives.

24

The "old" Bank was supply-driven. To some extent, projects were proposed and shaped in order to suit the staff and skill mix of each country department. The "new" Bank has greater flexibility; staff with the appropriate level and type of skills can be selected to respond to the needs of the project. Since a high priority is assigned to speedy delivery of quality services, popular staffers in the Technical Networks will be unlikely to raise nettlesome questions or use time-consuming participation techniques. In sum, the country departments will generate the demand; the networks will provide the supply. F. Budgeting. The country budgets will be in the range of $600 million to $700 million compared to network budgets in the $100 million to $125 million range. Since the technical networks will be financially dependent on the country departments for their survival, a downside of the new structure is that it could discourage intellectual pluralism, including dissent and whistle blowing. G. Will the Bank be driven by internal demand or external demand? In September, 1996, the Bread for the World Institute's Bank Watchers' Project issued a paper entitled, "World Bank's Loan Portfolio Management: How Reforms Can Reduce Poverty" for a Task Force managed by the Center for Strategic and International Studies (CSIS) and chaired by Senator Bradley and Representative Kasich. One of the key issues raised by our analysis is whether the Bank will be driven by the internal demand of its own country departments or by the needs of poor communities in borrowing countries. The Bank's Country Assistance Strategy (CAS), which establishes the purpose for all Bank lending to each borrowing country, is the linchpin between each borrower and the Bank. If external Bank resources are to serve the needs of poor communities in a given country, the CAS must document how and why. Frequently, CASs fail to meet this test — especially with regard to the formulation of the centerpiece of most CASs, the structural and sector adjustment programs. Furthermore, if citizen input to a CAS is sought and provided, such citizens are generally unable to discern whether their views have been taken into account since the CAS is a confidential World Bank document. Over the last two fiscal years, the Bank's overhead budget has been cut by 10 1/2%. According to an interview with the Washington Post (9/28/96) Wolfensohn is intent on cutting the budget by another 20%. This action would result in a 10% to 15% reduction in the size of the Bank's core staff of 6,400 permanent employees during the next three years. In general, the Bank does not appear to be budgeting for priorities. Most budget cuts are more-or-less across-the-board, meaning that expanding initiatives (e.g. the gender action plan) are totally strapped for funds. More and more staff are writing funding proposals to one bilateral donor or another — especially for "soft" activities, such as social development, gender, and participation.

25

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V. The World Bank's Ailing Strategies for Poverty

Reduction and Social Development Many initiatives are emerging from the World Bank at a time of tremendous upheaval caused by the restructuring of the institution's operations. Often, these initiatives are unintegrated. Sometimes, those master-minding one initiative are unaware of other related initiatives. This fragmentation risks diminishing the political support and financing for all initiatives, such as the Gender Action Plans, the Participation Action Plans, the Social Development Initiative, retooling of processes for performing Poverty Assessments, Environmental Assessments, and Country Assistance Strategies, and so on. These initiatives have little financial support. What support they do have often comes from donor governments. This fall, the Bank's Board is assessing the Bank's poverty and social development strategies. In September, it reviewed the effectiveness of its poverty assessments. This month, there will be a Board review of the proposed strategy for Bank promotion of social development. Effectiveness of poverty assessments. Poverty Assessments are studies performed by the World Bank staff (occasionally with input or participation by borrower governments and organizations of civil society). They assess the nature, extent and causes of poverty in a given country as well as strategies for overcoming poverty. Poverty Assessments are supposed to provide the rationale for World Bank-supported policies and operations. The report of the Bank's Operations Evaluation Department, "Poverty Assessment: A Progress Review" (Report No. 15881, dated August 7, 1996) compares a cohort of Bank poverty assessments against the Bank's own policies and guidelines for poverty reduction efforts. It also looks at the influence of these Poverty Assessments (PAs) on the Country Assistance Strategies (CASs) that provide the framework and rationale for Bank lending to each borrowing country. The report includes detailed and informative surveys, albeit with uneven samples, of Board members and staff. The report found that the Poverty Assessments, which cost an average of $220,000 apiece, are frequently of poor quality and often fail to influence World Bank-supported policies and operations in a meaningful way. Many Bank staff feel that Poverty Assessments, like Environmental Assessments, are exercises that must be performed to satisfy the Bank's Board and external constituencies. Because they are "add-ons," they often have little bearing on operations. The Financial Times for Friday, November 1, cites the reactions of some Board members to the report on Poverty Assessments. One Executive Director described the report as "catastrophic." Other Board members said that the report:

27

Cast doubt on the seriousness with which management and staff approached the task of poverty reduction. The management argued in turn that the report was overly rigid and too negative.

It is our own view that, while the report does have limitations including its rigidity, its negativity is, to a significant degree, merited. Those of us who are familiar with Poverty Assessments and the staffers who perform them are aware that their quality is very uneven and their influence on a borrower's project investments and macroeconomic program is frequently slight or non-existent. The most useful Poverty Assessments are usually those that rely on the input of poor people, themselves. The Bank relies heavily on bilateral Trust Funds to finance participatory poverty assessments and other peripheral Bank activities. The findings of this report reinforce the findings of one survey of borrowing government officials in Africa and another survey of officials from all regions. These surveys find considerable disappointment on the part of those officials in the samples with Bank poverty-related services together with some insensitivity to their concerns with respect to poverty and social equity. Some Bank staff, surveyed at the same time, labeled the Bank's commitment to poverty reduction as "abysmal." While the empirical basis of the recent report and the surveys is imperfect, it is fair to say that there is frequently all-round dissatisfaction with the lack of meaningful Bank poverty-related work. Many observers looked to the Social Development Task Force for a break-through to a surer commitment to poverty reduction. Promotion of social development. On September 24, 1996, the World Bank's Operations Policy Committee (OPC) approved the World Bank report, "Social Development and Results on the Ground." The report goes to the Board for approval this month. It was produced by an 11-member Social Development Task Force (SDTF) chaired by Latin America and the Caribbean (LAC) Region Vice President Javed Burki. The mission of the Task Force (one of thelast task forces to be commissioned in the process of restructuring the Bank) was to articulate a new mission for the Bank. This was announced on March 1, 1996 by the Managing Directors for Operations — Gautam Kaji and Caio Koch-Weser — who wrote:

...The building of "social infrastructure" has increasingly eclipsed the building of physical infrastructure as the central challenge of development...Political economy considerations that take into account who is likely to gain (and who will lose) are critical to the policy change process. The timing and design of policy changes are critical factors in their sustainability. Neglecting such concerns can worsen implementation problems down the road even if the proposed policies can be accepted at the outset.

—Memo to all Operational Managers, 3/1/96

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They asked the Task Group to address five topics: 1. Paradigm. How can social concerns be effectively absorbed into the development paradigm and used for policy-making purposes? What kind of additional work is needed to develop and disseminate the tools of social analysis and beneficiary participation? 2. Operationalization. Notwithstanding the possible need for further work on the paradigm and for research, what can we do now to extend and deepen the use within the Bank of social policy instruments with proven track records? 3. Clients: How do our clients feel about these issues? How can we take their concerns into account? 4. Partners: What are our partners doing on these issues? How can we take their work and views into account? 5. Staff: How can we sensitize and train staff in the critical areas? What level of training is needed? By whom? How should it be provided? There were ten "satellite groups" which put in prodigious hours to develop recommendations. The process of producing the report was highly contentious and chaotic. NGOs were consulted in a scatter-shot way. Various authors were appointed to write iterative drafts to reconcile strong differences among Bank staff. The final report dashes the hopes of those who looked to the Task Force for bold innovation. The report's recommendations call for a variety of approaches to analysis and operations involving social assessments; an alternative project cycle; pilot Country Assistance Strategies (CASs) that feature social development concerns; an expanded research program; a gradual reorientation of economic and sector analysis; and training. Managers are invited to experiment with "Development Partnership Agreements," which "permit open-ended lending based on a strategy prepared by the government that outlines a long-term policy and investment agenda." No role for organizations of civil society (CSOs) in designing these agreements is mentioned. A new Social Learning Group would (on top of their current responsibilities) monitor progress in these areas with help from the World Bank-NGO Committee. We hope that the Board sends the Task Force Report back to management with directives to:

a) Recast all Poverty Assessments so that they involve poor people, meet high quality standards, and shape the entire Bank lending program (especially its economic reform program) and Country Assistance Strategy;

b) Undergird floundering efforts to implement the gender action plan and the participation action plan. Such efforts are floundering for lack of money, staffing and leadership.

c) Design a series of social policies. The World Bank is accountable for financing development operations which adhere to its one hundred and fifty

29

Operational Policies (OPs). The Report does nothing to strengthen the Bank's weak and fragmented social policies. Indications are that these policies may be weakened.

d) Perform initial stakeholder assessments for every Bank-supported project and program, which identify groups likely to benefit, or be penalized, by proposed operations.

e) Revamp structural adjustment to benefit poor and vulnerable people. f) Clarify the difference between poverty-focused and social

development-focused Country Assistance Strategies. The report calls for Country Assistance Strategies (CASs) "tailored to country acceptance." Why wouldn't most CASs be substantially shaped by country interests? The report also calls for the CAS to assess the government's "attitude toward and commitment to poverty reduction." What are the indicators used for such assessment? The report calls for country teams to "include elements of a participatory approach [to CASs] whenever these seem worthwhile and are endorsed by the government." What weak language!

The best that can be said about the report is that it presents serious arguments against the Bank's approach to development and creates a number of openings for incremental change. In our view, the ultimate success of the initiative will be evident in a year. However, at this time, there are few signs of the kind of strong leadership and commitment that would be required to mainstream the incremental changes proposed by the report. (See Attachment "A," "Recommendations, Critique and Quotes from the Social Development Task Force.")

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VI. Inching Beyond Orthodoxy: Report On An

Extraordinary Conference At The Inter-American Development Bank (IDB)

When people refer to "orthodox economic policies" or "orthodox adjustment," what do they mean? Generally, they are referring to the collection of policies, known as the "Washington Consensus," which were articulated by John Williamson of the Institute for International Economics in 1989. Some people refer quite disparagingly to the "Washington Consensus" as epitomizing the kind of ideologically-driven package of prescriptions divined in Washington and exported to the rest of the world. However, Williamson was actually attempting to articulate the "least common denominator" of policies agreed-upon by Latin American governments. Seven years after his 1989 publication of the Washington Consensus, Williamson has reformulated a list of economic policies that, from his own point of view, point the way to prosperity. This reformulated list was presented at an extraordinary conference of development luminaries hosted by Enrique Iglesias, President of the Inter-American Development Bank, and his Senior Advisor on Social Reform, Louis Emmerij on September 3-5, 1996. This article gives only a few fleeting impressions of the "Conference on Development Thinking and Practice," which Emmerij put together as a wonderful farewell capping his years of service to the IDB. Emmerij organized the speakers to address these questions: What effect have the standard policy prescriptions had on peoples' lives — poverty, equity, employment, etc.? What can we learn from the prescriptions applied in a fast-growing region: East Asia? Can these lessons be useful for Latin American countries? What vision of development might serve people in the next century? John Williamson revisited and amended the prescriptions of the Washington Consensus, summarized in the box below: Box 2

Washington Consensus and Amendments

1989 Fiscal discipline Public expenditure priorities including primary health, education, and infrastructure Tax reform, including cutting marginal

1996 Amendments Increase savings, including by fiscal discipline Reorient public expenditure including targeted social expenditures Tax reform, including internalizing

31

tax rates, broadening tax base, improving administration, tax fight capital Financial deregulation Unified competitive (for trade) exchange rate of exchange rate as nominal anchor Trade liberalization Replace quantitative restrictions with (progressive lower) tariffs Liberalize foreign direct investment (FDI) rules Privatization Deregulation Property rights

externalities through eco-sensitive land tax Adequate Banking Supervision Competitive exchange rate (not floating); nor use of exchange rate as nominal anchor Regional free trade regional/unilateral continued tariff reductions Liberalized rules on FDI: Fully accomplished A competitive economy: Privatization and deregulation should improve competition between firms and improve conditions for market entry Property rights, including land reform

Two new elements added by Williamson are: (1) Institution-building: "the focus of policy needs to shift from cutting back a state that had become bloated to strengthening a number of key state institutions whose efficient functioning is important for rapid and/or equitable growth... (e.g independent central banks, strong budget offices, independent, incorruptible judiciary, and an agency to sponsor productivity missions)." (2) Improved education: Need to spend more and to refocus expenditure on primary and secondary education.

Bank President James Wolfensohn responded to numerous criticisms of the Bank's ideological rigidity by describing the Bank reorganization and the flexibility and professional excellence that are encouraged. Frances Stewart of Cambridge University (one of the handful of women in attendance) suggested that the Washington Consensus could be judged relative to whether or how the three objectives named by Gert Rosenthal of ECLAC have been achieved — namely, restoration of growth, increased employment and reduced inequity — and viewed these objectives as paths to sustained human development. The data she presented on trends in income inequality, results of tax reforms, formal sector employment and growth documented her conclusion that the Washington Consensus has neglected or, in some cases, hurt poor people.

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Stewart gave a broad-brush description of East Asian policies, which she said, are often diametrically opposed to those of the Washington Consensus. Ajit Singh, also of Cambridge University provided a painstakingly scholarly comparison of East Asian policies and those of the Washington Consensus and concluded:

If adequate supply response continues to be elusive, at what point will the architects of the Washington Consensus be willing to admit that the experiment has failed

Frances Stewart offered one of the more sobering moments of the conference by noting that:

The success of the Washington Consensus in opening up economies to global financial markets has let a genii out of the bottle which is stronger than Washington, and to which Washington itself must bow. Moreover, this genii is a more sinister one...The Washington Consensus has been replaced by the Market Consensus and... this is far less liberal and reasonable...the financial markets are...not open to rational debate as there is no one to debate with, only financial analysts who claim to know what `the market' thinks and how it will react.

Eisuke Sakakibara, Director-General of the International Finance Bureau of the Japanese Ministry of Finance, decried the Anglo-American model of development, comparing it to the continental European and Japanese, or East Asian, models:

Developing countries in Latin America, Asia, Eastern Europe, and elsewhere have become new frontiers and testing grounds for developed countries to continue their economic policies based on the neoclassical paradigm. However, the success of such experiments so far has been limited, and adhering further to this same path may endanger the future of these developing countries, as well as the world at large. It seems that we are at a crucial crossroads now, where we must start pursuing alternative approaches and choosing diversity rather than uniformity.

Sakakibara claimed that the Anglo-American model neglects the importance of the foundation for development — namely, the uniqueness of different cultures and evolutionary processes of history. This neglect, he said, can lead to "confusion and the collapse of the existing order rather than reform." Sakakibara described how confusion and collapse can ensue when deregulation and privatization are pursued in an Anglo-American style. With respect to deregulation, he noted that where domestic banking systems and monetary policy mechanisms are weak or lacking, deregulation through coercion of the creditors can impair the actual or potential sovereign management of economic policy and leave the economy vulnerable to volatile movements of international money. With respect to privatization, Sakakibara called for "less ideological and more pragmatic" approaches which value "management privatization" not only "ownership privatization."

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Amazingly, none of the proponents or critics of the East Asian model mentioned the fact that a cost (i.e. externality) of their eclectic prescriptions has been a range of environmental catastrophes. Amartya Sen, Harvard University described a path to a more humane future.

Some critics have expressed great reservations about broadening the view of development from the growth of GNP per head to the expansion of human capabilities and freedom...[T]he agreed merit of greater economic prosperity as a central part of the process of development lies in the reasonable presumption that this is what the people involved would inter alia value. This focus on democratic social choice is a crucial part of moving away from the "blood, sweat and tears" view of development to one that celebrates people's cooperation and agency and the expansion of human freedom and capabilities.

Sen contrasted the "blood, sweat and tears" (or BLAST) approach to his own approach of mutuality or "getting-by with a little assistance" (or GALA). The BLAST approach calls for "needed sacrifice" (e.g. low welfare, high inequality, intrusive authoritarianism). A speech by Larry Summers, US Assistant Under-Secretary of Treasury, seemed to epitomize this BLAST approach, replete with warnings of the dire consequences of deviations or detours from the free market rules. Sen's paper expressed the need for versions of BLAST in some circumstances, but argued that "hard" business and the "hard" state often oversell the need for sacrifice. IDB economist Ricardo Hausman has described the success of the BLAST approach in Latin America during the 1980s in controlling inflation and in restarting the growth processes. He compared the macroeconomic policies of the 1980s as "speeding vehicles" which left "horrible social consequences" in their wake, thus triggering a second generation of adjustment which, in addition, to the speeding vehicle has "ambulances" in the form of safety net programs. Sen's GALA approach would control the velocity and direction of macroeconomic policies so that vulnerable people do not become casualties. Growth, as Sen points out, is not only a function of investment, but of factors relating to quality of life, such as education, health care, and nutrition. Such factors influence present welfare as well as future productivity. Overall, participants did an adroit job of avoiding the hard questions posed by the IBD convenors: What are the successes and failures of the prevailing development model? Even us Ranis of Yale University, who wrote a paper on that wuestion, managed to avoid it. Luckily, there were a few stalwart souls unafraid to tell it like it is. Most had brought the conventional wisdom distilled, bottled and sold by the Bank and Fund.

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Papers from IDB Conference can be obtained from the office of Louis Emmerij, IDB, 1300 New York Avenue, NW, Washington, DC. Among the many papers available are those by: 1. Gus Ranis, "Success and Failures of Development Practice Since 1980." Respondents: Pedro Malan, Lawrence Klein 2. John Williamson, "The Washington Consensus Revisited." Respondents: Alister McIntyre, Frances Stewart, Toru Yanagihara 3. Ryokichi Hirono, "Globalization and Competitiveness: What are the Implications for Development Thinking and Practice?" Respondents: Dharam Ghai and Lourdes Arizpe 4. Katsuhisa Yamada and Akifumi Kuchiki, "Lessons from Japan." Respondents: Nancy Birdsall, Yung Chul Park 5. Gert Rosenthal, "Development Thinking and Policies in Latin America and the Caribbean: The Way Ahead." Discussants: Helio Jaguaribe, Ignacy Sachs, Akio Hosono 6. Pranab Bardhan, "The Political Economy of Development Policy: An Asian Perspective." 7. Ajit Singh, "Lessons from Asia." Discussants: Francis T. Lui and Keijiro Otsuka 8. Angus Maddison, "Lessons from Europe." Discussants: Irma Adelman and Wolf Grabendorff 9. Yves Berthelot, "Lessons from Countries in Transition." Discussants: John S. Flemming, Dragoslav Avramovic and Keiichi Tsunekawa 10. Amartya Sen, "Development Thinking at the Beginning of the 21st Century." Discussants: Paulo Renato Souza, Ricardo Hausmann, Miguel Urrutia, and Tetsuji Okazaki 11. Albert Fishlow, "Implications and Development Perspectives for Latin America and the Caribbean." Discussants: Andres Solimano, Francisco Sagasti, Mitsuhiro Kagami 12. Victor Tokman, "Implications for Employment and Poverty in Latin America and the Caribbean." Discussants: Alain Touraine, Richardo Ffrench-Davis, Takao Fukuchi.

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Attachment

Recommendations, Critique and Quotes From

The Social Development Task Force Report

Recommendations The following recommendations are being considered by the Bank's Board in a seminar on November 12, 1996. No benchmarks for progress toward recommendations are suggested. 1. The Bank should make clear its intention to incorporate social concerns into all its activities. This statement should be made in one of the President's major speeches, such as the Annual Meeting speech in October 1996. 2. Social analysis should be incorporated into projects through social assessments and other instruments, and a sourcebook on social assessment should be prepared. 3. An alternative project cycle making full use of social analysis and participatory approaches should become a standard option alongside the traditional project cycle. 4. To support the alternative cycle, Development Partnership Agreements should be expanded. Other instruments to support the integration of social factors in our lending program should be explored. 5. All Regions should present to the management and the Board two or three Country Assistance Strategies during FY97/98 that provide a full treatment of social issues. To that end, Economic and Sector Work (ESW) should contain expanded and integrated coverage of social issues. 6. The Bank should establish a multi-disciplinary Social Learning Group (SLG) to follow up on the recommendations of this report and to monitor implementation. This group should prepare a progress report by end-FY98. 7. Concrete steps should be taken to re-orient analytical work and ensure that Economic and Sector Work and the broader research program give greater coverage to social factors. As part of this effort, a proposal should be prepared for a 1999 World Development Report analyzing social factors in development. 8. The Bank should be ready to respond to the anticipated increase in demand for social specialists and current Bank staff should receive additional training to enable them to better incorporate social issues into their work. 9. Every effort should be made to meet these objectives in a budget-neutral fashion through reallocation of the existing administrative budget. As an interim measure, the Fund for Innovative Approaches to Humanitarian and Social Development should be continued with an annual budget of $3 billion.

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Critique 1) How does the social development initiative relate to the on-going effort to integrate poverty reduction objectives into all aspects of Bank lending? If the Bank's Poverty Assessment is so flawed, why isn't it retooled? Useful Poverty Assessments would be of greater value than most of the recommendations combined. 2) Proliferation of unintegrated initiatives. How integral to the life of the Social Development Task Force is implementation of the Participation Action Plan? What is the timeline and what are the benchmarks for progress in implementing the Bank's Participation Action Plan which was approved by the Board in September, 1994? What is the relationship between the Task Force recommendations and the regional Gender Action Plans? 3) Social Policies. How can the Bank integrate social policy into its operations when, at the same time, it is resisting formulation of key Operational Policies relating to the social dimensions of development and is even considering downgrading existing social policies (to the status of Bank Procedures or Good Practices). 4) Why are stakeholder assessments just one part, of many, of social assessments? Shouldn't stakeholder assessments which determine the interests of affected groups in a proposed operation precede design of that operation? Shouldn't stakeholder assessments be mandatory? After all, if groups affected by a proposed operation can't have a voice in the decisions about what its design should be and whether to implement the operation and how, isn't the social assessment just window-dressing? 5) Staffing. According to the report, the divide between the economists and non-economic social scientists (NESSies) (ratio is 28:1) has not been bridged. Why are there no goals for altering the current ratio of economists to non-economic social scientists (NESSies)? What reason is there to expect economists to demand the services of other social scientists? 6) Money. How can a proposal to alter the mission of the Bank be nearly budget neutral? 7) Gender. Why does the report just barely mention gender? 8) Governments. What is the role of borrowing governments in helping to implement the recommendations? They are barely mentioned. 9) Social Assessments. Which types of projects and adjustment loans could not benefit significantly from social assessments? Why? Why is there is no requirement that social assessments be performed for all projects? 10) Goals. Why is there a relative absence of goals, benchmarks and targets by which progress will be measured?

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11) Incentives. What incentives are there for Task Managers to perform social assessments, explore the alternative project cycle, and forge new open-ended Development Partnerships? 12) Economic and Sector Work. Why were the commitments in earlier drafts of the Social Development Task Force to integrate social analysis in all aspects of economic and sector work (ESW) abandoned? 13) Country Assistance Strategies. What is the difference between a poverty-focused CAS and a social development-focused CAS? The report calls for Country Assistance Strategies (CASs) "tailored to country acceptance." Why wouldn't most CASs be substantially shaped by country interests? The report also calls for the CAS to assess the government's "attitude toward and commitment to poverty reduction." What are the indicators used for such assessment? The report calls for country teams to "include elements of a participatory approach [to CASs] whenever these seem worthwhile and are endorsed by the government." What weak language! 14) Research. What is the Bank's Development Economics division (DEC) supposed to learn by initiating two or three projects with a strong social focus? 15) Grants for NGOs. The report calls for consideration of a Bank grant making program for NGOs. What is the process for deciding about such a program? 16) Training. It sounds as though the new training programs related to gender, social development and participation are add-ons to the main management training programs. Is this true? Are these "soft" concerns integrated into the management training that all staff are required to take? Or, are they for "extra credit"?

Quotes "Most of the developing world's poor people live in countries where the policy and institutional framework is not conducive to the rapid broad-based growth and human capital development that is needed to make significant inroads into poverty." (p.2) "...the Bank's economists and non-economist social scientists have seldom bridged the professional divides that separate them." (p. 16) "[The Bank] is supporting government efforts to map the location of indigenous groups and their lands in Latin America and...profiles of ethnic minorities have been completed in East and Central Asia and have provided the basis for discussion with governments about *investments to help minority groups." (p. 6)

Effectiveness "A recent empirical study attempted to quantify the contribution of social capital to development. Using data from 750 households in 45 Tanzanian villages, social capital was measured in terms of membership in groups and networks...The effect

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of a one standard deviation increase in village-level social capital was higher ($60) than for market access ($33) or female schooling ($30)." (p. 8) "A review of 121 community based water supply projects funded by various agencies found that only 3% of the projects with low participation rates were highly effective, whole 81 percent of projects with high participation were highly effective; in this same study community empowerment was found to be the single most important variable for explaining project success." (p. 11) "Economic performance and social relations are shaped by the degree to which accountability and participation characterize governance; by how information is generated and disseminated within the society; by the legal environment within which contracts are drawn and executed; by the transaction costs associated with trust (or the lack of it) within the group or the society; and by how cultural norms interact with individual profit maximization in explaining economic and social behavior." (p. 13) "A recent study of World Bank financed projects, showed that in countries with the best civil liberties the economic rate of return of these projects was significantly higher than in the countries with the worst civil liberties, after controlling for a variety of other determinants of project performance. However, political regimes (democracy versus non-democracy) and political liberties did not play a significant role in project performance. Work on decentralization also shows a strong relationship between degrees of decentralization, accountability and development effectiveness." (p. 14) "OED (Operations Evaluation Department) findings show that agriculture and education projects that do not have NGO involvement are twice as likely to have problems in meeting their development objectives as those that do." (p. 14) Costs. "A critical constraint [to social analysis and participatory approaches] is the timely availability of resources and skills." (p. 15) "Though not mandatory, 70 formal social assessments have been completed over the past two years, funded in part by the Fund for Innovative Approaches in Human and Social Development (FIAHS) and donor trust funds." (p. 7) "To help solve the immediate problem, including continued funding of the 10-15% of projects already financed in part through the FIAHS, the Task Group recommends that the annual budget of FIAHS be set at $3 million. (p. 29) "...We use the average of $75,000 for the (social) assessments undertaken to date. for illustrative purposes, if the coverage of projects increases from its current level of about 10-15% to, say, 25%, during FY97/FY98, the additional cost is of the order of $3 million or a total of $7.5 million...Assuming that CASs are typically supported by two pieces of ESW, each of which costs about $300,000, and assuming that incorporating more social analysis into these studies increases costs by 30%, the proposed pilots would cost about $2 million over two years." (p. 29)

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Bank policies. "The aim of social policy is to influence the distribution of income and power in society...By default or design, social policy is part of all that we do. Some operational staff think social policy refers exclusively to the coverage of OD 4.01, "Environmental Assessment;" OD 4.20, "Indigenous People;" and OD 4.30, "Resettlement." (p. 3) "OD 4.15, "Poverty Reduction," lists specific requirements for analyzing the impact of adjustment on the poor, and over time the policies supported by adjustment operations have become increasingly pro-poor. What is less clear-cut are our standards for the analysis of the social underpinnings and political economy of the reforms to be supported by adjustment operations." (p. 16) New ways of working. "...accelerating disbursements can undermine capacity-building and the relationships that underlie ownership and sustainability. High processing costs create incentives to devise large projects, which provide little scope for experimentation and learning by doing. Evaluations show that poor performing Bank projects often suffer from inadequate beneficiary participation and borrower commitment, poor assessment and management of risks, lack of implementation capacity, and failure to adjust to changes in a timely way. To overcome such problems, Bank staff have experimented with a more flexible project cycle." (p. 20) "Development Partnership Agreements permit open-ended lending based on a strategy prepared by the government that outlines a long-term policy and investment agenda...[They] have been used in South Asia." (p. 20-21) "The Task Group identified two ways for the Country Assistance Strategy (CAS) to better incorporate social concerns. First, the content of the CAS should be improved by drawing upon social analysis where this seems likely to improve the strategy and, ultimately, the development impact of the Bank’s assistance and advice. Second, the process should be improved by increasing the degree of consultation and participation by stakeholders...A CAS that satisfies the Bank and the government may fail as a tool for improving the lives of poor people in the borrowing country." (p. 22-23) "...the Social Learning Group (SLG) would work closely with the Bank-NGO Committee to ensure NGO involvement in monitoring the Bank's implementation of the initiatives recommended in this report." (p. 24)