News & Notices Vol. 2, No. 6 (Spring 2002)

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Volume 2, Number 6 Spring 2002

News & Notices For IMF And World Bank Watchers

The U.S.’s New Development Paradigm: Whither Essential Services?

Featuring:

I. The U.S.’s Millennium Challenge Account: New Paradigm For Development Assistance?

II. The World Bank’s Scorecard: Tool to Allocate Resources Among Low-Income Countries


Table of Contents

Introduction Quote I. The U.S.’s Millennium Challenge Account: New Paradigm For Development Assistance?

A. The Millennium Challenge Account (MCA) 1. Overview 2. MCA: Good News or Bad News? 3. Governance of MCA 4. Tied Aid 5. Performance Allocations 6. “Economic Freedom”

B. United States Influence on the International Development Association (IDA)

1. U.S. Contributions to IDA 2. Grants for Corporate and Consumer Subsidies 3. MCA and PRSP 4. Focus on Results

II. The World Bank’s Scorecard: Tool to Allocate Resources Among Low-Income Countries A. Bank’s Scorecard

B. Country-by-Country Ratings 1. East and Central Asia 2. Latin America/Caribbean 3. Africa 4. Asia 5. Middle East

C. The Rating Criteria D. The Political Significance of the Scorecard

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News & Notices for IMF and World Bank Watchers

Introduction

Since taking office and, especially since September 11, 2002 President Bush and his advisors have shaped a new development paradigm that calls for a much clearer re-definition of the role of government as facilitator, rather than provider, of basic services such as water, health and education. Many elements of the new paradigm are not new: privatisation, decentralization, and demand-responsive aid (DRA) and output-based aid (OBA). However, the U.S. plans to expand its development assistance to those governments that are willing to delegate service provision to private firms or non-profit groups. Conversely, it will curtail lending to governments that are unwilling to play by its rules. The U.S. wants the World Bank to play by its rules as well. Hence, it has played an active role in designing the institution’s new Private Sector Development (PSD) Strategy and ensuring that PSD is the centerpiece of each sector strategy. [The PSD Strategy is described in “News & Notices,” Volume 2, Number 5 (Winter 2001-02) and the PSD role in the Bank’s Water Resources Sector Strategy is described in “News & Notices,” Volume 2 , Number 6 (Summer 2002).] World Bank-financed privatizations of services are proceeding at an unprecedented rate and scale utilitizing new loan and grant instruments. Grants, in particular, are seen as crucial to compensate non-state providers for serving poor people that are unable to afford commercially priced services. As superpower, the U.S. will play an even stronger leadership role in the development enterprise than it does today. Historically, the U.S. has not put its money where its mouth is. Indeed, the U.S. has been stingy when it comes to development assistance. That is about to change. Part I describes the U.S.’s Millennium Challenge Account (MCA), which at a proposed level of $5 billion per year, will exert a powerful influence over all official development assistance (ODA), including that of the World Bank’s soft loan arm, the International Development Association (IDA). Indeed, the MCA and IDA will be the proving ground for aggressive moves to privatise essential services. The MCA will focus significant assistance on those countries that conform to rigorous, pre-determined standards in these areas: governance, economic freedom, and investment in people. In other words, the MCA will employ an index to rate government performance in these areas. The U.S. has worked closely with the World Bank to shape that institution’s index, or scorecard, for allocating assistance. (See Part II.) Part II displays the World Bank’s scorecard, or “report card,” for each low-income country that borrows from its soft loan arm, IDA. The Bank, which calls this scorecard a “Country Policy and Institutional Assessment” (CPIA), uses the scorecard to allocate loan resources. Many other donors and creditors rely on it for the same purpose. The Bank defines governments as “winners” or “losers” depending upon the extent to which

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they comply with its own definition of “good” policies, including willingness to privatise essential services. The winners receive high aid allocations; the losers do not.

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Quote

Countries that live by these three broad standards – ruling justly, investing in their people, and encouraging economic freedom – will receive more aid from America. And, more importantly, over time, they will really no longer need it, because nations with sound laws and policies will attract more foreign investment. They will earn more trade revenues. And they will find that all these sources of capital will be invested more effectively and productively to create more jobs for their people... I challenge other nations, and the development banks, to adopt this approach as well. America’s support for the World Bank will increase by almost 20% over the next three years. We expect the World Bank to insist on reform and results, measured in improvements in people’s lives. All the development banks should adopt a growth agenda, increasing their support for private sector enterprises and focusing more on education, as the Inter-American Development Bank has done…And I challenge the development banks to provide up to half of the funds devoted to poor nations in the form of grants, rather than loans. Grants instead of loans that may never be repaid. —President George Bush, March 14, 2002

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I. The U.S. Millennium Challenge Account: New Paradigm For Development Assistance?

(Note: This article is Part I of “News & Notices For IMF And World Bank Watchers” (Summer 2002). Below, Part “A” provides an overview of the U.S.’s Millennium Challenge Account; part B describes how the U.S.’s initiative is influencing the World Bank soft loan arm, IDA. Much of this article is based on a speech by U.S. Treasury Secretary Paul O’Neill on June 5 and presentations by senior U.S. officials at a “Public Meeting” on the Millennium Challenge Account held at The George Washington University in Washington, D.C. on March 22, 2002.) A. The Millennium Challenge Account (MCA) 1. Overview. On March 14, 2002, President Bush committed the U.S. to the Millennium Challenge Account (MCA), which would inject significant resources into development assistance – as much as $10 billion by 2006 and, thereafter, $5 billion per year. Officials from the Bush administration characterize MCA as the third great development assistance initiative during the century, following Truman’s Marshall Plan and Kennedy’s Alliance for Progress. In a mark of symbolism, U.S. Treasury Secretary Paul O’Neill delivered an address on the MCA at Georgetown University in Washington, D.C. on June 5 – 55 years to the day from Secretary of State George Marshall’s announcement of the Marshall Plan. Donning the sunglasses that Bono gave him on their recent trip to Africa, O’Neill emphasized the challenges of providing clean water, primary education and combating HIV/AIDS. U.S. officials claim that the MCA will represent a new, post Cold War development paradigm for achieving economic growth and poverty reduction in countries with the political will to pursue these goals in partnership arrangements with non-state actors (e.g., the private sector, NGOs, universities). While MCA activities will be coordinated with those of other development institutions, it is unlikely that any MCA resources would be channeled through the World Bank or any other multilateral agency. Therefore, new annual aid resources of $5 billion will be in addition to current levels of bilateral U.S. aid of $10 billion (in fiscal year 2000).1 Hence, new levels of U.S. aid could be more than double IDA’s annual commitments, which stood at $6.8 billion in FY01 (up from $4.4 billion in FY00), 2

1 In FY2002, the U.S. appropriated $2.7 billion for bilateral development assistance, which among other things includes $784 million for the former Soviet Union, $229 million for debt reduction, $42 million for counter-terrorism, and $842 for narcotics control. Bilateral development aid represents 60% of the $4.7 billion in aid to Egypt and Israel. In addition to development aid, the U.S. spends $1 billion per month on anti-terrorism and $578 million per year for export assistance. 2 The big increase in FY01 was primarily due to a $1.8 billion increase in new adjustment lending.

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MCA resources will be provided almost entirely in grants, although some resources may be channeled through financial intermediaries (e.g., microfinance institutions, social funds) for on-lending.3

The position of the U.S. is that the old development paradigm has largely failed. As evidence, it points to the Highly Indebted Poor Country (HIPC) Initiative and the fact that the only graduate from the ranks of the least developed countries is Botswana. Unlike the failed paradigm, the new paradigm will focus significant resources on relatively few (perhaps 15-20) countries that demonstrate the will and capacity to adhere to good policies and encourage and reward entrepreneurship. At the same time, officials promise that the U.S. will not desert poorly performing governments in need of help in qualifying for the MCA and addressing humanitarian needs.

Andrew Natsios, USAID Administrator, says that the MCA will give people in beneficiary countries the tools to overcome vested interests and make democratic, pro-market reforms. Patrick Cronin, a senior USAID official, maintains that the “big idea” that underlies the MCA is “freedom” – freedom from bad governance, illiteracy, HIV/AIDS, and poverty. “Growth and opportunity,” Cronin says, is at the “center of the Presidential vision.”

2. MCA: Good News or Bad News? Many people welcome the MCA as a mark of generosity. The U.S. has long been chastized for being tight-fisted with its aid dollars, especially for basic needs. As a percentage of its bilateral aid in the year 2000, the U.S. spent 1.89% on basic education ($189 million); 3.46% on basic health ($347 million); and 1.15% on water and sanitation ($115 million).4

The White House declares that U.S. aid will increase significantly in the areas of HIV/AIDS (54%), Basic Education (50%), Trade and Investment (38%), and Agriculture (38%) with particular attention to Africa, Latin America and the Caribbean, and especially, Asia and the Near East. U.S. private voluntary organizations (PVOs) will directly benefit from these increased resource flows. The question is: will poor people in poor countries benefit?

The devil may be in the details of the MCA. As noted below, there is a tension between the MCA’s goal of fostering national ownership of development goals and strategies, on the one hand, and rewarding those countries that play by the rules laid out by the MCA.

According to some insiders, the MCA may be fashioned along the lines of two initiatives: 1) The Bush Administration’s new initiative – the Global Development Alliance (GDA) of the U.S. Agency for International Development (USAID). In general, the GDA

3 As an outgrowth of the IMF and World Bank initiatives (e.g., HIPC and PRSP), many governments are moving from project-specific support for poor countries to general budgetary support. Mr. Larson of the State Department distanced himself from this practice of the Europeans, saying that he doesn’t believe in offering lump sums to Less Developed Countries if their overall policy orientation is approved. 4 “The Reality of Aid 2002: An Independent Review of Poverty Reduction and Development Assistance,” IBON Books, Manila, p. 246.

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mobilizes alliances among actors (e.g., corporate, NGO, university, government) in developing countries.5 (See Box below)

2) The World Bank’s private sector development (PSD) strategy, of which the Bush Administration was a principal architect. Among other things, the PSD Strategy would accelerate the private (and NGO) provision of basic services (e.g., health, education, water) on a commercial basis – that is, with cost-covering user fees. As described in “B,” below, grants from the World Bank Group may be used to subsidize both corporate provision of services and offset the cost of user fees to poor consumers. (See “News & Notices,” Volume 2, Number 5, Winter 2002.)

Initiatives of the

Global Development Alliance (GDA)

USAID is increasingly focused on challenges for which private funding is unavailable. At the same time, the GDA can mobilize parallel financing from a variety of private institutional partners. For instance, US corporations are partnering with USAID in education, health, family planning and environment initiatives. USAID helps channel socially responsible investing by these corporations.

The USAID is launching eight alliances:

"Water For The Poor"

This Alliance would initially be launched in West Africa and then expanded to other regions of the world. The Center for Corporate Citizenship describes the alliance as follows:

The toll on human life and health exacted by poor quality and insufficient water supply is huge, especially for the poor. Water-borne and water related diseases, coupled with poor sanitation and hygiene, kill at least three million people annually, primarily children under five. USAID, in conjunction with a major foundation, an NGO, and private philanthropists is helping form a global alliance for the development of potable water supply. Initially for the rural poor in West Africa, there will be expansion to other under-served countries in the future. The alliance plans to

5 In U.S. Congressional action, the House and Senate found merit with the concept, but blocked expenditure of resources until the administration provided details about the GDA’s scope and operations. In an unusual move, the conference committee tasked with reconciling the House and Senate bills (H.R. 2506) opened the way for USAID to launch the GDA with the proviso that USAID must first provide Congressional Appropriations Committees with details about its operations. See “Appropriations for FY2002: Foreign Operations, Export Financing, and Related Programs,” Larry Nowels, CRS Report for Congress, Updated February 4, 2002, Order Code RL31011.

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blend USAID's expertise in promoting sustainable water systems and its on-the-ground presence with significant additional investment in the sector from non-federal partners.

"Education"

USAID is competitively soliciting cooperative agreements for an education alliance. This partnership will collaboratively define an education need and its solution, and will combine resources to achieve far-reaching, mutually agreed upon results. An award will be made to the alliance partner(s) demonstrating:

1) A clear developing country need, 2) Firm commitment of significant nonfederal resources, 3) Cooperation of multiple partners with complementary contributions, 4) Measurable results, and 5) Long-term sustainability.

The other six budding alliances relate to:

�� Forest Certification �� Coffee �� Global Genebank Conservation Trust �� Information Technology (IT) �� Small Enterprise Development �� Youth

The GDA also links corporate interests in technology transfer, trade and investment to the interests of host country institutions.

One GDA program, the US Energy Assistance (USEA) Partnership Program, was established by about 80 utilities and regulatory partnerships in 32 USAID-assisted countries. Among other things, it accelerates the restructuring and commercialization of state-owned utilities in developing countries.

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Another GDA program focuses on strengthening government capacity to negotiate a concession agreement with corporations (led by Chevron) involved in the Western Africa Gas Pipeline.

Other GDA corporate programs include:

�� Nestlé and the Churches Medical Association in Zambia; �� Merck and the Conference Board in Russia �� Johnson and Johnson and Children's Health in Asia �� Chocolate/Coffee Production and Distribution Alliances �� Global Alliance to Improve Nutrition (GAIN) �� Cargill assistance to oilseed businesses in Southern Africa �� Telecommunications Leadership Program �� Higher Education Partnership for Development �� Partnership for Education Revitalization in the Americas

3. Governance of MCA. The basic elements of the MCA will be formulated by September 2002. From September 2002 to September 2003,6 when the MCA is launched, the elements of the new paradigm may be tested and piloted in selected countries. At the public meeting, U.S. officials would not divulge whether or not USAID is likely to deliver MCA assistance. The White House National Security Council (Condoleezza Rice) and Council of Economic Advisors (Larry Lindsay) have assumed significant leadership in formulating the MCA in coordination with the U.S. Treasury Department, the State Department, and the U.S. Agency for International Development (USAID). The Treasury Department chairs the committee that is identifying the criteria for country eligibility; specific criteria will determine which countries qualify for MCA assistance. The State Department chairs the outreach planning committee, which solicits recommendations on eligibility criteria and priorities for long-term spending for growth and poverty reduction. 4. Tied Aid. At the May 22 public meeting on the MCA, an InterAction7 spokesperson claimed that some 71% of U.S. assistance represents “tied aid” – that is, aid for the purchase by recipient countries of U.S. goods and services. The spokesperson asked whether the MCA would continue to tie aid or whether greater resources flows would directly benefit recipient countries. Alan Larson, U.S. Under Secretary of State for Economic Business and Agricultural Affairs, said that the just-concluded OECD 6 The initiative will be formally be launched on September 30 – the beginning of the U.S. fiscal year 2004. 7 InterAction, a membership association of U.S. private voluntary organizations, issued a policy paper which urges that the MCA advance the Millennium Development Goals and focus on the poorest countries. Its positions on country eligibility, implementation and administration, and the broader framework can be viewed at http://www.interaction.org/.

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http://www.interaction.org/


negotiations on tied aid had been “tortuous” and that the goal of untying aid would not represent the “sharp end of the spear” of the MCA initiative. Indeed, Larson said that he would not make this objective the centerpiece of any initiative, since it’s good policy to buy the time of talented consultants who are able to contribute to a country’s development. 5. Performance Allocations. The MCA will support countries that show, through their policy performance, commitment to:

�� Good governance. Rooting out corruption, upholding human rights, and adherence to the rule of law;

�� Investing in people, e.g., investment in schools, health care, and immunization. �� Economic freedom, or policies that foster enterprise and entrepreneurship,

more open markets, sustainable budget policies, and strong support for development. (See “Economic Freedom,” below.)

As yet, the Administration has not established the criteria or indicators for measuring progress and outcomes relative to these goals. Nor has it determined the relative weighting of these principles or the role of judgment in decisions about eligibility and aid allocations. It is currently examining the usefulness of different rating systems, such as those of Freedom House and the World Bank/IDA. In order to allocate credit to low-income countries, IDA uses the Country Policy and Institutional Assessment (CPIA) system. (See http://www.servicesforall.org/ for a display of the latest CPIA results.) The 20 criteria of the CPIA system not only represent a reward for past performance, but also act as policy prescriptions for the future. Hence, the CPIA can undermine efforts by borrowing countries to develop domestic ownership over their development activities. Most poor governments feel forced to comply with creditor prescriptions, even if those prescriptions conflict with domestic social consensus. U.S. officials concede that there is a contradiction between the MCA’s goal of fostering national ownership of development goals and strategies, on the one hand, and rewarding those countries that play by the rules laid out by the MCA. Some NGOs suggest that, in order to overcome this contradiction, the U.S. should use very general criteria to establish a large pool of countries that qualify for the MCA and, then solicit proposals for assistance. Aid allocation could then be made based upon the credibility of country proposals. 6. “Economic Freedom.” As noted above, “economic freedom” is one of three categories of criteria that will be used to allocate MCA resources. At the May 22 meeting, resource people presented approaches to defining and disaggregating the concept of “economic freedom” taken by the Cato Institute and by the Heritage Foundation/Wall Street Journal. The U.S. government is also working closely with the World Bank in designing criteria that define a key dimension of “economic freedom” -- namely, investment rules and standards. This work dovetails with WTO investment negotiations. The World Bank is currently conducting “minimum standard surveys” of the business and investment climate in several borrowing countries. The Bank is using these surveys,

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http://www.servicesforall.org/


among other things, to rate the investment climate in developing countries so that the Bank and its shareholders can conduct cross-sector and cross-country comparisons. This work will provide the springboard for a new generation of adjustment loans to borrowers that agree to adopt “investor-friendly” regimes.8

The MCA’s focus on private (and NGO) provision of essential services will heavily influence how all donor assistance in these areas is delivered. Therefore, an “investor-friendly” climate is essential for the World Bank and its shareholders to expand privatisation. The World Bank Group has identified the “privatisation frontier” – e.g., the social sectors and infrastructure, especially power and water-related infrastructure – as the centerpiece of its Private Sector Development Strategy.

C. United States Influence on the International Development Association (IDA) 1. U.S. Contributions to IDA. Every three years over the course of IDA’s life, donor countries have negotiated the terms and conditions of a new three-year funding cycle. The current, thirteenth round of IDA negotiations (IDA-13) is the longest and, perhaps, most contentious in history. Initially, some Europeans were outraged at the U.S.’s insistence on converting a high proportion of loans to grants.9 Many Europeans believe that, ultimately, the U.S. wants the World Bank to be a small grant-giving agency as called for by the International Financial Institutions Advisory Commission (also known as the “Meltzer Commission”) to the U.S. Congress. They object to a perceived shrinking in IDA’s resource base and sense that the conversion could be an initial step towards IDA’s demise. Since IDA and the U.N. Development Agency would both be grant-giving agencies, they could compete for scarce donor resources and find themselves with overlapping missions.

At one point, some Europeans suggested walking away from IDA and investing their contributions through other channels, such as the European Investment Bank (EIB).

Now, according to U.S. Deputy Assistant Secretary and IDA Deputy, Bill Scheurch, donors are getting closer to an agreement to convert between 16% and 22% of IDA loan resources to grants. The grants will be focused on social service provision, especially relating to HIV/AIDS. In fiscal year 2003, the President proposed $1.1 billion to help fight HIV/AIDS – a 13% increase over FY2002.

In a presentation to the World Bank’s Country Directors in May 2001, former Treasury Secretary Larry Summers suggested that if $1 billion were moved from IDA’s country work to a global public goods fund focused on a particular disease, or agricultural research, or long-distance learning, IDA’s long-term development impact might increase. 8 To advance this agenda, the Bank has designed a minimum standards investment survey. Survey results from borrowing countries will enable the Bank to conduct inter-sectoral analyses and cross-country comparisons of the investment climate. 9 However, for several months, IDA negotiators have been stalemated on the issues related to the level of IDA loan resources that should be converted to loans. European officials have opposed the U.S. proposal to convert half of IDA’s loan resources to grants. The Europeans have indicated that converting 10% of IDA’s resources would be acceptable, but it seems likely that, if an agreement is forthcoming, it could be in the area of 20% grants.

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He noted “there is likely to be very considerable internal resistance in the Bank to doing that. I can’t help but wonder whether it would not be well to overcome that.” Indeed, the increasing portion of IDA grant resources could be used for Global Fund to Fight HIV/AIDS or focus on other public goods. In addition to proposing the conversion of loans to grants, the U.S. Administration is requesting an 18% increase in IDA contributions over the next three years (equivalent to a pledge of $2.85 billion) – if the World Bank demonstrates it can use the resources to achieve measurable results. (See below, “The World Bank’s Focus on Results.”) 2. Grants for Corporate and Consumer Subsidies. There is considerable discussion at the World Bank Group about how grant-financed subsidy streams might be used.10 One proposal is that the Bank subsidizes corporations. On May 6 at the World Bank’s Water Forum, Jamal Saghir, World Bank Director of Water and Sanitation, said that when utilities provide services or meet certain performance benchmarks, subsidies may be provided for:

�� Coverage expansion: lump payment for each new connection in poor areas;

�� Tariff transition: support gradual tariff increase to recover costs; Payment based on service delivered (quality parameter; collection rate over designated period;

�� Consumption: Subsidize minimum consumption for poor households �� Wastewater treatment: Subsidy based on amount of pollution removed.11

In a presentation in February 2002 to the World Bank, J.F. Talbot, the Chairman and CEO of the water giant Saur International asked, “Is the international water business really a business?” He said that it is often not a viable business without soft funding and subsidies:

The considerable dependence of the growth of the water sector in the developing world on soft funding and subsidies imposes a key role on the World Bank Group as investment financier and coordinator.

Another proposal is that the Bank provides subsidy streams to offset the cost of user fees for services. 12 3. MCA and PRSP. At the Public Meeting on the MCA, Robert Chase, Vice President of World Learning suggested that the U.S. government had been largely indifferent to the Poverty Reduction Strategy Paper (PRSP) process – a situation of “benign neglect.” He suggested that the U.S. should avoid establishing an MCA framework in parallel with the PRSP framework. While suggesting that the U.S. engage, modify, and make the PRSP

10 IDA may use its grants for subsidies. In addition, the Bank’s private sector affiliate, the International Finance Corporation (IFC) will have a subsidy stream. The World Bank’s Private Sector Development (PSD) Strategy stipulated that the IFC should overhaul its accounting system so that the subsidy element implicit in its transactions is segregated and normal financing is extended at market rates. 11 World Bank, Water and Sanitation Business Strategy Development (PowerPoint), May 6, 2002, p. 30. 12 See News & Notices, Volume II, Number 5, “The Growing Dangers of Service Apartheid: How the World Bank’s Private Sector Development (PSD) Strategy Threatens Infrastructure and Basic Service Provision.

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framework function satisfactorily, Chase said that the U.S. should at least “do no harm” to it.

Bill Scheurch, Deputy Assistant Secretary of Treasury, was surprised that the U.S. was perceived as indifferent or neglectful of the PRSP framework since, he said, the U.S. government (specifically, the U.S. Treasury) created the PRSP Initiative with help from others. The framework was needed to address frustrations with the inter-working between the World Bank and the IMF and questions about how to implement the HIPC initiative with sufficient participation in country planning processes. Scheurch said that there are quality problems with PRSPs and differences among shareholders about the extent to which they should endorse different PRSPs.

The MCA will take a “partnership” approach to development. Scheurch said that the U.S. prefers a “partnership” approach to an “ownership” approach. The PRSP exemplifies the ownership approach, whereas the World Bank’s Country Assistance Strategies (CASs)13 exemplifies the partnership approach. While the Bank owns the CAS, the Bank draws from country documents (e.g., the PRSP) and the borrowing government provides input. In the partnership approach, the government of a recipient country may be influential, but not decisive in terms of defining the nature and terms of development assistance.

4. Focus on Results. The Bank does not systematically track the outcomes of its lending operations for the target populations of its borrowing countries. The Bank has always had weak monitoring and evaluation (M&E) systems. Indeed, as of last year, only two of the 46 highly indebted poor countries (HIPCs) had sufficient baseline poverty data to track progress against objectives or determine outcomes. This highlights the Bank’s negligence and disingenuous approach to its core mission of poverty reduction. Now, increases in U.S. IDA contributions hinge on whether the World Bank makes satisfactory progress toward a results orientation in its lending operations. Hence, these systems will be upgraded and retooled to ascertain outcomes and track progress against objectives. This task is decades overdue. There has been disappointment with IDA’s record in some quarters. Less than half of the institution’s operations are sustainable over time and the Bank’s Operations Evaluation Department (OED) reports that IDA’s development outcomes from 1994 to 2000 were “partially satisfactory.”14 In order to respond to its shareholders and secure the full U.S. contribution, the Bank is beginning to design an outcomes-based approach to the design of country strategies, analytical work, and loan instruments. It is also launching research to determine what produces outcomes under different country circumstances. In the future, World Bank Country Assistance Strategies will include specified country outcomes, monitoring and evaluation systems, performance benchmarks and completion reports. Moreover, in preparing PRSPs, governments will need to establish final and intermediate outcome indicators and a monitoring framework – together with baseline data.

13 The World Bank prepares a CAS for each borrowing country. The CAS, which represents the Bank’s medium-term (3-year) business plan in a country, identifies and provides the rationale for the Bank’s prospective investments. 14 See Shannon Lawrence, “Exposing the World Bank’s `Development Effectiveness’ Rhetoric,” Environmental Defense, May 2002.

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II. World Bank Scorecard: Tool to Allocate Resources Among Low-Income Countries

A. The Bank’s Scorecard. Background. In March 2002, IDA roughly determined how much money each of its low-income members could borrow over fiscal years 2003 to 2005. Because the IDA negotiations were not completed in March, the institution estimated the size of the replenishment.15 Lending to Africa, which constitutes half of the total replenishment, will focus on twelve countries with sound performance. In order to allocate loan resources, the World Bank rates countries primarily on the basis of current performance in relation to twenty criteria that are grouped into four categories. As described below, the Bank also rates governments relative to their portfolio performances and adjusts the overall rating by a governance factor. A synopsis of the twenty criteria appears at the end of the chart. The four categories are:

�� Economic management, including management of inflation and current account; fiscal policy; management of external debt; and management and sustainability of the development program.

�� Structural policies, including trade policy and foreign exchange regime; financial stability and depth; banking sector efficiency and resource mobilization; competitive environment for the private sector; factor and product markets; and policies and institutions for environmental sustainability.

�� Policies for social inclusion, including equality of economic opportunity, equity of public resource use, building human resources, safety nets; and poverty monitoring and analysis.

�� Public sector management and institutions, including property rights and rule-based governance; quality of budgetary and financial management; efficiency of revenue mobilization; efficiency of public expenditures; and transparency, accountability, and corruption in the public sector.

In calculating a government’s rating, the criteria are weighted as follows: 1) The CPIA counts for 80% of the overall rating; 2) The portfolio performance rating counts for 20% of the overall rating. (This rating is a measure of how well a government manages its loan resources and, in particular, how it prevents disbursement lags through expedited procurement.) 3) Borrowing governments can receive a premium or discount as a result of its governance rating, along with a measure of the speed of a government's procurement. 16

The following countries have not been rated and do not appear in the tables below: Afghanistan, Liberia, Myanmar, and Somalia.

http://www.worldbank.org/ida/IDAPerfalJan02.pdf

15 The volume of the replenishment was estimated at 17.6 billion in special drawing rights (SDRs), plus SDR 500 for HIPC-related lending for a total of SDR 18.1 billion. There are additional allocations for Afghanistan and Pakistan. There are special allocations for post-conflict countries: Congo Republic, Eritrea, Guinea Bissau, Sierra Leone, Afghanistan, Burundi, and the Democratic Republic of the Congo. Shortly, East Timor will become eligible. There are capped or fixed allocations for several (blend) countries which borrow from both the IBRD and IDA — namely, Nigeria, India, Pakistan, Indonesia, Yugoslavia, Uzbekistan, and Bolivia. 16 Recent changes in the allocation system can be reviewed at:

.

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Also, in the following tables in the column labeled "Overall Rating" the plus or minus sign(s) in parentheses indicates a change in rating from 1999. For example, (-) indicates that the rating has been lowered one grade while (+) indicates that the grade has been increased by one grade. Multiple plus or minus signs indicate the total number of grades that that country has been increased or lowered as in (--) or (++), etc. No plus or minus sign indicator shows that there has been no change in the grade. N/R stands for "Not Rated."

C. Country-by-Country Ratings.

Europe/Central Asia — 2001

1.

OverallRating

2.

Economic Management

3.

StructuralPolicies

4.

Social Inclusion

5.

Public Sector

6.

PortfolioPerformance

Albania A A A B B C

Armenia A (+) B A A C A

Azerbaijan C (+) A C C D C Bosnia/Herzegovina B (+) B B B C A Georgia C C B A D A Kyrgyz Republic C (-) D D A D B Moldova C C B B D B Tajikistan F D F D F D Uzbekistan C D D C B N/R Yugoslavia, Former Republic

C D D C B N/R

Latin America and the Caribbean — 2001

1.

Overall Rating

2.

Economic Management

3.

StructuralPolicies

4.

Social Inclusion

5.

Public Sector

6.

Portfolio Performance

Bolivia C (-) B B C C F Dominica B F A B A F

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1.

Overall Rating

2.

Economic Management

3.

StructuralPolicies

4.

Social Inclusion

5.

Public Sector

6.


(++)

Grenada A A A A A F Guyana C (--) B C C C F Haiti F F F F F B Honduras B (-) B A B B B Nicaragua C D B B D B St. Lucia A A A A A F St. Vincent A A A A A N/R

Africa — 2001

1.

OverallRating

2.

Economic Management

3.

StructuralPolicies

4.

Social Inclusion

5.

Public Sector

6.


Angola F F F F F A Benin B B B D A A Burkina Faso B (+) B C B A D Burundi F F F F F A Cameroon D (-) C B F F F Cape Verde A C A A A A Central African Republic

F F D F F A

Chad D B D D F D Comoros D (+) F F F D A Congo, Democratic Republic

F F F F F N/R

Congo, Republic D (+) D D F D N/R Cote d'Ivoire D (---) F A D C F Djibouti D (+) F C F D F

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1.

OverallRating

2.

Economic Management

3.

StructuralPolicies

4.

Social Inclusion

5.

Public Sector

6.


Ethiopia C (-) D D B B D Eritrea C D C B A D Gambia C C B C D A Ghana B (-) D B A B A Guinea D C C C D A Guinea-Bissau F D F F F B Kenya C (+) C C C C D Lesotho B B C D B F Madagascar B (+) C B C C B Malawi B C C B B F Mali D (-) C C C C B Mauritania A A A A B C Mozambique B B D C B D Niger D C D D D B Nigeria D D D D D B Rwanda B (+) B C C A C Sao Tome & Principe

F D F F C C

Senegal A (+) A A B B D Sierra Leone F F F F F C Sudan F F F F F N/R Tanzania A (+) A B B A C Togo F F D F F F Uganda A A A A B C Zambia B C B B B D Zimbabwe F (-) F F D D F

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South Asia/East Pacific — 2001

1.

Overall Rating

2.

Economic Management

3.

StructuralPolicies

4.

Social Inclusion

5.

Public Sector

6.


Bangladesh C (-) C C A C D Bhutan A A B A A N/R Cambodia D C D D D C India A (+) A B B A C Indonesia C (+) C C B C F Kirabati D B F D C N/R Lao PDR F (-) D F D D B Maldives A A A A A B Mongolia C D D C C B Nepal B

(++) A C C B D

Pakistan B (+) B B D B D Samoa A A A C A C Sri Lanka A B A A A F Solomon Islands F (--) F F F F C Tonga D D D C C N/R Vanuatu D D C D B C Vietnam B (+) A D A C F

Middle East/North Africa — 2001

1.

OverallRating

2.

Economic Management

3.

StructuralPolicies

4.

Social Inclusion

5.

Public Sector

6.


Republic of Yemen D (--) B D D D D

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C. The Rating Criteria. Using a numerical scale (from 1 to 6), the Bank rates each low-income country government on twenty criteria, which are synopsized as follows:

Economic Management

1) Management of Inflation and Current Account. Countries with the highest rating (6) have not needed a stabilization program for 3 years or more. Countries with the lowest rating (1) have needed, but have not had, an acceptable program for 3 years or more.

2) Fiscal Policy. Countries with high ratings have fiscal policies that are consistent with overall macroeconomic conditions and generate a fiscal balance that can be financed sustainably for the foreseeable future, including by aid flows where applicable.

3) Management of External Debt. Ratings take into account the existence and amount of any arrears; whether and how long the country has been current on debt service; the maturity structure of the debt; likelihood of reschedulings; and future debt service obligations in relation to export prospects and reserves. 4) Management and Sustainability of the Development Program. This question assesses the degree to which the management of the economy and the development program reflect three elements: technical competence; sustained political commitment and public support and participatory processes through which the public can influence decisions.

Structural Policies

5) Trade Policy and Foreign Exchange Regime. This item assesses how well the policy framework fosters trade and capital movements. Countries with a high grade have low (10% or less) average tariffs (weighted by global trade flows) with low dispersion and insignificant or no quantitative restrictions or export taxes. There are no trading monopolies. Indirect taxes (e.g., sales, excise, surcharges) do not discriminate against imports. The customs administration is efficient and rule-bound. There are few, if any, foreign exchange restrictions on long-term investment capital inflows.

6) Financial Stability and Depth. This item assesses whether the structure of the financial sector, and the policies and regulations that affect it, support diversified financial services and present a minimal risk of systemic failure. Countries with a low rating have high barriers to entry and banks’ total capital to assets ratio less than 8%. Countries with high scores have diversified and competitive financial sectors that include insurance, equity and debt finance and non-bank savings institutions. An independent agency or agencies effectively regulate banks and non-banks on the basis of prudential norms. Corporate governance laws ensure the protection of minority shareholders.

7) Banking Sector Efficiency and Resource Mobilization. This item assesses the extent to which the policies and regulations affecting financial institutions help to

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mobilize savings and provide for efficient financial intermediation. Countries with high scores have real, market-determined interest rates on loans. Real interest rates on deposits are significantly positive. The spread between deposit and lending rates is reasonable. There is an insignificant share of directed credit in relation to total credit. Credit flows to the private sector exceed credit flows to the government.

8) Competitive Environment for the Private Sector. This item assesses whether the state inhibits a competitive private sector, either through direct regulation or by reserving significant economic activities for state-controlled entities. It does not assess the degree of state ownership per se, but rather the degree to which it may restrict market competition. Ideally, firms have equal access to entry and exit in all products and sectors.

9) Factor and Product Markets. This item addresses the policies that affect the efficiency of markets for land, labor and goods. Countries with high scores limit any controls or subsidies on prices, wages, land or labor. Remaining controls are consistently applied and explicitly justified on welfare or efficiency grounds.

10) Policies and Institutions for Environmental Sustainability. This item assesses the extent to which economic and environmental policies foster the protection and sustainable use of natural resources (soil, water, forests, etc.), the control of pollution, and the capture and investment of resource rents. Macroeconomic and fiscal policies foster sustainable resource use and environmental stewardship. Fees and charges create incentives for efficiency; there are no subsidies encouraging overuse of resources. Water and sanitation services have wide coverage and are financially sustainable. There are clear property rights and transparent mechanisms for allocation of concessions and quotas. Laws and policies on resource use and pollution control are in place and are implemented by credible regulation, monitoring and enforcement. The private sector and civil society participate in setting environmental priorities and finding solutions.

Policies for Social Inclusion and Equity

11) Gender. This item assesses the extent, to which the country has created laws, policies, practices, and institutions that promote the equal access of males and females to social, economic, and political resources and opportunities. These laws may concern, e.g. inheritance, land transfer or ownership, residency, contracts, employment, financial services, education, etc. Countries with high scores have legal systems (as written and applied) that provide equal access to assets, credit and markets to women and men. The government has adequate policies and institutions to implement these laws fairly and enforce them effectively. Policies provide for equal access to education, training credit, markets, or the labor force. Policies also provide for a high degree of personal safety for all – notably women and girls.

12) Equity of Public Resource Use. This item assesses the extent to which the overall development strategy and the pattern of public expenditures and revenues favors the poor. National and sub-national levels of government should be appropriately weighted. Countries with high scores have public expenditures for social services that benefit the poor more than the better-off. The government is designing appropriate targeted programs with participation of individuals, groups, or localities that are poor, vulnerable

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or have unequal access to services and opportunities. The overall incidence of revenues is progressive.

13) Building Human Resources. This item assesses the policies and institutions that affect access to and quality of education, training, literacy, health, AIDS prevention, nutrition and related aspects of a country’s human resource development. It assesses the policy and institutional framework affecting public, private and individual actors. Countries with high scores have involved the public and affected groups in shaping appropriate priorities and a strategy to build the country's human resources. Relevant macroeconomic and sectoral policies and budgets are consistent with these priorities. The roles and responsibilities of the various levels of government and of the government, voluntary and private sectors are appropriate to implement the policies. 14) Social Protection and Labor. Government policies reduce the risk of becoming poor and support the coping strategies of poor people. Safety nets are needed to protect the chronically poor and the vulnerable. The needs of both groups are important, but in countries where the chronically poor remain inadequately protected, an unsatisfactory score (2 or 3) is warranted. Countries with high scores have regulations that assure: equity in the labor market; protection of basic labor standards; affordable insurance schemes; incentives for financial savings for old age or disability; microsavings and microfinance; social safety nets; community-driven development projects; and labor market programs such as public works or job training. 15) Poverty Monitoring and Analysis. This item assesses both the quality of poverty data and its use in formulating policies. "Quality" encompasses: timeliness, reliability and coverage (by geographical areas, gender and relevant socioeconomic dimensions, such as race, caste or religion). Countries with high scores regularly conduct nationally representative household surveys covering consumption/income, social indicators, access to social services, etc. The data are timely, widely accessible and disaggregated by gender and socioeconomic groups. The data are analyzed within the country to monitor trends in poverty indicators and the impact of key projects and programs. These analyses are systematically used to inform policy decisions and program design.

Public Sector Management and Institutions

16) Property Rights and Rule-based Governance. Countries with high scores have a rule-based governance structure. Contracts are enforced. Laws and regulations affecting businesses and individuals are consistently applied and not subject to negotiation. 17) Quality of Budgetary and Financial Management. This item assesses the quality of processes used to shape the budget and account for public expenditures. It also addresses the extent to which the public, through the legislature, participates in the budget and audit processes. Ratings should cover both national and subnational governments, appropriately weighted. Countries with high scores have budgets formulated through inter-ministerial and legislative deliberations. The budget covers all or most fiscal operations. The budget is implemented, as planned, and actual expenditures deviate only slightly from planned levels (e.g. by less than 5% on most broad categories). Audits of public accounts are

22


carried out and submitted to the legislature in a timely way, and there are sanctions for negative audit opinion. 18) Efficiency of Revenue Mobilization. This item evaluates the overall pattern of revenue mobilization, not only the tax structure as it exists on paper, but revenues from all sources, as they are actually collected. Countries with high scores generate the bulk of revenues from low-distortion taxes such as sales/VAT, property, etc. Top corporate and personal tax rates are in line with international levels. The base for major taxes is broad and free of arbitrary exemptions. Tax administration is effective, cost efficient and entirely rule-based. 19) Efficiency of Public Expenditures. This item assesses the extent to which the desired results of public programs are clearly defined and the available resources are used efficiently to achieve them. National and sub-national governments should be appropriately weighted. Countries with high scores specify the expected results of public programs. Performance is reported and influences budget allocations. Public servants' compensation is adequate (e.g. at least 75% of comparable private sector compensation) and their hiring and promotion are competence-based. Line agencies have flexibility to make operational decisions and are accountable for results and adhering to budget. 20) Transparency, Accountability and Corruption in the Public Sector. In countries with high scores, the reasons for decisions, and their results and costs, are clear and communicated to the general public. Accountability for decisions is ensured through audits, inspections, etc. Conflict of interest regulations for public servants are enforced. Authorities monitor the prevalence of corruption and implement sanctions in a transparent manner. D. The Political Significance of the Scorecard The 2001 ratings for each low-income borrowing country appear at the beginning of this article. The World Bank defines governments as "winners" or "losers" depending upon the extent to which they comply with the creditor community's definition of "good policies." In 2001, the Bank allocates almost five times more money to governments that were "A" students than to "F" students. While the CPIA measures past performance of borrowing governments, its rating criteria also represent implicit policy prescriptions. If a government exhibits some weakness relative to a CPIA category (e.g., liberalization, privatization, budget discipline), then the Bank offers that government a programmatic, or adjustment, loan to address that "weakness."

No matter what a country's own development strategy says, a country must follow the path laid out by the CPIA system if it expects to receive external support. Shifting Investment to the "Winners." Use of the CPIA to allocate aid has resulted in changes in investment patterns. The share of the Bank's portfolio in low-income countries declined to 40% in FY01 from 48% in FY96.17 17 World Bank, Annual Report on Portfolio Performance, FY01, December 21, 2001.

23


The Bank asserts that, in good policy environments, an aid dollar results in a gross investment of $1.90, including 60 cents of foreign direct investment (FDI). Using this logic, the Bank assumes that IDA can promote as much as growth in incomes.

Out of 60 active borrowers (out of 75 low-income countries), the World Bank pronounced 15 as "A" students.

Winners According to the World Bank

"A" Students

"B" Students

Albania Benin Armenia Bosnia/Herzegovina Bhutan Burkina Faso

Cape Verde Dominica Grenada Ghana

India Honduras Maldives Lesotho

Mauritania Madagascar Samoa Malawi Senegal Mozambique

Sri Lanka Nepal St. Lucia Rwanda

St. Vincent & The Grenadines Pakistan Tanzania Vietnam Uganda Zambia

The World Bank Adopts Stronger Conditionalities. If a government shows a weakness in a particular CPIA policy area, the Bank uses its Country Assistance Strategies (CASs) and lending instruments to address it. The Bank prepares a CAS for each borrowing country that outlines prospective Bank investments over a medium-term (e.g., three-year) time horizon. Each country's CAS contains a high, medium and low-level lending scenario. A government will not gain access to its full allocation - the high level lending scenario - unless it accomplishes specific policy actions, or "triggers." What about Poverty? In 1999, the World Bank and the IMF launched an initiative that required each low-income country government to develop a Poverty Reduction Strategy Paper (PRSP) as a precondition for access to IMF and World Bank and other external resources. In preparing a PRSP, governments are encouraged to consult with citizens' groups as well as donors and creditors. Governments are in a double bind if citizens and elected officials choose a path other the CPIA's path of preferred policies. Developing country governments aren't given the same flexibility that industrialized country governments claim for themselves when

24


determining whether or when to liberalize, privatize or exercise greater budgetary discipline. When the IMF and World Bank launched the PRSP initiative, they led borrowers to believe that national ownership over the formulation of policies was not only permissible, but desired. The institutions are breaking their promise. Adoption of a rigid CPIA system defeats the purpose of the PRSP initiative. Cash-strapped governments may not feel that they can afford to listen to citizens when it could lower their CPIA rating and put jeopardize their flows of external assistance. As yet, the allocation system considers the size of the borrower's population, but not the level of poverty and how different aid allocations might assist a government in meeting the Millennium Development Goals (MDGs). Changes on the Horizon. Shareholders, especially the U.S. is unhappy that the Bank's rating system does not adequately take into account "results on the ground." The multilateral development banks (MDBs) do not have the capacity to measure outcomes, or results, of their operations. In June 2002, the World Bank and the regional development banks will meet to establish an approach to results-based management. In order to secure the full U.S. contributions, the Banks must overhaul their approach to formulating and implementing lending strategies and operations. Monitoring and evaluative mechanisms, such as the CPIA system, must also be retooled to accommodate the results, or outcomes-based, approach to development.

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News & Notices Vol. 2, No. 6 (Spring 2002)

Documents

Transcript of News & Notices Vol. 2, No. 6 (Spring 2002)