GLOBAL 32518 MONITORING REPORT 2005 Millennium Development Goals: From Consensus to Momentum GLOBAL MONITORING REPORT 2005 GLOBAL MONITORING REPORT 2005 Millennium Development Goals: From Consensus to Momentum © 2005 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org Cover design: Richard Fletcher, Fletcher Design, Washington, D.C. Cover photo credits: Top left, Getty Images, Eric Wheater. Top right, World Bank Photo Library, Dominic Sansoni. Bottom left, World Bank Photo Library. Bottom right, World Bank Photo Library, by Sebastian Szyd. Typesetter: Precision Graphics, Champaign, Illinois. All rights reserved 1 2 3 4 09 08 07 06 This volume is a product of the staff of the World Bank and the International Monetary Fund. 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ISBN 0-8213-6077-9 Contents Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Abbreviations and Acronyms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvii Millennium Development Goals (MDGs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxii 1 Overview: Building Momentum toward the Millennium Development Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 Spurring and Sustaining Economic Growth . . . . . . . . . . . . . . . . . . . . . . . 17 3 Scaling Up Service Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 4 Realizing the Development Promise of Trade . . . . . . . . . . . . . . . . . . . . . 117 5 Increasing Aid and Its Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 6 Strengthening and Sharpening Support from International Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239 Boxes Millennium Development Goals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxii 1.1 A five-point agenda for accelerating progress toward the MDGs . . . . . . . . . 3 2.1 Growth is central to sustained poverty reduction . . . . . . . . . . . . . . . . . . . . 18 2.2 South Asia shows that stronger growth and better service delivery are key to the MDGs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 2.3 Do poverty traps account for Africa's underdevelopment? . . . . . . . . . . . . . 28 2.4 A gush of oil rents and surge in public investment do not ensure sustained growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 2.5 Political commitment is central to breaking the conflict cycle. . . . . . . . . . . 31 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 v C O N T E N T S 2.6 Better macroeconomic policies and stronger institutions are associated with longer growth accelerations . . . . . . . . . . . . . . . . . . . . . 34 2.7 Challenges for fiscal policy in oil-producing Sub-Saharan countries . . . . . . 37 2.8 Fiscal transparency has improved in Africa, but much remains to be done. . . . 39 2.9 Strengthening expenditure monitoring under the enhanced HIPC Initiative . . . 42 2.10 Comparing business regulations in two resource-dependent economies: Angola and Botswana. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 2.11 High returns to investment climate improvements in Uganda. . . . . . . . . . . 50 2.12 How does governance affect per capita incomes in Africa, and vice versa?. . . 57 2.13 The Economic Commission for Africa's governance indicators and agenda . . 59 3.1 Sub-Saharan Africa shows that fast progress is possible in closing the gender gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 3.2 Reducing child mortality in Mozambique. . . . . . . . . . . . . . . . . . . . . . . . . . 73 3.3 Improving sanitation in India's slums . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 3.4 Attracting doctors to rural areas in Thailand . . . . . . . . . . . . . . . . . . . . . . . 88 3.5 IMF programs and MDG progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 3.6 Scaling up service delivery in low-income countries under stress (LICUS). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 3.7 Rewarding schools for MDG outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . 108 4.1 The varying effects of the Agreement on Textiles and Clothing . . . . . . . . 124 4.2 Why has rapid export growth failed to significantly reduce poverty in Madagascar? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 4.3 Many of the rents created by trade preferences accrue to importers . . . . . 141 5.1 The U.S. Millennium Challenge Account--poised to deliver . . . . . . . . . . 155 5.2 Estimates of MDG financing needs vary widely, but all point to the need for a major increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 5.3 Addressing absorptive capacity in Ethiopia . . . . . . . . . . . . . . . . . . . . . . . 164 5.4 Scaling up development efforts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168 5.5 Alignment and harmonization: country examples show a wide variety of approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175 5.6 Mozambique's performance assessment framework--for donors . . . . . . . 176 5.7 Proposals for additional debt relief--moving beyond HIPC . . . . . . . . . . 184 6.1 Profile of the "Big 5" multilateral development banks . . . . . . . . . . . . . . . 191 6.2 Independent evaluation of the World Bank's role in poverty reduction strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194 6.3 Grant financing in the African and Asian Development Funds and IDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 6.4 IDA's strategy in Sub-Saharan Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 6.5 Cambodia's country strategies--coordinating efforts among multiple donors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 6.6 Malawi's sectorwide--and multisectoral--approach to HIV/AIDS . . . . . 214 6.7 Multilateral development banks' support to build Colombia's culture of evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218 6.8 IDA13's Results Measurement System--comparing targets and results . . 222 vi G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 C O N T E N T S 6.9 Indicators introduced under IDA14's Results Measurement System . . . . 223 6.10 IMF activities in Sub-Saharan Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226 6.11 Recent evaluations by the IMF's Independent Evaluation Office . . . . . . . 228 6.12 Key elements of the IMF's role in low-income countries . . . . . . . . . . . . . 230 Figures 1.1 Country focus and leadership are key to coherent and effective implementation of the MDG agenda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.1 Growth prospects are promising, but wide regional disparities remain. . . . 21 2.2 Most regions will reach the poverty MDG by 2015, but Sub-Saharan Africa is seriously off track . . . . . . . . . . . . . . . . . . . . . . . 23 2.3 Sub-Saharan Africa has lagged behind other regions . . . . . . . . . . . . . . . . . 25 2.4 And the gap in income levels is widening . . . . . . . . . . . . . . . . . . . . . . . . . . 25 2.5 Lower investment rates in Sub-Saharan Africa have been a source of low growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 2.6 Sub-Saharan Africa has suffered from many conflicts. . . . . . . . . . . . . . . . . 31 2.7 Annual growth rates during accelerations are improving in Sub-Saharan Africa. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 2.8 There is scope for allocating more to priority sectors such as health. . . . . . 38 2.9 Sub-Saharan firms view taxes, finance, electricity, and corruption as particularly constraining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 2.10 Sub-Saharan Africa lags other regions in the quality of the business environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 2.11 The cost of starting a business varies widely. . . . . . . . . . . . . . . . . . . . . . . . 46 2.12 A weak investment climate entails high costs . . . . . . . . . . . . . . . . . . . . . . . 50 2.13 Business environment reforms need to be scaled up in Sub-Saharan Africa. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 2.14 Registering property is unduly time-consuming in Malawi. . . . . . . . . . . . . 51 2.15 Financial depth is lowest among low-income Sub-Saharan countries . . . . . 52 2.16 The cost of borrowing is higher in Sub-Saharan Africa. . . . . . . . . . . . . . . . 53 2.17 Weak access to infrastructure is a major constraint in Sub-Saharan Africa and South Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 2.18 Infrastructure spending fails to meet needs, particularly in Sub-Saharan Africa. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 2.19 Private participation in infrastructure remains low in most Sub-Saharan countries, and has recently fallen . . . . . . . . . . . . . . . . . . . . . 55 2.20 Participatory processes are improving in developing countries, but most rapidly in Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Stronger performance on political representation; weaker performance on public sector management and institutional effectiveness . . . . . . . . . . . 60 3.1 Despite progress, the 2005 gender target will not be met . . . . . . . . . . . . . . 68 3.2 Several regions are off track to achieve to universal primary completion by 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 3.3 Despite progress on child mortality, all regions are off track . . . . . . . . . . . 72 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 vii C O N T E N T S 3.4 Since 1990 the number of people living with HIV/AIDS has quadrupled. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 3.5 Progress is being made in water supply, especially in South Asia . . . but sanitation progress is slower. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 3.6 Progress on health does not always benefit poor people . . . . . . . . . . . . . . . 78 3.7 Progress on education is generally more equitable . . . . . . . . . . . . . . . . . . . 78 3.8 Health service coverage increases with the number of providers. . . . . . . . . 79 3.9 Provider presence is also associated with better health outcomes . . . . . . . . 80 3.10 Projected primary teacher needs are large in Sub-Saharan Africa . . . . . . . . 81 3.11 Projected primary teacher needs far exceed training capacity in many African countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 3.12 Low-income countries are spending more on health and education . . . . . . 89 3.13 Budget shares for health and education have increased in many regions. . . 90 3.14 Seventy percent of bilateral education aid is reported to be technical assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 3.15 Donor commitments can oscillate substantially . . . . . . . . . . . . . . . . . . . . . 94 3.16 Total ODA for health and education is increasing . . . . . . . . . . . . . . . . . . . 96 3.17 Higher spending on education and health do not always mean better outcomes.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 3.18 Leakage of funds can be high but is not inevitable . . . . . . . . . . . . . . . . . . 105 3.19 Absence rates can be very high, especially in health . . . . . . . . . . . . . . . . . 107 4.1 LDC Exports: Less food and raw materials, more energy and apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 4.2 Nontariff measures are more important in rich countries . . . . . . . . . . . . 126 4.3 Trade restrictiveness at home and abroad falls as countries become richer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 4.4 Trade restrictiveness at home and abroad rises with poverty headcount . . . 127 4.5 Agricultural protection is high in OECD countries, and border barriers account for most of it . . . . . . . . . . . . . . . . . . . . . . . . 128 4.6 OECD trade restrictiveness remains high for developing countries. . . . . . 130 4.7 A low ambition round vs. deep WTO reforms . . . . . . . . . . . . . . . . . . . . . 135 4.8 WTO Market access commitments for services by mode of supply. . . . . . 136 4.9 Foreign direct investment and cross-border exchange account for most trade in services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 4.10 Distribution of ODA for trade-related activities and infrastructure by region and main category . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 4.11 Bank trade-related lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 5.1 ODA is rising but is well short of what is needed; donors need to raise their post-Monterrey commitments and extend them beyond 2006 . . . . . 154 5.2 Wide variation in donor effort . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 5.3 Debt relief and technical assistance dominate the increase in ODA . . . . . 156 5.4 Dependence on aid varies by region and is highest in Sub-Saharan Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 5.5 Sub-Saharan Africa's largest donors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 viii G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 C O N T E N T S 5.6 Official flows are the main source of external finance for Sub-Saharan Africa, twice as large as FDI and nearly four times as large as remittances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159 Projected income poverty in Ethiopia, 2003­15 (Headcount index) . . . . . 164 5.7 Higher development assistance is increasingly supporting and catalyzing more spending in priority areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 5.8 In low-income countries donors allocate more aid to better performers; more generous donors also tend to be more selective. . . . . . . 170 5.9 Difficult partnership countries receive less aid than predicted by their policy/institutional quality and poverty levels . . . . . . . . . . . . . . . 171 5.10 Aid fragmentation is high, especially in Sub-Saharan Africa. . . . . . . . . . . 172 5.11 Progress on alignment, harmonization, and predictability of aid needs to be accelerated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 6.1 Financial flows from the Big 5 multilateral development banks, IMF, and private sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190 Differences in the Big 5 client bases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 Average incomes of Big 5 client countries. . . . . . . . . . . . . . . . . . . . . . . . . 191 Small states in the Big 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 Borrower shares in Big 5 ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 Big 5 decentralization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 6.2 Trends in lending and grant commitments by multilateral development banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 6.3 Policy and poverty selectivity of aid from multilateral development banks, 2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 6.4 Big 5 multilateral development banks: sectoral distribution of lending, 1999­2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 6.5 DFID Scorecard for multilateral development banks . . . . . . . . . . . . . . . . 221 Tables 2.1 Over the next 10 years growth is expected to rise and poverty fall around the world . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 2.2 Many Sub-Saharan countries require rapid growth to achieve the income poverty MDG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 2.3 Macroeconomic policies are weaker in Sub-Saharan Africa than in other low-income countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 2.4 Growth accelerations have been much less common in Sub-Saharan Africa. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 2.5 Macroeconomic indicators have generally improved in low-income countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Many HIPCs need to substantially upgrade public expenditure management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 2.6 Investment climate constraints vary across Sub-Saharan Africa . . . . . . . . . 44 Businesses face a lower regulatory burden in Botswana than Angola . . . . . 48 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 ix C O N T E N T S 3.1 Public health spending per capita has fallen in some regions . . . . . . . . . . . 91 3.2 Significant additional financing is needed to achieve the health and primary education MDGs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 4.1 Trade has grown rapidly in recent years, especially in developing countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 4.2 Developing countries account for a growing share of non-oil exports . . . 119 4.3 Applied most favored nation tariffs are highest in South Asia and Sub-Saharan Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 4.4 Nontariff measures remain high in several regions, 2002 . . . . . . . . . . . . . 122 4.5 Developing countries initiate more antidumping investigations, 1995­2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 4.6 A few large developing countries have launched the most antidumping investigations, 1995­2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 4.7 OECD trade restrictiveness is highest toward low-income countries, 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 4.8 Globally, trade restrictiveness is highest for agriculture, 2002 . . . . . . . . . 129 4.9 Developing countries impose high restrictions on trade with one another, 2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 4.10 Key elements of the August 2004 WTO framework agreement . . . . . . . . 132 4.11 Most economic welfare benefits of full merchandise trade liberalization would come from agriculture, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 4.12 Developing countries have made fewer market access and national treatment commitments for services under the WTO . . . . . 137 Estimates of additional ODA requirements vary widely . . . . . . . . . . . . . 162 5.1 Selectivity in aid allocation: Donors' policy and poverty focus is improving, but bilateral donors could do more . . . . . . . . . . . . . . . . . . 169 5.2 Indicators of progress (on ownership, harmonization, alignment, and results). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174 5.3 African governments are viewing donor behavior more favorably . . . . . . 179 5.4 Debt service is falling and poverty-reducing spending rising among the 27 HIPCs that have reached their decision points . . . . . . . . . . 182 6.1 Country strategies of multilateral development banks . . . . . . . . . . . . . . . 196 6.2 Lending instruments of multilateral development banks . . . . . . . . . . . . . 199 6.3 Transparency among multilateral development banks . . . . . . . . . . . . . . . 217 6.4 Managing for development results in multilateral development banks . . . 218 6.5 Project monitoring, evaluation, and reporting in multilateral development banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220 x G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 Foreword T he Global Monitoring Report 2005 is given to accelerating progress in Sub-Saharan the second in a series of annual reports Africa. assessing progress on the policy How to generate momentum? This report agenda for achieving the Millennium Devel- sets out an agenda spanning the responsibili- opment Goals (MDGs) and related outcomes. ties of all key actors. Developing countries It is prepared jointly by the staff of the World must take the lead in articulating and imple- Bank and the International Monetary Fund menting development strategies that aim (IMF), in close collaboration with partner higher. They should build on recent progress agencies. This report comes at an important on reforms by deepening improvements in time, when the international development policies and governance to achieve stronger community is taking stock of implementation economic growth and scale up human devel- of the Millennium Declaration in the five opment and related key services. The recent years since its adoption and discussing how pickup in growth in many developing coun- progress toward the MDGs can be acceler- tries, including several Sub-Saharan coun- ated. We hope that the analysis presented in tries, demonstrates the payoff to reforms. this report will make a useful contribution to Developed countries must step up imple- those efforts. mentation of the commitments they made as The report's central message is clear: with- part of the Monterrey Consensus. They out early and tangible action to accelerate should substantially increase the volume of progress, the MDGs will be seriously jeopar- development aid and improve its delivery to dized--especially in Sub-Saharan Africa, facilitate more effective use by recipients. And which at current trends will fall short of all they should show leadership on trade policy the goals. At stake are prospects not only for reforms that open markets to developing hundreds of millions of people to escape country exports and that give greater coher- poverty, disease, and illiteracy, but also for ence to developed country policies in terms of long-term peace and security--objectives inti- their impact on development. Progress on mately linked to development. During 2005 both aid and trade is crucial--and the need the international community must seize the for action urgent. opportunities presented by increased global International financial institutions should attention on development to build momen- strengthen and sharpen their support for this tum for the MDGs. Special focus must be agenda. A priority for us is to strengthen our G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 xi F O R E W O R D support for country-led poverty reduction and better on global and regional public strategies in low-income countries and goods. sharpen our focus on development results. With just 10 years until 2015, achieving We also need to continue to adapt our the MDGs seems daunting, especially in Sub- approaches and instruments to the evolving Saharan Africa. But rapid progress is possible and varying needs of middle-income coun- if there is sufficient commitment to reform tries. Geared to the needs of both low- and and support from development partners, middle-income countries, international within the framework of the enhanced global financial institutions should also do more partnerships envisaged at Monterrey. James D. Wolfensohn Rodrigo de Rato President Managing Director World Bank International Monetary Fund xii G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 Acknowledgments T his report has been prepared jointly Martinez, William Dorotinsky, Poul Eng- by the staff of the World Bank and the berg-Pedersen, Antonio Estache, Qiu Fang, International Monetary Fund. In Manuel Felix, Ariel Fiszbein, Lucia Fort, preparing the report, staff have collaborated Paul Gertler, Alison Gillies, Bee Ean Gooi, closely with partner institutions--other Pablo Gottret, Laura Gregory, Engilbert multilateral development banks, the United Gudmundsson, Christopher Hall, Mary Nations, World Trade Organization, Orga- Hallward-Driemeier, Jonathan Halpern, nization for Economic Cooperation and Kirk Hamilton, Amy Heyman, Barbry Development and its Development Assis- Keller, Steve Knack, Aart Kraay, Inna Kush- tance Committee, and the European Com- narova, Ranjit Lamech, Victoria Levin, mission. The cooperation and support of Magnus Lindelow, Susan McAdams, Car- staff of these institutions are gratefully alee McLiesh, Raymond Muhula, Mohua acknowledged. Mukherjee, Alessandro Nicita, Eustache Zia Qureshi was the lead author and man- Ouayoro, Sulekha Patel, Long Quach, Clau- ager of the report. The work was carried out dio Raddatz, Gary Reid, Viorica Revutchi, under the general guidance of Shengman Klas Ringskog, Maria Rivero-Fuentes, Zhang, Managing Director, World Bank. George Schieber, Susan Sebastian, Shekhar The core team included Barbara Bruns, Shah, Nicola Smithers, Ahmet Soyleme- Punam Chuhan, Poonam Gupta, Bernard zoglu, Abigail Spring, Mark Sundberg, Eric Hoekman, Marcelo Olarreaga, Joanne Swanson, Marilou Uy, Dominique Van Der Salop, and Lada Strelkova (World Bank) and Mensbrugghe, Linda Van Gelder, Christel Andrew Berg, Peter Fallon, Elliott Harris, Vermeersch, Marco Vujicic, Dana Weist, and Carlos Leite (IMF). Jerome Wolgin, and Alan Wright. A number of other staff made contribu- Other contributors from the IMF included tions. They included the following from the David Andrews, Jean Clément, Sanjeev World Bank: Dina Abu-Ghaida, Olusoji Gupta, Michael Hadjimichael, Peter Heller, Adeyi, Christine Allison, Jorge Araujo, Simon Johnson, Godfrey Kalinga, Ritha Khe- Gilles Bauche, Rosemary Bellew, Rene Bon- mani, Hans Peter Lankes, Brad McDonald, nel, Eduard Bos, Donald Bundy, Paul Wayne Mitchell, Catherine Pattillo, Arvind Collier, Edgardo Campos, Jose De Luna Subramanian, and Chris Wu. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 xiii A C K N O W L E D G M E N T S Guidance received from the Executive review of the report. The World Bank's Office Directors of the Bank and the Fund during of the Publisher managed the editorial, discussions of the draft report is gratefully design, production, and printing of the book. acknowledged. The report has also benefited In particular, Susan Graham, Paul Holtz, and from many useful comments and suggestions Monika Lynde deserve special mention for received from Bank and Fund management their skill and professionalism in editing and and staff in the course of the preparation and producing this book on a very tight schedule. xiv G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 Abbreviations and Acronyms ACP African, Caribbean, and Pacific EPA Economic Partnership ACT Artemisinin combination Agreement treatment EU European Union AfDB African Development Bank FDI Foreign direct investment AGOA African Growth and FSAP Financial Sector Assessment Opportunity Acceleration Act Program (IMF) AIDS Acquired immune deficiency FSO Fund for Special Operations syndrome (Inter-American Development APRM African Peer Review Bank) Mechanism FTI Fast Track Initiative (Education ADB Asian Development Bank For All) ASEAN Association of South-East GAO U.S. General Accounting Office Asian Nations GATS General Agreement on Trade in BEEP Business Environment and Services Enterprise Performance Survey GAVI Global Alliance for Vaccination CAS Country assistance strategy and Immunization CPIA Country policy and GFATM Global Fund to Fight AIDS, institutional assessment Tuberculosis, and Malaria DAC Development Assistance GNI Gross national income Committee (OECD) HIPC Heavily indebted poor country DANIDA Danish International HIV Human immunodeficiency Development Agency virus DFID U.K. Department for IBRD International Bank for International Development Reconstruction and DIME Development Impact Development (World Bank) Evaluation (World Bank) ICRG International Country Risk DOTS Directly observed treatment Guide strategy IDA International Development EBRD European Bank for Association (World Bank) Reconstruction and IDB Inter-American Development Development Bank ECLAC United Nations Economic IEO Independent Evaluation Office Commission for Latin America (IMF) EFA Education For All IFC International Finance EFF Extended Fund Facility (IMF) Corporation (World Bank) G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 xv A B B R E V I A T I O N S A N D A C R O N Y M S IFF International Finance Facility PEFA Public Expenditure and IFFIm International Finance Facility Financial Accountability for Immunization program IFI International financial PEPFAR U.S. President's Emergency Plan institution for AIDS Relief IMF International Monetary Fund PETS Public Expenditure Tracking LDC Least developed country Survey (World Bank) LICUS Low-income countries under PRGF Poverty Reduction and Growth stress Facility (IMF) MAP Multi-country AIDS Program PRS Poverty Reduction Strategy (World Bank) PRSC Poverty Reduction Support MCA Millennium Challenge Account Credit (World Bank) MDB Multilateral development bank PRSP Poverty Reduction Strategy MDG Millennium Development Goal Paper MFN Most favored nation PSIA Poverty and Social Impact MIF Multilateral Investment Fund Analysis (IMF) (Inter-American Development QAG Quality Assurance Group Bank) (World Bank) MIGA Multilateral Investment ROSC Report on the Observance of Guarantee Agency (World Standards and Codes Bank) SDR Special Drawing Right (IMF) MTEF Medium-term expenditure SPA Strategic Partnership for framework Africa NAFTA North American Free Trade SWAp Sectorwide approach Agreement TRAINS Trade Analysis and Information NEPAD New Partnership for Africa's System (UNCTAD) Development UN United Nations NGO Nongovernmental organization UNAIDS Joint United Nations NLF New Lending Framework Programme on HIV/AIDS (Inter-American Development UNCTAD United Nations Conference on Bank) Trade and Development ODA Official development assistance UNDP United Nations Development OECD Organisation for Economic Programme Co-operation and Development UNECA United Nations Economic OED Operations Evaluation Commission for Africa Department (World Bank) UNESCO United Nations Educational, OLS Ordinary least squares Scientific, and Cultural OTRI Overall trade restrictiveness Organization index UNICEF United Nations Children's Fund OVE Office of Evaluation and VAT Value added tax Oversight (Inter-American WHO World Health Organization Development Bank) WP-EFF Working Party on Aid PAHO Pan-American Health Effectiveness and Donor Organization Practices PARIS21 Partnership in Statistics for WTO World Trade Organization Development in the 21st Century xvi G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 Executive Summary B old actions are urgently needed if the dren under five die of disease and 10,000 development vision that world leaders women die giving birth. In Sub-Saharan laid out in remarkable unison at the Africa alone, 2 million people will die of turn of the century is to be realized. The Mil- AIDS this year. And as many as 115 million lennium Development Goals (MDGs) and the children in developing countries are not in Monterrey Consensus have created a power- school. The need to scale up and speed up ful global compact for development. The action is thus urgent, and the opportunities MDGs set clear targets for eradicating presented by the year 2005 must be seized. poverty and related human deprivations. The To be sure, there has been progress. Devel- Monterrey Consensus stresses the mutual oping countries have continued to improve accountability of developing and developed their policies and governance, which has con- countries in achieving these goals. But the tributed to an encouraging acceleration in their continued credibility of this compact hinges economic growth. Even Sub-Saharan Africa on expediting its implementation. Nearly five may be turning the corner, with several coun- years have passed since the Millennium Dec- tries in the region showing notable progress in laration was adopted, and current stocktak- reforming policies and reviving growth. ing of progress during that time has focused Developed countries have increased aid and global attention on the need to scale up introduced actions to make it more effective. action--making 2005 a crucial year to build Some initial steps have also been taken toward momentum for the MDGs. trade policy reform. But, overall, progress has Without faster progress, the MDGs will be been slower than envisaged, uneven across pol- seriously jeopardized--especially in Sub- icy areas and countries, and far short of what Saharan Africa, which is off track on all the is needed to achieve the MDGs. goals. At stake are prospects not only for With just a decade to go until 2015, achiev- hundreds of millions of people to escape ing the MDGs seems daunting, especially in poverty, disease, and illiteracy, but also Sub-Saharan Africa. But rapid progress is pos- prospects for long-term global security and sible--if there is sufficient commitment to peace--objectives intimately linked to devel- reform and sufficient support from develop- opment. Behind cold statistics on the MDGs ment partners. Better-performing developing are real people, and lack of progress has countries provide reasons for hope for others. immediate and tragic consequences. Every Even in many lagging countries, including in week in the developing world, 200,000 chil- Sub-Saharan Africa, advances are being made G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 xvii E X E C U T I V E S U M M A R Y and the ground is being laid for better perfor- set medium-term targets--tailored to coun- mance. What is needed is to quicken and try circumstances--for progress toward the broaden this progress, based on the frame- MDGs and related development outcomes. work of the enhanced global partnership And they should define clear national plans envisaged at Monterrey. and priorities for achieving those targets, How to generate momentum and broaden linking policy agendas to medium-term fis- progress? Developing countries must take the cal frameworks. Donors should use these lead in articulating and implementing strate- strategies as the basis for aligning and har- gies that aim higher--to rise above current monizing assistance. trends and substantially accelerate progress. Deeper improvements are needed in policies Improve the Environment for Stronger, and governance, to expedite economic growth Private Sector­Led Economic Growth and scale up human development and related key services. Developed countries must also · Promotion of economic growth must be at step up implementation of their part of the the center of the strategy to achieve the development compact. They must provide MDGs. Sub-Saharan Africa needs to almost more and better aid but also show leadership double its growth rate, to an annual average on trade policy reform that would open mar- of about 7 percent over the next decade. kets for developing country exports and give · Progress in macroeconomic management greater coherence to their policies in terms of should be deepened, with a focus on fiscal their impact on development. management and the structure of public spending--to create more fiscal space for A Five-Point Agenda priority expenditures while ensuring fiscal sustainability. To build the momentum needed to achieve the · Improving the enabling climate for private MDGs, this report proposes a five-point activity--by removing regulatory and agenda of accelerated and concerted actions by institutional constraints and strengthening developing and developed countries--based on infrastructure--is key. An important area the Monterrey framework of mutual account- of reform in many countries is the ability. Within this agenda, special focus must strengthening of property rights and the be given to accelerating progress in Sub-Saha- rule of law, including legal and judicial ran Africa, the region that is furthest from the reform. Countries should use the development goals but that has recently improved diagnostics and metrics of the demonstrated a capacity for improvement in private business environment now avail- economic performance--capacity that must be able (such as the World Bank's Doing Busi- fostered through further domestic reform and ness Indicators and Investment Climate stronger support from development partners. Surveys) to guide action and monitor progress. Spending on infrastructure, for both investment and operation and main- Anchor Actions to Achieve the MDGs in tenance, needs to rise in all regions but Country-Led Development Strategies must double in Sub-Saharan Africa--from · For coherence and effectiveness, the scaling about 4.7 percent of GDP in recent years up of development efforts at the country to more than 9 percent over the next level must be guided by country-owned decade--as gaps in infrastructure are espe- and -led poverty reduction strategies cially severe in that region. Across coun- (PRSs) or equivalent national development tries, the pace of the increase in investment strategies. Framed against a long-term will depend on institutional capacity and development vision, these strategies should macroeconomic conditions. xviii G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 E X E C U T I V E S U M M A R Y · Overarching this agenda is the need to cific health interventions are aligned with improve governance--upgrading public sec- recipient countries' priorities and support-- tor management, controlling corruption-- rather than undermine--the coherence of as doing so is crucial to both the private their health sector strategies and systems. sector's business environment and the pub- lic sector's development interventions. The Dismantle Barriers to Trade New Partnership for Africa's Development and its African Peer Review Mechanism are · The international community must aim for promising African-led initiatives with a an ambitious outcome to the Doha Round focus on strengthening institutions. Member that fully realizes its development promise, countries should take advantage of the including in particular a major reform of impetus they provide to develop and imple- agricultural trade policies in developed ment national capacity building strategies, countries. The round should be completed which donors should support. Developed by 2006. countries can also help curb corruption by · "Aid for trade" should be scaled up sub- demanding high standards from their com- stantially to help poor countries address panies active in developing countries, behind-the-border constraints to their trade including by giving high-level political capacity, including through investments in endorsement to the Extractive Industries critical trade-related infrastructure. Transparency Initiative. Substantially Increase the Level Scale Up Human Development Services and Effectiveness of Aid · The human development MDGs require a · Official development assistance (ODA) major scaling up of education and health must at least double in the next five years services--primary education, basic health to support the MDGs, particularly in low- care and control of major diseases such as income countries and Sub-Saharan Africa, HIV/AIDS, and women's access to educa- with the pace of the increase aligned with tion and health care--and of water and san- recipients' absorptive capacity. To signal itation infrastructure, which is closely that needed resources will be forthcoming, linked to health outcomes. Again, the short- 2005 is an opportune time for donors to falls are most serious, and the need to scale raise their initial post-Monterrey commit- up most urgent, in Sub-Saharan Africa. ments and extend them over a longer time · Critical to effective scaling up are: rapidly horizon--2010 or beyond. Also, explo- increasing the supply of skilled service ration should continue on the merits and providers (health workers, teachers); pro- feasibility of innovative financing mecha- viding increased, flexible, and predictable nisms to complement increased aid flows financing for these recurrent cost-intensive and commitments. services; and managing the service delivery · Equally important is improving the quality chain to ensure that money produces results. of aid, with faster progress on alignment · To strengthen the Education for All Fast and harmonization, and delivery modali- Track Initiative, partners should make ties that increase aid flexibility and pre- monitorable, public, long-term commit- dictability. Firm implementation of the ments to significant annual increases in Paris Declaration on Aid Effectiveness is funding for primary education. Still larger central to this agenda. additional resources are needed to achieve · Closure should be reached in 2005 on cur- the health MDGs. It is important to ensure rent proposals for additional debt relief for that global programs organized around spe- poor countries with heavy debt burdens G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 xix E X E C U T I V E S U M M A R Y that are pursuing credible reforms. Any countries, including further streamlining additional debt relief should not cut into of conditionality and investment lending. the provision of needed new financing-- · Ensure that the implications of dismantling which for these countries should be pri- trade barriers and increasing the scale and marily in the form of grants--and should effectiveness of aid are adequately reflected not undermine the financial viability of in support for country capacity building, so international financial institutions. that emerging opportunities can be fully uti- lized. International financial institutions Role of International should sharpen the strategic focus and Financial Institutions improve the effectiveness of their support for global and regional public goods. How should international financial institu- · Strengthen partnerships and harmonize tions--multilateral development banks and further by improving transparency, reduc- the International Monetary Fund (IMF)-- ing red tape and enhancing the flexibility of strengthen and sharpen their support for this assistance (through simplification and use agenda? This report emphasizes action in five of sectorwide approaches), and promoting areas, as outlined below. In each of these areas the development and use of country sys- there has been progress, but there is a need to tems--for procurement, financial manage- do more and pick up the pace. The priorities ment, and environmental assessment. for action and monitoring progress are: · Strengthen the focus on results and account- ability by supporting country efforts to man- · Support the deepening of the PRS frame- age for development results--strengthening work in low-income countries, and the public sector management and development operationalization of the MDGs and align- statistics--and furthering progress within ment of assistance within that framework. international financial institutions in enhanc- For low-income countries under stress, ing the results orientation of their country support to building institutional capacities strategies and quality assurance processes. is especially important. Adopt a common framework for self-evalu- · Continue to adapt approaches and instru- ation of multilateral development banks' ments to better respond to the evolving performance and results measurement, and and differentiated needs of middle-income adapt to IMF operations as much as possible. xx G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 Millennium Development Goals (MDGs) Goals and Targets from the Millennium Declaration GOAL 1 ERADICATE EXTREME POVERTY AND HUNGER TARGET 1 Halve, between 1990 and 2015, the proportion of people whose income is less than $1 a day TARGET 2 Halve, between 1990 and 2015, the proportion of people who suffer from hunger GOAL 2 ACHIEVE UNIVERSAL PRIMARY EDUCATION TARGET 3 Ensure that by 2015, children everywhere, boys and girls alike, will be able to complete a full course of primary schooling GOAL 3 PROMOTE GENDER EQUALITY AND EMPOWER WOMEN TARGET 4 Eliminate gender disparity in primary and secondary education, preferably by 2005, and at all levels of education no later than 2015 GOAL 4 REDUCE CHILD MORTALITY TARGET 5 Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate GOAL 5 IMPROVE MATERNAL HEALTH TARGET 6 Reduce by three-quarters, between 1990 and 2015, the maternal mortality ratio GOAL 6 COMBAT HIV/AIDS, MALARIA, AND OTHER DISEASES TARGET 7 Have halted by 2015 and begun to reverse the spread of HIV/AIDS TARGET 8 Have halted by 2015 and begun to reverse the incidence of malaria and other major diseases GOAL 7 ENSURE ENVIRONMENTAL SUSTAINABILITY TARGET 9 Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources TARGET 10 Halve by 2015 the proportion of people without sustainable access to safe drinking water and basic sanitation TARGET 11 Have achieved a significant improvement by 2020 in the lives of at least 100 million slum dwellers GOAL 8 DEVELOP A GLOBAL PARTNERSHIP FOR DEVELOPMENT TARGET 12 Develop further an open, rule-based, predictable, nondiscriminatory trading and financial system (including a commitment to good governance, development, and poverty reduction, nationally and internationally) TARGET 13 Address the special needs of the least developed countries (including tariff- and quota-free access for exports of the least developed countries; enhanced debt relief for heavily indebted poor countries and cancellation of official bilateral debt; and more generous official development assistance for countries committed to reducing poverty) TARGET 14 Address the special needs of landlocked countries and small island developing states (through the Programme of Action for the Sustainable Development of Small Island Developing States and the outcome of the 22nd special session of the General Assembly) TARGET 15 Deal comprehensively with the debt problems of developing countries through national and international measures to make debt sustainable in the long term TARGET 16 In cooperation with developing countries, develop and implement strategies for decent and productive work for youth TARGET 17 In cooperation with pharmaceutical companies, provide access to affordable, essential drugs in developing countries TARGET 18 In cooperation with the private sector, make available the benefits of new technologies, especially information and communication Note: The Millennium Development Goals and targets come from the Millennium Declaration signed by 189 countries, including 147 heads of state, in September 2000. The goals and targets are related and should be seen as a whole. They represent a partnership of countries determined, as the Declaration states, "to create an environment--at the national and global levels alike--which is conducive to development and the elimination of poverty." Source: United Nations. 2000 (September 18). Millennium Declaration. A/RES/55/2. New York. United Nations. 2001 (September 6). Road Map towards the Implementation of the United Nations Millennium Declaration. Report of the Secretary General. New York. xxii G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 1 Overview: Building Momentum toward the Millennium Development Goals T he Millennium Development Goals deprivations and for promoting sustainable (MDGs) and the Monterrey Consen- development. The Monterrey Consensus cre- sus have created a powerful global ated a framework of mutual accountability compact for development.1 But the continued between developing and developed countries credibility of this compact hinges on fostering in the quest for these goals, calling on devel- momentum in its implementation. With the oping countries to improve their policies and five-year stocktaking of implementation of governance and developed countries to open the Millennium Declaration focusing their markets and provide more and better increased global attention on development, aid. With consensus reached on the MDGs 2005 is a crucial year to build momentum. and on responsibilities for action, the focus of Without tangible action to accelerate development efforts shifted to implementa- progress, the MDGs will be seriously jeopar- tion. As this report shows, both groups of dized. At stake are prospects not only for countries have made progress on needed poli- hundreds of millions of people to escape cies and actions. But progress has been poverty, disease, and illiteracy, but also for uneven and slower than envisaged. The pace long-term global security and peace--objec- must pick up if the vision of the Millennium tives that are intimately linked to develop- Declaration is to be realized--hence the title ment. Behind cold data on the MDGs are real of this report. people, and lack of progress on the goals has This report should be read in the context immediate and tragic consequences. Every of the broader review of progress on the week in the developing world, 200,000 chil- development agenda in 2005, which includes dren under five die of disease and 10,000 several other major reports--the UN Secre- women die giving birth. In Sub-Saharan tary-General's report, the UN Millennium Africa alone, 2 million people will die of Project report, and the Commission for AIDS this year. Moreover, 115 million chil- Africa report.2 All these reports complement dren in developing countries are not in one another in assessing, from their respective school. The need to scale up and speed up vantage points, progress toward the MDGs action is thus urgent, and the opportunities and related goals and in identifying priorities presented by the year 2005 must be seized. for the agenda ahead. They all share the com- The MDGs set clear targets for dramati- mon objective of expediting and broadening cally reducing poverty and related human progress toward these goals. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 1 C H A P T E R 1 Daunting Challenges-- success of better-performing regions and and Grounds for Hope countries provides reason for hope for others. A particularly striking example is Vietnam, a Globally, prospects are promising for halving low-income country that reduced poverty income poverty between 1990 and 2015--the from 51 percent in 1990 to 14 percent in first MDG. China and India, the two coun- 2002. And even in many lagging countries, tries with the highest numbers of poor people, including in Sub-Saharan Africa, progress is have achieved strong, sustained growth and being made and the ground is being laid for made major, rapid progress in reducing better performance. This progress needs to be poverty. Due largely to their efforts, East Asia furthered and quickened, within the frame- has already achieved the poverty MDG, and work of the enhanced partnership for global South Asia is on target. Most other develop- development envisaged at Monterrey. ing regions are also making steady progress and are expected to achieve the goal or come Building Momentum: close--though some countries will fall short A Five-Point Agenda in every region, and others will continue to have large pockets of poverty even while How to generate momentum and broaden meeting the goal at the national level. In Sub- progress? Developing countries must take the Saharan Africa the momentum has been lead in articulating and implementing strate- much slower, and most countries are at risk gies that aim higher, to rise above current of falling far short. Indeed, between 1990 and trends and substantially accelerate progress. 2001 the incidence of poverty rose in Sub- That will require improving policies and gov- Saharan Africa. Almost half of the region's ernance to achieve stronger economic growth population lives on less than $1 a day. and scaling up human development and key Across regions, the risks of falling short related services. Developed countries must are far greater for the human development also bolster their efforts and live up to the MDGs. Prospects are gravest in health. On commitments they made at Monterrey. Pro- current trends, most regions will fall short-- viding more and better aid is an important some seriously--of the health and related part of such efforts. But a big push in aid is not goals, including reduced child and maternal the sole answer. International development mortality and increased access to sanitation. policy needs to move beyond aid and aim for The number of people with HIV/AIDS con- a set of actions that cohere into a broader big tinues to grow. Prospects are brighter in edu- push--including, importantly, trade policy cation, but in three of the six developing reform but also other policies that affect regions the pace of progress is too slow to development, such as those involving private attain the goal of universal primary school capital flows, knowledge and technology completion. Although significant progress transfer, security, and the environment. has been made in all regions in reducing gen- Based on its analysis, the report proposes a der disparities in education, again half of the five-point agenda for accelerating progress regions will not achieve the goal of gender toward the MDGs (box 1.1). Within its global equality in primary and secondary education coverage, the report has a special focus on by 2005. Prospects for achieving gender Sub-Saharan Africa--the region that is fur- equality in tertiary education by 2015 are thest from the development goals and faces even less encouraging. Sub-Saharan Africa is the toughest challenges in accelerating off track on all these goals. progress.3 But much of the analysis of Sub- Against this backdrop, and with just 10 Saharan countries is relevant for similar coun- years until 2015, achieving several of the tries in other regions. For example, MDGs seems daunting. Indeed, it is a huge Sub-Saharan Africa contains the largest num- challenge. But rapid progress is possible. The ber of least developed countries (LDCs) and 2 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 O V E R V I E W : B U I L D I N G M O M E N T U M T O W A R D T H E M I L L E N N I U M D E V E L O P M E N T G O A L S BOX 1.1 A five-point agenda for accelerating progress toward the MDGs Anchor efforts to achieve the MDGs in country-led development strategies · Operationalize the MDGs in country-owned and -led poverty reduction strategies, linked to medium-term fiscal frameworks. Donors should use these strategies as the basis for aligning and harmonizing assistance. Improve the environment for stronger, private sector­led economic growth · Strengthen fiscal management, with a focus on the structure of public spending. · Improve the enabling climate for private activity by removing regulatory and institutional con- straints and strengthening economic infrastructure. · Improve governance by upgrading public sector management and combating corruption. Scale up human development services · Rapidly increase the supply of skilled service providers (health workers, teachers). · Provide increased, flexible, and predictable financing for these recurrent cost­intensive services. · Manage the service delivery chain to ensure that money produces results. Dismantle barriers to trade · Achieve an ambitious outcome to the Doha Round that fully realizes its development promise, including in particular a major reform of agricultural trade policies in high-income countries, completing the round no later than 2006. · Augment assistance to poor countries to address behind-the-border constraints to their trade capacity, including through investments in critical trade-related infrastructure. Substantially increase the level and effectiveness of aid · Double official development assistance over the next five years to support the MDGs, particu- larly in low-income countries and Sub-Saharan Africa, aligning the pace of the increase with recipients' absorptive capacity. · Improve the quality of aid, with faster progress on alignment and harmonization, and delivery modalities that increase aid flexibility and predictability. · Reach closure in 2005 on current proposals for additional debt relief. Any additional debt relief should not cut into the provision of needed new financing--nor undermine the financial viabil- ity of international financial institutions. low-income countries under stress (LICUS). (PRSs) should provide the framework for But other regions also contain countries in operationalizing the MDGs at the country these groups, with similar characteristics and level in low-income countries. (Equivalent challenges. For example, East Asia, though national development strategies should per- better known for its major emerging market form this role in middle-income countries.) economies, contains 6 of the 25 LICUS. Framed against a long-term development vision, PRSs should define medium-term tar- gets, tailored to country circumstances, for Anchoring Efforts in Country-Led progress toward the MDGs and related devel- Development Strategies opment outcomes. They should also articu- An overarching theme of this report is the late a clear national plan and priorities for centrality of country-based development achieving those targets, including policy strategies in pursuing the MDGs. Country- reforms, institutional strengthening, and owned and -led poverty reduction strategies investments. The development program set G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 3 C H A P T E R 1 out in a PRS should be linked to a medium- dimensions, including its transparency and term fiscal framework and annual budgets to inclusiveness, articulation of the growth align budget allocations with program prior- agenda, attention to institutional capacity ities. Donors should use this framework of building (such as public expenditure manage- nationally articulated priorities--and their ment), and incorporation of poverty and budget implications--to align and harmonize social impact analysis. But progress on these their assistance. In this way the PRS process dimensions varies across countries. can bring coherence both to the setting and Going forward, an area requiring particu- implementation of national priorities for lar attention is strengthening the links achieving the MDGs and to donor support between PRSs and fiscal frameworks, which for the country. It can also, through annual in most countries will require further devel- reviews of PRS implementation, provide a opment of medium-term expenditure frame- mechanism for monitoring progress on the works. This is key both for enhancing the development program in an integrated man- operational effectiveness of PRSs for national ner and for adjusting it as needed (figure 1.1). authorities in setting and implementing devel- To perform this central strategic and oper- opment priorities and for donors in better ational role effectively, PRSs need strengthen- aligning their support with country priorities. ing in many countries. Overall, there has been In most low-income countries, achieving the good progress in extending and deepening the MDGs will require a major scaling up of PRS process in developing countries. At pre- development efforts. Countries should use sent, 47 countries are implementing PRSs, the PRS framework to assess alternative sce- and another 12 have prepared interim PRSs. narios that can help them map out how to Of these, 33 are Sub-Saharan countries. scale up, drawing implications for intensified Countries are increasingly reflecting the domestic policy reform, mobilization of addi- MDGs more centrally in their PRSs. The PRS tional external assistance, and enhancement process is also being deepened along various of absorptive capacity. FIGURE 1.1 Country focus and leadership are key to coherent and effective implementation of the MDG agenda MDGs: Framework for implementation at the country level Medium-term poverty reduction Translating PRS into budget terms strategy (PRS) Long-term vision for Medium- ·Intermediate development goals and Annual development term fiscal targets linked to MDGs budgets For achieving MDGs framework and related outcomes ·Development strategy and priorities­ policies, institutions, and investments to promote growth and improve delivery of key services External assistance ·Predictable, long-term aid, ·Scaling-up scenarios aligned with PRS priorities and related fiscal framework ·PRS-aligned support for Annual review of PRS capacity building implementation ·Monitoring of progress ·Feedback to PRS for any adjustments 4 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 O V E R V I E W : B U I L D I N G M O M E N T U M T O W A R D T H E M I L L E N N I U M D E V E L O P M E N T G O A L S Spurring and Sustaining Sub-Saharan countries show that rapid Economic Growth progress is possible if there is sufficient com- mitment to reform and support from devel- PRSs and other national development strate- opment partners. gies must define clear programs for promot- Specific priorities and sequencing of actions ing stronger and sustained economic growth, to promote growth necessarily vary by coun- and governments must firmly commit to try. Across developing countries there is con- those programs. Growth is central to achiev- siderable diversity in economic circumstances. ing the MDGs and related development out- Sub-Saharan Africa alone contains middle- comes. It reduces poverty directly and income countries and least developed coun- expands resources and capacities for achiev- tries, large countries and small island ing the nonincome MDGs. In recent years economies, resource-rich countries (including developing countries have achieved an oil exporters) and resource-poor countries, encouraging pickup in economic growth, coastal countries and landlocked countries, thanks to continuing progress on improving and countries experiencing conflict and other policies and governance. In 2004 GDP forms of severe stress. Thus the specifics of the growth in developing countries averaged 6.7 policy agenda for growth at the country level percent--the highest level in three decades. must be defined as part of individual country Sub-Saharan Africa also appears to be development strategies. Looking across coun- turning the corner. Twelve countries in the tries, this report's analysis finds that three region--such as Ghana, Mali, Mozambique, broad areas require particular attention. Tanzania, and Uganda--are experiencing growth accelerations of the type more com- D E E P E N I N G P R O G R E S S O N monly associated with other regions, with M A C R O E C O N O M I C M A N A G E M E N T annual GDP growth averaging more than 5.5 percent since the mid-1990s. Many African Macroeconomic management has improved countries face region-specific handicaps, in all regions, yet progress has been uneven including unfavorable geography, vulnerabil- and remains fragile in many countries. The ity to shocks, and widespread disease. Still, as main area requiring attention is fiscal man- in other regions, policies and institutions mat- agement, particularly the structure and qual- ter in achieving higher growth. Differences in ity of public spending--to create more fiscal policies and institutions largely explain the space for priority expenditures while ensur- differences in growth and poverty reduction ing fiscal sustainability. Better public expen- between other regions and Sub-Saharan diture management would allow allocations Africa and among countries in Sub-Saharan to growth-promoting and poverty-reducing Africa. Sound policies also position countries spending to rise in a way consistent with sus- better to deal with economic shocks. tainable fiscal and debt positions. The scope The recent strengthening of growth is only for such improvements in spending remains the beginning of what Sub-Saharan Africa considerable in many countries. Sound fiscal needs to achieve and sustain necessary management and macroeconomic stability improvements in income levels. Historically, are also important underpinnings of an envi- it has been far more difficult for countries to ronment conducive to growth in private sustain growth than to initiate it. To achieve investment. the income poverty MDG, Sub-Saharan Africa would have to achieve average annual I M P R O V I N G T H E E N A B L I N G C L I M A T E GDP growth of around 7 percent over the F O R P R I V A T E S E C T O R A C T I V I T Y next decade--almost twice the current rate. A vigorous private sector drives economic Though this is a big challenge, past achieve- growth, but government plays a vital role in ments by countries in other regions and some creating a climate where entrepreneurship can G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 5 C H A P T E R 1 flourish. An improved business environment tional trade. Infrastructure spending (invest- not only delivers higher and more productive ment plus operation and maintenance) will private investment, it also expands the private need to rise in all regions to support stronger sector by establishing a level playing field-- growth and service delivery consistent with encouraging small businesses (often the most MDG targets. But such spending will need dynamic business segment), inducing a shift to double in Sub-Saharan Africa, from from the informal to the formal economy, and about 4.7 percent of GDP in recent years to better engaging the energies of women. A bet- 9.2 percent over the next decade--implying ter business environment is also essential to annual infrastructure spending of about $20 attracting more foreign investment. Action is billion and a need for about $10 billion a needed on two fronts: year in additional external financing. The increase in spending will need to be man- · Improving the regulatory and institutional aged well to ensure effectiveness and quality, environment for private activity, with a with the pace of the increase depending on focus on simplifying regulations for start- institutional capacity and macroeconomic ing a business, securing property rights, conditions in the countries concerned. and strengthening contract enforcement and the rule of law. Access to finance also S T R E N G T H E N I N G P U B L I C S E C T O R needs to be improved, but fundamentally G O V E R N A N C E depends on the same regulatory and insti- Improving governance--upgrading public sec- tutional underpinnings. Sub-Saharan tor management, controlling corruption-- Africa considerably lags other regions on overarches this agenda, because it is crucial to these dimensions. Countries should use the both the private sector's business environment improved diagnostics and metrics of the and the public sector's development interven- private business environment now avail- tions. Although governance is getting better in able--such as the World Bank's Doing most countries, reforms need to be accelerated Business Indicators and Investment Cli- in many. Sub-Saharan Africa has seen encour- mate Surveys--to guide action and moni- aging progress on political representation, tor progress. Further reductions in trade reflecting a trend toward broader participatory barriers (discussed below) are also needed processes that enable citizens to influence pol- to improve the climate for private invest- icymaking and hold leaders accountable. ment and growth. There has been less progress on public sector · Substantially increasing investment in phys- management and institutional effectiveness. ical infrastructure, promoting private par- But the improvements in political institutions ticipation, and reversing the decline in public could create the momentum needed to investment that persisted for much of the strengthen institutions of economic gover- past decade--recognizing that the bulk of nance. The African Peer Review Mechanism, the increase in infrastructure investment, recently introduced by the African Union's especially in Sub-Saharan Africa, will have New Partnership for Africa's Development to come from the public sector. Gaps in (NEPAD), focuses on improving governance infrastructure are especially severe in Sub- and could provide impetus. Informed by the Saharan Africa, reflecting low past invest- peer reviews, countries should develop capac- ment as well as the large needs implied by ity building strategies, with NEPAD providing the region's challenging geography--such as a forum to share best practices, reinforce peer for transportation linking distant rural areas pressure, and advocate for external support. to markets (key to boosting agriculture, External partners should support the strength- which accounts for the bulk of employment ening of this promising African-led reform in most countries) and regional infrastruc- framework. Developed countries can also help ture linking landlocked countries to interna- curb corruption by demanding high standards 6 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 O V E R V I E W : B U I L D I N G M O M E N T U M T O W A R D T H E M I L L E N N I U M D E V E L O P M E N T G O A L S from their companies active in developing tors, nurses, and community health workers-- countries, including by giving high-level polit- especially in Sub-Saharan Africa. Estimates ical endorsement to the Extractive Industries suggest that the region will need to as much as Transparency Initiative. triple its health workforce by 2015, adding 1 The context for economic growth in Sub- million workers. The impact of AIDS on the Saharan Africa also appears to be improving workforce is exacerbating the capacity problem in terms of the region's peace and security in countries such as Malawi, Tanzania, and outlook, with some decline in the incidence Zambia. Human resource shortages will likely of conflicts. Still, preventing, managing, and be a binding constraint on service expansion, recovering from conflicts remain major chal- especially in health, unless countries adapt poli- lenges in the region. cies and increase provider productivity. Strate- Long-term growth prospects also depend gies that are proving effective include: on ensuring environmental sustainability. An important element of the agenda is enhancing · Pragmatic adjustments to recruitment and access to reliable, affordable, and clean energy training standards, to increase production options. So is checking environmental degra- of community teachers and health workers. dation to mitigate the threat of increased cli- · Careful deployment and management of matic volatility. Environmental sustainability service providers, to avoid underutilization. is an MDG in its own right, but it has strong · Maximum use of nonsalary incentives to links to the achievement of many other goals. make public sector positions attractive, especially in rural areas. · Selective salary adjustments for the high- Scaling Up Service Delivery est-skilled workers (such as doctors) in the The human development MDGs require a public sector, to restrain migration. major scaling up of education and health ser- · Cost-effective investments in medical, nurs- vices--including primary education, basic ing, and teacher training capacity, to com- health care and control of diseases such as plement the shorter-term strategies above. HIV/AIDS, and women's access to education and health care--and of water and sanitation Donors have an important role to play in infrastructure, which is closely linked to addressing the health worker crisis. Devel- health outcomes. The shortfalls are most seri- oped countries that benefit from African- ous, and the need to scale up most urgent, in trained medical personnel can help finance Sub-Saharan Africa. expanded training facilities in home countries As with the growth agenda, priorities for and assist those countries in recouping med- action in scaling up human development ser- ical students' loans. vices must be determined in the context of country-owned development strategies. The M O B I L I Z I N G F L E X I B L E A N D appropriateness of individual interventions, P R E D I C T A B L E F I N A N C I N G be they "quick wins" or longer-term efforts, Developing countries have increased budget needs to be evaluated in these country-specific allocations to education and health, but frameworks. The analysis in this report finds many need to go further to achieve the that most countries face three critical chal- MDGs. For education, 20 percent of the lenges in scaling up service delivery. recurrent budget is the benchmark under the Education for All Fast Track Initiative I N C R E A S I N G T H E S U P P L Y O F S K I L L E D (FTI)--while Sub-Saharan countries average S E R V I C E P R O V I D E R S 15 percent. For health, in 2000 African gov- Expanding education and health services on the ernments set a target of 15 percent of the scale needed to achieve the MDGs will require recurrent budget, well above their current major increases in the supply of teachers, doc- average of 8 percent. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 7 C H A P T E R 1 But allocating more from countries' own and treat childhood diseases, reduce fiscal resources will not be enough: A sub- maternal mortality, expand HIV/AIDS stantial increase in external financing is treatment, and make progress against required. Achieving the universal primary malaria and tuberculosis. Increases in education MDG in low-income countries will donor funding must be long-term and require at least $3 billion a year in additional aligned with country priorities. The inter- external financing. Much more is needed to national health community urgently needs meet the health goals--at least $25 billion a to look at all options for ensuring that year. Equally important are deep changes in global programs organized around specific the nature of donor support. A significant health interventions do not undermine the share of bilateral assistance falls outside coherence of country health strategies, the national planning and budgeting processes. balanced allocation of resources, and the Transaction costs severely strain countries' strengthening of health systems. While limited administrative capacity. Aid flows are preserving the mandates these programs often volatile. And there is often a disconnect have for mobilizing resources, raising between the types of expenditures that coun- awareness, monitoring results, and financ- tries need to finance to scale up education and ing global public goods with respect to health services--recurrent, local, largely per- individual diseases, these functions must sonnel costs--and what bilateral donors pro- be better coordinated at the global level vide--in-kind financing, technical assistance. and better aligned at the country level with Roughly two-thirds of aid for education is government-led sector plans, with harmo- extended as technical assistance. nized procurement, disbursement, and Flexible and predictable financing is espe- reporting procedures. The High Level cially important for these recurrent cost- Forum for the Health MDGs, established intensive services. Priorities for improving the in 2003, offers a platform for this collabo- delivery of financing for these services include: rative rethinking of the global health archi- tecture and the development of common · Making aid flexible. All aid should support principles and standards of good practice priorities identified in PRSs and endorsed for engaging global health partnerships at sector plans. In countries that meet public the country level. expenditure management thresholds, more aid should be provided as budget support. I M P R O V I N G M A N A G E M E N T O F T H E · Creating a stable funding framework for S E R V I C E D E L I V E R Y C H A I N the Fast Track Initiative. To strengthen the Sound expenditure management and a focus FTI, partners should make monitorable, on development results are crucial to effective public, long-term commitments to annual service delivery. The realization of increased increases in funding for primary educa- aid, especially in the form of flexible budget tion. The target should be a significant support, also depends on them. Sound expen- increase from each partner's 2005 base, diture management requires systems for bud- which the FTI Secretariat should monitor. get formulation, allocation, and reporting Annual funding commitments should help that meet threshold standards of integrity and fill agreed financing gaps for endorsed efficiency. In a number of countries in great- countries where partners have a presence est need of external support for recurrent or interest; any residual should be allo- costs, these systems are too weak to give cated to the FTI's Education Program donors confidence that resources can be Development Fund or Catalytic Fund. tracked and used well. Donors are giving high · Aligning global health initiatives with priority to building capacity in this area, but national policies and priorities. Additional progress depends crucially on domestic com- external resources are needed to prevent mitment to reform. 8 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 O V E R V I E W : B U I L D I N G M O M E N T U M T O W A R D T H E M I L L E N N I U M D E V E L O P M E N T G O A L S A focus on development results requires liberalization offers the best means for realiz- the capacity to gather and analyze real-time ing the development promise of trade. A data on MDG progress. Countries need to be timely, pro-development outcome to the Doha able to track the primary completion rate and Round is therefore crucial. Based on develop- use regular household surveys and sentinel ments to date, there is a significant risk that a monitoring to generate data on child and limited, "business as usual" outcome may maternal mortality and major communicable emerge. Not only would such an outcome diseases. Since these indicators improve rela- greatly reduce the potential of trade to help tively slowly, intermediate indicators of achieve the MDGs, it could imply a further progress are also important--as are measures erosion of the multilateral trading system. of system efficiency, such as those for educa- The 2001 Doha ministerial declaration put tion developed by the FTI. A similar frame- development at the center of the trade reform work is being developed by the Health agenda. The international community must Metrics Network, a donor consortium in raise the level of its ambition with respect to health. Progress also requires a better evi- the Doha Round and aim for an outcome dence base for policy, built on rigorous equal to that vision. High-income countries impact evaluation of key programs. must lead by example. Efforts should focus Ultimately, strengthening service delivery on a major reduction in market access barri- and ensuring that services reach poor people ers--particularly a transformation of agricul- require action to improve the core account- tural trade policy in high-income countries. ability relationships identified in the World Taking into account both tariff and nontariff Development Report 2004: responsiveness of measures, trade policy in high-income coun- governments to citizen demands through the tries is more than seven times as restrictive in political process; responsiveness of service agriculture as in manufacturing. Ambitious providers to clients; and effectiveness of gov- reference points would be helpful in guiding ernment agencies in turning resources into the negotiations, including: results.4 Weaknesses in these accountability relationships can be the deepest threat to · Agriculture: reducing all agricultural tar- effective service delivery. But countries are iffs to no more than 10 percent, eliminat- making progress. Sector management can be ing agricultural export subsidies, and fully helped by clear funding norms, competency- decoupling domestic agricultural subsidies based recruitment, results focus, attention to and rural support from production. cost-effective standards, and strategies to · Manufacturing: eliminating tariffs on make effective use of the private sector. Above manufactured products. all, governments can strengthen the voice of · Services: committing to free cross-border clients at the point of service delivery-- trade in services delivered over telecom- through the power of information, direct munications networks, complemented by involvement in school and health facility mon- actions to liberalize the temporary migra- itoring and management, and the use of con- tion of service providers. ditional cash transfers. For these actions to assist in attaining the Realizing the Development MDGs, they should be completed by 2015, Promise of Trade with major progress achieved by 2010. Significant trade policy commitments by T H E D O H A D E V E L O P M E N T A G E N D A developing countries are an essential, and Improving market access for developing coun- equally urgent, part of the agenda to realize tries would provide a major boost to economic the potential of trade for development, growth and progress toward the MDGs. Mul- including tapping the considerable scope tilateral, reciprocal, nondiscriminatory trade for expanded trade among them. Trade G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 9 C H A P T E R 1 restrictions are generally much higher in bilateral donors, and governments of least developing than developed countries, and developed countries, offers a mechanism to are highest on average in Sub-Saharan identify priorities and allocate additional assis- Africa, South Asia, and the Middle East and tance to trade-related investments and support North Africa. for policy reforms. Resources provided to the An ambitious Doha Round would yield Integrated Framework to date have been able large gains for the world as a whole and for to support only small-scale technical assis- developing countries. Most estimates place tance. But the framework offers a ready-made the gains from such an outcome at more than vehicle for boosting aid for trade, supported by $250 billion a year by 2015, with 33­40 per- increased integration of the trade capacity cent accruing to developing countries--more building agenda by countries in their PRSs. than their 20 percent share of world GDP. This would imply a boost to the GDP of low- T A R I F F P R E F E R E N C E S income countries of about 2 percent and that Recent policy in OECD countries has empha- of Sub-Saharan Africa of 1.3 percent; corre- sized tariff preferences for small, poor coun- sponding estimates for a low-ambition, busi- tries--mainly the least developed countries ness-as-usual Doha outcome are 0.3 percent and Sub-Saharan countries. While actions to and 0.1 percent, respectively. More than make existing tariff preferences more effec- three-fifths of the estimated global gains are tive--for example, through adoption of com- related to reform of agricultural trade. The mon, liberal rules of origin--would be estimates of gains are from merchandise trade beneficial in the short run, in the long run the reform only, and capture mainly static gains. focus should shift toward alternative forms of Significant liberalization of services could trade assistance that generate greater benefits increase the gains considerably--by a multi- for recipients and are less trade-distorting. Tar- ple on some estimates. iff preferences have been of limited value to many African countries and have negative A I D F O R T R A D E effects on the functioning of the global trade Complementing an ambitious Doha outcome, system. Alternative measures include stepped- aid for trade should be scaled up substantially. up financial assistance to strengthen trade For many low-income countries, fully captur- capacity and help countries deal with the ing the opportunities arising from improved adjustment costs of trade policy reform, market access, as well as their own trade including preference erosion and revenue reforms, requires addressing the behind-the- losses. They also include action by major border constraints on their trade capacity. importers to minimize the incidence of nontar- This applies particularly to the least developed iff measures (quotas, licensing requirements, countries, most of which are in Africa, for health- and safety-related product standards) whom lack of trade capacity and competitive- on exports from poor countries. Regardless of ness is the binding constraint. The agenda their intent, regulatory product standards includes improving trade logistics and facili- applied at the border have a major restrictive tation, strengthening critical trade-related impact on trade and affect poor countries dis- infrastructure (such as transport), and further proportionately. Reducing their incidence on reforming policies that create anti-export bias. these countries, including by assisting in build- A host of diagnostic trade integration stud- ing their capacity to meet the regulatory ies undertaken for least developed countries requirements, would have a high payoff. under the Integrated Framework for Trade- Related Technical Assistance have identified R E G I O N A L I N T E G R A T I O N areas where aid can be used to build trade Regional trade agreements can also help capacity. The Integrated Framework, a collab- leverage trade for development--provided orative venture among multilateral agencies, they do not detract from the pursuit of an 10 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 O V E R V I E W : B U I L D I N G M O M E N T U M T O W A R D T H E M I L L E N N I U M D E V E L O P M E N T G O A L S ambitious Doha outcome. Full realization of a much smaller but still important role, by the development contributions of both catalyzing reforms, supporting efforts to North-South and South-South regional inte- tackle concentrations of poverty, and helping gration arrangements requires that develop- to counter negative shocks. ing country members of these arrangements Donors are beginning to respond to the implement significant liberalization on a need to increase aid, following up on their nondiscriminatory basis, in addition to grant- Monterrey commitments. Aid volumes have ing preferential access to partner countries. been recovering since 2001, following a decade Because a number of Sub-Saharan countries of almost continuous decline. Between 2001 still rely on import duties for a significant and 2003 net ODA increased by 12 percent in portion of government receipts, revenue con- real terms. This is encouraging, but aid cerns and the ability to put in place alterna- remains well short of what poor countries need tive revenue sources are factors in and can use effectively. At least a doubling of determining the appropriate speed of liberal- ODA is needed within the next five years to ization. Agreements that the European Union build sufficient momentum in progress toward and the United States are negotiating with the MDGs. Further increases will likely be developing countries can do much good if needed beyond that period up to 2015. The designed in a way that puts development con- need for more ODA is especially great in Sub- siderations at the center. Saharan Africa--and analysis suggests that, provided countries continued and strength- Increasing Aid and Its Effectiveness ened policy and institutional reforms, the region could effectively use a doubling of aid S C A L I N G U P O F F I C I A L over a five-year timeframe. D E V E L O P M E N T A S S I S T A N C E To signal that needed resources will be Developing countries must make stronger forthcoming, 2005 is an opportune time for efforts to mobilize more domestic resources to donors to raise their initial post-Monterrey accelerate progress toward the MDGs--mov- commitments and extend them over a longer ing more vigorously to spur economic growth, horizon--2010 or beyond. Only half of Devel- strengthening revenue administration, and opment Assistance Committee (DAC) donors improving the efficiency of spending. They have announced aid commitments beyond must also build on reforms that enhance their 2006. The others should do so in 2005. ability to attract private nondebt capital While aid volumes are rising, it is impor- inflows, especially foreign direct investment. tant to ensure that development aid to poor Moreover, in many countries worker remit- countries to support their efforts to achieve tances are becoming an increasingly impor- the MDGs is not crowded out by donors' tant source of private external finance. strategic and security objectives. Large Still, for most low-income countries offi- amounts of aid have recently been committed cial development assistance (ODA) remains a to geopolitically important countries. A bet- major source of external finance--and for ter balance in aid is needed, focusing more on poor and least developed countries it remains poverty reduction. Reducing poverty and the the predominant source. In Sub-Saharan hopelessness that comes with human depri- Africa, home to most of these countries, offi- vation is perhaps the most effective way of cial flows account for about two-thirds of promoting long-term peace and security. And capital inflows. Even with stronger efforts to it costs less: doubling ODA would amount to mobilize more domestic resources and attract less than one-tenth of what high-income more private capital inflows, these countries countries devote to military spending. It is will need a substantial increase in ODA to also eminently affordable, representing only improve their prospects for achieving the about 0.2 percent of high-income countries' MDGs. In middle-income countries aid plays gross national income (GNI). G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 11 C H A P T E R 1 A L I G N I N G A I D W I T H directed aid can be effective in these situations. A B S O R P T I V E C A P A C I T Y Key elements of effective support are appropri- Both how aid is allocated across countries and ate sequencing of aid within a long-term how increases are sequenced within countries engagement (rather than a stop-go or quick-in, must be aligned with recipients' absorptive quick-out approach) and use of instruments capacity. Country readiness to use significant and delivery mechanisms responsive to specific increases in external assistance varies consider- local conditions while supporting the longer- ably. Which countries should be "fast tracked" term buildup of national institutional capacity. depends on the robustness and strength of Well-timed aid can also be quite productive fol- ownership of development programs articu- lowing adverse exogenous shocks, helping to lated in their PRSs and on progress in gover- limit the diversion of development resources nance and institutional capacity to implement into short-run relief efforts. them, and should be approached on a country R A I S I N G A I D Q U A L I T Y by country basis through the normal dialogue between donors and recipients. Increasing the quality of aid is just as impor- A number of low-income countries, includ- tant as increasing its quantity. As noted above ing several in Sub-Saharan Africa, have in relation to the financing of human devel- demonstrated the capacity to effectively man- opment services, aid is often fragmented and age a scaling up of development efforts sup- volatile, aligned more with donor agendas ported by external assistance. Examples and preferences than country priorities, and include Tanzania's scaling up of primary edu- entails high transaction costs. These issues are cation, Indonesia's rapid development of rural receiving more attention and progress is being infrastructure in its kecamatans, Uganda's made, but it has been slow and uneven. The accelerated expansion of poor people's access outcome and follow-up to the Second High to primary health care and of programs to Level Forum on Aid Effectiveness, held in combat HIV/AIDS, Mozambique's transfor- Paris in March 2005, must lead to a signifi- mation of its growth performance by harness- cant step-up in progress. Key areas for atten- ing significant aid flows in support of tion are achieving closer strategic and stepped-up domestic reforms and investments, operational alignment with country-owned and Vietnam's rapid reduction of poverty and and -led strategies (PRSs or other national of the incidence of scourges such as malaria. development strategies), improving the pre- Recent detailed work on absorptive capacity in dictability of aid (including making longer- Ethiopia, carried out by the World Bank in term commitments when recipient cooperation with the government, shows the performance warrants it), and strengthening feasibility of substantial increases in aid in sup- the focus on development results. The Paris port of the MDGs being used effectively--but Declaration on Aid Effectiveness, which aims also underscores the importance of appropri- for improvements in these and other areas, ate sequencing of aid to minimize costs and must be implemented firmly and expedi- ensure desired development results. There are tiously. A notable outcome of the Paris also many countries where absorptive capacity Forum was the adoption of a set of indicators is weak and increases in aid need to be more of aid quality that should help with closer measured. Absorptive capacity is neither static monitoring of progress and reinforcement of nor exogenous to aid; aid can be instrumental donor and recipient responsibilities. in expediting the buildup of capacity. D E B T R E L I E F T A I L O R I N G A I D T O T H E For heavily indebted poor countries (HIPCs), N E E D S O F L I C U S debt relief is important for increasing the fis- Support for capacity building is particularly cal space for much-needed increases in spend- important for LICUS. Appropriately timed and ing to promote growth and reduce poverty 12 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 O V E R V I E W : B U I L D I N G M O M E N T U M T O W A R D T H E M I L L E N N I U M D E V E L O P M E N T G O A L S and for relieving the debt overhang. Contin- and effectiveness of voluntary contributions ued and effective implementation of the in supporting development. HIPC Initiative remains key. The Executive Boards of the IMF and the World Bank have Strengthening and Sharpening endorsed key elements of a debt sustainabil- Support from International ity framework for low-income countries that Financial Institutions would support these countries in their efforts to achieve the MDGs without creating future How are international financial institutions debt problems and keep countries that have (IFIs)--multilateral development banks received debt relief under the HIPC Initiative (MDBs) and the International Monetary on a sustainable path. With respect to recent Fund--contributing to implementation of the proposals for additional debt relief, efforts above agenda, by supporting country devel- should be made to reach closure in 2005. Any opment, drawing on sectoral, regional, and additional debt relief should not cut into the global programs and research, strengthening provision of needed new financing, which for partnerships, and managing for development these countries should be primarily in the results? The report finds that there has been form of grants. Nor should it undermine the progress in each of these areas, but there is a financial viability of international financial need to do more and pick up the pace. institutions. Recent steps to increase the share of grants in concessional financing from the Low-Income Countries International Development Association (IDA) and other multilateral development Recent replenishment negotiations for the banks and to link the mix of grants and loans African Development Fund (AfDF), Asian to recipients' debt sustainability represent Development Fund (AsDF), and IDA notable improvements in the framework for endorsed a common framework for the use of assisting poor countries. PRSs that reflect the MDGs, grants, debt sus- tainability, and disclosure of country policy I N N O V A T I V E F I N A N C I N G M O D A L I T I E S and institutional assessments. They also sup- The year 2005 should also see progress on ported piloting of results-based country ongoing work assessing the merits and feasi- strategies, adoption of results measurement bility of innovative modalities for mobilizing systems, and special programs for low- resources to fund the needed increases in aid income countries under stress. Given that and ensure their timely availability, including these replenishments cover some 95 percent the proposed International Finance Facility of MDB programs in low-income countries, and global taxes related to important inter- they have established a concrete platform for national externalities, such as carbon emis- accelerating implementation of these initia- sions. Blending arrangements, which tives and harmonizing them across the banks. combine flows with different financial terms Support for countries in the event of exoge- and characteristics to increase concessional- nous shocks is also being strengthened. ity or gain leverage, also offer possibilities to Reflecting independent evaluations, the augment resources for the MDG agenda, World Bank and the IMF need to support including in middle-income countries with stronger country leadership of the PRS large pockets of poverty, and to finance process while deepening the dialogue with global and regional public goods. Finally, the countries on the policy agenda. Clearer own- impressive scale of private contributions in ership of the PRS by countries, with the Bank response to the recent Asian tsunami, and and the IMF reflecting their views in Joint major private contributions to causes such as Staff Advisory Notes and related process, combating HIV/AIDS, point to the impor- would also help clarify the accountabilities of tance of exploring ways to enhance the role Bank and IMF staff. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 13 C H A P T E R 1 Middle-Income Countries World Bank­IMF relations have continued to mature, based on comparative advantage and For middle-income countries there has also a mandate-driven division of labor high- been a trend toward harmonization across the lighted by ongoing collaboration on PRSs, MDBs, albeit slower, reflecting the evolving debt sustainability analysis and its application and varying needs of these countries. Middle- to concessional and grant financing, and fur- income countries have been vocal in calling ther streamlining of structural conditionality. for reductions in the costs of doing business with the banks, especially when those costs arise in the context of replenishment exercises Managing for Development Results for concessional funds that they cannot During 2004 important milestones were access. Competitive pressures among the achieved in building results-based systems in banks have led to the transmission of innova- the MDBs. These include the completion of the tions in one--such as liberalization of expen- first cycle of the IDA13 results measurement diture eligibility categories for investment system, the adoption of the IDA14 and AfDF lending or increased reliance on country sys- X results measurement systems, the comple- tems--to the others in fairly rapid succession. tion of results-based country strategy pilots by the Asian Development Bank and the World Knowledge and Capacity Building Bank (and their commitment, along with the African Development Bank's, to conduct fur- Research by IFIs has helped to articulate the ther pilots in 2005), the Inter-American Devel- global development agenda, making notable opment Bank's adoption of a Medium-Term contributions on trade and aid, among other Action Plan for Development Effectiveness, the areas. These institutions have also con- new independence of the Asian Development tributed much to building trade capacity and Bank's evaluation department, the launch of enhancing countries' fiduciary and fiscal sys- the draft Results Sourcebook prepared jointly tems for the absorption of aid. But they need by these institutions and bilateral donors, and to do more--including systematically keeping the major PRS evaluations carried out in coop- track of where capacity gaps are, as a basis eration by the World Bank's Operations Eval- for guiding donor actions--if developing uation Department (OED) and the IMF's countries are to fully exploit the opportuni- Independent Evaluation Office (IEO). The ties emerging from the dismantling of trade IMF is considering how to conceptualize and barriers and increasing the scale and effec- operationalize the results agenda within its tiveness of aid proposed above. institutional framework, drawing on recom- mendations from various reports of the IEO. Partnerships The MDBs are partnering more effectively Priorities for Action with clients, with each other, and with other How can IFIs strengthen and sharpen their donors. This progress is largely due to the support? This report suggests five priorities developments cited above with respect to the for action and monitoring progress: replenishments of the banks' concessional windows and their greater reliance on country · Support the deepening of the PRS frame- systems to process their funding. Relative to work in low-income countries, and the civil society, disclosure remains a major issue, operationalization of the MDGs and because despite improvements many critics alignment of IFI assistance within that feel that IFIs have not met a standard of framework. Support for building institu- accountability commensurate with their tional capacity is especially important for power and influence in a number of areas. low-income countries under stress. 14 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 O V E R V I E W : B U I L D I N G M O M E N T U M T O W A R D T H E M I L L E N N I U M D E V E L O P M E N T G O A L S · Continue to adapt approaches and instru- country strategies and programs and quality ments to better respond to the evolving assurance processes. In addition, a common and varying needs of middle-income coun- framework should be adopted for self-eval- tries, including further streamlining of uation of MDB performance and results conditionality and investment lending. measurement, and adapted to IMF opera- · Ensure that the implications of dismantling tions as much as possible. trade barriers and increasing the scale and effectiveness of aid are adequately reflected Notes in support for country capacity building, so that emerging opportunities can be fully 1. The MDGs flowed from the Millennium utilized. International financial institutions Declaration adopted by 189 countries at the should sharpen the strategic focus and United Nations Millennium Summit, held in New improve the effectiveness of their support York in 2000. The Monterrey Consensus emerged from the UN Conference on Financing for Devel- for global and regional public goods. opment, held in Monterrey, Mexico, in 2002. · Strengthen partnerships and harmonize 2. UN (2005); UNMP (2005); Commission for further by improving transparency, reduc- Africa (2005). ing red tape and enhancing the flexibility of 3. The Global Monitoring Report 2004, pre- assistance (through simplification and use pared for the Spring 2004 Development Commit- of sectorwide approaches), and promoting tee meeting and published in June of that year, the development and use of country sys- provided a comprehensive assessment of the policy tems--for procurement, financial manage- agenda for achieving the MDGs and related devel- ment, and environmental assessment. opment outcomes, spanning the responsibilities, as reflected in the Monterrey Consensus, of all the key · Strengthen the focus on results and account- actors--developing countries, developed countries, ability by supporting country efforts to man- and international financial institutions. Building on age for development results (strengthening that analysis, this report has a more selective focus public sector management and development on key areas of the policy agenda but provides a statistics) and furthering progress within IFIs more in-depth assessment of those areas. on enhancing the results orientation of their 4. World Bank (2003). G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 15 2 Spurring and Sustaining Economic Growth E conomic growth is central to reducing high incidence of disease, responds to key poverty and meeting the Millennium policy drivers in a manner fundamentally Development Goals (MDGs). Globally, similar to economies elsewhere. Thus the pro- prospects are promising for halving income motion of higher growth rates through policy poverty--the first goal--by 2015. The two and institutional reforms is critical for countries that in 1990 were home to the most poverty reduction (box 2.1), and outlining poor people, China and India, have acceler- the agenda for spurring and sustaining ated economic growth for sustained periods growth in Sub-Saharan Africa is the focus of and made significant inroads into reducing this chapter. the incidence of poverty. Due partly to their Recently there has been evidence that Sub- efforts, East Asia has already achieved the Saharan Africa is starting to turn the corner. poverty goal, and South Asia is on target. Twelve countries are experiencing a growth Most other developing regions are making acceleration of the type more commonly steady progress and are expected to either associated with other regions. More gener- achieve the goal or come close, even as pock- ally, improvements in economic policies and ets of poverty remain at the national and sub- political institutions have supported higher national levels. But in Sub-Saharan Africa the growth rates across the region. But these momentum has been slower, and most coun- achievements are only the beginning of what tries are at severe risk of falling short. is needed to sustain needed improvements in To accelerate progress toward the poverty income levels and living standards. It is con- goal, Sub-Saharan Africa will need to sub- siderably more difficult to sustain growth stantially boost economic growth. Increases than merely to initiate it. in a country's overall income tend to lift the Sub-Saharan Africa's weak economic per- income of its poor people proportionately, formance over the past four decades, and its and there is little doubt that differences in difficult prospects for reaching the MDGs, policies and institutions have played a major have led some analyses to conclude that many role in explaining the divergent poverty African countries are caught in "poverty trends seen, for example, in East Asia and traps." The suggestion in these analyses is Sub-Saharan Africa. The growth process in that large amounts of aid are needed to jump- Africa, although subject to some initial dis- start growth across the region. But increased advantages such as difficult geography and aid is insufficient to spur and sustain higher G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 17 C H A P T E R 2 BOX 2.1 Growth is central to sustained poverty reduction The strong relationship between income growth and poverty reduction has been documented in a large empirical literature. This relationship can also be seen in the figure below, which shows changes in poverty over the past two decades--using the $1 a day headcount measure--for a large sample of developing countries. (For details on the data and decomposition methodology used in this box, see Kraay, forthcoming.) The figure also indicates wide variation around this average rela- tionship. What implications do these differences have for poverty reduction? Consistent with other developing regions, most countries in Sub-Saharan Africa are clustered in the top left quadrant (with negative growth and rising poverty) or bottom right quadrant (with pos- itive growth and declining poverty). Sub-Saharan countries have a median per capita growth rate of 0.8 percent a year, substantially lower than the overall median of 2.1 percent, and most fall above the regression line, indicating worse poverty reduction performance than for a typical developing country with similar growth performance. The figure also indicates important differences across countries in the rate at which poverty declines for a given growth rate. Ghana, and Uganda, for example, had similar annual growth rates (1­3 percent), but their rates of annual change in poverty ranged from about ­8 percent to +2 per- cent. There are two reasons for such differences: cross-country differences in the sensitivity of poverty to growth, holding constant the distribution of income; and cross-country differences in how the distribution of income changes over time. Change in $1-a-day poverty rate per person 0.2 Ethiopia 1995­2000 0.15 Côte d'Ivoire 0.1 1985­95 Burundi 1992­98 0.5 Ghana 1987­99 Annual growth rate Nigeria 1985­97 in per capita income Lesotho 1986­95 ­0.2 ­0.15 ­0.1 ­0.05 0.05 0.1 0.15 0.2 Botswana 1985­93 Madagascar 1980­99 Mauritania 1988­95 ­0.05 Kenya 1992­7 Uganda ­0.1 1989­96 Gambia 1992­98 ­0.15 ­0.2 Note: Sub-Saharan countries are labeled, including the years of the change in poverty. Regression line shown: y = ­1.15x ­ 0.01; R2 = 0.54 18 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S P U R R I N G A N D S U S T A I N I N G E C O N O M I C G R O W T H BOX 2.1 Growth is central to sustained poverty reduction (Continued) Sub-Saharan countries tend to have a low sensitivity of poverty to growth, and the contribution of changes in inequality to changes in poverty in the region is similar to that in the developing world as a whole. Together these findings suggest that poverty reduction in Sub-Saharan Africa has been disappointing primarily because of its slow growth and low sensitivity of poverty to growth (hold- ing constant the distribution of income). This low sensitivity can be traced to the region's low incomes and high inequality. (Sub-Saharan Africa and Latin America are the world's most unequal regions.) What are the implications for policy? At a basic level, growth remains crucial for reducing poverty in Africa--all the more so given that the region's low income levels imply a relatively low sensitivity of poverty to growth. Moreover, the dominance of growth as the driver of changes in poverty seems to be even clearer over longer periods, suggesting that growth is especially critical for sustained reduc- tions in poverty. Finally, evidence does not suggest that policy and institutional reforms aimed at pro- moting growth lead to higher inequality, which would temper the poverty impacts of growth. Recent case studies on the factors driving pro-poor growth in 14 developing countries confirm the importance of macroeconomic reforms, followed by substantially higher growth without any short-term increase in the Gini coefficient. During the first five years of economic reforms, annual per capita growth rose by 2.0 percentage points in Burkina Faso and 4.5 points in Uganda. During the same period the Gini coefficient fell from about 0.47 to 0.45 in Burkina Faso. Although lack of pre-reform data preempts a similar comparison for Uganda, a relatively low post-reform Gini coef- ficient of 0.36 does not raise serious concerns about rising inequality. Source: World Bank 2004; Dollar and Kraay 2002; Ghura, Leite, and Tsangarides 2002; Lopez 2004. growth--and its provision by itself does not may undertake substantial reforms and constitute a growth strategy. While certain observe disappointing growth payoffs for a forms of aid do appear to raise growth rates, while. With respect to growth accelerations, the effects can be relatively small and are sub- for example, occurrences are both fairly ject to diminishing returns. There is also no common and hard to explain--though both systematic evidence supporting the empirical policy and institutional improvements help relevance of poverty traps. extend these episodes. The policy agenda discussed in this chap- The priorities emphasized in this chapter ter is daunting in its breadth, complexity, are macroeconomic stability, and institutions and ambition. It would be useful to describe and policies that promote private sector the minimum set of reforms required to growth. For countries that have achieved spur growth, or the larger set sufficient to broad macroeconomic stability, better expen- sustain it. But neither is possible: the rela- diture management is critical to sustaining it tionship between growth and policies, aid, and creating fiscal space for investments shocks, the external environment, and other aimed at promoting growth and reducing factors is complex. The policy recommen- poverty, including those that complement pri- dations in this chapter reflect a wealth of vate activity. To invigorate the private sector cross-country, time series, and case study and encourage a wider range of profitable experiences. Yet growth often occurs in opportunities to be taken up, it is essential to countries where several of these mecha- remove excessive regulatory and institutional nisms are not in place. Similarly, countries constraints and improve weak infrastructure. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 19 C H A P T E R 2 To underpin these efforts, recent progress on interests intent on maintaining the status quo, political governance must begin to be trans- political commitment is key to initiating and lated more clearly into progress on economic sustaining reforms. governance. Better economic governance is The scale of the challenge in Sub-Saharan important for improving the private sector Africa means that domestic efforts will environment and increasing public sector require external support. Large increases in effectiveness. Transparency in its various aid will be needed, particularly to accelerate dimensions is a theme underlying many of the progress toward the nonincome MDGs (see interventions identified here. Trade liberal- chapter 3). Better access to the markets of ization is also a policy priority in many coun- developed countries is needed to promote and tries (see chapter 4). diversify exports (chapter 4), and external This discussion of priorities is inevitably debt levels must be sustainable to ease the broad because, in the end, the best path will burden on fiscal policy (chapter 5). be tailored to each country. While there are The first section of this chapter provides the many similarities, different countries face dif- context for the discussion of the growth agenda ferent problems to different degrees. Equally by reviewing medium-term projections for important, the relationship between different growth and poverty rates, analyzing Sub-Saha- aspects of reform will vary across countries. ran Africa's record of economic performance, Progress must occur on a number of fronts, and identifying conditions that have histori- and the key areas will differ by country. In cally accompanied the onset of, and tended to many cases, trade liberalization will create sustain, periods of growth acceleration. The possibilities for reform in other areas. In oth- subsequent sections focus on the three key ele- ers, improvements in the regulatory environ- ments of the growth agenda: the macroeco- ment will have an important impact. In still nomic environment, the private investment others, improving the regulatory environ- climate, and public sector governance. ment or even achieving macroeconomic sta- bility will depend on improving public sector Growth and Its governance. Countries must adapt the rec- Implications for Poverty ommendations in this chapter, in terms of form and sequence, to their own circum- The overall outlook for growth remains stances, in the context of country-owned promising over the next decade (figure 2.1).1 poverty reduction strategies. Still, the priori- Strong growth should continue in East Asia ties and progress indicators described here even as China's spectacular growth rates ease, should help in determining the direction of and in Europe and Central Asia as the benefits reforms and assessing progress. of EU accession continue for several countries In Sub-Saharan Africa, home to most low- in the region. Elsewhere, ongoing reforms income countries under stress (LICUS), the should ensure a better investment climate and road ahead is not easy, and there is a need for stable macroeconomic environment--particu- bold action. Within the agenda outlined larly in South Asia, where the average annual above, there is substantial room for enabling increase in per capita income is expected to virtuous circles. For example, as credible evi- exceed 4 percent over 2005­15.2 After various dence of a change in the macroeconomic pol- difficulties in recent years, including conta- icy regime takes hold, the uncertainty gion from Argentina's long crisis, per capita attached to fixed investments begins to growth in Latin America is expected to aver- decrease--and as more investors consider age nearly 2.5 percent a year. Although Sub- taking up profitable opportunities, the Saharan Africa's performance has improved demand for a better investment climate since the mid-1990s (see below), the region increases. Because there will remain vested continues to lag in terms of economic growth. 20 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S P U R R I N G A N D S U S T A I N I N G E C O N O M I C G R O W T H FIGURE 2.1 Growth prospects are promising, but wide regional disparities remain Real GDP per capita growth by region, 1991­2015 Percent per year 8 1991­2000 7 2001­04 2005­15 6 5 4 3 2 1 0 ­1 ­2 East Asia Europe & Latin Middle South Asia Sub- Low- Middle- & Pacific Central America & East & Saharan income income Asia Caribbean North Africa countries countries Africa Source: World Bank staff estimates. If these projections hold, the income Still, many individual countries are not on poverty MDG will be achieved globally. track to achieve the poverty goal, including Worldwide, the poverty headcount index will most countries in Sub-Saharan Africa. Even fall from 28 percent in 1990 to 10 percent in in regions with strong overall performance 2015, and the number of people living on less and prospects for achieving the poverty than $1 a day will fall from 1.22 billion to MDG, some countries need to substantially 622 million (table 2.1). These achievements accelerate progress, such as Cambodia and will largely reflect successes in China and Papua New Guinea in East Asia. In some India, which contained most of the world's large middle-income countries the national poor people in 1990 but where income poverty rate is low, but some subnational growth has since accelerated and remained regions continue to have large concentrations high. In Europe and Central Asia, where the of poverty, such as inland western provinces rate of poverty is relatively low, the increase in China, some southern states in Mexico, in poverty that accompanied the sharp drop and the northeast region of Brazil.3 in incomes in the early 1990s has been In Sub-Saharan Africa, reaching the poverty reversed, as it has in Latin America. goal will require a substantial acceleration in G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 21 C H A P T E R 2 TABLE 2.1 Over the next 10 years growth is expected to rise and poverty fall around the world (percent unless otherwise indicated) Population living on less than $1 a day Average annual growth Number of rate, 2005­15 Headcount index people (millions) Region Per capita GDP GDP 1990 2001 2015 1990 2001 2015 East Asia and Pacific 5.5 6.3 29.6 14.9 0.9 472 271 19 China 6.0 6.7 33.0 16.6 1.2 375 212 16 Europe and Central Asia 3.6 3.7 0.5 3.6 0.4 2 17 2 Latin America and the Caribbean 2.4 3.6 11.3 9.5 6.9 49 50 43 Middle East and North Africa 2.4 4.2 2.3 2.4 0.9 6 7 4 South Asia 4.2 5.6 41.3 31.3 12.8 462 431 216 Sub-Saharan Africa 1.7 3.6 44.6 46.4 38.4 227 313 340 Average/total 3.6 4.8 27.9 21.1 10.2 1,219 1,089 622 Excluding China 2.8 4.2 26.1 22.5 12.9 844 877 606 Source: World Bank staff estimates. income growth or a significant increase in the where similar initial disadvantages--includ- poverty elasticity of growth. While the recent ing a high incidence of conflict--and similar pickup in growth has improved prospects, the income levels have not prevented rapid economic stagnation of the early 1990s caused progress toward the MDGs. In South Asia an poverty rates--already the highest in the world improving investment climate and stronger in 1990--to increase even further by 2001 (fig- policies have sustained rapid economic ure 2.2). Household surveys, which are avail- growth since 1990 and made significant able for 28 countries (accounting for 78 inroads into reducing poverty. Important percent of the region's population and 87 per- developments in service delivery, such as pro- cent of its GDP), suggest that the weighted vision of basic services by nongovernmental average annual growth in per capita income organizations (NGOs) and the private sector, required to achieve the income poverty goal is have also contributed to the MDGs in some about 5 percent (table 2.2). Of these countries, South Asian countries. Still, sustaining and Cameroon, Ethiopia, Senegal, South Africa, accelerating economic growth, increasing the and Swaziland have a required per capita effectiveness of public spending, making ser- growth rate of less than 3 percent a year, leav- vices work for all people, and dealing with ing them well positioned to meet the poverty lagging regions and countries remain vast goal. Also close are Mauritania and Mozam- challenges in South Asia (box 2.2). bique, where the required per capita growth rate is less than 3.5 percent a year. But together Africa's Growth Record these seven countries contain less than a quar- ter of the population of Sub-Saharan Africa. Although Sub-Saharan Africa's performance Ensuring that Sub-Saharan Africa makes has recently improved, its overall economic significant progress toward the income record over recent decades presents a somber poverty goal will require substantial efforts picture.4 Since 1980 real per capita GDP from countries in the region and all their growth has been lower than in other develop- development partners. For a successful exam- ing regions, and growth rates have been more ple the region might look to South Asia, volatile (figure 2.3).5 Of the 45 Sub-Saharan 22 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S P U R R I N G A N D S U S T A I N I N G E C O N O M I C G R O W T H FIGURE 2.2 Most regions will reach the poverty MDG by 2015, but Sub-Saharan Africa is seriously off track East Asia & Pacific Europe & Central Asia Latin America & the Caribbean on 50 50 50 y vingli da 40 40 40 a 29.6 30 30 30 $1 people 20 14.8 20 20 of than 11.3 9.5 14.9 less 10 10 10 3.6 6.9 0.9 0.5 0.4 0 0 5.7 0.3 0 Number 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Middle East & North Africa South Asia Sub-Saharan Africa on 50 50 50 44.6 46.4 41.3 y 38.4 vingli da 40 40 40 31.3 a 30 30 30 $1 20.7 22.3 people 20 20 20 of than 10 10 10 less 12.8 2.3 2.4 1.2 0 0.9 0 0 Number 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Goal 1990 2001 2015 Actual and forecast Path to goal Source: World Bank staff estimates. TABLE 2.2 Many Sub-Saharan countries require rapid growth to achieve the income poverty MDG Share of Share of Required growth of Population, 2000 Sub-Saharan Sub-Saharan GDP, per capita GDP, 2005­15 Number of countries (millions) population (percent) 2000 (percent) < 2 percent 1 9.5 1 2 2 ­3 percent 4 124.5 19 52 3­4 percent 2 20.2 3 1 4­6 percent 4 44.4 7 5 > 6 percent 17 315.4 48 27 Total 28 514.0 78 87 Source: World Bank staff estimates. Note: For the 28 countries in this sample, the weighted average required growth in per capita GDP is 5.2 percent a year. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 23 C H A P T E R 2 BOX 2.2 South Asia shows that stronger growth and better service delivery are key to the MDGs With per capita income averaging $460 a year, the eight countries of South Asia--Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka--are home to nearly 40 per- cent of the world's people living on less than $1 a day. But since 1990 the region has achieved annual GDP growth of nearly 5.5 percent, helping to reduce poverty significantly. For example, India--the region's largest country, with a population of more than 1 billion people--has reduced its poverty rate by 7­10 percentage points since 1990. Most other countries in the region have registered sim- ilarly significant reductions. Two notable exceptions are Afghanistan, which is emerging from decades of conflict, and Pakistan, where poverty has stagnated at around one-third of the popula- tion. Improving the delivery of human development and key related services has also been instrumental in boosting MDG-related outcomes and prospects. Three places in South Asia stand out as having especially good MDG indicators for their income levels. Sri Lanka and the Indian state of Kerala have strong records of good performance (similar to those in high-income countries), reflecting the prior- ity that successive governments have long given to investing in human development. And Bangladesh has shown remarkable progress on many of the MDGs despite its low income, high poverty (second only to Afghanistan in the region), adverse initial conditions, high population density, contentious pol- itics, and vulnerability to natural disasters. Bangladesh's success has owed much to an effective scal- ing up of basic services based largely on partnerships between the public sector and NGOs and a resulting high degree of community involvement, local innovation, and experimentation. Although reducing poverty remains a huge challenge for South Asia, the income poverty MDG is within reach, as continued high economic growth will raise incomes, widen economic opportu- nities, and create jobs for poor people. But sustaining rapid growth will require further improve- ments throughout the region in the investment climate, basic infrastructure, and delivery of basic services within a framework of macroeconomic (especially fiscal) stability. A number of other MDGs are also within the region's reach if service access and delivery improve for poor people--as shown by the region's success stories. Yet despite substantial public spending, health, education, water, and sanitation services continue to fail poor people in some countries and states. In many cases this is due to the fragile accountability between users, providers, politicians, and policymakers caused by ineffective public institutions, poor focus on outcomes and incentives, political clientelism and patronage, and difficulty of monitoring and supervision. But with democ- racy firmly rooted across the region, the devolution of political power to lower levels of govern- ments is proceeding. While progress varies, decentralizing resources and responsibilities to local providers and communities holds prospects for better service delivery. Against this backdrop the universal primary education, gender equality, child mortality, and major disease MDGs appear within reach of most South Asian countries, with only Afghanistan, Pakistan, and poorer states in India remaining off track unless progress quickens substantially. Source: World Bank South Asia Vice Presidency. countries, only 5 consistently recorded real per ­10 percent. Consequently, Africa's real income capita growth rates above 2 percent a year: per capita has steadily declined relative to other Botswana, Cape Verde, Mauritius, Seychelles, regions, and is roughly the same as in the mid- and Swaziland.6 Moreover, economic disrup- 1970s (figure 2.4). tions have been widespread, with nearly three- At the same time, the region's income dis- quarters of the region's countries recording at tributions may have become more unequal. least one year of per capita growth lower than Empirical estimates indicate that inequality in 24 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S P U R R I N G A N D S U S T A I N I N G E C O N O M I C G R O W T H Africa has increased since 1970, with the FIGURE 2.3 Sub-Saharan Africa has lagged behind other regions income of the poorest people deteriorating but the income of the richest remaining sta- GDP per capita growth rate, ble. These findings have potentially impor- selected developing regions, 1980­2003 tant political and economic consequences: Percent With the elite buffered from poor economic 10 performance, they are less likely to introduce 8 the reforms needed to improve Africa's out- look.7 This problem is perhaps more evident 6 in countries where the elite have a more 4 autonomous source of income, such as oil 2 sector rents. Although factor accumulation rates have 0 been lower than in other regions, negligible ­2 improvements in productivity have been the ­4 primary source of Africa's slow growth. Since 1980­84 1985­89 1990­94 1995­99 2000­03 the 1960s the private investment rate has con- Sub-Saharan Africa East Asia & Pacific sistently been lower in Sub-Saharan Africa-- Latin America & Caribbean South Asia even when the comparison is restricted to low-income countries in other developing Source: World Bank staff estimates. regions (figure 2.5)--and in the 1990s a small number of major oil-producing countries received the bulk of the increase in such investment.8 Similarly, modest increases in FIGURE 2.4 And the gap in income levels is widening GDP per capita: Developing regions, 1975­2003 PPP, constant international US$ 7000 6000 5000 4000 3000 2000 1000 0 1975 1980 1985 1990 1995 2000 2003 Sub-Saharan Africa, low-income countries Other low-income countries Sub-Saharan Africa, middle-income countries Other middle-income countries Source: World Bank World Development Indicators database; and World Bank and IMF staff estimates. Note: In this figure, income classification groups follow the earliest available World Bank analytical classification (1987), in order to minimize the effects of selectivity bias. The conclusion on a widening gap is robust to the use of classifications for different years. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 25 C H A P T E R 2 FIGURE 2.5 Lower investment rates in Sub-Saharan Africa On the former, it has suffered, and continues have been a source of low growth to suffer, from a number of major disadvan- tages relative to other regions. It has a dis- Private investment in Sub-Saharan Africa and proportionately large number of landlocked low-income countries in other regions, 1960­2003 countries that, given weak regional infra- Percent of GDP structure, are unduly dependent on trade 19 with their immediate neighbors. Many coun- 17 tries are heavily dependent on low-value agri- culture and therefore vulnerable to climatic 15 fluctuations, including periodic droughts. Its 13 population endures high rates of malaria, HIV/AIDS, and other communicable dis- 11 eases.11 Since 1970 one-quarter of its coun- 9 tries have experienced civil conflict. And like other developing regions, Sub-Saharan Africa 7 1965­69 1970­74 1975­79 1980­84 1985­89 1990­94 1995­99 2000­03 has been handicapped by lack of access for its exports to markets of developed countries East Asia & Pacific Sub-Saharan Africa South Asia Latin America & Caribbean and vulnerability to natural disasters and terms-of-trade shocks. Still, there is a general view that drivers of Sources: IMF, World Economic Outlook; World Bank, World Development Indicators database; and IMF staff estimates. growth operate in much the same way in Africa as elsewhere.12 Critically, on the main dimensions of macroeconomic and structural education enrollments have implied a smaller policies as well as the effectiveness of institu- contribution from increased human capital tions, Sub-Saharan Africa tends to underper- than for most other developing regions.9 But form relative to other developing regions. The the key source for the region's weak economic World Bank's Country Policy and Institu- performance was that total factor productiv- tional Assessment (CPIA) ratings confirm ity growth was nonexistent between 1960 and that Sub-Saharan Africa achieves a lower 2002--unlike in other developing regions, average score than other developing regions where such efficiency improvements played an on each of the main categories assessed: eco- important role in supporting growth.10 nomic management, structural policies, social On a more positive note, since the mid- inclusion and equity policies, and public sec- 1990s economic growth has improved to lev- tor management and institutions. In addition, els last recorded in the region in the early macroeconomic instability--as measured, for 1970s. Since 1995 more than 15 Sub-Saharan example, by the standard deviation of con- countries have persistently recorded real per sumer price inflation or the parallel market capita growth rates above 2 percent a year, exchange rate--has tended to be higher in compared with only 5 in 1960­94. This Africa than most developing regions.13 Even improvement has benefited a range of coun- when the comparison is restricted to low- tries, including low- and middle-income income countries in other regions, the quality countries and even those that recently suf- of macroeconomic policies is still lower in fered conflict. On the whole, though, oil- Africa (table 2.3). based economies have enjoyed the best Empirical studies confirm that weak macro- performance, with real per capita growth of economic policies and governance have had a close to 4 percent a year since the mid-1990s. negative impact on growth in Sub-Saharan What explains Sub-Saharan Africa's poor Africa. These studies indicate that in recent economic record--and incipient recovery? decades growth could have been significantly 26 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S P U R R I N G A N D S U S T A I N I N G E C O N O M I C G R O W T H TABLE 2.3 Macroeconomic policies are weaker in Sub-Saharan Africa than in other low-income countries (percentage of countries) Governance and transparency Composition Consistency Public in monetary Fiscal of public Monetary of macro sector and financial Trade Region/rating policy spending policy policies governance institutions regime Sub-Saharan Africa Unsatisfactory 42 68 17 30 46 30 14 Good 22 3 72 46 14 52 73 Other low-income countries Unsatisfactory 19 57 7 14 26 7 5 Good 48 10 74 55 14 63 86 Source: IMF staff assessments. Note: Policies are assessed as unsatisfactory, satisfactory, or good. Percentages do not sum to 100 because the intermediate category --satisfactory--is not shown. raised by better fiscal policies (including lower allow significant increases in key public ser- government consumption and smaller fiscal vices (see chapter 5). Moreover, aid increases deficits), policies that promoted human capital complement improvements in policy, institu- formation and private investment, and tions, and the international environment. But stronger institutions. Estimates of the addi- the apparently limited growth impact of aid, tional growth that Africa would have enjoyed combined with its diminishing returns, with the adoption of policies, institutions, and implies that by itself aid does not constitute rates of factor accumulation similar to those in a growth strategy.15 other regions range from 2­8 percentage Experiences with oil windfalls in Sub- points a year.14 Saharan Africa in the late 1970s illustrate One explanation for which there is no sys- that increases in public investment driven by tematic empirical evidence is the view that foreign inflows are also unlikely, in them- poverty traps explain Sub-Saharan Africa's selves, to lead to sustained growth. Because of poor economic record. Proponents of such large increases in oil production and prices, explanations argue that low productivity and countries such as Congo enjoyed large wind- savings rates make it difficult for poor countries falls over nearly 10 years starting in the late to rise past a threshold income level. This logic 1970s. But the medium-run impact on living is plausible, given the persistence of poverty. In standards was negligible at best (box 2.4). general, however, neither macroeconomic nor This example is particularly relevant because microeconomic evidence tends to support the oil rents share many characteristics with and existence of such traps. Moreover, there is little have similar macroeconomic effects as for- evidence of the type of productivity and savings eign assistance flows. behavior needed at low income levels to gener- Since the 1960s Sub-Saharan Africa has ate poverty traps (box 2.3). also experienced widespread conflict and Empirical evidence also offers some words endured the associated heavy costs (figure 2.6). of caution on the commonly proposed solu- In the region's low-income countries the typi- tion for poverty traps--namely, large exter- cal civil war has lasted about seven years and nal resource transfers. Certainly, large caused GDP to decline (relative to the coun- increases in foreign assistance are needed in terfactual) by more than 2 percentage points many Sub-Saharan countries, including to for each year of conflict. It has typically taken G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 27 C H A P T E R 2 BOX 2.3 Do poverty traps account for Africa's underdevelopment? A popular and plausible explanation for Africa's persistent underdevelopment is that much of the continent is caught in a trap: Poverty leads to low savings, low investment productivity, poor health, and other features that cause poverty to persist (Sachs and others 2004; Collier 2004). But there is little empirical work testing for poverty traps, and much of what exists tends not to sup- port the hypothesis. The persistence of poverty across countries is consistent with the hypothesis. A number of papers have documented that over the past 50 years the cross-country distribution of per capita incomes has become bimodal, with a group of countries clustered around quite a low income level. (See Azariadis and Stachurski 2004 for links between models of poverty traps and this kind of empiri- cal evidence; Quah 1993a, 1993b, 1996, and 1997 for the evidence; and Kremer, Onatski, and Stock 2001 for a critique. Bloom, Canning, and Sevilla 2003 also provide closely related cross-country evidence.) Other evidence comes from looking at the dynamics of individual incomes. Many mod- els of poverty traps suggest that individuals receiving large income shocks may take a long time to recover--and if their incomes fall below a certain threshold, they may never recover. But Lokshin and Ravallion (2004) carefully examine household data from Hungary and Russia, and conclude that there is no evidence of the kind of "threshold effects" associated with models of poverty traps. Reduced-form evidence such as this can demonstrate the persistence of poverty but not the nature of the underlying mechanism that may be creating a trap. Without such information it is dif- ficult to distinguish a poverty trap from persistence in the determinants of poverty, or to formulate an appropriate policy response. Several recent studies have looked for evidence of particular mech- anisms generating poverty traps. One such mechanism involves financial market imperfections. If the upfront cost of starting a small business is large, and poor individuals cannot borrow to finance this investment, they will be unable to reap the benefits of self-employment. McKenzie and Woodruff (2004), using data on microenterprises in Mexico, show that the costs of starting such a business are surprisingly small--averaging just two weeks' income for a typical low-wage Mexican worker. This finding casts doubt on the idea that fixed costs, combined with financial frictions, are responsible for poverty traps. Another possible mechanism is that productivity is low at low levels of development. This may be because it is difficult to reach minimum efficient scales of production, or because complemen- tary investments in public goods (such as infrastructure) are inadequate in poor countries. Once these thresholds are crossed, it is possible that productivity will increase sharply, allowing countries about 14 years after the end of a conflict for a Sub-Saharan Africa's recent recovery has country to recover to its prewar growth path. been supported by improvements in key In addition, substantial spillover costs under- macroeconomic indicators, particularly in the mine economic performance in neighboring fastest-growing economies, and some strength- countries. In the typical low-income African ening of political institutions. Across the conti- country, with a purchasing power parity value nent, macroeconomic indicators have improved of GDP of around $20 billion, the present since the mid-1990s: price inflation is at near- value of the cost of conflict is about $50 bil- historic lows, distortions in exchange rates lion. Most costs arise in the form of externali- have been mostly eliminated, fiscal deficits are ties, accruing either to people in the future or lower, and export volumes have increased. to neighbors.16 Crucially, the risk of conflict School enrollments are also increasing, along tends to be strongly affected by low economic with budget allocations to both education and performance (box 2.5). health. The percentage of countries holding 28 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S P U R R I N G A N D S U S T A I N I N G E C O N O M I C G R O W T H BOX 2.3 Do poverty traps account for Africa's underdevelopment? (continued) to reach much higher income levels. Kraay and Raddatz (2005) embed this mechanism in a stan- dard growth model and show that for this mechanism to generate a poverty trap, productivity must increase (implausibly) sharply with the level of development. In particular, the authors show that if this mechanism is at work, one should expect to see increasing returns to scale much larger than are ever seen in the extensive empirical literature on estimating production functions. Somewhat more directly, McKenzie and Woodruff (2004) find in their Mexican data that returns to investment are very high even for microenterprises. Poverty traps might also arise because of low savings rates in poor countries. If many households live at the margins of subsistence, they will be unable to save much. In addition, public saving might be low in poor countries because governments have difficulty with tax collection. Low savings rates may translate into such low investment rates that countries are unable to accumulate significant stocks of productive assets per capita. And if savings rates only begin to increase at much higher levels of development, countries that start out poor may be stuck in a poverty trap. Kraay and Raddatz (2005) confirm that savings rates tend to increase with income--but not in a way that would explain the existence of poverty traps for most African countries. The authors also calibrate a growth model with subsistence consumption and find that the impact on saving and growth is substantial only for countries that start out close to subsistence levels. But the observed dispersion in per capita incomes, which is significant even in a poor region such as Sub-Saharan Africa, implies that the role of subsistence consumption can explain low saving and growth in only a few of the region's poorest countries. There are also potential poverty traps based on self-reinforcing dynamics in the area of gover- nance. For example, there is evidence that civil wars are both a consequence and a cause of low income, creating the possibility of a conflict trap (Collier and others 2003). There are also reasons to believe that high corruption creates self-perpetuating expectations of future corruption. The role of such mechanisms in generating stable poverty traps in growth models has not been fully studied. But in these cases, large increases in foreign aid might actually be counterproductive, increasing incentives and opportunities for corruption and conflict. Tackling these underlying dysfunctions directly must be done in parallel with any large increases in aid (Collier 2004). Source: Kraay and Raddatz (2005). competitive elections has increased, and the Growth Accelerations incidence of conflict appears to be declining. Policy improvements since the mid-1990s To achieve the MDGs, the central challenge have been particularly striking among the facing Africa is generating at least 10 years of fastest-growing Sub-Saharan countries. Rela- sharply accelerated growth. Such growth tive to slower growers, these countries have a accelerations, while not uncommon, have much lower average inflation rate, smaller fis- proven somewhat more elusive in Sub-Saharan cal deficits (despite similar spending levels), Africa (table 2.4).17 Between 1960 and 2003, and significantly higher trade openness (mea- across developing countries as a whole, the sured by the share of exports and imports in probability of a growth acceleration starting in GDP). Moreover, growth in productivity was a country in any year averaged 3.3 percent, a robust 2.4 percent for the fastest growers, while 37 percent of observed country years compared with close to zero for the others. occurred during an acceleration episode. But in G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 29 C H A P T E R 2 BOX 2.4 A gush of oil rents and surge in public investment do not ensure sustained growth In the 1970s the Republic of Congo began to benefit from a large rise in oil rents as international oil prices surged and national oil production increased. In 1979­86 oil prices averaged more than $30 a barrel (up from $14 in 1978 and $2 in 1970), and by 1986 national production reached 120,000 barrels a day (up from 65,000 in 1980). Suddenly the Congo was much richer and the state treasury--as the main local beneficiary of the enclave oil sector--experienced a surge in revenues. The ensuring increase in government spending helped to generate a temporary growth acceleration (see figure below, and Hausmann and others 2004). The failure to sustain the growth spurt of the early 1980s was apparently not due to appropria- tion of the rents for consumption. The Congo significantly boosted public investment--indeed, between 1980 and 1986 (again taking 1979 as the base year) the increase in public capital spending was equivalent to 93 percent of the additional government oil revenues. The impact on social indi- cators was positive, including a surge in electricity consumption and school enrollments. Ultimately, however, weak policies and institutions (including a highly overvalued real exchange rate and low governance ratings) did not sustain the growth spurt. Real per capita income, which had risen to almost $1,000 in the mid-1980s, fell to less than $900 by 2000 (measured in purchasing power par- ity terms and constant dollars), and the improvements in social indicators proved temporary. Signif- icantly, aid flows increased throughout the oil boom until reaching a peak, at just over $70 per capita, in the mid-1990s. Republic of Congo: Oil rents, 1975­2003 Percent (5-year moving averages) US$ 25 40 Public investment (percent of GDP, left axis) 35 30 15 25 Oil price (US$ per barrel, right axis) 20 15 5 10 0 Real non-oil GDP growth 5 (annual percent change, left axis) ­5 0 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Source: IMF (2004). Note: The use of five-year moving averages is intended to capture the effects of faster financial than physical execution and of the usual lags in bringing projects fully online. 30 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S P U R R I N G A N D S U S T A I N I N G E C O N O M I C G R O W T H FIGURE 2.6 Sub-Saharan Africa has suffered from many conflicts Incidence of war, 1960­2002 Number of wars 14 12 10 8 6 4 2 0 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 Sub-Saharan Africa All other regions Source: World Bank Staff estimates. BOX 2.5 Political commitment is central to breaking the conflict cycle Conflict tends to have multiple causes. Typically, an incipient rebel group gets a charismatic leader, the government mishandles counter-insurgency, and a neighboring government sees an opportunity for mischief. But susceptibility to such events is strongly affected by economic circumstances-- namely, low income, low growth, dependence on natural resource exports, and vulnerability to adverse shocks. A legacy of previous conflict also increases the probability of conflict, possibly because the only organizations that flourish are those that profit from violence. The role of aid and economic policy is limited to their impact on the growth rate. If Côte d'Ivoire conforms to the global pattern, its prospects are for prolonged and intermittent violent conflict. Postconflict experience is highly diverse. Some economies recover rapidly, while others continue to decline. Recent analysis finds that choices of policy, institutions, and governance are radically more important for growth during the postconflict decade than at other times: The same improve- ment (as measured by country policy and institutional assessments) generates much more growth during the postconflict decade. Aid also appears effective in raising growth during the postconflict decade. But the peak effect of aid occurs in the middle of the decade. In the first few years, although needs are great, capacity to absorb project aid is probably rather limited. Hence an early priority is to rebuild the institutions that manage the spending process. Because the risk of repeat conflict is high, policy needs to be directed to managing it. Postcon- flict governments typically maintain high military spending--almost at conflict levels--resulting in very small peace dividends. This can be a major policy error because high military spending in post- conflict situations can increase the risk of further conflict. Two good models are Mozambique, where the government radically cut military spending, and Sierra Leone, where peace has been guar- anteed not by domestic military spending but by robust external peacekeeping. In addition, strong political commitment to economic development and social inclusion is fundamental. Sources: Collier and Hoeffler 2002b, 2004; Miguel, Satyanath, and Sergenti 2004. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 31 C H A P T E R 2 TABLE 2.4 Growth accelerations have been much less common in Sub-Saharan Africa (percent) Probability of growth Proportion of country years episode starting occurring in a growth episode Sub-Saharan Europe and Sub-Saharan Europe and Period Africa Central Asia Other Africa Central Asia Other 1960s 5.5 6.7 8.1 18.8 42.1 42.6 1970s 1.8 0.0 2.7 25.7 14.3 50.2 1980s 0.9 2.7 2.5 11.8 13.4 30.5 1990s 3.3 8.2 3.2 20.2 30.2 32.2 2000­03 ... ... ... 28.4 60.2 9.7 All periods 2.4 2.5 3.3 20.0 32.5 36.7 Sources: Penn World Tables database; IMF, World Economic Outlook; and IMF staff calculations. Sub-Saharan Africa the annual probability of about 5 percent in Sub-Saharan Africa (fig- such an episode starting was just 2.4 percent, ure 2.7). and only 20 percent of country years occurred The experience on the duration of growth during such an episode.18 accelerations raises a note of caution about Not only has it been more difficult to initi- episodes under way in Sub-Saharan Africa. ate sustained growth in Sub-Saharan Africa, Historically, 75 percent (44 percent) of but safeguarding those advances has also been episodes in low-income (middle-income) Sub- more problematic. Growth acceleration Saharan countries end before their 10th episodes in Sub-Saharan Africa have been more anniversary. At the end of 2003 the average likely to be followed by a period of negative per length of the episodes under way was 8.5 capita growth: of the 23 accelerations that years for low-income countries and close to ended before 1998, only 7 were followed by a 20 years for middle-income countries. period of positive growth.19 This observation is Initial analyses of the determinants of in sharp contrast to the post-acceleration expe- growth accelerations have found that these rience in other regions--such as Latin Ameri- episodes are not easily amenable to explana- can and the Caribbean, where 20 of 33 tion or prediction.20 Still, it is possible to acceleration periods were followed by positive identify some policy and institutional mea- per capita growth. sures that are significant correlates with their On a more positive note, in the midst of inception (box 2.6). The analyses suggest that the general slump of the 1990s, when the lower inflation, higher fiscal expenditures on average per capita growth rate was negative investment (within a given spending enve- for the region as a whole, some successes lope), higher private investment, and better began to emerge in Sub-Saharan Africa. Over governance are associated with the beginning the past decade or so Africa saw a faster of growth accelerations, particularly those increase in the frequency of growth episodes, that last longer. and in the proportion of country years spent in such episodes, than did other regions (with Macroeconomic Policy: Stability, the exception of Europe and Central Asia). Sustainability, and Space Average growth performance during these recent African episodes was similar to that of Recent progress toward macroeconomic sta- other regions. In terms of episodes ending in bility across Sub-Saharan Africa has begun to the 1990s or ongoing at the end of 2003, the remove obstacles to vigorous economic average annual per capita growth rate was growth, and growth has picked up in some 32 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S P U R R I N G A N D S U S T A I N I N G E C O N O M I C G R O W T H countries. On the whole, however, the region FIGURE 2.7 Annual growth rates during accelerations are continues to suffer from low growth. Key improving in Sub-Saharan Africa macroeconomic issues include the sustain- ability of the fiscal stance and the availability Acceleration episodes, in developing regions, 1960­2003 of fiscal space for additional investments in (average per-capita growth rates by ending date) such crucial areas as physical infrastructure Percent and human capital. 5.5 Underlying this discussion is the notion that a stable policy framework is a crucial determi- 5.0 nant of an enabling macroeconomic environ- ment. Moreover, the relationship between the 4.5 policy framework, macroeconomic stability, and economic growth is intermediated by the 4.0 institutional setting.21 Ultimately, higher growth is the result of profitable investment 3.5 opportunities, whose feasibility depends not just on macroeconomic predictability but also 3.0 1960s 1970s 1980s 1990s & later on the state of the microeconomy and the Sub-Saharan Africa Other (enabling) role of institutions. Macroeconomic stability is thus a necessary but insufficient condition for sustained growth. Source: IMF staff calculations. Over the medium term it is crucial that fis- cal policy be perceived as sustainable. The fis- cal stance is sustainable when it is unlikely prices) tends to be closely linked to govern- that wrenching policy adjustments will be ment financing requirements.23 required to maintain stability and avoid cri- Additionally, the effect of government sis. Such a policy configuration increases the spending on growth depends on the macro- predictability of the macroeconomic environ- economic context and the composition of ment and ensures the long-term viability of a expenditures. If macroeconomic stability is noninflationary growth path. Policy stability lacking, even productive government spend- contributes to macroeconomic stability by ing can, on net, have an adverse effect on removing the effects of destabilizing policies growth, due to negative macroeconomic con- and enabling a stabilizing response to exoge- sequences. On the other hand, a structure of nous shocks. spending that is financed in a sustainable In low-income countries fiscal sustainabil- manner and that favors growth-sensitive sec- ity has two crucial dimensions: reliance on tors can be expected to increase factor pro- external concessional financing; and the need ductivity and crowd in private investment, to limit recourse to domestic financing. The including by reducing private sector costs. high degree of concessionality of external Targeting fiscal sustainability while paying finance implies that, as long as the productiv- attention to the structure and quality of fiscal ity of public investment is reasonable and the spending is fully consistent with the goal of country does not experience large adverse promoting productive public investment. For shocks, further external finance should not Sub-Saharan Africa, further progress toward threaten sustainability.22 With underdevel- fiscal sustainability will be necessary to secure oped financial sectors, most governments in recent gains, and the current structure of Sub-Saharan Africa do not have the option of spending could be made more commensurate raising substantial sums from domestic capi- with the growth imperative. Institutionalizing tal markets, and the growth of domestic improvements in macroeconomic policy may credit (and therefore money supply and be a quick way to change perceptions. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 33 C H A P T E R 2 BOX 2.6 Better macroeconomic policies and stronger institutions are associated with longer growth accelerations While statistical models of growth accelerations have modest explanatory power, there is some evi- dence that improvements in key policies and institutions tend to accompany the onset of such accel- erations--particularly in the case of longer episodes. Comparing the behavior of key policy and institutional variables at the onset of growth accelerations with the preceding five-year period indi- cates that rapid increases in growth tend to be accompanied by a lower level of inflation, a less dis- torted exchange rate, and an improved perception of law and order. On the other hand, there is no evidence of major changes in investment, exports, terms of trade, foreign aid, or savings. Over the lifetime of growth accelerations, there is improvement in a broader set of indicators. While this result would generally be expected for macroeconomic variables, including private invest- ment and the fiscal balance, it is perhaps surprising in the case of institutions, which are generally thought to be relatively stable. During a typical 10­12 year acceleration, indicators of political regime, bureaucratic quality, and law and order improve by a statistically significant amount, rais- ing the possibility of a virtuous circle whereby higher growth facilitates institutional reform. Just as critical as spurring growth accelerations is sustaining them. The improvements observed during accelerations are consistent with the idea that ongoing reforms are necessary to sustain such accelerations, but it is also possible that faster growth enables policy improvements. Comparing the degree of upfront improvements in indicators across longer episodes (those lasting at least nine years) and shorter episodes (those lasting less than eight years) sheds some light on what tends to make accelerations durable. Upfront improvements in macroeconomic indicators are more generalized for longer than shorter episodes (see table). First, the improvements in inflation and the exchange rate that tend to accompany the onset of accelerations are stronger for longer accelerations. Second, longer episodes tend to be more private sector­led, with lower government consumption and higher private investment. Third, there is an Changes in values of key indicators at the onset of long relative to short acceleration upfront improvement in the perception of episodes (percent except where noted) corruption in episodes that turn out to be longer. These results are generally robust Inflation rate ­10.6 Government consumption/GDP ­4.1 across different groups of countries, includ- Noninterest spending/GDP ­4.2 ing Sub-Saharan and low-income countries, Black market premium ­39.2 and similar conclusions emerge when the Law and order (index) 0.1 assessment is made three years into episodes Corruption (index) 0.6 of growth accelerations. Private investment/GDP 2.5 These results offer hope that recent improvements in these indicators in a number of Sub-Saharan countries may mean that Note: Numbers in bold indicate statistical significance at the 10 percent ongoing African accelerations will prove level. Corruption and law and order are measured on a scale of 1­6, where a higher score indicates less corruption and stronger law and order. more sustained than in the past. Source: IMF staff. Note: For purposes of this analysis, a growth acceleration is deemed to last at least five years (the average duration exceeds eight years) and to be defined by an increase in annual average per capita GDP growth of at least 2 percent (accelerating growth) and annual average per capita growth of at least 3.5 percent (rapid growth). Accelerations are deemed to end when annual per capita GDP growth dips below an average of 2 percent for the subsequent five-year period, or below 3 percent in the year immediately following the period of acceleration. This is an extension of the definition proposed by Hausmann, Pritchett, and Rodrik (2004). 34 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S P U R R I N G A N D S U S T A I N I N G E C O N O M I C G R O W T H Recent Developments in Macroeconomic have reasonably low inflation. During Policy and Stability 2000­3 the median rate of inflation was 5 Across low-income countries as a whole, percent, and only a half-dozen countries macroeconomic policies have improved over (Angola, Eritrea, Liberia, Nigeria, Zambia, the past decade. Inflation has slowed appre- Zimbabwe) recorded annual price increases ciably, and other indicators--such as fiscal persistently above 10 percent. But progress and current account deficits--have also on the fiscal front has been less consistent.26 improved, though more modestly (table 2.5). Although domestic financing in Sub-Saharan Similar patterns have emerged in Sub-Saha- Africa averaged close to 1 percent of GDP ran Africa. On this basis, to what extent can during 2001­3, about one-third of countries stabilization in Sub-Saharan Africa, as the in the region exceeded this level. Of those, 12 region most in need of a growth payoff, be recorded domestic financing ratios persis- considered a success? tently higher than 3 percent of GDP. In these Macroeconomic stability depends heavily countries further progress on fiscal consoli- on control of inflation and sound fiscal per- dation would appear particularly prudent in formance, although some definitions of sta- order to safeguard the recent improvements bility also include criteria on growth rates (as on the inflation front.27 an additional measure of internal macroeco- This general assessment disguises consid- nomic balance) and international reserve lev- erable variation across the region. As a els (as a measure of robustness to external group, middle-income Sub-Saharan coun- shocks).24 The rationale for the inclusion of a tries have registered substantial progress on fiscal criterion derives from the close link macroeconomic stability since the early between the fiscal stance and inflation, par- 1990s.28 These countries have averaged ticularly in an environment where fiscal pol- annual per capita growth rates of nearly 4.5 icy holds sway over monetary policy or where percent, and their fiscal positions appear the scope for noninflationary domestic sound. At the end of 2003 their recourse to financing is limited. domestic budget financing stood at close to 1 Given Sub-Saharan Africa's heavy reliance percent of GDP, while their stock of interna- on concessional external financing, it seems tional reserves reached five months of appropriate to assess the fiscal contribution imports--levels that would allow flexibility to stabilization by monitoring domestic in the event of unanticipated fiscal chal- financing of the budget deficit, instead of the lenges. deficit itself. Not only does external financing For low-income Sub-Saharan countries, have less of an impact on inflation than does tangible progress toward stabilization started domestic financing, but most of this borrow- to materialize only in the second half of the ing tends to come with a sizable grant ele- 1990s. But by 2000­3 the picture had bright- ment, further diluting the applicability of the ened considerably. Within this group, natural fiscal balance measure. In this context a forth- resource­dependent economies have benefited coming International Monetary Fund (IMF) most from recent movements in international study, in defining successful stabilization prices. As a result their fiscal position has efforts in developing countries, measures fis- strengthened, with the primary budget in bal- cal sustainability in terms of limited recourse ance, supplemented by external grants of to domestic financing, proxied by a target of almost 4 percent of GDP. Of potential con- less than 1 percent of GDP.25 cern, however, these countries remain exposed With the recent progress toward price sta- to international price corrections--and bility, most countries in Sub-Saharan Africa domestically, recent appreciations in real G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 35 C H A P T E R 2 TABLE 2.5 Macroeconomic indicators have generally improved in low-income countries (annual average except where indicated) Indicator/region 1984­8 1989­93 1994­8 1999­03 2004 2005­9 (estimate) (projected) Inflation (percent, median) a East Asia and the Pacific 7.1 9.5 8.7 6.1 5.8 3.6 Europe and Central Asia 1.2 417.7 233.8 10.2 5.6 4.2 Latin America and the Caribbean 4.4 12.6 6.7 3.3 3.9 3.1 Middle East and North Africa 14.2 23.1 21.0 6.3 8.6 7.1 South Asia 7.7 10.5 8.4 3.7 4.6 4.1 Sub-Saharan Africa 9.9 10.6 12.7 5.6 6.5 3.6 All low-income countries 6.8 10.8 11.9 4.7 5.0 3.8 Current account balance (percentage of GDP) b East Asia and the Pacific ­1.9 ­4.4 ­1.5 ­1.3 ­1.1 ­3.1 Europe and Central Asia ­1.0 ­6.4 ­11.7 ­7.1 ­7.7 ­2.5 Latin America and the Caribbean ­10.8 ­14.3 ­14.1 ­12.1 ­11.7 ­11.3 Middle East and North Africa ­6.5 ­5.4 ­1.4 0.3 ­3.6 ­9.8 South Asia ­7.2 ­5.7 ­2.4 ­1.3 ­2.0 ­2.3 Sub-Saharan Africa ­7.2 ­8.5 ­9.1 ­8.8 ­7.7 ­6.8 All low-income countries ­6.1 ­8.0 ­8.0 ­6.9 ­6.5 ­5.9 External debt (percentage of GDP) East Asia and the Pacific 63.1 69.4 58.5 60.1 56.5 52.3 Europe and Central Asia 0.0 14.2 49.8 63.8 49.8 43.6 Latin America and the Caribbean 105.8 178.2 92.5 68.0 60.6 58.8 Middle East and North Africa 53.4 57.1 68.6 59.9 53.3 48.4 South Asia 45.5 50.8 45.1 45.6 46.0 40.1 Sub-Saharan Africa 85.9 108.1 136.7 120.5 97.4 84.0 All low-income countries 70.6 93.5 99.2 89.6 75.1 66.2 Fiscal balance (percentage of GDP) b East Asia and the Pacific ­8.9 ­5.7 ­4.0 ­5.0 ­3.8 ­3.5 Europe and Central Asia ­1.2 ­11.1 ­7.7 ­3.6 ­2.0 ­0.2 Latin America and the Caribbean ­7.7 ­5.1 ­2.4 ­5.0 ­3.9 ­2.8 Middle East and North Africa ­16.7 ­11.2 ­6.0 ­0.5 ­1.8 ­8.2 South Asia ­5.5 ­5.0 ­4.8 ­5.9 ­4.9 ­4.7 Sub-Saharan Africa ­6.2 ­6.9 ­5.5 ­5.4 ­3.2 ­1.3 All low-income countries ­6.5 ­6.9 ­5.1 ­5.0 ­3.3 ­2.2 Memorandum item: real per capita GDP growth (percent) All low-income countries 1.3 ­1.3 1.5 1.5 2.8 3.3 Source: IMF, World Economic Outlook database. Note: Averages are calculated as unweighted means of country values. a. Calculated from annual medians, then averaged over five-year periods. b. Includes grants. exchange rates may weaken the competitive imposed on public policy by the nature of oil position of nonresource sectors, on which operations (box 2.7). most people depend. In addition, fiscal policy For most of these countries the challenge is in these countries has tended to be procyclical, to strengthen the fiscal outlook (and stabilize partly a reflection of some unique challenges prices) not just for an interim phase, but for a 36 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 BOX 2.7 Challenges for fiscal policy in oil-producing Sub-Saharan countries Like oil-producing countries elsewhere, those in Sub-Saharan Africa face some sharp challenges. At a technical level, the main challenges stem from the high volatility and unpredictability of oil prices and the nonrenewable nature of oil reserves. At an institutional level, the nature of oil operations raises the social benefit of good governance. Uncertainty about oil prices translates into uncertainty about fiscal revenues. As a result the fiscal balance tends to be volatile and unrelated to developments in domestic demand. One of the main con- cerns of policymakers should be insulating the local economy from this volatility. In this context two standard policy prescriptions are that fiscal policy should be guided by the non-oil primary balance, as a fiscal target, and by caution, as a motive for building up financial reserves. Contrary to these pre- scriptions, oil economies in Sub-Saharan Africa have tended to carry out fiscal polices that are pro- cyclical relative to oil price movements, leading to variability in the real exchange rate, which tends to be damaging to the non-oil sector and capital formation, and to increased fiscal costs, including through a negative impact on spending levels and quality induced by boom-bust cycles. It is also desir- able for such countries to build up financial reserves against unanticipated falls in revenue, but such prudence in fiscal policies has not always emerged. One example of good practice is Botswana, which in 2001­2 absorbed a confluence of shocks by relying on income from accumulated financial assets. The second challenge stems from the nonrenewable nature of oil revenues and the attendant rise in the importance of long-run fiscal sustainability, mainly due to concerns for intergenerational equity. In countries with significant short-term development needs and insufficient physical and human capital, intergenerational equity could conceivably be secured through sufficient accumula- tion of financial and nonfinancial assets. In this context it is essential that projects be compatible with broader development strategies and projected returns secured by strong oversight. But as dis- cussed in the case of the Congo (see box 2.4), returns have not always matched expectations. At an institutional level, strong governance is of primary importance in the context of an enclave oil sector, which benefits a country mainly through its tax payments, and the nature of oil revenues, which tend to be both high and easily appropriated. With the government being the channel of most of the possible benefits of an enclave oil sector, judicious use of government revenues is even more critical than usual. Otherwise the rest of the economy only sees its competitiveness eroded (the Dutch disease effect). In an environment with weak oversight institutions, the size of oil revenues may mean that the public sector is asked to manage more resources than it can prudently administer and that the gov- erning elite acquires substantial financial independence. Oil-producing Sub-Saharan countries tend to underperform on key dimensions of economic governance. Yet given the extreme need to ensure judicious administration of public resources, these are precisely the countries where good gover- nance has the highest social benefit. With their income derived mostly from the oil sector, including possibly in illicit ways, the governing elite are less motivated to strengthen oversight institutions, and the overall investment climate suffers. The nature of oil contracts tends to further obfuscate public sector management and hamper rev- enue transparency. The typical results are fiscal policies that are beholden not to the population, but to entrenched elites. Under the typical oil contract in Sub-Saharan Africa, the bulk of the fiscal regime is subject to confidentiality clauses and unknown to the public. In such circumstances the system draws resources, including human capital, into activities geared to appropriating rents rather than encouraging more directly productive activities. Elites tend to favor excessive and imprudent investments--especially large projects, which are particularly prone to graft, and other inefficient means of rent distribution, such as sustained protection for favored firms. In light of the resulting difficulties of implementing prudent fiscal policy and promoting sound economic governance in oil-producing countries, the creation of oil savings funds is often proposed as a solution. It is crucial to integrate such funds into the overall design of fiscal policy and the bud- get process. They have tended to work well in environments with strong institutions, such as Canada (Alberta), Norway, and the United States (Alaska). But savings funds have tended not to work where underlying institutions were weak and political commitment was lacking, as with Mexico's oil sta- bilization fund and the Venezuelan Investment Fund. Source: IMF staff. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 37 C H A P T E R 2 sustained period and in a credible manner. For · Judicial systems that control tax evasion. a significant impact on growth, "gains in · Spending constraints that mitigate tenden- macroeconomic stability need to be viewed by cies toward inefficient and procyclical the private sector as indicative of a permanent spending policies. change in the macroeconomic policy regime."29 The structure of public spending in some Sub-Saharan countries could be made more Fiscal Institutions: Key to commensurate with the growth imperative. Fiscal Sustainability and Fiscal adjustment and sustainability should be Macroeconomic Predictability viewed not just in terms of quantity but also At a fundamental level, strong fiscal institu- quality. To the extent that basic investments in tions enhance fiscal discipline and provide physical and human capital raise growth, it is clear evidence on the direction of policy. A crucial to orient public spending toward pro- growing literature has indicated that institu- ductive projects in these areas. tional weaknesses, such as budget institutions Recent increases in social sector allocations that allow narrow interests to prevail, play an in low-income countries implementing poverty important role in influencing fiscal outcomes. reduction strategies (PRSs) have begun to make Some developing countries lack institutions a difference, but there is scope for further that can promote sound fiscal policies, such as: improvement. In 2000­3 increases in the spending envelope (noninterest spending as a · Transparency, including wide dissemina- percentage of GDP) have not resulted in addi- tion of key economic data and controls on tional allocations to public investment. More- public enterprise budgets. over, given the consensus on the need to rapidly raise the level of human capital across the region, further progress on raising the share of noninterest spending allocated to education FIGURE 2.8 There is scope for allocating more to priority sectors and health would appear necessary. This is par- such as health ticularly the case for health spending, for which Sub-Saharan Africa falls at the bottom among Public expenditures in low-income countries, 1970­2003 developing regions (figure 2.8).30 Percent of GDP Looking ahead, it will be essential that 45 Total non-interest expenditures Sub-Saharan countries underpin attempts to 40 strengthen their fiscal outlook with enhanced 35 transparency and stronger fiscal institutions. Budget transparency has been associated with 30 enhanced fiscal discipline, particularly in the 25 aftermath of the East Asian crisis of the late 20 1990s, and enhanced government account- 15 ability. The more transparent government operations are, the easier it is to identify fis- 10 Expenditures on health cal policy weaknesses and address them. Fis- 5 cal transparency improves the business 0 environment because investors (domestic and 1970­79 1980­84 1985­89 1990­84 1995­99 2000­03 foreign) gain more confidence in government East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa policies, and transparency can improve sov- South Asia Sub-Saharan Africa ereign credit rating--a tangible benefit for cash-strapped governments. Consequently, the IMF published the Fiscal Transparency Sources: IMF, World Economic Outlook database and World Bank, World Development Indicators database. Code in 1999 and the Manual on Fiscal 38 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S P U R R I N G A N D S U S T A I N I N G E C O N O M I C G R O W T H Transparency in 2001, and a draft Guide on while recording some progress and examples Resource Revenue Transparency is available of good practice, highlight the general need for public comments and will be published in for better budget formulation and reporting, the near future. The earlier publications serve and broader data coverage (box 2.8). as a framework for the fiscal Report on the One Sub-Saharan country that has recently Observance of Standards and Codes (ROSC), made significant strides toward fiscal trans- a voluntary diagnostic tool that assesses the parency is the Republic of Congo, where the availability and quality of fiscal data. In Sub- publication of fiscal data, audit reports on oil Saharan Africa 11 countries have agreed to activities, and reports on external verification publish fiscal ROSCs, and the assessments, of government revenues, oil contracts, and data BOX 2.8 Fiscal transparency has improved in Africa, but much remains to be done Country-specific fiscal transparency assessments--called fiscal Reports on the Observance of Stan- dards and Codes, or fiscal ROSCs--have been published on the IMF's Web site for more than 70 countries, including a number of countries in Sub-Saharan Africa (Benin, Burkina Faso, Cameroon, Ghana, Malawi, Mali, Mauritania, Mozambique, Rwanda, Tanzania, Uganda). Reports are being prepared for several other Sub-Saharan countries. The assessments record some progress in improving fiscal transparency in a number of areas, including the quality of budget formulation and investment in fiscal reporting systems. South Africa, while it has not published a fiscal ROSC, provides examples of good transparency practices, includ- ing clear policy statements and publication of a "budget in brief"--a summary of the government budget written for the layman. But fiscal ROSCs have also found that much still remains to be done in Africa. For example, in many Sub-Saharan countries central government budget data remain weak and unreliable, and there is insufficient reporting on local government fiscal operations. Fis- cal risks related to off-budget activities (such as quasi-fiscal activities related to state-owned enter- prises or banks, contingent liabilities, tax expenditures) are often not transparent. External audit is generally weak, impairing the ability of parliaments and the general public to monitor government operations and hold the executive branch accountable for its actions. There appears to be a strong need to maintain continuing assessment of fiscal transparency in Sub-Saharan Africa and to encour- age publication and dissemination of good practices that are in place. The need for better fiscal transparency in resource-rich countries has recently gained some promi- nence. Several Sub-Saharan countries, including Ghana and Nigeria, have begun to participate in the Extractive Industries Transparency Initiative. This initiative emphasizes the need for oil and other extractive industry companies to publish what they pay to governments and to reconcile these pay- ments with what government reports show that they have received from companies. The IMF has pre- pared a draft Guide on Resource Revenue Transparency, which supplements its Manual on Fiscal Transparency and can be used to assess fiscal transparency in resource-rich countries. The draft guide has been released for public comments (http://www.imf.org/external/np/sec/pr/2004/pr04274.htm). A number of pilot country assessments are being undertaken in resource-rich countries--including Equa- torial Guinea, which recently hosted a seminar for parliamentarians from the six countries of the Eco- nomic and Monetary Community of Central African States (CEMAC) that focused on fiscal transparency and accountability (see IMF Survey, 7 February 2005). Note: The IMF has promoted fiscal transparency over the past several years as part of its Standards and Codes initiative. Its Fiscal Transparency Code and Manual on Fiscal Transparency are available at http://www.imf.org/. Source: IMF staff. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 39 C H A P T E R 2 has been influential in convincing development Ultimately, a change in accounting rules partners that a significant change in the policy cannot make the resource envelope larger or regime is under way.31 Nevertheless, as dis- ensure that additional spending is justified. For cussed below, broader gains in governance are Sub-Saharan Africa the proposed change in fis- needed for Sub-Saharan Africa to reach the cal data coverage would not have much of an level attained by other developing regions. impact, given that standard practice across the More broadly, stronger fiscal institutions region already limits coverage to general gov- can improve fiscal management by clarifying ernment (and only records direct transfers to lines of responsibility and constraining the public enterprises as fiscal expenditures). political bargaining that typically affects fiscal Moreover, targeting the current deficit (as a outcomes. One approach has been to create way of treating investment spending differ- autonomous revenue agencies and grant cen- ently from recurrent spending) would not tral banks independence in the pursuit of price obviate the need to assess the sustainability of stability. Another has been to strengthen rules debt loads, the impact of higher domestic governing budget procedures and reporting, financing on inflation and private investment, often in the context of medium-term expendi- and the productivity of expenditure.34 ture frameworks (MTEF). Neither approach Effectively creating fiscal space would has been widely embraced in Sub-Saharan require, first, generating additional resources Africa. Institutional independence is more and, second, ensuring that projects are appro- likely to be effective in a climate with multiple priately selected and implemented. Domestic checks and balances, and an MTEF is only sources of additional resources include mobi- effective when fully integrated with the bud- lization of additional fiscal revenue and get process and related documents--which domestic borrowing. Scope for the latter is typ- has only happened in five Sub-Saharan coun- ically limited, however, in part because finan- tries.32 Yet another approach is to adopt a fis- cial markets in Sub-Saharan Africa are thin cal responsibility act, under which broad and in part because of a need to preserve discussion of the policies underlying budget domestic savings for private investment. Exter- documents precedes formal presentation of nal sources include a sustained and predictable the budget. The debate takes place both flow of external grants (and, to a lesser extent, within and outside parliament, improving other concessional borrowing). Ensuring the transparency and binding government over overall adequacy and quality of development the medium term--as in Brazil, which spending may entail reprioritizing expenditure adopted a fiscal responsibility law in 2000.33 toward more productive sectors and projects (as discussed earlier), and lifting limits on absorption capacity, including by improving Fiscal Space: Safeguarding expenditure monitoring systems. Development Spending In Sub-Saharan Africa the bulk of the addi- The identification of significant infrastructure tional financing required to achieve the gaps, particularly in Latin America, has led to MDGs will have to come from sources other calls for the creation of fiscal space through a than additional taxation. Certainly, tax rev- revision in accounting rules and change in the enue ratios in low-income Sub-Saharan coun- approach to fiscal analysis. It has been sug- tries are on the low side. But raising revenue gested that data on fiscal expenditures should ratios will require improvements in tax not cover the operations of public enterprises, administration and resolution of important and that fiscal programming should target the issues of tax design, including greater reliance current, instead of overall, fiscal deficit. These on indirect taxation schemes such as the value arguments have also been marshaled as a way added tax (VAT).35 The associated political to substantially increase government spend- and administrative challenges are not easily ing on the MDGs. overcome in a short period.36 40 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S P U R R I N G A N D S U S T A I N I N G E C O N O M I C G R O W T H External grants unambiguously enhance mulating country-specific strategies. At the fiscal space--in contrast to borrowing, where macroeconomic level, aid may distort domes- such space is constrained by debt sustainabil- tic markets by raising the price of domestic ity considerations, even when loans are con- goods and services, and impair economic per- cessional. Still, a sustained, predictable flow of formance by threatening fiscal sustainability external grants is needed to secure a sustained (particularly with volatile and unpredictable scaling up of expenditures. Historically, aid aid flows). Managing these policy challenges flows have been more volatile and less pre- is facilitated by the use of a medium-term fis- dictable than other sources of revenue.37 cal framework and flexibility in adjusting These tendencies have been more pronounced expenditure and revenues, and possibly by for countries least capable of absorbing exter- the absorption of shortfalls in aid flows with nal shocks: those with a higher proportion of the use of international reserves or nonmon- aid-financed budgets and those with fewer etary financing instruments. For some sec- domestic financial instruments to smooth the tors, such as health and education, human fiscal impact. These effects undermine some of and physical infrastructure constraints may the benefits of foreign assistance. also be relevant. Addressing these concerns is In Sub-Saharan Africa recent drops in pub- likely to require more resources and time. lic investment underscore the importance of In sum, sustained effort is necessary to improving capacity to implement productive ensure that recent progress toward a stable projects. Over the past two decades the share macroeconomic environment marks a per- of public investment has fallen by about 3 manent shift in the policy regime. In the short percentage points of GDP across the region. term, with high fiscal deficits and limited abil- Although part of the drop has been offset by ity to raise revenues, most increases in domes- rising private investment, budget execution in tic contributions to the region's development low-income Sub-Saharan countries regularly needs will come from higher economic results in lower than programmed capital growth and a shift in spending toward high- spending and overruns on current spending. quality projects in growth-sensitive sectors. The shortfalls in capital spending cannot be Finally, macroeconomic stability cannot attributed entirely to lower than expected bear the entire burden of boosting economic foreign financing--underscoring the impor- growth. As the past two decades have shown, tance of improving project selection and Sub-Saharan Africa's institutional environ- implementation. ment has not always ensured that policy gains Better public expenditure management is translate into permanent improvements. Fis- critical in addressing concerns about the rela- cal institutions should ensure transparency, tionship between additional spending, public effective expenditure monitoring, and sustain- service delivery, and improved outcomes. ability. Institutionalizing nascent improve- Attempts have been made to address public ments in macroeconomic policy may be a expenditure management in the context of quick way to change perceptions. efforts to increase pro-poor spending under the aegis of the enhanced HIPC Initiative Enabling Climate for Private (box 2.9). The reported increase in poverty- Sector Activity reducing spending will have to be supple- mented by improvements in efficiency and The earlier analysis of growth accelerations targeting to raise social outcomes. For this, indicates that private investment can play a countries must also develop the means to significant role in supporting sustained eco- assess the effectiveness and social impact of nomic growth. In slow-growing economies in poverty-reducing spending. Sub-Saharan Africa and elsewhere, invest- More generally, identifying and addressing ment is typically low.38 The rate of return on absorptive capacity constraints requires for- investment also tends to be low, due to low G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 41 C H A P T E R 2 BOX 2.9 Strengthening expenditure monitoring under the enhanced HIPC Initiative The IMF and World Bank have been working closely with countries benefiting from the enhanced HIPC initiative to strengthen the link between HIPC assistance and poverty reduction. Recogniz- ing that public expenditure management plays a key role in poverty reduction, action plans for expenditure management were agreed with the authorities of each HIPC--taking into account the technical assistance available to them from their development partners--and two assessments of those plans have been completed. (More generally, a key feature of the IMF's Poverty Reduction and Growth Facility, the Bank's Poverty Reduction Strategy Credits, and the PRS approach is that the budgets of low-income countries should become more pro-poor, which makes tracking poverty- reducing spending relevant to all PRS countries.) Under the 2001 assessment, progress was tracked using 15 indicators: 7 related to budget preparation and 4 each to execution and reporting. For the 2004 assessment a new indicator was added, on procurement. After the first assessment confirmed the weak state of public expenditure management systems, HIPCs began strengthening expenditure management and monitoring. By 2004 most were able to report poverty-reducing spending as defined in their PRSs, and the average number of benchmarks met increased from 6.0 to 6.5. (The second assessment covered 25 HIPCs--22 in Sub-Saharan Africa and 3 in Latin America; see table.) On average, pro-poor spending has grown by about 2 percent of GDP a year. But to reduce poverty, higher spending must be accompanied by increased efficiency and better targeting to improve social outcomes. Revised action plans are being incorporated into IMF-supported programs and Bank adjustment operations--and to increase ownership, should also be incorporated into PRSs. Many HIPCs need to substantially upgrade public expenditure management Level of upgrading required 2004 2001 Substantial Some Little Substantial Bolivia (5, 4) Mozambique (5, 4) (7 or fewer Cameroon (4, 7) Niger (3, 5) benchmarks met) Ethiopia (6, 7) São Tomé and Principe (4, 4) The Gambia (5, 3) Senegal (4, 7) Ghana (1, 7) Zambia (3, 3) Guinea (5, 5) Madagascar (7, 4) Malawi (7, 5) Some Chad (8, 7) Benin (8, 8) Mali (8, 11) (8­10 Honduras (8, 7) Burkina Faso (8, 9) Tanzania (8, 11) benchmarks met) Guyana (8, 10) Rwanda (8, 8) Uganda (9, 8) Little (11 or more benchmarks met) Not assessed in 2001 Democratic Republic of Congo (4) Guinea-Bissau (0) Sierra Leone (7) Note: Numbers in parentheses are the number of benchmarks met in 2001 and 2004, in that order. Source: IMF (2003); and IMF and World Bank staff. 42 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S P U R R I N G A N D S U S T A I N I N G E C O N O M I C G R O W T H productivity and high costs of doing busi- more than 70 percent of nonagricultural ness.39 Faster growth requires a business cli- employment in the region, many firms do not mate that enables the private sector to take up pay any taxes--or report only a fraction of profitable investment opportunities, raising their sales to the authorities. And many firms, both the level and productivity of investment. particularly small ones, do not see many ben- In many developing countries excessive reg- efits from becoming formal. Most firms lack ulation and other institutional constraints confidence that courts will uphold their prop- impose a heavy burden on entrepreneurial erty rights, and most have little access to activity. A number of countries are imple- finance due to shallow financial systems and menting regulatory reforms, but recent the difficulty of obtaining collateral. improvements need to be deepened and under- Corruption and policy uncertainty are also pinned by stronger institutions--particularly significant constraints in Sub-Saharan Africa. those related to property rights and the rule of In particular, the discretion that many offi- law. Alongside regulatory and institutional cials enjoy in implementing complex regula- reform, access to finance and availability of tions creates opportunities for bribes and key infrastructure need to be improved. Lim- uneven application of requirements. More ited access to credit and poor infrastructure than 95 percent of firms in the region report undermine private activity in many countries, that corruption or policy uncertainty are a limiting growth in industry and agriculture problem, with most firms calling them major alike. Among regions, Sub-Saharan Africa has or very severe constraints on their ability to the greatest need to improve these determi- operate and expand. nants of the business environment. Unreliable electricity supply is reported as a constraint by 52 percent of firms in Sub- Saharan Africa, compared with 42 percent in Assessing the Business Environment Recent enterprise surveys and business regu- lation assessments provide the necessary FIGURE 2.9 Sub-Saharan firms view taxes, finance, electricity, and metrics for a careful evaluation of the invest- corruption as particularly constraining ment climate in developing countries.40 The enterprise surveys provide benchmarks of investment climate indicators and firm per- Percent of firms reporting constraints as major or very severe formance, allowing conclusions to be drawn Policy uncertainty on constraints facing entrepreneurs. The Access to land Corruption business regulation assessments provide benchmarks of regulatory and property pro- tection systems, providing policy guidance Legal Cost & access on areas needing improvement. Across the to finance developing world, entrepreneurs consistently report regulatory impediments, corruption, 25 Crime 50 Telecommunications and lack of access to finance and key infra- 75 structure (such as electricity) as major con- straints on their activity. Electricity Tax rates Firms in Sub-Saharan Africa consider high Regulation & tax administration taxes and poor access to finance to be among Sub-Saharan Africa South Asia their most significant constraints (figure 2.9). Latin America & the Caribbean East Asia & Pacific In countries with small tax bases, firms often Europe & Central Asia bear a disproportionate share of the tax bur- den, particularly small and medium-size Source: World Bank Investment Climate Surveys. firms. With the informal sector representing Note: The graph does not include every country in each region. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 43 C H A P T E R 2 South Asia, 24 percent in East Asia and Latin worst 5 worldwide. Entrepreneurs in these America, and less than 10 percent in Europe countries face a staggering array of costs, and Central Asia. Moreover, a much larger including those related to starting a business, share of African firms report frequent power registering property, enforcing contracts, hir- outages and serious production losses stem- ing and firing workers, getting credit, closing ming from such interruptions in production. a business, and protecting investors. There is considerable cross-country varia- On average, starting a company in Sub- tion in the ranking of constraints reported by Saharan Africa costs the equivalent of 224 Sub-Saharan firms. For example, policy percent of national per capita income, com- uncertainty is reported as a major or severe pared with 45 percent in South Asia and only constraint by 27 percent of firms in Uganda 7 percent in high-income countries. Similarly, but by 57 percent in Zambia. Similarly, a simple, formal property transfer costs 14 unpredictable interpretation of regulations is percent of the value of the property and takes a problem cited by 40 percent of firms in more than 100 days in Africa, compared with Uganda but by 70 percent in Zambia (table 48 days in East Asia and the Pacific and 36 2.6). In Kenya more than 75 percent of firms days in high-income countries. report paying bribes, averaging more than 5 Nigeria has some of the world's most cum- percent of sales. Losses from power interrup- bersome regulations for registering property, tions average 6­7 percent of sales in Ethiopia requiring 21 procedures, 27 percent of the and Zambia, and 10 percent or more in property value in fees, and a registration Eritrea, Kenya, and Senegal. period of 274 days. Other African countries The above picture, derived from the World present similar obstacles to registering prop- Bank's Investment Climate Surveys, is corrob- erty: Completing the transfer process takes orated by its Doing Business indicators. The more than a year in Ghana and 354 days in business environment, as measured by the reg- Rwanda, and costs 34 percent of the property ulatory burden, is weakest in Sub-Saharan value in Senegal and 23 percent in the Repub- Africa (figure 2.10).41 Among the 20 countries lic of Congo. Moreover, Africa's property reg- with the most regulatory obstacles to doing istries tend to be poorly organized and business, 16 are in Sub-Saharan Africa--with provide little security of ownership. Angola, Burkina Faso, Chad, and the Democ- Sub-Saharan Africa is also the region where ratic Republic of Congo ranking among the it is most difficult to enforce a simple com- TABLE 2.6 Investment climate constraints vary across Sub-Saharan Africa (percentage of firms citing problem, unless otherwise indicated) Management Unpredictable Lack confidence time spent dealing Average interpretation courts will uphold with officials number of days Finance a Infrastructure a Skills a Country of regulations property rights (percentage of time) to clear customs major constraint major constraint major constraint China 33.7 17.5 19.0 7.9 22.3 29.7 30.7 Kenya 45.5 51.3 13.8 8.9 58.3 48.1 27.6 Mozambique 11.3 11.9 78.0 64.0 33.5 Senegal 42.5 40.5 13.8 6.5 60.0 30.7 18.5 Tanzania 58.6 55.1 16.2 17.5 53.0 58.9 25.0 Uganda 40.0 30.1 5.0 52.8 44.5 30.8 Zambia 70.1 36.0 14.1 4.8 67.7 39.6 35.7 Sources: World Bank, World Development Report 2005; World Bank Investment Climate Surveys. 44 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S P U R R I N G A N D S U S T A I N I N G E C O N O M I C G R O W T H FIGURE 2.10 Sub-Saharan Africa lags other regions in the quality of the business environment Ease of doing business Ranking 120 100 80 60 40 20 0 Overall Starting a Hiring and Registering Getting Protecting Enforcing Closing a business firing property credit investors contracts business Overall index and Sub-indexes Sub-Saharan Africa Other low-income countries Other middle-income countries High-income countries Source: Doing Business in 2005 database. mercial contract through the courts. On aver- third highest in the world; night and weekend age, creditors must go through 35 steps, wait work are prohibited; and women are not per- 15 months, and pay 43 percent of their coun- mitted to work more than 8 hours a day. If a try's per capita income before receiving their business needs to downsize, it must notify the due payment. The result is less access to jus- Ministry of Labor of its intention to retrench tice and weaker protection of property rights, workers, and the law requires that redundant leading to fewer formal business transactions. workers be trained and placed in other jobs Hiring and firing workers in the formal prior to dismissal. If an employer follows sector in Africa is also not easy. The region these procedures, a redundancy costs an aver- has the most rigid labor regulations and age of 18 months' wages in severance pay and among the highest firing costs.42 In Burkina penalties. Thus it is little wonder that many Faso employers cannot write a fixed-term businesses operate in the informal economy, contract unless a job is seasonal; the man- which accounts for about 40 percent of the dated minimum wage is $54 a month, which country's output. High firing costs make at 82 percent of value added per worker is the employers less likely to hire. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 45 C H A P T E R 2 Moreover, without clearly defined prop- (figure 2.11). Botswana and South Africa erty rights and efficient contract enforce- have low official fees, in line with those in ment, lenders are less likely to extend credit high-income countries, while Angola and to entrepreneurs. Although Sub-Saharan Sierra Leone have costs that are among the Africa performs better on indicators of legal world's highest. In other examples of good rights for borrowers and lenders than do practice, Tanzania and Uganda have com- South Asia, Latin America, and the Middle mercial or small claims courts, Tanzania has East and North Africa, institutions that a specialized court for bankruptcy, support credit markets are weak. For exam- Botswana and Tanzania have no minimum ple, only four Sub-Saharan countries-- capital requirement for starting a business, Botswana, Ghana, Namibia, and South Madagascar and Namibia have introduced Africa--have private credit bureaus to pro- moderate severance pay for redundant vide lenders with information on a bor- employees, and South Africa gives investors rower's creditworthiness. access to ownership and financial data Within Sub-Saharan Africa's overall diffi- before they invest in a company. cult business environment, however, perfor- There are also broader patterns across the mance varies considerably, and there are region. As in other regions, middle-income several examples of good practice. The cost countries have more efficient regulation than of starting a business varies across countries do low-income countries. For instance, it by more than 100-fold, from 10 percent of takes an average of 234 days to enforce a debt per capita income to more than 10 times contract in a middle-income country, but FIGURE 2.11 The cost of starting a business varies widely Cost of starting a business in African countries Percent of GNI per capita 1500 1268 1000 885 557 500 396 53 77 95 9 11 23 0 South Botswana Zambia Kenya Ethiopia Nigeria Niger Congo, Angola Sierra Africa Dem. Leone Rep Source: Doing Business in 2005 database. 46 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S P U R R I N G A N D S U S T A I N I N G E C O N O M I C G R O W T H almost twice that in a low-income country. the private business environment, reforms On the other hand, business regimes tend to need to be quickened and extended to other be most onerous in oil-dependent economies countries. Despite their heavier burden of (box 2.10) and countries that have recently business regulation and weaker protection of endured civil conflict. property rights, African countries lagged those in other regions in the scope and pace of reform achieved in the past year, as Improving the Business Environment assessed by the annual Doing Business The costs of a weak investment climate are report.44 Of the 58 countries in the sample substantial, and the impacts widespread. At that had reformed regulation or strengthened the enterprise level the estimated costs, mea- property rights, only 8 were in Africa. Most sured in terms of the share of sales lost, range reforms in Africa were in the relatively from less than 10 percent in Poland to more straightforward area of starting a business, than 30 percent in Zambia. The composition while outside Africa there were reforms in of costs also varies dramatically across coun- every area measured (figure 2.13). tries. In Kenya, Tanzania, and Uganda weak Among Sub-Saharan nations enacting infrastructure services are particularly bur- reforms, Ethiopia improved the process for densome, while in Zambia bribes are espe- starting a business by cutting the number of cially costly (figure 2.12). Priorities for required procedures and reducing the associ- reform thus vary by country. ated cost and time. Madagascar slashed the Reform offers large payoffs. In Ethiopia time required to start a business by establish- annual business registrations increased by 48 ing a new one-stop shop for entrepreneurs. percent after the process was simplified in Benin, the Democratic Republic of Congo, 2003. In Namibia the cost of expanding out- Côte d'Ivoire, and Kenya also reformed entry put fell by 15 percent as a result of more flex- regulation. In Mozambique a public credit ible working hours introduced in 2003. In registry went online, strengthening the qual- Mozambique commercial banks report that ity of data. In contrast, some countries wors- reforms to the public credit registry have ened their investment climates: actions in helped provide credit to a wider set of entre- Malawi, Mauritania, Rwanda, and Zim- preneurs. Empirical analysis indicates that babwe raised the cost of starting a business. Africa could grow by an additional 1.6 per- Looking ahead, how can the business centage points a year if the average country environment be improved in Sub-Saharan were to improve its business regulation system Africa? The evidence points to a broad to the level of the average OECD country.43 agenda of reform, with specific priorities Countries with better business environments and sequencing varying by country. Assess- tend to benefit from higher private invest- ments of the business environment suggest ment: among Sub-Saharan countries that the following as key areas for improving the scored 50 or higher on the ease of doing busi- regulatory and institutional framework in ness index in 2005, the correlation between many countries: that score and the rate of private investment during 1990­2003 was 70 percent. Improve- · Streamlining entry regulations and cutting ments in Uganda's business environment have fees. In Africa the official fees for starting contributed significantly to stronger economic a business are prohibitive for most would- performance since the early 1990s (box 2.11). be entrepreneurs. Cutting these fees While some countries in Sub-Saharan would encourage more businesses to oper- Africa are taking notable steps to improve ate in the formal sector. To reduce the pro- G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 47 C H A P T E R 2 BOX 2.10 Comparing business regulations in two resource-dependent economies: Angola and Botswana One of the manifestations of the "resource curse" is lack of economic diversification in resource- dependent economies. Among the most severe cases have been oil-dependent economies in Sub- Saharan Africa, such as Angola, where significant private investments have flowed to the oil sector (with its enclave fiscal, regulatory, and legal regime) but, for the most part, not to other sectors. Other countries, including Botswana, have been able to harness the power of natural resources by implementing sound macroeconomic and structural policies and providing adequate incentives for entrepreneurs to take up profitable opportunities in all sectors. The table below compares the reg- ulatory burden imposed on entrepreneurs in Angola and Botswana. Businesses face a lower regulatory burden in Botswana than Angola Starting Registering Enforcing Hiring Closing a Protecting a business property contracts and firing Getting credit business investors Labor Firing Legal Credit Recovery Country Days Cost Days Cost Days Cost rigidity costs rights information rate Disclosure Angola 146 885 335 11 1,011 9 75 116 3 4 1 2 Botswana 108 11 69 5 154 25 20 19 9 5 51 5 Note: Cost of starting a business is measured as a percentage of per capita gross national income (GNI). Cost of registering property is measured as a percentage of property value. Cost of enforcing contracts is measured as a percentage of debt value. Labor rigidity is an index from 0­100, with higher values indicating more rigid regulation. Firing costs are measured in number of weeks of salary due as severance payment. Legal rights is an index from 0­10, with higher scores indicating the degree to which collateral and bankruptcy laws facilitate lending. Credit information is an index from 0­6, with higher scores indicating more availability of information through public or private bureaus. Recovery rate is measured in cents on the dollar. Disclosure is an index from 0­7, with higher scores indicat- ing more disclosure of corporate information. Worldwide, Angola is among the 20 countries with the least business-friendly regulations, while Botswana is among the top 20. On most indicators measured by the Doing Business project, Botswana substantially outperforms Angola. Registering property--essential for obtaining credit in many countries--takes almost five times longer in Angola. Hiring and firing workers is considerably less flexible and more costly in Angola. And closing a business, which helps entrepreneurs start and cedures and time required for business before property is transferred. This registration (which can also significantly causes delays, usually requires an exorbi- reduce the cost), governments could also tant fee, and can be a major source of cor- create single access points for business (as ruption. Lesotho, Malawi, Nigeria, in Madagascar), introduce temporary Rwanda, Senegal, and Zambia all have business licenses, impose "a silence is con- government consent requirements. The sent" rule for business registration, and impact of such requirements can be con- standardize paperwork. siderable. For example, if Malawi elimi- · Cutting fees and unnecessary procedures nated the requirement of obtaining for property registration. A large bottle- consent from its Ministry of Land (proce- neck in several African countries is the dure 3 in figure 2.14), registering prop- requirement for government consent erty would take 28 days instead of 118. 48 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S P U R R I N G A N D S U S T A I N I N G E C O N O M I C G R O W T H BOX 2.10 Comparing business regulations in two resource-dependent economies: Angola and Botswana (continued) grow their businesses, is significantly more complex in Angola. Not surprisingly, Botswana has a more diversified economy and has grown roughly twice as fast as Angola over the past 10 years. Ease of doing business in Sub-Saharan Africa Ranking 70 60 50 40 30 20 10 0 Overall Starting a Hiring and Registering Getting Protecting Enforcing Closing a business firing property credit investors contracts business Sub-Saharan Africa Oil countries Non-oil countries Across Sub-Saharan Africa, Angola is typical of oil-driven economies, which tend to have more cumbersome business regulations and weaker protection of property rights than do non-oil economies (see figure). Reforms in these areas could significantly enhance the attractiveness of non- oil private investment in oil economies. Source: Doing Business in 2005 database. Other reforms that strengthen property By encouraging the development of credit rights and encourage investment include bureaus, African governments can help simplifying and consolidating procedures furnish creditors with information to sort at the property registry, cutting fees, link- good from bad borrowers, price loans cor- ing the cadastre and property registry, rectly, and reduce screening costs. and providing easier access to informa- · Making labor regulations more flexible tion in the registry. and reducing the cost of firing. To accom- · Encouraging the establishment of credit plish this, African countries can increase bureaus. Access to credit would be made the length and scope of term contracts, easier if lenders had assurance that bor- introduce apprentice wages (following the rowers are creditworthy (and that it is pos- example of Madagascar), allow flexible sible to recover debt, in cases of default). working hours (as in Namibia), and G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 49 C H A P T E R 2 FIGURE 2.12 A weak investment climate entails high costs Share of sales lost 40 30 20 10 0 Poland China Brazil Uganda Algeria Kenya Tanzania Zambia Infrastructure disruptions Crime and security Bribes Regulation Contract enforcement Sources: World Bank 2004b; World Bank Investment Climate Surveys. BOX 2.11 High returns to investment climate improvements in Uganda The economic successes of China and India are well known, with China growing at 10 percent a year and India having doubled its growth rate since the 1970s, following major reforms over the past two decades. But the benefits of investment climate reforms are not limited to large countries. Uganda's experience shows the importance of persistence, rather than perfection, in translating investment climate reforms into increased growth and poverty reduction. Uganda initiated its investment climate improvements in the early 1990s, after a period of civil conflict and macroeco- nomic instability. Reforms covered many areas affecting the investment climate: Macroeconomic stability was achieved, expropriations by a previous government were reversed, trade barriers were reduced, and tax and court systems were strengthened. The persistence of the government's reform efforts enhanced its credibility, giving firms confidence to invest. Indeed, private investment as a share of GDP more than doubled, from just over 6 percent in 1990 to 15 percent in 2002. These improve- ments contributed to stronger per capita income growth, which averaged 4 percent a year in 1993­2002 (eight times the average in Sub-Saharan Africa), and a reduction in the share of Uganda's population living below the poverty line, from 56 percent in 1992 to 35 percent in 2000. Source: Adapted from World Bank 2004b. remove administrative approvals for dis- with the help of the police), and creating missal. specialized courts or sections of commer- · Reducing unnecessary procedures and cial courts (as in Ghana and Tanzania). contract enforcement times. Approaches include introducing case management (as Some reforms, such as improvements to in Uganda), reducing abuse of appeals pro- entry regulations, credit reporting systems, cedures (as in Botswana), improving and property registries, can be achieved rela- enforcement (in Uganda the creditor's tively quickly through administrative reforms. attorney is responsible for enforcement, Others, such as those involving labor regula- 50 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S P U R R I N G A N D S U S T A I N I N G E C O N O M I C G R O W T H FIGURE 2.13 Business environment reforms need to be scaled up in Sub-Saharan Africa Reforms outside Sub-Saharan Africa Reforms in Sub-Saharan Africa Credit Enforcing information contracts Starting a Hiring business and firing Closing a business Starting a Credit Hiring and business information firing Source: Doing Business in 2005 database. tions and court reforms, require longer-term nificant bank failures. The resolution of these efforts and legislative action. Investment cli- failed banks through restructuring and priva- mate reform is a process, not an event. Not tizing has been the main focus of policymak- everything needs to be fixed at once, or per- ers over the past 15 years. fectly at one go. Significant progress can be In addition, considerable efforts have been achieved by addressing the more important made to improve legal and regulatory frame- constraints facing businesses in a way that works and to build regulatory capacity to gives them confidence to invest and by sus- prevent further failures. African banking laws taining a process of ongoing improvements.45 and regulations are now largely comparable The foregoing discussion focuses on the need for regulatory and institutional reform. The evidence presented also points to lack of FIGURE 2.14 Registering property is unduly time-consuming financial and physical infrastructure as major in Malawi constraints in many countries. The next two sections focus on these aspects of the agenda. Days 120 Financial sector Sub-Saharan Africa's financial sector has gone through major changes over the past 15 80 years, and has largely been transformed into an open system that includes a variety of institutions owned by domestic and foreign 40 private entities. With the proliferation of financial institutions, the average bank size has shrunk by about 25 percent. These 0 1 2 3 4 5 6 changes have revealed weaknesses in regula- Procedures tory capacity and limitations in risk assess- ment within financial institutions, and many African countries have had to cope with sig- Source: Doing Business in 2005 database. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 51 C H A P T E R 2 to international standards--although the investment climate surveys in Sub-Saharan enforcement of regulatory standards is weak, Africa reveal that inadequate access to finance as in many other developing countries. The is a major constraint for entrepreneurs. The region's reforms have achieved substantial surveys also indicate that access is hampered results, and financial system stability has for two reasons. First, high real interest rates improved appreciably. and banking fees make financial services too Despite this legal and regulatory progress, costly. Second, mainstream financial institu- financial systems in Sub-Saharan Africa tions fail to serve the needs of important pop- remain underdeveloped. Outside Mauritius ulation segments, including small-scale and South Africa, lending to the private sec- entrepreneurs. Virtually all surveys indicate tor is still limited and costly. Since 1995 there that financial institutions are hesitant to lend has been limited progress on financial sector because of difficulties in securing collateral and deepening (figure 2.15). Excluding South seizing assets in case of default. The availabil- Africa, private sector credit relative to GDP ity of financial services is also crucially related has grown by only about 2 percentage points to financial system supporting structures, over the past 10 years, with most of the including regulation, information infrastruc- growth occurring recently (figure 2.16). A ture, property rights enforcement, and overall number of explanations have been advanced, governance and institutional development. including increased holdings of government There have been notable efforts to develop paper by banks due to bank restructuring, credit information systems and improve reg- crowding out, and more conservative lending ulations to facilitate access to finance.47 The in the face of high credit risks.46 Another World Bank has documented the incipient problem is that the cost of borrowing is development of credit reporting systems in 30 higher in Sub-Saharan Africa than in other Sub-Saharan countries, including systems regions (figure 2.16b). operated by private firms in Botswana, Cape In this context, improving access to financial Verde, Equatorial Guinea, Eritrea, and services poses a significant challenge. As noted, Namibia. A number of countries have FIGURE 2.15 Financial depth is lowest among low-income Sub-Saharan countries a. M2/GDP in b. M2/GDP by income category Sub-Saharan Africa 1995­2003 in Sub-Saharan Africa 1995­2003 Percent Percent 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 Low-income Lower-middle- Upper-middle- countries income countries income countries 1995 2003 Source: World Bank Staff estimates. 52 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S P U R R I N G A N D S U S T A I N I N G E C O N O M I C G R O W T H FIGURE 2.16 The cost of borrowing is higher in Sub-Saharan Africa a. Domestic credit to private sector b. Lending and deposit rates in 2003 Percent of GDP 19 18 Percent 17 30 16 25 15 20 14 15 13 12 10 11 5 10 0 1995 1997 1999 2001 2003 Sub- Latin South Europe Middle Middle- Saharan America Asia & East & income Africa & Central North countries Caribbean Asia Africa Real lending rate Real deposit rate Source: World Bank staff estimates. improved their regulatory systems to facili- diaries do not provide an adequate frame- tate access to finance, notably legal rights for work for promoting efficient resource alloca- creditors in Kenya, Nigeria, and Zimbabwe tion. Coordination among providers of these and registration of movable collateral in facilities and harmonization of terms and Botswana and South Africa. In addition, conditions are among the most important Ghana, Kenya, Mauritius, Tanzania, and challenges for donor-funded facilities to Uganda have introduced regulations to facil- improve financial intermediation. itate the integration of microfinance institu- tions with mainstream financial systems. Physical infrastructure These are all promising efforts, as develop- ment of financial infrastructure can secure Inadequacies in the level and quality of infra- access to credit for a wider segment of the structure--including electricity, transporta- population. tion, and communications--can adversely Most African countries receive (bilateral affect private sector productivity and invest- and multilateral) donor-funded facilities for ment rates. While macro evidence on the trade and investment finance purposes. When growth impacts of infrastructure remains these facilities are implemented effectively, somewhat inconclusive, businesses in devel- they substantially enhance domestic private oping countries often cite infrastructure qual- sector credit (as in Zambia). But experiences ity among their top constraints, particularly with donor-funded financing vehicles have in Sub-Saharan Africa and South Asia. For shown the need for terms and conditions example, entrepreneurs in Sub-Saharan more consistent with long-term goals for Africa consider unreliable electricity one of financial sector development. Donor-funded their biggest constraints (see figure 2.9). facilities that are priced below market rates, Transport infrastructure is also key in the targeted to specific sectors and borrowers, region, given its long distances and many and channeled through a few select interme- landlocked countries. But the wide variation G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 53 C H A P T E R 2 in survey responses across developing coun- ciently to take up the slack. Recent projec- tries suggests that the severity of the con- tions indicate that Sub-Saharan Africa has straints imposed on the private sector by investment needs of $17­22 billion a year in inadequate infrastructure differs consider- 2005­15, including both capital and mainte- ably.48 In particular, in some countries a lack nance expenditures.50 Estimates place current of sufficient maintenance, rather than a lack public infrastructure investment at about $6 of infrastructure, is the more pressing issue. billion a year (roughly half of which is donor- Sub-Saharan Africa and South Asia have financed) and private commitments at about the lowest access to basic infrastructure such $4 billion a year. Thus the region's infra- as water, electricity, communications, and structure financing gap is $7­12 billion a roads (figure 2.17). Even when services are year, or 4.5 percent of GDP (figure 2.18). available, their quality tends to be quite poor. Under current conditions it is unlikely Moreover, the quality of electricity and roads that infrastructure projects involving private declined during the 1990s.49 participation will fill a significant portion of Estimates of infrastructure gaps for the Sub-Saharan Africa's financing gap. Due to developing world indicate sizable investment its relatively low level of private involve- needs and large financing gaps. These gaps ment, the region escaped the retrenchment increased in many developing countries in the of private participation in infrastructure 1990s as public investment in infrastructure that occurred throughout the developing fell and private investment failed to rise suffi- world in the late 1990s (figure 2.19). But FIGURE 2.17 Weak access to infrastructure is a major constraint in Sub-Saharan Africa and South Asia Access to infrastructure 250 East Asia & Pacific Europe & Central Asia 200 Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa 150 100 50 0 Electricity Telephone mainlines Mobile phones Roads kwh per per 1000 people per 1000 people km per 1000 sq km 20 million people Source: World Development Indicators database. 54 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S P U R R I N G A N D S U S T A I N I N G E C O N O M I C G R O W T H Africa's initial experience with private par- FIGURE 2.18 Infrastructure spending fails to meet needs, ticipation was unsatisfactory in two key particularly in Sub-Saharan Africa respects. First, private participation was below government expectations. Second, a Annual spending on infrastructure, 2005­15 number of contracts were subsequently Percent of GDP renegotiated or cancelled. In general, private 10 9.2 investors perceived a high level of opera- 9 tional and political risk, particularly because 8 of the lack of reliable information on the 7 operational and financial outlook. More- 6 5.5 5 4.7 over, the bulk of projects were implemented 4 3.5 in South Africa. 3 Long-term success will require ensuring 2 an enabling regulatory environment for 1 both private and public projects. In this 0 Developing countries Sub-Saharan Africa respect, three challenges appear crucial. Actuals Needed First, it is important to strike an adequate balance in government budgets between capital and recurrent spending. Politicians Source: Estache and Yepes 2004. tend to find more satisfaction in opening new facilities--but throughout the develop- FIGURE 2.19 Private participation in infrastructure remains low in ing world, a maintenance deficit tends to most Sub-Saharan countries, and has recently fallen significantly shorten the lifespan of expen- sive equipment. Second, it is essential to ensure the financial viability of infrastruc- Private participation in infrastructure, 1991­2003 US$ millions ture projects, with a focus on full cost 6,000 recovery. It is notable that South Africa, which has made enormous progress in 5,000 expanding water and sanitation services, Sub-Saharan Africa has a policy of full cost recovery. Third, it is 4,000 essential that returns not be confiscated by 3,000 the government. A major risk for private- public partnerships is that governments will 2,000 renege on commitments to cost-recovering tariffs once fixed investments are sunk. 1,000 Addressing these concerns requires careful South Africa design of the contracts and regulatory envi- 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 ronments under which utilities operate. Year Public Sector Governance: Source: Private Participation in Infrastructure database (World Bank). The Role of Institutions Public sector governance has a significant Building on the earlier discussion on the need impact on economic outcomes, such as for sound public financial management and an growth and poverty reduction, and on the enabling environment for private sector activ- achievement of the nonincome MDGs. In ity, this section assesses progress in strength- many ways improving governance is the ening a broader set of institutions--economic biggest challenge facing developing countries. and political--that affect economic outcomes. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 55 C H A P T E R 2 Economic Governance higher income leads to better governance; these claims ignore the effect of potential The perception that economic governance is causality from governance to income levels. weaker in Sub-Saharan Africa than in other Yet empirical evidence suggests that the regions is broadly supported by available stronger causality effect is from governance indicators. For example, the Worldwide Gov- to income and, once that is accounted for, ernance Indicators, a comprehensive set of most African countries have governance measures compiled by the World Bank and scores lower than would be expected on the based on information from a wide set of basis of their income levels (box 2.12). sources, show weak performance in Sub- Within this general assessment, disaggrega- Saharan Africa on four critical governance tion of the previous indexes by income level issues--rule of law, voice and accountability, reveals important differences across African government effectiveness, and control of cor- countries. While low-income countries in Sub- ruption--throughout the period covered, Saharan Africa are assessed as having weaker 1998­2004. The only exception is voice and performance than their counterparts else- accountability, where Sub-Saharan Africa where, the eight middle-income Sub-Saharan slightly outperforms the Middle East and countries outperform other middle-income North Africa and South Asia. Country Policy countries. This result holds for the Worldwide and Institutional Assessments (CPIAs), devel- Governance Indicators and the CPIA scores, oped by World Bank staff, paint a similar pic- as well as the ICRG risk assessments.52 ture, with Sub-Saharan Africa rated lower than all other developing regions on property Political Governance and Accountability rights and rule-based governance, quality of budgetary and financial management, effi- On political governance, Sub-Saharan Africa's ciency of revenue mobilization, and quality of performance is stronger, with indicators gen- public administration. erally ranking it ahead of some other develop- Crucially for investment flows, the percep- ing regions. For example, on Freedom House's tions presented by these indicators are con- 2005 rankings of political rights and civil lib- firmed by the risk assessment services erties, Sub-Saharan Africa is rated "more free" commonly used by private investors. For than the Middle East and North Africa and example, the composite risk index from the South Asia. More impressively, the Database International Country Risk Guide (ICRG) on Political Institutions maintained by the rates Sub-Saharan Africa as the highest-risk World Bank shows that by 2002, Sub-Saharan region during 2000­3 (and consistently since Africa attained a higher percentage of coun- the inception of the group's assessments in the tries with chief executives selected through 1980s).51 This overall rating is consistent competitive multiparty elections than the aver- with the results of the previous section as well age for other developing regions (figure 2.20). as low scores on key economic governance Finally, the African Governance Indicators, dimensions such as bureaucratic quality, cor- compiled for the United Nations Economic ruption, and law and order. Commission for Africa's 2005 African Gover- Moreover, while there has been some nance Report,53 confirm the region's higher improvement in recent years on a few indica- scores on the political dimension and lower tors in some Sub-Saharan countries, econo- scores on economic governance (box 2.13). metric evidence confirms that the region's On press freedom, a key indicator of countries tend to underperform on gover- political accountability, the picture is simi- nance, relative to their income levels. Recent lar. A well-informed citizenry has been claims to the contrary suggesting that the per- called the "ultimate constraint on a democ- ception of weaker governance in Africa is due ratic government,"54 and recent evidence entirely to low income levels assume that points to the role of the media in promoting 56 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S P U R R I N G A N D S U S T A I N I N G E C O N O M I C G R O W T H BOX 2.12 How does governance affect per capita incomes in Africa, and vice versa? A recent paper argues that weak governance is not a major factor in Africa's poor growth performance (Sachs and others 2004). The argument is that, once their (low) level of income is accounted for, Sub- Saharan countries do not have particularly poor governance indicators. This point is illustrated in the figure below, which plots the rule of law measure from the Worldwide Governance Indicators (on the vertical axis) against the logarithm of real per capita GDP in the mid-1990s (on the horizontal axis). Sub-Saharan countries are identified by green dots outlined in black. A striking observation is that more than half (27 of 46) of the countries in the region fall above the (ordinary least squares, or OLS) regression line, shown in black. The conclusion drawn by Sachs and others (2004) is that, with more than half of the countries in the region performing better on governance than would be predicted by their income, the perception of weak governance in Africa is simply a reflection of low income levels. But the simple correlation portrayed by the OLS regression line does not imply causality. The above argument assumes that higher income leads to (or causes) better governance. Intuitively, how- ever, causality could run in the opposite direction, with better governance leading to higher income--or, more likely, in both directions. In either case, the OLS results do not isolate the differ- ent directions of causality and do not support any conclusion on the causal relationship between governance and income. Rule of Law index, 2004 2.5 2 OLS regression line 1.5 1 MUS BWA 0.5 Causal effect of income CPV ZAF NAM on governance LSO (Rodrik-Rigobon, 2004 GHA SEN SYC MWIMLI estimate) MDG GMB TZA ZMBMOZ BEN STP ­0.5 GAB BFA MRT DJI UGA ERI Causal effect of income on NER RWA ETH SWZ TGO KEN CMR COM GNQ ­0.1 GIN governance TCD SLE COG GNB AGO (Kaufmann-Kraay, 2002 CAF NGA CIV BDI ZWE ­1.5 SDN estimate) Log GDP ZAR per capita y = 0.82x ­ 0.01 ­2 in PPP, 1996 R2 = 0.68 ­3 ­2.5 ­2 ­1.5 ­1 ­0.5 0.5 1 1.5 2 2.5 ­3 On the other hand, the green lines are drawn from two attempts to effectively identify the direc- tion of causality. The upward-sloping green line is from Rigobon and Rodrik (2004) and the down- ward-sloping green line from Kaufmann and Kraay (2002). Although the two estimates use different approaches to identification, the conclusions are similar: Very few countries (7 and 6, respectively) fall above the regression line. Thus the evidence suggests that governance in Sub-Saharan Africa is not as good as one might expect given the level of per capita income. Source: Kaufmann, Kraay, and Mastruzzi 2005. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 57 C H A P T E R 2 FIGURE 2.20 Participatory processes are improving in developing countries, but most rapidly in Africa Chief executives elected through competitive multiparty elections Percent 70 60 50 40 30 20 10 0 1982 1987 1992 1997 2002 Africa All others Source: World Bank Database on Political Institutions. Note: The index measures the percentage of country leaders elected in multiparty elections with less than 75 percent of the vote. The category "all others" includes developing countries in all other regions except Europe and Central Asia (for lack of comparable data for that region for the early part of the period covered). good governance and holding governments On the other hand, there have been sub- responsive and accountable.55 For 2004 the stantial improvements in political institutions Freedom House indicator of press freedom across Sub-Saharan Africa. Since 1990 Free- ranks Sub-Saharan Africa (with 50 percent dom House indexes on political rights and of countries ranked as "not free") ahead of civil liberties in Africa have outpaced the gen- both the Middle East and North Africa (100 eral trend toward more inclusive and open percent) and South Asia (75 percent). political systems; similar indications are pro- vided by the polity index on democracy. As noted, equally positive has been the progress Is Governance Improving? suggested by the World Bank's Database on On economic governance, there is little evi- Political Institutions, according to which Sub- dence of regionwide improvement. The Saharan Africa has made impressive strides Worldwide Governance Indicators do not since the mid-1990s. provide any evidence of a relative improve- ment over the period covered, 1998­2004.56 Can Policy Spur Institutional Reform? Similarly, the most common ICRG indicators (bureaucratic quality, corruption, law and Although institutions tend to persist, they are order) show no improvement over time, not predetermined.58 Economic institutions while the CPIAs show only marginal have improved considerably in Chile and the improvement.57 The same pattern of stagna- fast-growing countries of East Asia, and tion holds for both low- and middle-income there is evidence of recent improvements in Sub-Saharan countries. political institutions across Sub-Saharan 58 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S P U R R I N G A N D S U S T A I N I N G E C O N O M I C G R O W T H BOX 2.13 The Economic Commission for Africa's governance indicators and agenda The African Governance Indicators, compiled as part of the United Nations Economic Commission for Africa's (UNECA's) African Governance Report 2005, offer interesting insights on the strengths and weaknesses of different governance dimensions in Africa. Based on surveys of 25 Sub-Saharan countries, the figure below shows that, on average, the highest scores are given for indicators of political representation: the credibility of the electoral process, the freedom of political parties, and the distribution of political power. Average scores were lower for the effectiveness of institutions in all three branches of government (executive, judicial, legislative). Scores were lower still for the effi- ciency of government services, the control of corruption, and the transparency and accountability of the civil service. Scores were lowest for the decentralization of government structures and cor- ruption in the tax system. Generally, these assessments are consistent with the thrust of the earlier discussion on economic and political governance. The report identifies 10 priority areas in building capable and accountable states: · Strengthening the capacity of parliaments to perform their core functions, including providing checks and balances on the executive. Parliamentarians and their support staff need training and access to libraries and databases. · Deepening legal and judicial reforms, including through protection and enforcement of the autonomy of the judiciary and modernization of the judicial process. The judiciary needs inde- pendent funding. Reforms must also cover the police force and public prosecutors. · Improving public sector management through long-term, sustained efforts, tailored to country needs--for example, reducing red tape, accelerating improvements in pay and other incentives, and using in-country, regional, and international knowledge hubs. · Improving the delivery of public services, through effective channels of accountability between public providers and their clients. Options include decentralizing and encouraging greater choice and competition. · Removing bottlenecks to private enterprise, to improve national and regional investment cli- mates. This requires macroeconomic stability, consistent policies and regulations for business entry, protection of property rights, and enforcement of contracts. · Tapping the potential of information and communication technologies for promoting trans- parency, openness, and knowledge exchange in the affairs of government. Due to high costs, a strategic approach to e-governance is needed. · Fostering credible and responsible media that report accurate information and stimulate debate in an environment of freedom. Training is needed to support professionalism and effective self- regulation by the media. · Maximizing the contribution of traditional modes of governance. Traditional authorities must be enabled to complement the resources of government in providing public goods and services, including for conflict prevention and resolution. · Confronting the governance dimension of HIV/AIDS, which requires strong national leadership to reduce the effects of the pandemic on institutional structures and to manage the resources and mechanisms needed for societywide responses. · Getting partners to live up to their commitments for more and better aid through harmonized procedures, budget support, and predictable disbursements. Policies on aid, trade, and debt must be consistent with African efforts to achieve the MDGs. This ambitious reform agenda will require considerable contributions in the area of political commitment and supporting actions from donors, including assistance for capacity development. On every dimension, international financial institutions, in concert with bilateral donors, have launched initiatives to assist steadfast reformers push ahead. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 59 C H A P T E R 2 BOX 2.13 The Economic Commission for Africa's governance indicators and agenda (continued) Stronger performance on political representation; weaker performance on public sector management and institutional effectiveness Perception of key dimensions of governance (average for 23 African countries) Corruption control 48 Economic management 49 CSO/media independence 54 Executive's effectiveness 44 Human rights and rule of law 48 Institutional effectiveness/accountability 48 Political representation 65 0 10 20 30 40 50 60 70 100 Source: UNECA (2004). Notes: The scale is from 0 to 100, where scores close to 100 reflect good governance as perceived by the survey respondents. CSO = Civil Society Organizations. Africa. At times, crises or changes in leader- tional improvement.60 Opening up new mar- ship have led to institutional change, but kets may reduce the rents derived from the these are not amenable to policy guidance. prevailing economic and institutional arrange- More applicable is the possible role of policy ments and thus weaken vested interests. in promoting improvements in economic or There is also evidence that the wide avail- political institutions. ability of independent sources of information In general, policies that open up economic tends to encourage accountability. Where opportunities to a circle wider than the ini- ownership of press outlets is monopolized by tially entrenched elite tend to be conducive to the government, political and economic free- institutional improvement. An improved dom tends to be lower and corruption investment climate tends to spur demand for higher--and when there is more information wider institutional reforms because as available on policy choices and outcomes, gov- "investors, whether domestic or foreign, come ernments tend to be more responsive.61 In a forward, they tend to demand more effective prominent case, Amartya Sen drew a link institutions, greater security, and constant between the impact of transparency on the rel- improvements in the provision of public ative incidence of poverty and famine in China goods, which further enhances the quality of and India.62 The combination of higher trans- the investment climate."59 Along the same parency of public decisions and press freedom lines, a number of studies have found that to stoke the public debate tends to constrain strengthening competition, including through the options available to policymakers and trade openness, can be conducive to institu- reduce the scope for institutional failure. 60 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S P U R R I N G A N D S U S T A I N I N G E C O N O M I C G R O W T H In some cases external anchors may also The underlying objective is to foster the adop- contribute to institutional change. In combi- tion of policies, standards, and practices that nation with domestic commitment to reform, lead to political stability, high economic external incentives, constraints, and agree- growth, sustainable development, and acceler- ments may help in breaking through ated subregional and continental economic entrenched interests and other domestic integration through sharing of experiences and impediments to reform. This has been true in reinforcement of successful and best practice. the case of accession to the European Union In 2004 NEPAD heads of state approved for new members in Central and Eastern Ghana, Kenya, Mauritius, and Rwanda as Europe, to the North American Free Trade the first countries to be exposed to the Agreement (NAFTA) for Mexico, and to the APRM reviews. The second group of coun- World Trade Organization (WTO) for China. tries to be reviewed will include Algeria, In Africa the New Partnership for Africa's Mali, Mozambique, Nigeria, Senegal, and Development (NEPAD) aims to use collective South Africa. The four countries that have commitments and peer pressure to promote started the review process have established institutional reform (see below). Conces- focal points (at ministerial level or higher) sional loans and technical assistance from for the APRM as well as national coordinat- international financial institutions are also ing mechanisms to secure widespread con- geared to improving the policy and institu- sultations through all APRM stages. The tional framework in borrowing countries. extended design of the APRM process emphasizes learning and seeks to build more inclusive processes than are typically found Priorities for Building Capable and in, for example, poverty reduction strategy Accountable States in Africa (PRS) formulation and implementation. Across Sub-Saharan Africa there is growing Recent changes in approach have consid- recognition of the critical role of good gover- erably lengthened the process, and the focus nance, and a renewed resolve to improve per- has changed from the regional to the country formance on the ground. Under the aegis of level. With the limited capacity of the APRM NEPAD, African states have agreed to secretariat to prepare background analyses improve their economic and political gover- of countries and to promote substantive, nance. The work of regional development political discussions on governance problems agencies is focusing more on governance, and in the individual countries as well as in the the United Nations Economic Commission Peer Review Panel and Forum, the APRM for Africa's 2005 African Governance Report faces the challenge of moving beyond formal represents a major contribution to the buildup consultations and extended processes. These of a critical mass of country-specific data and are critical challenges for the APRM as the analysis on governance achievements and most innovative and potentially influential challenges. On the ground, NEPAD continues component of NEPAD. to advance with the African Peer Review In the period ahead, it will be essential to Mechanism (APRM), its innovative approach translate the recent improvements in political to improving governance. institutions to similar enhancements in eco- Already, 23 countries--containing about nomic institutions, particularly in rule-based three-quarters of the population of Sub-Saha- governance and protection of property rights. ran Africa--have acceded to the APRM, a key Extending reforms to these critical dimensions objective of NEPAD since its inception in of governance would begin to set in motion a 2001. Under the APRM, African countries vol- virtuous circle consisting of renewed incentives unteer to "open their books" on political gov- for better policies, a more favorable environ- ernance, economic governance, corporate ment for private investment, and rising living governance, and socioeconomic development. standards. Better policies can play a role in G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 61 C H A P T E R 2 spurring institutional development, including plicates regional comparisons. In either case, the by helping to overcome resistance to change relevant conclusions are robust to their inclusion. from entrenched interests. In practice, political 6. Equatorial Guinea should also be included commitment will be key in ensuring that in this group, but its period average growth rate reforms extend beyond mere changes of for- has been heavily influenced by spectacular oil-led growth since the mid-1990s. mal laws to more fundamental transforma- 7. The estimates of inequality and the argu- tions of daily practice, including informal rules ment on the political economic consequences of of behavior and the impact of vested interests. observed patterns across Africa are both from Artadi and Sala-i-Martin (2003). The same study Notes points out that most of the inequality in Africa can be accounted for by inequality within countries 1.The scenario presented is based on current rather than across countries. trends and primarily useful as a reference point. 8. The major oil producers in Sub-Saharan 2.The tsunami that hit Indian Ocean countries Africa are Angola, Cameroon, Chad, Republic of in December 2004 caused a human tragedy of epic Congo, Equatorial Guinea, Gabon, and Nigeria. proportions. The quick humanitarian and finan- 9. Bosworth and Collins (2003, p. 8). cial response of the rest of the world helped the 10. See Bosworth and Collins (2003) and affected countries quickly launch the recovery and Tahari and others (2004). Growth in total factor reconstruction process and also helped limit the productivity reflects not just changes in economic economic and financial costs of the tragedy. Based efficiency, but also the influence of growth deter- on initial assessments, the macroeconomic impact minants not otherwise included in measured is expected to be modest for India, Indonesia, Sri changes in physical or human capital, including Lanka, and Thailand. Although the impact on political instability and conflicts, droughts and growth and inflation will also be modest in the other exogenous shocks, and changes in govern- Seychelles, the economy was not as robust as in the ment policies and institutions. other countries prior to the disaster, and there may 11. While HIV/AIDS prevalence rates differ be increased pressure on the fiscal position and the widely across countries, ranging from 1 to almost balance of payments in 2005. In the Maldives, 40 percent, average life expectancy across the where the physical destruction was also significant, region has fallen over the past 15 years, largely the macroeconomic impact may be more pro- due to HIV/AIDS. The primary effect of nounced, with initial estimates suggesting that out- HIV/AIDS is an increase in mortality and a dete- put in 2005 may be lower than forecast by some 5 rioration in health, primarily among young percentage points of GDP. Somalia was also adults. In turn, HIV/AIDS affects most of the affected by the disaster, but the relative lack of common indicators of living standards, such as information and absence of an internationally rec- income, health standards, and access to educa- ognized government operating in the country have tion--and success in combating HID/AIDS, along slowed the pace of assessments, which are cur- with other communicable diseases, is one of the rently under way. MDGs. The channels through which the disease 3. In addition, for some regions the $1 a day affects economic growth are not well understood. poverty line may underestimate the extent of Studies focused on disruptions to the production poverty. Using a $2 a day definition of poverty, the process, and additional health expenditures tend headcount measure for East Asia and Pacific to find modest effects. On the other hand, studies would be 69.9 percent for 1990 and 11.3 percent that have attempted to capture some of the micro- for the 2015 forecast, for Europe and Central Asia economic impacts associated with the disease find it would be 4.9 percent and 5.2 percent, and for a larger effect on economic growth owing, for Latin America and the Caribbean it would be 28.4 example, to disruptions in the process of accumu- percent and 19.6 percent. lating human capital (Haacker 2004). 4. This section draws on IMF (2005b). 12. The earlier spotlight on unique drivers of 5. The figure excludes Europe and Central African growth has given way to a more complex Asia, for which membership has varied consider- explanation as the empirical relevance of the ably across the period covered, and Middle East "African dummy" has been eliminated and a and North Africa, where heavy reliance on oil com- more policy-relevant dialogue has focused on the 62 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S P U R R I N G A N D S U S T A I N I N G E C O N O M I C G R O W T H underlying determinants of economic outcomes. changes, macroeconomic stabilizations, and posi- See, for example, Hoeffler (2002). tive terms of trade shocks tend to be statistically 13. Satyanath and Subramanian (2004) significant predictors of accelerations, and that attribute the causes of long-run macroeconomic sustained booms tend to be associated with eco- instability to the incidence of conflict, lack of nomic reform rather than external shocks. openness to trade, and ineffective political institu- 21. World Bank (2005). tions. This raises the general question of the extent 22. In heavily indebted poor countries, debt sus- to which macroeconomic policy is a function of tainability is closely linked to the attainment of the deeper determinants and thus not an independent completion point under the enhanced Heavily driver of growth. It is clearly the case that macro- Indebted Poor Countries (HIPC) Initiative. In addi- economic performance is partly driven by deeper tion, successful implementation of the new Bank- political, economic, and structural factors. But a IMF forward-looking debt sustainability framework variety of evidence, including case studies and for low-income countries will be critical. This in turn experience, suggests that there is an important role will require an adequate supply of grant financing. for macroeconomic policy itself. In any case, both These issues are discussed in chapter 5. macroeconomic policy and underlying institu- 23. The fragility of fiscal sustainability with tional policies must be addressed simultaneously. respect to domestic financing is illustrated by sev- 14. Artadi and Sala-i-Martin (2003); Tsan- eral African countries that saw sharp increases in garides (2005). domestic real interest rates as domestic debt levels 15. The impact of foreign aid on recipient coun- rose from very low levels to amounts that would tries has been a controversial question in the acad- not typically be considered excessive in more emic literature, with earlier results often found not developed economies. The examples of Ghana, to be robust to changes in sample or specification. Malawi, and Zambia show how even what look Recently, Clemens, Radelet, and Bhavnani (2005) like relatively small increases in domestic debt can found that economic aid raised growth in Sub- sharply increase real interest rates. Saharan Africa, but they also found evidence of 24. There is no universal definition of a success- diminishing returns to aid. By their estimates, rais- ful stabilization (that is, a post-stabilization) coun- ing aid to Sub-Saharan Africa from current levels try. Adam and Bevan (2005) suggest that inflation to the point at which marginal returns diminish to rates lower than 15 percent for at least two years are zero, at close to 17 percent of GDP, would raise sufficient for qualification as a successful stabiliza- growth in the region by 0.4 percent per year. Rajan tion. Gupta and others (2002) propose a combina- and Subramanian (2005) find no evidence that aid tion: fiscal deficits under 2 percent of GDP and is associated with growth. inflation rates under 10 percent. A forthcoming IMF 16. See Collier, Hoeffler, and Soderbom (2004) study advances a more comprehensive measure: on duration, Collier and Hoeffler (2004a) on the some degree of internal macroeconomic balance, costs, and Staines and others (2005) on the macro- proxied by positive per capita growth rate and low economics of recovery from conflict. inflation; a fiscal stance that is sustainable over the 17. Growth accelerations are defined in box 2.6. medium term, proxied by restricted domestic financ- 18. The lower incidence of growth accelera- ing of the budget deficit; and robustness to external tions in Sub-Saharan Africa does not seem to be shocks, proxied by the level of international reserves. attributable to the region's higher proportion of 25. IMF (Forthcoming). low-income countries. Measured by the percent- 26. Using the alternative indicators of the fiscal age of country years spent in acceleration episodes, balance to assess progress in Sub-Saharan Africa the incidence of growth accelerations has been would tend to reduce the number of countries con- unrelated to either the initial level of income per sidered successful stabilizers. capita or the initial savings rate--a result that 27. Despite the caveats mentioned in the text holds for both the overall sample of countries and on the applicability of overall fiscal deficits to for those in Sub-Saharan Africa. assess the sustainability of fiscal positions in Sub- 19. The cutoff at 1998 is imposed to allow cal- Saharan Africa, it is worth noting that empirical culation of the post-episode five-year average. estimates of the deficit-growth nexus yield a sub- 20. Hausmann, Pritchett, and Rodrik (2004) stantively similar conclusion in suggesting that find that statistical models tend to have modest some African countries could boost growth with a explanatory power but that political regime reduction in fiscal deficits. Recent studies indicate G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 63 C H A P T E R 2 that post-stabilization countries with low deficits ness 2005 were conducted by the World Bank in may not benefit from further fiscal consolidation. collaboration with local partners. There have been However, most countries in Sub-Saharan Africa 8 surveys completed by countries in Sub-Saharan have a fiscal deficit higher than the threshold of Africa, in a total of 53 across all developing 1.5­2.5 percent of GDP (Adam and Bevan 2005). regions, and 8 more are planned over the next year. At the end of 2003 there were 25 countries in Sub- The goal of the exercises is to assess the impact of Saharan Africa with a fiscal deficit, including the investment climate on firm performance, and grants, higher than 2.5 percent of GDP, with 13 to measure business regulations across the world countries exceeding 5 percent. Among the latter and benchmark best practices. Doing Business group, the growth rate per capita was 0.9 percent 2005 covers 145 countries, including 32 in Sub- in 2003, compared with the regional average of Saharan Africa. 1.2 percent. 41. The ease of doing business index is the sim- 28. As of April 2004 this group included ple average of country rankings (from 1-135) in Botswana, Cape Verde, Equatorial Guinea, each of the seven measures included in Doing Gabon, Mauritius, Namibia, Seychelles, Swazi- Business 2005, with higher values indicating more land, and South Africa. efficient regulation and stronger protection of 29. World Bank (2005, chap. 3, p. 16). property rights. 30. Within Sub-Saharan Africa the pattern of 42. Labor regulation rigidity is the average of relative underallocation toward capital expendi- the difficulty of hiring index, rigidity of hours tures and the social sectors is particularly striking index, and difficulty of firing index. This indicator in the oil economies, which tend to underinvest rel- ranges from 0-100, with higher values indicating ative to other countries in the region. more rigid regulation. 31. The data, contracts, and audit reports are 43. Djankov, McLiesh, and Ramalho (2004). available at http://www.mefb-cg.org. 44. Doing Business in 2005. 32. Le Houerou and Taliercio (2002, p. 35). 45. This a key message of World Bank (2004b). 33. IMF (2005a). 46. Hanson and Ramachandran (2004). 34. IMF (2003). 47. Doing Business database. 35. Tax reform could also contribute to policy 48. There are, of course, other good reasons to stability by helping to moderate the relatively large prioritize investments in infrastructure, such as variance of revenue ratios in African countries. enhancing service delivery and accessibility in line This tendency for greater variability effectively with the nonpoverty goals of the MDGs; these are reduces the level of sustainable debt, among other discussed in chapter 3. things. 49. Estache and Goicoechea (2004). 36. As noted, sustainable policy configurations, 50. Estache and Yepes (2004). by promoting private investment and economic 51. The International Country Risk Guide growth, can be an effective source of fiscal space. (ICRG) economic risk index is a weighted average 37. Bulir and Lane (2002) document that aid of measures on political, economic, and financial has been up to seven times more volatile than risk components, with the values ranging from 0- domestic fiscal revenue, and that aid disbursements 100, where a higher score indicates lower risk. have not been well predicted by aid commitments. During 2000-3 the median rating for Sub-Saharan 38. See, for example, Levine and Renelt (1992) Africa was 59, followed by South Asia at 62, Latin on the robustness of investment in cross-country America and the Caribbean at 67, East Asia and regressions, and Collier and Gunning (1997) on the Pacific, Europe and Central Asia, and the Mid- the conclusion that investment in Africa is low. dle East and North Africa at 70, and high-income 39. For example, Devarajan, Easterly, and Pack countries (OECD and others) at 82. (2001) and, more recently, Eifert, Gelb and 52. On the ICRG economic risk index, low- Ramachandran (2004). Arguably, the reported income countries in Sub-Saharan Africa have a risk high level of capital flight from Sub-Saharan Africa assessment of 31.0, compared with 33.5 for other could be seen as a rational response to the lack of low-income countries (where a lower score implies profitable investment opportunities at home (Col- a higher risk). On the other hand, the same index lier, Hoeffler, and Pattillo 1999). rates middle-income countries in Sub-Saharan 40. The Investment Climate Surveys and the Africa at 36.5, compared with 35.5 for other mid- assessment of business regulations in Doing Busi- dle-income countries. 64 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S P U R R I N G A N D S U S T A I N I N G E C O N O M I C G R O W T H 53. United Nations Economic Commission for average improvement in other regions and, statis- Africa: Striving for Good Governance in Africa. Syn- tically, relative to the standard deviation. opsis of the 2005 African Governance Report (Pre- 58. This section draws on IMF (2003). pared for the African Development Forum IV, Addis 59. Stern (2001). Ababa, October 2004; http://www.uneca.org/agr/). 60. See, for example, Ades and Di Tella (1999), 54. McMillan and Zoido (2004, p. 87). Berg and Krueger (2003), Djankov and others 55. Besley and Burgess (2004); Djankov and (2001), Wei (2000), and World Bank (2002). others (2003). 61. See, for example, Djankov (2002), Adserà, 56. These indicators are not, strictly speaking, Boix, and Payne (2003), and Brunetti and Weder designed to show progress over time, but they do (2003) on the relationship between the press and indicate whether a region is making progress rela- governance, and Besley and Burgess (2002) on the tive to others over time. relationship between government responsiveness 57. The improvement in CPIAs during 1999- and newspaper circulation. 2003 is marginal in two senses: relative to the 62. Sen (1995). G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 65 3 Scaling Up Service Delivery T he chance for every child to go to pri- · Scaling up skilled providers--the doctors, mary school. A place to go for medi- nurses, and teachers needed to rapidly cine and basic health care. Clean water expand health and education services. flowing from a tap. Sanitation. Electricity at · Ensuring the sustained financing required the turn of a switch. These basic services are to expand these recurrent cost intensive taken for granted by citizens of developed services. countries. Yet in much of the developing · Making sure that resources translate into world--even for relatively wealthy groups-- effective service delivery, by improving these services are either unavailable or avail- governance and accountability. able only at low quality or high private cost. This selective focus means that the chapter The human development outcomes at the gives less attention to many other issues-- core of the Millennium Development Goals such as social protection, population trends, (MDGs)--primary education, literacy, gen- pharmaceutical availability, and school con- der equality, good health--depend on access struction--that are also important for MDG to these basic services. Human development progress. The goal is to complement other outcomes are also influenced by many other analyses, including Global Monitoring Report factors, such as individuals' traits and family 2004 and the recent Millennium Project and backgrounds, community features (including task force reports, which are more compre- roads and communications), and country hensive. The chapter also contains an assess- characteristics (including income, demogra- ment of MDG-related global programs phy, geography, and history). But striking dif- launched since 2000 and of the role donors ferences in these outcomes across countries need to play in accelerating MDG progress. It can be explained to an important degree by concludes with an action agenda for countries the policy choices that governments make to and their development partners derived from shape the financing and delivery of the basic this stocktaking. education, health, water, and sanitation ser- vices that directly affect human development. The Pace of MDG Progress, This chapter assesses the progress that 2000­5 countries and regions are making toward the human development MDGs, focusing on the Fiveyearsaftertheglobalcommitmentwasmade three most difficult implementation chal- to the MDGs, progress has been inadequate to lenges for most countries: ensure their attainment. Sub-Saharan Africa is G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 67 C H A P T E R 3 not on track to achieve a single MDG. In addi- tion, countries must simultaneously invest in tion to the goals discussed in the following sec- secondary and tertiary education--both to tions, it is off track on the hunger goal--and is produce the skilled workers that health, edu- the only region where child malnutrition is not cation, and other sectors need, and because declining. South Asia is off track on six goals: increasing rates of primary completion gener- gender equality, universal primary school com- ate social demand for more schooling. No pletion, child mortality, maternal mortality, matter how high child mortality is, countries communicable diseases, and sanitation. And must also address increased chronic diseases while malnutrition in the region is dropping among adult populations. In a world of com- sufficiently to achieve the MDG target reduc- peting priorities and devastating natural disas- tion, it remains at very high absolute levels: ters, the challenge facing developing countries almost half of children under five are under- is not just to achieve the MDGs; it is to achieve weight. The Middle East and North Africa is them at minimum global cost while simultane- also off track on six goals: gender equality, uni- ously advancing other important goals. The versal primary completion, child mortality, following sections look at where progress is communicable diseases, water, and sanitation. being made, where it is not, and why. Europe and Central Asia is off track on child mortality, maternal mortality, communicable Gender Equality diseases, and sanitation. And both Latin Amer- ica and the Caribbean and East Asia and the The world will not achieve the first MDG tar- Pacific are off track on child mortality, mater- get, set for 2005: gender equality in primary nal mortality, and communicable diseases. and secondary education. Despite strong This slow progress is all the more troubling progress in every region, girls' enrollments at because the MDGs are only first-stage devel- the primary level are still less than 90 percent opment goals; no 21st century country can of boys' in Sub-Saharan Africa, South Asia, afford to focus on these alone. No matter how and the Middle East and North Africa (figure far they are from universal primary comple- 3.1). At the secondary level, only Europe and FIGURE 3.1 Despite progress, the 2005 gender target will not be met Ratio of female to male gross enrollment Ratio of female to male gross enrollment rates in primary education rates in secondary education 1.0 MDG target 1.0 MDG target 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 0.0 0.0 Middle East & Sub-Saharan South Asia Middle East & Sub-Saharan South Asia North Africa Africa North Africa Africa 1990 2002 Source: UNESCO Institute for Statistics. 68 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S C A L I N G U P S E R V I C E D E L I V E R Y Central Asia has achieved enrollment parity. Paid employment is crucial to women's Primary completion rates show the same pat- empowerment and important to families' wel- tern--great progress in narrowing the gap, but fare because women are more likely than men as of 2003 the completion rate for girls was to invest their income in health care, educa- still more than 15 percent below that of boys tion, and food.1 But progress has been slow in in Sub-Saharan Africa and South Asia. Fore- this area. Between 1990 and 2003 women's casts for the 2015 goal of gender equality in share of nonagricultural employment in devel- tertiary education are even less encouraging, oping countries increased only 2 percentage with less than 10 percent of developing coun- points, from 35 percent to 37 percent. tries on track to achieve this target. More encouraging has been progress in polit- Although gender parity in primary education ical representation. The share of countries will not be reached globally in 2005, an impres- where women hold at least one-fifth of the seats sive number of countries will achieve it--even in in national parliaments grew from 13 percent in the three regions with the deepest education 1990 to 24 percent in 2004--a significant inequality. In Sub-Saharan Africa these coun- change. But as noted in a report prepared for the tries include Botswana, Gabon, The Gambia, recent 10-year follow-up to the 1995 Beijing Lesotho, Mauritania, Mauritius, Namibia, Conference on Women, the real mark of Rwanda, Seychelles, Tanzania, Uganda, and progress is women's greater prominence in Zimbabwe; in South Asia, Maldives and Sri political life translating into leadership positions Lanka; and in the Middle East and North and more influence over decision making. And Africa, Jordan, Libya, Oman, and Saudi Arabia. in many cases, that has yet to happen.2 Much Jordan and Oman have also achieved gender remains to be implemented from the Beijing parity in secondary education. action plan, including faster progress on the While some of these countries had rela- gender equality targets reaffirmed in the MDGs. tively equitable gender outcomes in education The world's failure to meet the 2005 target in 1990 (the year against which progress for gender parity in primary and secondary edu- toward the MDGs is measured), in others cation should not be rewarded with a reprieve policy actions and incentives have trans- to 2015. Most regions are on track to achieve formed the playing field for girls. In Guinea parity sooner--particularly at the primary level, girls' enrollments in primary education rose where girls' enrollments have been growing from barely 40 percent of boys' in 1990 to a faster than boys' in every region. The United projected 88 percent in 2005. Similar Nations should review the latest data and set a progress has been made in Benin, The Gam- new year for this target, such as 2007 or 2008, bia, and Mauritania, as well as Bangladesh, to encourage the fastest possible progress. Morocco, Nepal, Papua New Guinea, and Yemen. How did they do it? Box 3.1 profiles Universal Primary Education different strategies. But achieving gender equality and empow- Primary education completion rates are ering women--the third MDG--require increasing in all developing regions. But as with more than parity in education enrollments. gender equality, in the Middle East and North Additional targets include attaining gender Africa, South Asia, and especially Sub-Saharan parity in literacy and increasing the share of Africa the pace of progress is too slow to ensure women in nonagricultural employment and attainment of the second MDG: universal pri- national parliaments. Although progress has mary completion by 2015 (figure 3.2). Latin been made, the gap has not closed in Sub- America and the Caribbean has made strong Saharan Africa, South Asia, and the Middle progress and, on a population-weighted basis, East and North Africa, where literacy rates both it and East Asia and the Pacific are close among 15­24-year-olds are 10­20 percentage to achieving the goal. In both regions, though, points lower for women than for men. some smaller countries are not on track. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 69 C H A P T E R 3 BOX 3.1 Sub-Saharan Africa shows that fast progress is possible in closing the gender gap Twelve Sub-Saharan countries will meet the 2005 target of gender parity in primary education, and at least three others will come close. Many countries in other regions have also made exceptional progress in getting girls into school. In every case some combination of the following policies lies behind the progress: · Making schools affordable. Eliminating school fees increases both girls' and boys' enrollments-- but as shown in Tanzania and Uganda, these policies have a larger effect on girls. Countries such as Bangladesh and The Gambia have gone further, providing scholarships and financial aid for girls in the poorest communities. World Food Program "take-home rations" in Eritrea, Ethiopia, Ghana, Guinea, and many other African countries have also been associated with significant increases in girls' school attendance and completion. · Reducing the distance to school. New schools often expand girls' enrollments faster than boys' because they relieve concerns about girls' safety in walking long distances to school. · Providing water and sanitation at schools. In Bangladesh, India, Kenya, Nigeria, and other coun- tries the introduction of clean, private sanitation and washing facilities in schools has raised girls' attendance rates by as much as 11 percent. UNICEF surveys in Africa and Asia show that in some countries as few as 10 percent of schools have adequate, separate sanitation facilities for boys and girls, and in some schools as many as 150 students share a single latrine. Standpipes at schools also ease the burden that girls face in fetching household water from distant sources. · Providing bilingual instruction. Instructing children in their first language during the early years of schooling lowers repetition and raises attendance, classroom participation, exam scores, and promotion rates--especially for girls. In Mali teaching in the mother tongue in grade 1 and grad- ually replacing it with French afterward has led girls to volunteer more during class, read more comfortably, and stay in school. In Mauritania a switch to Arabic language instruction has increased girls' enrollments. · Increasing the number of female teachers. In Botswana a consistently positive relationship has been found between the proportion of female teachers in a school and girls' achievement levels. The Gambia has reviewed curriculums to ensure that they are gender-sensitive and offers career counseling for girls. · Involving the community. Involving communities in the development of national and local action plans helps identify and address factors that deter girls from attending school. In 1993 The Gam- bia became the first country to apply the Participatory Learning and Action approach to girls' education. Ideas that emerged included flexible fee payment schedules, separate latrines for girls and boys, and enforcement of sexual harassment policies in schools--and sharply increased girls' enrollments at both the primary and secondary levels. In Guinea, Kenya, Senegal, and Uganda this approach has led to changes in school calendars and fee policies, the creation of single-sex schools, and provision of community-supervised protection for girls. · Raising public awareness. Niger's increase in girls' primary enrollments is partly due to cam- paigns on the importance of girls' education, particularly in rural areas. The Gambia has used women's theater groups to raise community awareness about the importance of girls' education. · Making schools girl-friendly. Allowing married and pregnant adolescents to attend school and offering flexible school schedules has promoted girls' secondary school attendance in Botswana, Guinea, Kenya, Malawi, and Zambia. Sources: IRC 2004; UNICEF Nigeria 2003; UNICEF India 2003 and other data; Sen 2000; UNICEF Somalia 1999. 70 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S C A L I N G U P S E R V I C E D E L I V E R Y FIGURE 3.2 Several regions are off track to achieve universal primary completion by 2015 East Asia & Pacific Europe & Central Asia Latin America & the Caribbean 110 110 110 97 100 100 97 100 100 100 100 vant 88 90 97 90 90 90 eler 80 80 80 88 of ouprg e 70 70 70 ag cent 60 60 60 erP 50 50 50 40 40 40 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Middle East & North Africa South Asia Sub-Saharan Africa 110 110 110 100 100 100 100 100 100 vant 90 90 90 eler 79 80 74 80 84 80 80 of ouprg e 70 70 70 ag 59 cent 60 60 60 erP 50 50 50 50 40 40 40 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Goal Primary completion rate 1990 2004 2015 Actual Path to goal Sources: UNESCO Institute for Statistics and World Bank joint database. Note: Data are weighted by population. Although Europe and Central Asia needs to increases in primary completion in the region's accelerate progress, the goal is within reach. best-performing countries far exceed anything In the Middle East and North Africa, coun- achieved by today's developed countries when tries such as Morocco have made rapid at a similar stage in their development.3 Since progress, although primary completion rates 1990, 8 of the developing world's 10 top per- in many of the large population countries in formers have been in Africa: Benin, Eritrea, the region have been stagnating. In South Asia, Ethiopia, Guinea, Mali, São Tomé and Principe, reaching the education MDG will require Togo, and Malawi. In all these countries pri- faster overall progress: in India, where impres- mary completion rates have grown by more sive performance in a number of states has not than 5.0 percent a year, well above the low- yet translated into aggregate national progress; income country average of 0.8 percent. Core in Pakistan, which remains seriously off track; elements of policy progress in these and other and Afghanistan, which is recovering quickly, countries have been political commitment to but from a tragically low base. universalizing education, actions to lower the In Sub-Saharan Africa the overall prospects costs of expanding schooling through more effi- are dim. In 2003 only 59 percent of children cient construction, teacher training, and hiring, completed primary school, and on current attention to crucial inputs such as books and trends the region will not achieve universal materials, and "demand side" adjustments to primary completion until 2061. make schools more accessible--by adapting the Yet enormous education progress is being language of instruction, changing school calen- made in many Sub-Saharan countries. Annual dars, eliminating fees, and other actions. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 71 C H A P T E R 3 For many countries the main challenge for financing to help lagging countries, including attaining this MDG is the very low base from through global programs such as the Educa- which they started. For any country with a pri- tion for All Fast Track Initiative. But global mary completion rate below 60 percent in attainment of universal primary education by 2003, even the highest recorded rates of 2015 is far from assured. improvement (on a percentage point basis) would not be enough to attain the MDG. Child Mortality Around the world, 26 countries fall below that threshold--and 22 are in Sub-Saharan Africa. Every week in the developing world, 200,000 In another set of countries, though, slow children under five die of disease--as many progress is the issue. Between 1990 and 2000 lives as were lost in the recent South Asian the primary completion rate was stagnant in tsunami. The fourth MDG aims to reduce Ghana, Kenya, Nigeria, and Tanzania, and infant and under-five mortality by two-thirds has only recently begun to increase. These between 1990 and 2015, implying an average countries can attain universal primary com- reduction of 4.3 percent a year. Although no pletion, but only if progress improves sub- region achieved such a population-weighted stantially and is sustained. That is also true reduction in the 1990s, Latin America and for a significant number of countries in other the Caribbean, the Middle East and North regions, most notably India. There is clear Africa, and East Asia and the Pacific are not scope for knowledge diffusion and increased far off track (figure 3.3). FIGURE 3.3 Despite progress on child mortality, all regions are off track East Asia & Pacific Europe & Central Asia Latin America & the Caribbean ths 200 200 200 bir evli 150 150 150 100 100 100 1,000 per 50 50 50 33 59 41 20 36 15 53 18 ths 46 0 0 0 Dea 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Middle East & North Africa South Asia Sub-Saharan Africa ths 200 200 200 187 171 bir evli 150 150 130 150 100 100 100 1,000 92 62 per 43 50 77 53 26 50 50 ths 0 0 0 Dea 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Goal Under age five mortality 1990 2004 2015 Actual Path to goal Sources: UN and World Bank staff estimates. Note: Data are weighted by population. 72 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S C A L I N G U P S E R V I C E D E L I V E R Y As with the primary completion rate, there Central Asia, the Middle East and North is substantial variation in trends at the coun- Africa, and Latin America and the Caribbean. try level. Even in Sub-Saharan Africa, where But coverage has fallen in East Asia and the little progress has been made overall, coun- Pacific, and in Sub-Saharan Africa it has stag- tries such as Ethiopia, Malawi, Mozambique, nated at less than 60 percent. Namibia, and Uganda have improved child survival despite challenging circumstances, Maternal Mortality such as widespread HIV/AIDS (box 3.2). But other Sub-Saharan countries saw child mor- Every week 10,000 women in the developing tality increase in the 1990s, erasing earlier world die giving birth. A woman's risk of progress. dying during delivery is 250 times higher in About 70 percent of child mortality occurs low-income than in developed countries. The in the first year of life, and almost 40 percent in fifth MDG calls for reducing the maternal the first month. Most of these deaths are due to mortality ratio by three-quarters between five highly preventable and treatable condi- 1990 and 2015, an average annual reduction tions: acute respiratory infections, diarrhea, of 5.4 percent. Due to scarce data, maternal malaria, measles, and malnutrition. Basic post- mortality is tracked largely through modeling natal care, breastfeeding, and access to simple, projections from demographic data rather low-cost treatments for diarrheal diseases can than direct reporting, and trend estimates are have a major impact on infant mortality. Water quite tentative. The World Bank estimates supply and sanitation can also make a big dif- that only one developing region is on track to ference: about 90 percent of diarrheal deaths reach the maternal mortality target (Middle among children are due to lack of safe water East and North Africa), though two others and sanitation.4 Finally, low-cost immuniza- (East Asia and the Pacific, Europe and Cen- tions against measles, diphtheria, polio, and tral Asia) are close.5 In Latin America and the other diseases can prevent a lot of childhood Caribbean the maternal mortality ratio (190 sickness and death. Encouragingly, three devel- per 100,000 births) is lower than in other oping regions have achieved 90 percent immu- regions, but it is proving more difficult to nization coverage against measles: Europe and achieve incremental improvements. BOX 3.2 Reducing child mortality in Mozambique Despite low economic development and high poverty--per capita gross national income (GNI) was $200 in 2002, and 54 percent of the population lives below the poverty line--Mozambique has made impressive progress in lowering under-five mortality, from 226 per 1,000 live births in 1990 to 170 in 2003. While this level is still very high, the decline is encouraging given the country's unfa- vorable disease environment, with HIV/AIDS affecting an estimated 15 percent of adults and a high prevalence of malaria and other infectious childhood diseases. What accounts for Mozambique's success? One important factor has been the country's efforts to provide basic preventive health services in remote areas, delivered by both community health facilities and mobile teams, resulting in high coverage for key interventions. About 85 percent of pregnant women receive antenatal care, while 77 percent of children are immunized against measles and 63 percent are fully immunized. Community-based services also promote healthy behaviors such as breastfeeding and oral rehydration therapy. Mozambique has shown that mobile teams can be effective in an environment with too few health facilities and a dire shortage of qualified health staff, reaching households that otherwise lack access to health care. Source: World Bank 2004c. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 73 C H A P T E R 3 Because measuring maternal mortality other infectious disease. That same year nearly ratios directly is so difficult, the percentage of 5 million people became infected with HIV, 2 deliveries attended by medically skilled per- million children were living with it, and 15 mil- sonnel is also used to track progress. Although lion children had been orphaned by AIDS. this indicator increased in all regions between Sub-Saharan Africa remains by far the worst- 1990 and 2000, it is still below 50 percent in affected region, home to nearly two-thirds of all South Asia and Sub-Saharan Africa. people with HIV/AIDS. The average HIV preva- lence rate in the region is 7.4 percent, or 1 in every 14 adults--and in parts of Southern HIV/AIDS, Malaria, and Other Diseases Africa it is 1 in 3. In nine African countries life The sixth MDG is to halt and begin reversing expectancy has dropped below 40 years because the spread of HIV/AIDS, malaria, and other of the disease, and across the region 11 million major communicable diseases by 2015. children have been orphaned by it. But HIV/AIDS poses enormous threats in H I V / A I D S every region. Since 2002 the number of peo- Despite 20 years of efforts to control it, ple living with it has risen by 50 percent in HIV/AIDS continues to spread. In 2004, 39 mil- East Asia, reflecting China's rapidly growing lion people were living with HIV/AIDS (figure epidemic, and by 40 percent in Europe and 3.4) and 3.1 million died--more than from any Central Asia, driven by its rapid spread in the Russian Federation and Ukraine. Two decades of battling HIV/AIDS FIGURE 3.4 Since 1990 the number of people living with HIV/AIDS has have taught the world two main lessons. quadrupled First, countries have a crucial window of opportunity early in the epidemic, when prevalence is largely confined to high-risk 1990 populations such as sex workers and intra- 1991 venous drug users. Brazil, Cambodia, Senegal, and Thailand are among the 1992 countries that acted decisively to introduce 1993 strong prevention programs when preva- 1994 lence was low, and they have achieved declining levels of new infections. Early 1995 action in Thailand averted an estimated 5 1996 million infections during the 1990s. 1997 Second, even in countries where HIV/AIDS has spread into the general 1998 population and the main mode of trans- 1999 mission is heterosexual, some are doing 2000 better than others at curbing its spread. 2001 Among African countries, in Uganda HIV prevalence among pregnant women 2002 dropped from 13 percent in the early 2003 1990s to just under 5 percent in 2002, and 2004 in Botswana, Ethiopia, and Kenya the prevalence in urban populations appears 0 5 10 15 20 25 30 35 40 45 to have stabilized.6 The key has been Millions of people forthright national leadership, widespread public awareness campaigns, and inten- Source: UNAIDS data. sive prevention efforts. 74 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S C A L I N G U P S E R V I C E D E L I V E R Y Yet these lessons appear unheeded in many Yet malaria is eminently preventable, cur- countries, including large countries such as able, and controllable with modern technolo- China, India, and the Russian Federation. gies--at a cost of a few dollars per person. Unless more aggressive actions are taken in Brazil's malaria control program is credited these and other countries, HIV prevalence is with averting an estimated 2 million cases projected to rise further. Work continues on and 231,000 deaths. Other countries that vaccine development, and the Joint United have made impressive progress include Nations Programme on HIV/AIDS (UNAIDS) Eritrea (which has reduced malaria incidence estimates that the number of people with over four consecutive years through the use of access to antiretroviral drugs increased from insecticide-treated bednets), India (which 300,000 in 2002 to 700,000 in 2004. But since 2002 has reduced malaria incidence by given that the impact of expanded treatment 58­98 percent across different states), and on HIV transmission is not clear, it is crucial Vietnam. to redouble education and prevention efforts Effective strategies generally involve a at the same time. combination of vector control, insecticide- Financing, research, and global advocacy treated bednets and curtains, indoor resid- for HIV/AIDS have increased significantly ual (house) spraying with insecticides where since the MDGs were adopted. Commitments the pattern of transmission warrants it, for HIV/AIDS prevention and treatment pro- intermittent preventive treatment during grams jumped from less than $400 million in pregnancy, and prompt treatment of infec- the late 1990s to an estimated $6 billion in tions with effective drugs. Global funding 2005. Now concerns have shifted from financ- for malaria has almost quintupled in the ing to implementation, reflecting the multiple past few years, from $120 million to $570 donor procedures for accessing support and million, thanks largely to the Global Fund weaknesses in health delivery systems. Faster to Fight AIDS, Tuberculosis and Malaria. progress is needed in harmonizing donor aid Yet most experts estimate that as much as at the country level and implementing the $1 billion more a year is needed. Bednet use "three ones" principle agreed to in mid-2004: remains low in many malarious countries, that all donors will work through one vector control is inadequate, and increased HIV/AIDS coordinating agency in each coun- resistance to traditional drugs is requiring try, one national strategic plan, and one sys- newer, more expensive treatments. But tem for monitoring and evaluating progress. experience shows that rapid gains can be made against malaria, even in countries M A L A R I A with weak health systems. The Roll Back Malaria takes a heavy toll on health and eco- Malaria effort provides a global framework nomic productivity where it is endemic, and for intensified progress. it is concentrated in countries that can least afford it: 69 of the 80 poorest countries have Water and Sanitation endemic malaria. Data are poor because many cases go unreported, but the annual Expanding water and sanitation services is incidence of malaria is estimated at 300­500 one of the most cost-effective strategies for million cases--with 1.2 million deaths, improving health outcomes. Water and san- mainly among children. About 85 percent of itation coverage also makes powerful con- these deaths occur in Africa, 8 percent in tributions to other MDGs, including Southeast Asia, 5 percent in the Eastern achieving gender equality and reducing Mediterranean, 1 percent in the Western poverty and malnutrition. The seventh Pacific, and 0.1 percent in the Americas. In MDG seeks to halve by 2015 both the pro- many African countries malaria is the leading portion of people without sustainable cause of death. access to safe water and the proportion G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 75 C H A P T E R 3 without adequate sanitation. Achieving tries in any region have achieved such both targets would provide safe water to progress, particularly in rural areas. But another 1.5 billion people and sanitation to Ghana, Senegal, South Africa, and Uganda another 2.0 billion people. Unsafe water and have shown that it can be done. poor sanitation and hygiene are responsible The sanitation target is more problematic, for 90 percent of diarrheal diseases and an with only two regions on track--East Asia and estimated 4­8 percent of the total disease bur- the Pacific and Latin America and the den in developing countries.7 Caribbean. At current trends, the world will The most recent estimates by the World miss the sanitation target by more than half a Health Organization and United Nations billion people. But even within lagging regions Children's Fund indicate that most develop- some countries have made significant progress. ing regions are on track to achieve the safe Between 1990 and 2002 Bangladesh, India, water target (figure 3.5). The exception is and Nepal more than doubled sanitation cov- Sub-Saharan Africa, where only slightly more erage, with some notable successes in slums than half of the population has access to safe (box 3.3). In Africa strong progress has been water. To achieve the water target in Sub- made by Cameroon, South Africa, and Saharan Africa, for each of the next 10 years Uganda. And within countries there are local the number of additional people served success stories, as in Burkina Faso and Senegal. would have to double for urban water and The keys are sustainable institutions triple for rural water. Only a handful of coun- financed through effective cost recovery of FIGURE 3.5 Progress is being made in water supply, especially in South Asia, but sanitation progress is slower People without access to piped water and improved sanitation Sub-Saharan Africa South Asia East Asia & Pacific 90 90 83 90 tion 68 70 64 65 60 60 60 51 popula 42 51 34 35 of 42 30 30 30 22 cent 15 26 30 29 16 erP 15 0 0 0 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Latin America & the Caribbean Europe & Central Asia Middle East & North Africa 90 90 90 tion 60 60 60 popula 32 of 31 30 26 30 30 25 16 18 15 cent 14 13 7 12 erP 18 11 6 0 9 0 0 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Goal Water Sanitation Water Sanitation 1990 2004 2015 1990 2004 2015 Actual Path to goal Actual Path to goal Source: WHO and UNICEF joint monitoring program. Note: Only sanitation estimates are available for Europe and Central Asia. 76 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S C A L I N G U P S E R V I C E D E L I V E R Y BOX 3.3 Improving sanitation in India's slums The crowded slums of Mumbai (formerly Bombay), India, are home to 7 million people. Recog- nizing their needs, an innovative sanitation program financed by the World Bank has built 320 toi- let centers that serve 500,000 slum residents. These community-managed centers provide sanitary excreta disposal (with continuous water supply, to ensure hygiene), offer health education, and are gradually replacing municipally managed latrines that were rapidly falling into disuse. Although the toilet centers were financed by grants, user families pay monthly subscriptions that cover the running costs, including wages of attendants. All the toilet centers have been well maintained and are the pride of the communities that own them. The success of similar community-run programs in other Indian cities has led to the adoption of a nationwide slum sanitation program that will apply the same principles. Source: OED 2003. sanitation surcharges linked to water bills, Because improvements in health outcomes greater use of demand-based onsite sanitation for the poorest groups will not automati- technologies, and increased reliance on small- cally result from the pursuit of MDG health scale local contractors and artisans as sanita- goals, policymakers must focus on targeted tion service providers. A shift in focus to strategies for reaching poor households. In onsite sanitation, which is much cheaper than many settings effective targeting must take piped sewerage, is helping increasing num- into account other characteristics of disad- bers of low-income countries speed MDG vantaged groups, such as ethnicity or rural progress. In Dakar, Senegal, for example, residency. Effective strategies for reaching onsite sanitation has permitted service deliv- target groups include prioritizing the ery to hundreds of thousands of periurban expansion of services in poor or rural slum residents for the first time. The invest- regions, expanding those services (such as ment cost was about $400 a household, and basic water and sanitation, primary health residents can afford the operating costs. care, and primary education) that most ben- efit poor people, and eliminating user fees in primary education and for essential health Is MDG Progress Reaching Poor People? services for poor families, since such fees The MDGs aim to improve human welfare. can impede their access to services. But it is important to recognize that some of In education, progress toward universal the goals--especially in health--can be primary completion more often enhances achieved without progress reaching poor peo- equity. In 21 of 31 developing countries for ple. In two-thirds of the countries that have which comparable survey data are available reduced child mortality since 1990, outcomes between 1991 and 2002, primary enrollments for families in the lowest income quintile have for children in the bottom income quintile improved less than for the population as a increased faster (in two cases, declined less) whole (figure 3.6). In some of these countries than enrollments for the population as a outcomes have actually worsened for the whole (figure 3.7) This finding is confirmed poor while improving for richer groups. by more detailed studies in countries such as It is crucial to learn from the exceptions. India, showing that expansion of basic edu- During the 1990s Mali, Turkey, Egypt, cation has been progressive in impact--that Peru, and Cameroon achieved faster reduc- is, it has benefited lower-income groups more tions in child mortality for the poorest quin- than other groups.8 Still, in about 30 percent tile than for the population as a whole. of countries primary enrollments for children G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 77 C H A P T E R 3 FIGURE 3.6 Progress on health does not always FIGURE 3.7 Progress on education is generally benefit poor people more equitable Difference in annual percentage improvement Difference in annual percentage improvement in child mortality between the poorest in primary enrollments between the quintile and the population average, selected poorest quintile and the population average, years between 1991 and 2001 selected years between 1991 and 2002 Mali Mali Haiti Turkey Dominican Rep. Egypt Benin Guatemala Peru Nigeria India Cameroon Malawi Colombia Uganda Rwanda Haiti Kenya Colombia Malawi Egypt Tanzania Burkina Faso Indonesia Nepal Cameroon Côte d'Ivoire India Zimbabwe Ghana Bolivia Peru Guatemala Philippines Bolivia Zambia Kazakstan Benin Turkey Ghana Bangladesh Namibia Nicaragua Nepal Bangladesh Vietnam Nicaragua Tanzania Kazakhstan Niger ­12 ­8 ­4 0 4 ­5 0 5 10 15 20 Sources: World Bank estimates from Demographic and Health Survey Source: World Bank estimates from Demographic and Health Survey data. data. 78 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S C A L I N G U P S E R V I C E D E L I V E R Y from upper-income groups increased more cation costs in developing countries, and health than those for the poorest children. As poli- care salaries typically account for 60­75 per- cymakers and development partners track cent of government health spending.9 Policies national progress toward the MDGs, it is governing the recruitment, training, salaries, essential to watch the progress of the poor. deployment, and management of skilled edu- In education, health, water, and sanitation cation and health workers are core drivers of many of the interventions needed for better system costs, unit costs, resources available for outcomes in developing countries are well complementary inputs, and outcomes. understood. The International Water Supply Although there is considerable variation and Sanitation Decade of the 1980s showed across countries, the number of health care that scaling up investment is not difficult--far providers is correlated with health service cov- more challenging is ensuring the sustainabil- erage. Countries with fewer than 1.5 health ity of systems, which is crucial for safe and workers per 1,000 people are highly unlikely to continuous services. Building schools and have a measles immunization rate of 80 percent, health clinics is far less complex than devel- whereas this rate is almost assured in countries oping and organizing the large workforces of with a health worker density of more than 2.5 skilled providers that must engage in face-to- (figure 3.8).10 Countries with fewer than 2.5 face interactions with individual clients health workers per 1,000 people are also less across highly decentralized networks. For likely to have at least 80 percent of births most countries the two main implementation attended by skilled personnel. In education the challenges to the health and education MDGs process of classroom instruction creates even are scaling up skilled providers to achieve tighter limits on the number of children that can universal access to services and ensuring that receive "education services" for a given number providers perform effectively. The rest of this of teachers. No country with less than 1 teacher chapter focuses on these two issues and on a per 70 school-age children has achieved univer- third with important links to both: the role of sal primary enrollment. donor financing in supporting system expansion and leverag- FIGURE 3.8 Health service coverage increases with the number of providers ing better performance. One-year-olds immunized against measles (2001) Scaling Up Coverage (percent) Nicaragua Trinidad Skilled Providers 100 Mozambique Eritrea Student learning and patient Gambia health result from multiple 80 complementary inputs, includ- Births attended by skilled health personnel (1995­2001) ing school and clinic infrastruc- 60 ture, availability of books, Namibia drugs, and clean water, and Kenya RB de Venezuela family investments of time and Uganda 40 energy, to study for exams or follow treatment instructions. Mali But skilled providers--teachers, 20 Laos doctors, nurses--are the biggest Nepal expense in any social sector 0 budget, as well as the most 0 1 1.5 2 2.5 3 4 5 essential input for effective ser- Health workers per 1,000 population vice delivery. Teacher costs average 75 percent of total edu- Source: Joint Learning Initiative 2004. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 79 C H A P T E R 3 FIGURE 3.9 Provider presence is also associated with better their level of education or years of experience. health outcomes What counted was what teachers actually know and can do. A recent large-scale learning assessment in Skilled health worker density and mortality Vietnam confirms this finding. The strongest Mortality per 1,000 (log) predictor of students' performance on fifth- 9 grade tests of reading comprehension and 8 mathematics was their teachers' performance 7 on the same tests. Not the teachers' salaries, 6 training levels, or teaching conditions--but 5 their mastery of the subjects being taught. A 4 sobering finding was that the bottom 30 per- 3 cent of teachers actually scored lower on read- 2 ing comprehension than did the top 12 percent 1 of fifth grade students.13 Few developing coun- 0 0 1 2 3 4 5 tries have braved political pressures to measure Density, workers per 1,000 (log) teachers' subject knowledge directly, but those that have--including Brazil and Peru--have Maternal Infant Under-five also found teachers' mastery of content to be a critical determinant of education quality. Source: Calculations based on Anand and Barnighausen 2004. Research also demonstrates the impor- tance of provider quality in health. In 1992 The number of skilled providers is also Indonesian health centers were forced to cut important for health outcomes. A recent incentive payments for rural doctors as part study of 83 countries found that a 10 percent of a government effort to reduce the fiscal increase in the number of trained health deficit. As a result, over the next several years workers (doctors, nurses, midwives) per pop- there was a 30 percent decline in the average ulation unit is associated with a 2­5 percent number of physicians per rural health center decline in mortality, controlling for per capita (from 1.8 to 1.2). Although patient visits income, poverty, and female literacy (figure were not affected, the quality of care was-- 3.9) 11 Maternal mortality outcomes are the and there was a 39 percent increase in child most sensitive to provider density, because stunting in the affected regions.14 Such severe skilled health workers can address a larger malnutrition is likely to have long-term cog- share of the conditions that lead to maternal nitive and productivity effects on the children mortality than the conditions that lead to involved and may generate cumulative eco- infant or child mortality. nomic costs that outweigh the short-term fis- Although worker numbers are important, cal savings from the reforms. skilllevelsarekey.Inarigorousstudyofprimary Interestingly, the researchers in Indonesia educationintheUnitedStatesthatcontrolledfor evaluated providers not with formal mea- students' innate ability and socioeconomic sta- sures such as level of education, but by tus, the teacher a child was assigned could affect observing how closely they followed best his or her learning levels that school year by up practices in diagnosing and treating patient to a full grade--a huge difference that dwarfs conditions. The conclusion: As in the educa- anyotherfactorcorrelatedwithlearning,suchas tion research, what providers know and can books, facilities, class size, or teacher salaries.12 do are crucial to quality services. Whether And,importantforpolicymakers,theselargedif- scaling up systems through new hiring or try- ferences in teacher effectiveness were not well ing to improve existing education and health correlated with the formal measures usually services, the most effective governments focus believed to determine teacher quality, such as on screening and rewarding candidates for 80 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S C A L I N G U P S E R V I C E D E L I V E R Y competency, and avoid recruitment and FIGURE 3.10 Projected primary teacher needs are large in advancement driven by clientelism, formal Sub-Saharan Africa qualifications, or years of service alone. Annual production of teachers needed, 2002­15, to achieve universal primary Are Human Resources education, as a percent of existing number a Binding Constraint? of teachers The low-income countries furthest from the Seychelles Mauritius MDGs, many of which are in Sub-Saharan Cape Verde Africa, face major challenges in producing the Sao Tome' and Principe ~ number of skilled providers required to Kenya deliver the health and education services Togo needed to attain the MDGs--even under opti- Botswana mistic assumptions about the impact of ser- Ghana vice delivery on outcomes. The Joint Learning Comoros Namibia Initiative, supported by the Rockefeller Foun- Swaziland dation, the World Health Organization, and Zimbabwe other health donors, estimates that for Sub- Uganda Saharan Africa to rise from its current ratio of South Africa 1 health worker per 1,000 people to a target Gabon level of 2.5, the region will need to add the Liberia Nigeria equivalent of 1 million health workers Lesotho between now and 2015.15 Ethiopia will Equatorial Guinea require an additional 150,000 workers, while Mauritania the Democratic Republic of Congo and Nige- Benin ria will each need 90,000. Globally, about 4 Gambia million additional health workers will be Cameroon needed, including 285,000 in Bangladesh. Côte d'lvoire Estimates of teacher requirements are also Rwanda Tanzania daunting, especially for Sub-Saharan Africa. Sierra Leone To meet the needs for primary education Madagascar alone, eight Sub-Saharan countries must pro- Guinea duce at least 30 percent of their current stock Malawi of teachers each year until 2015 (figure 3.10). Zambia Two countries need to annually produce Senegal Republic of Congo more than 40 percent of their current stock. Burundi In some countries annual requirements are Angola more than 10 times current output from Mali teacher training schools (figure 3.11). Chad Clearly, in much of Sub-Saharan Africa the Eritrea MDGs will not be attained with "business as Ethiopia usual" approaches to the production of Mozambique Burkina Faso skilled health workers and teachers. But in a Central African Republic growing number of countries, pragmatic Niger changes in human resource policies have dra- matically increased the number of skilled 0 10 20 30 40 50 providers. Although not all cases have been Percent equally successful in terms of provider and Source: Calculated from EdStats data. service quality, they demonstrate a range of Note: Projected from 2001 data. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 81 C H A P T E R 3 FIGURE 3.11 Projected primary teacher needs far exceed training capacity in many African countries Actual production of teachers and required production, 2002­15, to achieve universal primary education Number of teachers 12,000 10,000 8000 6000 4000 2000 0 Benin Niger Lesotho Burkina Chad Eritrea Mali Malawi Ghana Kenya Faso Yearly production of teachers needed at projected Actual production of teacher rate of attrition (including expected impact of training colleges HIV/AIDS on teacher supply), assuming average class size of 40 and 10% student repetition Source: Calculated from EdStats data. Note: Projected from 2001 data. strategies for rapidly shifting the production · Manage international migration, either by curve for skilled providers. In several cases sector importing skilled workers or curbing out- efficiency has also improved, because new flows of nationally trained workers. recruitment strategies have lowered costs per · Increase retention, by drawing retired or beneficiary served. And a few cases show that unemployed workers back into the work- rapid expansion of quantity can be managed force or by improving the health of sick with attention to quality. workers, such as with antiretroviral treat- ment for employees with HIV/AIDS. Core Strategies for Scaling Up Providers The first of these strategies has generated Three basic strategies can be used to rapidly the most dramatic progress: In a wide range of increase a country's production of education countries, adapted standards and reengineered and health workers: training processes for teachers and health workers have set the stage for rapid expansion · Expand training capacity and/or adapt of service delivery. The second strategy applies recruitment standards and training much more to health than to education, given processes. the international market for health workers. 82 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S C A L I N G U P S E R V I C E D E L I V E R Y The third strategy, while important, offers lim- new mothers and monitor infants' weight and ited quantitative prospects in most contexts. health for the first month of life. In control vil- lages infant mortality declined only from 77 to A D A P T I N G R E C R U I T M E N T S T A N D A R D S 75 per 1,000 live births.18 A N D T R A I N I N G P R O C E S S E S Since 1991 South African tuberculosis The time lag and costs involved in expanding patients treated by community health work- traditional medical, nursing, and teacher ers have actually achieved better health out- training schools have led a number of devel- comes than those treated by more skilled oping countries to seek alternative ways of personnel; 88 percent of patients seen by scaling up basic health and education person- community health workers completed the full nel. In education the most common approach course of treatment, compared with 79 per- is to set new standards for teaching that do cent of patients seen by fully trained doctors not require graduation from a pedagogical and nurses. As a result the directly observed institute--even though in some cases more treatment strategy (DOTS) for tuberculosis years of general education may be required. In implemented by community health workers health, waiving or shortening medical school- was as effective as hospitalization or sanato- ing for doctors is generally unacceptable, so rium care--at less than half the cost.19 the main strategy is to leverage available doc- The Planned Parenthood Association of tors and nurses better with paraprofessionals. Ghana trained community members to pro- These paraprofessionals--often called com- vide health education and family planning munity health workers--are trained for peri- support to women in their communities. In vil- ods ranging from three months to two years lages covered by the program, family planning and can provide many primary and preventive use reached 25­44 percent, far higher than the health care services. In countries with severe rural average. Immunization rates were 74­87 shortages of higher-skilled professionals they percent, compared with 30 percent in control may even perform duties normally performed villages. Moreover, village women who by physicians, as China's "barefoot doctors" received support promoted maternal and child did in the 1960s.16 An important advantage of health and family planning in neighboring vil- community health workers--and of alterna- lages. The results point to a low-cost strategy tive or community teachers--is that they are for improving maternal and child health.20 willing to work in rural areas, where it can be Drawing on these experiences and the evi- difficult to attract highly trained personnel. dence on cost-effectiveness, several African Community health workers are also less likely countries are rapidly scaling up training of to migrate out of the country.17 paraprofessional health cadres. Over the next Bangladesh, China, Cuba, The Gambia, five years, for example, Ethiopia plans to train Ghana, India, Madagascar, Mozambique, and 20,000 health extension workers to staff rural South Africa are among the many countries health posts throughout the country.21 How- that have trained community health workers to ever, not all country efforts to realign the skills scale up delivery for a wide range of services, mix in health have been evaluated carefully, including malaria prevention, immunizations, and clearly not all skills can be substituted. A family planning, tuberculosis treatment, and significant number of programs--particularly home visits to provide neonatal care. In many those where paraprofessionals have not been cases these efforts have substantially increased paid or supported with basic equipment, coverage, generated measurable improvements drugs, and backup--have been unsuccessful.22 in outcomes, and dramatically lowered unit But with adequate supervision, reasonable costs. In rural Maharashtra, India, infant mor- remuneration, and simple support systems, tality was cut in half--from 76 to 39 per 1,000 there is great potential for community health live births--between 1995 and 1998 by a pro- workers to help expand service delivery at gram that trained village health workers to visit basic levels of quality.23 Medical schools are G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 83 C H A P T E R 3 rare in Sub-Saharan Africa, with 6 countries mastery (through a higher level of general having none and 21 having just one.24 For education), and complementing this with rel- countries such as these, at least over the short atively short-term training focused on practi- to medium term--as production of doctors cal classroom techniques, can be more and nurses expands--there appears to be lit- efficient than expanding traditional teacher tle alternative but to leverage the skills of fully training institutes. trained professionals with judicious use of A similarly pragmatic strategy enabled community health workers. Madhya Pradesh, India, to eliminate its back- In education a number of countries have log of children out of school in just 18 shown the potential for alternative teachers months, at one-third the usual cost.26 The to help accelerate expansion of primary state reduced the education level required to schooling. Even countries where the annual teach in rural schools and gave villages fund- production of teacher training institutes is ing to directly hire local secondary school small often have large pools of unemployed graduates. These changes eased constraints university graduates who can be recruited on teacher supply and permitted rapid expan- into teaching. In West Africa this strategy has sion of access; in 1997 the state opened 40 led not only to a large increase in primary new primary schools a day. A key similarity enrollments over the past decade, but also to with the Guinean program was the emphasis rising average levels of teacher education. placed on supporting these new teachers in Guinea--which over the past decade has service, with materials and regular supervi- achieved one of the world's most impressive sion, as a cost-effective alternative to formal increases in primary school completion--is a pre-service training. good example. These two examples--and similar earlier In 1998, under a project supported by the reforms in countries ranging from the Repub- World Bank, Guinea experimented with two lic of Korea in the 1950s to Indonesia in the alternative changes in recruitment standards 1970s and Zimbabwe in the 1980s--demon- for primary teachers. Under one variant pre- strate that with pragmatic strategies to adapt service teacher training was shortened from recruitment standards and restructure train- two years to a staggered program involving ing, teacher production can be scaled up 10- three months of initial training, eight to nine fold or more in just one or two years. In months of on-the-job training, and a final recent years virtually all countries with very three months of formal training. The second low primary completion rates have begun variant involved eight months of formal pursuing such policies, and in none has the training followed by eight to nine months on supply of potential teachers been a constraint. the job. For both alternatives the pre-training On the contrary, even when offering average education requirement was increased from salaries as low as half the civil service teacher grade 10 to grade 13 (grade 12 for women). wage, countries have found more qualified The two new programs enabled Guinea to applicants for contract teaching positions increase annual teacher production from 200 than they can afford to hire. In Benin, where to 2,000 a year--a 10-fold increase that has the national training institute produces only had a similar impact on enrollment growth. 100 teachers a year, 6,500 university gradu- Moreover, the benefits were not all quantita- ates recently applied for 1,000 new contract tive: Controlling for socioeconomic and positions. In Senegal, which in 1998 became school factors, students of the new teachers the first West African country to introduce performed better than those of traditional contract teachers, there were 35,000 appli- teachers on a recent study of learning achieve- cants for the first 6,000 positions. In Niger ment in francophone countries.25 Guinea's teacher production has quadrupled since experience suggests that adjusting teacher 2001, when teacher training was shortened recruitment standards to emphasize content from two years to one and contract teachers 84 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S C A L I N G U P S E R V I C E D E L I V E R Y were introduced. The experience has been the adapting teacher standards, achieve higher same in Ethiopia, Mali, Togo, and elsewhere. average levels of student learning.28 The keys Do the adapted standards affect quality? to success are likely to be countries' ability to While more research is needed, the best screen new candidates carefully, train them answer at present is that the results have been effectively, equip them adequately with well- mixed. In many countries the adoption of designed teaching manuals and treatment new standards has been driven as much by fis- protocols, provide ongoing, cost-effective, in- cal constraints on hiring teachers at prevail- service support and supervision, monitor and ing civil service standards and wage scales as reward performance effectively, and gradu- by an absolute shortage of skilled (or skill- ally raise standards over time. In education able) personnel. Alternative teachers are often that has been exactly the approach taken over hired under new contracting arrangements a 40-year span by countries, such as the that provide less job security and, in many Republic of Korea and Singapore, that have cases, a direct role for communities in creat- made the transition from low-income status ing contracts and monitoring performance. and low average education levels to sustained These multiple variables can make it difficult economic growth and high-performing edu- to disentangle whether changes in teacher cation systems. behavior and student learning outcomes reflect differences in teacher skills or differ- M A N A G I N G M I G R A T I O N ences in motivation. In contrast to the results A confounding issue for developing countries from Guinea, a study of fifth graders in Togo trying to scale up health services is the glob- showed slightly lower learning by students of alization of the health care workforce, as contract teachers, controlling for other fac- migration flows increase throughout the tors.27 But it is important to remember that in world. While the national specificity of a cur- most cases--and especially for poor children riculum makes teacher migration relatively in rural areas--the alternative to contract rare, the past decade has seen an explosion in teachers is not a formally trained civil service the migration of physicians and nurses from teacher, but no schooling at all. developing to developed countries.29 Changes in teacher contracting and the Such outflows have reached troubling lev- training of paraprofessional health workers els in several developing countries, when have met resistance from labor unions. compared with the size of the health work- Indeed, one of the most difficult aspects of force and the output of local training insti- launching such reforms may be the political tutions. There are allegedly more Nigerian economy of maintaining two-tier salary sys- doctors in the New York (United States) tems over time. African teacher unions have area than in Nigeria, and more Malawian been vocal critics of the use of contract teach- doctors in Manchester (United Kingdom) ers and are trying to organize these workers than in Malawi. Of the more than 600 to demand higher salaries. physicians trained in Zambia since its inde- But the magnitude of human resource pendence, only 50 remain in the nation's shortfalls in these sectors leaves governments health system. Of the 489 students who committed to universalizing education and graduated from the Ghana Medical School basic health coverage--committed, that is, to between 1986 and 1995, 61 percent have achieving MDG targets--little choice but to left Ghana--with more than half going to make these pragmatic adjustments, evaluate the United Kingdom, and just over a third to them carefully, and upgrade provider quality the United States.30 A third of Ethiopia's over time. It is encouraging that the long-term physicians left the country between 1988 evidence in education suggests that, control- and 2001. And in 2003, 7 percent of Zim- ling for country income, countries that babwe's public sector nursing force migrated achieve universal coverage sooner, even by to the United Kingdom alone. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 85 C H A P T E R 3 While migration brings significant benefits 2003. The doctors provide services, mainly in terms of remittances, networks, and tech- in rural areas, for two years.34 nology transfers, for most Sub-Saharan coun- There is no simple solution, and actions are tries it also creates a loss of skills that the region needed by both developed and developing can ill afford. There are relatively few countries countries. Donor countries can help by trying in the region where the labor market cannot to attract more of their own citizens into nurs- fully absorb graduates of medical training pro- ing, for example, by raising wages; the British grams. In Malawi, for example, vacancy rates government recently did this. Donors can also for funded positions in the public health system help finance the expansion of medical training are 25 percent for nurses and as high as 80 per- in developing countries, recognizing that some cent for specialists, and in Zambia, 40 percent share of graduates will inevitably migrate. of funded public sector health positions are Developing countries need to keep salaries in vacant. Yet, at the same time, in both countries public health systems as competitive as possi- skilled providers are leaving the public system. ble, and donor countries can help finance The key constraint on the use of available fund- salary increases through development assis- ing appears to be the public sector's inability to tance. Finally, developing countries can make selectively increase wages in health to more medical and nursing students finance their competitive levels without creating broader studies with loans and, if a student migrates civil service wage pressures. before the loan is repaid, work with the receiv- The pull from developed countries is ing country to recoup the balance through expected to grow. In the United States an esti- that country's tax system. mated 126,000 nursing positions are unfilled, and the shortage is projected to hit 500,000 I N C R E A S I N G R E T E N T I O N by 2015. The United Kingdom will require an To boost human resources, several countries additional 35,000 nurses by 2008.31 Given have explored recruiting retired, inactive, or the enormous compensation differences unemployed workers back into the labor force between developing and developed countries, and in some cases allowing flexible, part-time what can developing countries do to manage employment. Since 1994 public hospitals in migration? Thailand have recruited retired physicians to Policies currently being tried include work part time.35 Ghana is also experiment- bonding, mandatory community service, ing with such policies. Up to two-thirds of diaspora exchange programs, and ethical retiring doctors and nurses apply to the recruitment guidelines, such as the Com- Ghana Health Service to be reengaged after monwealth Code of Practice adopted in retirement. The first contract period lasts two 1999 in the United Kingdom. While the gen- years, and is renewable for two more years eral consensus is that these efforts have had and an additional year until the age of 65.36 little impact,32 Thailand has had some suc- Countries facing human resource short- cess in attracting back medical professionals. ages must also actively protect the health of The government's "reverse brain drain" existing providers, particularly those with strategy has involved relaxing licensing HIV/AIDS. In low-income countries disabil- requirements and offering generous research ity and death typically account for less than funding and monetary incentives.33 A few 10 percent of attrition among health care other countries, most notably Ghana, are providers. But in Southern African countries trying reverse migration strategies; in the such as Malawi, where HIV/AIDS prevalence early 1990s they began recruiting Cuban has reached 15 percent among 15­49-year- doctors and senior allied health profession- olds, death accounted for 58 percent of the als. The number of Cuban doctors recruited attrition of Ministry of Health personnel to Ghana increased from about 60 a year in between 1990 and 2000--with a substantial the early 1990s to more than 200 a year in proportion due to AIDS.37 Data are scarce, 86 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S C A L I N G U P S E R V I C E D E L I V E R Y but in the highest prevalence countries the Several countries have analyzed the factors annual death rate from AIDS is estimated at influencing the willingness of service providers 4­5 percent for education workers and 2­3 to locate in remote areas. While salary com- percent for health workers.38 Surveys of pensation is one factor, other factors are just supervisors indicate that absenteeism linked as important. But virtually all the relevant fac- to AIDS, both from sickness and attending tors imply higher costs for governments. Non- funerals, is also a serious issue. Most employ- financial concerns include the intellectual and ers estimate that the costs of absenteeism are social isolation that highly qualified staff can even higher than the costs of training and feel in remote rural communities, lack of recruitment to replace staff lost to AIDS.39 amenities such as electricity and telephones, The key operational implication is that primitive accommodations, limited trans- human resource management and planning-- portation availability and difficulties in main- even in relatively low-prevalence settings--must taining contact with family and colleagues, an address the impacts of HIV/AIDS. The disease absence of professional support and develop- tends to exacerbate weaknesses in human ment, lack of quality education options for resource management and planning, and few children, and a mismatch between an individ- countries have implemented systems that ual's professional training and the skills respond effectively to the additional strains that required on the job.41 the epidemic places on the supply of services. Countries that have succeeded in imple- Fewer than 5 of 30 ministries of education in menting multipronged strategies to provide Sub-Saharan Africa have built HIV/AIDS indi- rural services include Indonesia, which cators into their management information sys- posted tens of thousands of primary school tems or included projections of the disease's teachers to rural areas in the 1970s and impact in their models of future human resource thousands of skilled doctors to remote needs. Many countries also lack workplace provincial clinics in the 1980s, and Thailand policies that ensure access to prevention, anti- (box 3.4). Ethiopia, Guinea, Mauritania, retroviral therapy, and other support and treat- and Niger provide allowances for teachers in ment, mitigate the impacts on infected staff, and deprived areas, and Niger has also intro- provide clear backup arrangements for staff duced allowances for teachers in nomadic absences. Most crucial is to protect health schools. The premium over the average workers from job-related exposure to infection salary varies, but in these cases is 15­40 per- through appropriate training, enforceable safety cent. Experiences from these and other policies, and adequate supplies and protective countries permit several cautious conclu- gear--and to give these workers first call on sions about the keys to success: antiretroviral therapy. · Rural and other hardship allowances should be linked to the position, not the person. If a Deploying Providers to Underserved teacher leaves a rural post, he or she should Areas--A Separate Issue not continue to receive the premium. In both the developed and developing world, · Allowances should be calibrated to regional even when overall numbers of education and conditions, but differentials should be health personnel balance needs, there can be transparent and based on observable char- wide variations in the quantity and quality of acteristics. service delivery across regions. Almost always, · Criteria for and levels of allowances must these variations result from difficulties in be reevaluated periodically. In Bolivia, deploying and retaining workers in rural areas. failure to do this has led to a large share of Although 66 percent of Ghana's population rural hardship allowances going to schools lives in rural areas, for example, only 15 per- in areas that have actually become urban cent of its physicians work there.40 over time. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 87 C H A P T E R 3 BOX 3.4 Attracting doctors to rural areas in Thailand Over the past 30 years Thailand has achieved universal coverage of basic health services and sus- tained improvement in health outcomes. At the heart of this success are three decades of policy efforts and incentives aimed at expanding health services and attracting doctors to rural areas. Thai- land's experience illustrates the need for a multipronged approach and confirms evidence from other countries that financial incentives are not always the most important component of such efforts. In the early 1970s Thailand introduced a bonding system that offers medical students heavily subsidized tuition if they promise to work in the public sector for three years upon graduation. Stu- dents who decline the program have to pay full tuition, which is quite high, and doctors who breach the contract must pay a large fine. During that period the government also began putting priority on rural health infrastructure, as part of a national rural development effort. Expansion of urban hospitals was halted, while rural hospitals and health centers grew significantly. So did the avail- ability of paramedics, drugs, equipment, supplies, housing, and other amenities in rural areas. A further reform aimed at strengthening rural service delivery began in 1994, when medical schools began increasing recruitment of students from rural areas. By 2001, 32 percent of medical students were from rural areas, up from 23 percent in 1994. Medical training was also changed, to increase exposure to rural practice, and rural doctors were given priority in continuing education programs. Experience in rural public service is now a prerequisite for residency training programs, and doctors with more than five years of rural experience can apply for a Thai board certificate-- the equivalent of a doctorate. Rural doctors receive hardship allowances, with the largest allowances going to the most remote districts. In addition, each year a rural hardship award is presented to the best doctor from a remote area, as is a rural doctor of the year award. Since the early 1970s the difference in density between doctors in rural areas and Bangkok has been cut in half, from 1/20th to 1/10th--a dramatic improvement equaled by very few countries. In addition, the proportion of outpatient visits to public health facilities occurring in rural areas has increased from 54 percent to 82 percent. After their compulsory three-year contract expires, two- thirds of doctors in rural areas remain there. During the late 1990s an economic boom led many doctors to breach their public contracts (paying a large fine) to work in the private sector. But doc- tors with rural training were least likely to do so. Source: Wibulpolprasert and Pengpaibon 2003. As a general strategy, recruiting individuals 1 teachers and pupils. In the first year of the from rural areas into service or training pro- program, in schools that received the funding, grams is a more effective way to increase attendance averaged 90 percent for locally retention and improve service delivery than hired teachers and 73 percent for civil service trying to rotate individuals trained in urban teachers. Locally hired teachers were also areas to rural settings.42 Recent research in more likely to be in class when the researchers western Kenya shows interesting results in this arrived--71 percent compared with 46 per- respect. Since early 2004 a pilot program has cent for regular teachers. Finally, the program enabled schools to hire additional teachers for seems to have had beneficial effects on school grade 1, to cope with increased enrollment accountability and performance: Average after Kenya's introduction of free primary teacher attendance in the program schools is education. Teachers are hired locally, at about 78 percent, compared with 71 percent in non- one-fifth the cost of civil service teachers. program schools.43 Once a month a team of nongovernmental In sum, in many developing countries the organization (NGO) researchers visits schools magnitude of doctor, nurse, and teacher unannounced and records attendance of grade shortfalls relative to ambitious MDG targets 88 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S C A L I N G U P S E R V I C E D E L I V E R Y calls for pragmatic strategies for scaling up scarce skills and expand provider cadres at providers that represent a sharp change sustainable unit costs. from traditional training systems. Such · Increasing the efficiency of service delivery, strategies include changes in recruitment the focus of the next section. standards to permit faster production of · Increasing domestic financing for education, providers, maximum use of complementary, health, water, and sanitation in countries less skilled workers to leverage scarce skills, where fiscal allocations for these sectors are attention to international migration pres- low, to minimize aid dependency. sures, and incentives or rural recruitment · Mobilizing efficient donor support to fill strategies to ensure service delivery in rural remaining financing gaps. areas. These strategies have enabled some countries to achieve impressive scale-ups of Trends in Developing Countries' Spending human development services. In some cases it appears that the supply of trained or train- Between 1990 and 2002 low-income coun- able human resources could support even tries significantly increased their spending on faster production or hiring. The next section education and health. In both sectors spend- examines financing issues that affect the scal- ing as a share of GDP started from a low ing up of human development services. base--3.1 percent of GDP for education and 1.4 percent for health--but it has grown by Ensuring Sustained more than 40 percent in education and 70 and Predictable Financing percent in health (figure 3.12). There is little question that delivery of human development The challenge of achieving the MDGs at min- services has become a higher priority in many imum global cost implies four distinct lines of poor countries. action, aimed at both minimizing costs and By contrast, spending shares in middle- maximizing the efficiency of financing: income countries have remained relatively flat. These countries started the 1990s with · Lowering the marginal costs of expanded much higher levels of GDP devoted to educa- service delivery as much as possible, espe- tion and health than low-income countries, cially through human resource strategies but the gap in health has nearly closed and in such as those discussed above, to leverage education it has narrowed considerably. FIGURE 3.12 Low-income countries are spending more on health and education Government spending on education Government spending on health Percent of GDP Percent of GDP 8 4 6 5.4 3 2.7 2.7 2.7 2.7 5.1 5.0 5.1 2.4 4.1 4.0 4.3 2.1 2.1 4 2 3.1 1.4 2 1 0 0 1990 1995 2000 2002 1990 1995 2000 2002 Low-income countries Middle-income countries Source: IMF data. Note: Unweighted averages based on corresponding available data from 1990­2002. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 89 C H A P T E R 3 Education and health spending also 1 percent, while Eritrea, Lesotho, and São accounts for a growing share of government Tomé and Principe spent more than 5 per- budgets in low-income countries. Between cent. In many countries human development 1990 and 2002 education rose from an aver- spending appears to be below what they age of 12 percent to 14 percent of govern- could afford. ment spending, and health increased from 5 In health, though, public spending is only percent to 7 percent. The upward trend has a small part of the story. In low-income coun- been most pronounced in Sub-Saharan tries as much as 70 percent of health spend- Africa, South Asia, and Europe and Central ing is private, out-of-pocket payments to Asia, and more consistent in education than private providers. In general, as country health, but overall it reflects increasing fiscal incomes increase, both the private share of shares for the two sectors (figure 3.13). In health spending and the share of private Sub-Saharan Africa these trends show the spending that is out-of-pocket--rather than benefits of debt relief. A recent study of for health insurance--tend to decrease. The African heavily indebted poor countries mix of these sources has important implica- found that between 1998 and 2002 their tions for health system access, equity, and spending on education and health increased financial sustainability. by 1.9 percentage points of GDP, while debt Broadly speaking, these financing trends payments as a share of GDP fell by 1.4 per- are encouraging. Still, spending falls well centage points.44 short of needs. Progress on MDG outcomes At the country level, however, there is wide needs to be accelerated for some goals in variation in fiscal efforts for human develop- every region--and in Sub-Saharan Africa, for ment. In Sub-Saharan Africa education every goal. Even with significant increases in spending averaged about 4.9 percent of GDP fiscal effort for health, in recent years slow in 2002--but ranged from less than 2 percent GDP growth and rapid population increases in Burkina Faso and Guinea to more than 10 have translated into declines in per capita percent in Botswana and Lesotho. In health public spending in several regions, most dra- the regional average was 2.7 percent of GDP, matically in Sub-Saharan Africa (table 3.1). If but Burundi and Madagascar spent less than South Africa is excluded, rather than $12 per FIGURE 3.13 Budget shares for health and education have increased in many regions Health Education Percent of government spending Percent of government spending 15 25 20 10 15 10 5 5 0 0 Sub- East South Middle Latin Europe Sub- East South Middle Latin Europe Saharan Asia & Asia East & America and Saharan Asia & Asia East & America and Africa Pacific North & the Central Africa Pacific North & the Central Africa Caribbean Asia Africa Caribbean Asia 1990 2000 2002 Source: IMF data. Note: Unweighted averages based on corresponding available data from 1990­2002. 90 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S C A L I N G U P S E R V I C E D E L I V E R Y capita in 2001, the region's public health TABLE 3.1 Public health spending per capita has fallen in some spending drops to $6 per capita. regions (current U.S. dollars, weighted by population) Many low-income countries require sub- stantially increased domestic financing and Region 1997 1998 1999 2000 2001 external aid if they are to achieve the MDGs. East Asia For middle-income countries, although not and Pacific 15 15 16 17 19 all are on track to all the goals, the case for Europe and incremental aid is less compelling--given Central Asia 100 90 77 84 89 these countries' higher fiscal capacity, closer Latin America proximity to MDG targets, and more devel- and the Caribbean 131 132 120 125 122 oped health, education, and water supply and Middle East sanitation systems. and North Africa 59 61 61 66 69 South Asia 4 5 5 5 5 External Financing Requirements Sub-Saharan Africa 17 15 13 13 12 Numerous studies have estimated the incre- High-income 1,596 1,609 1,694 1,714 1,763 mental costs and external financing needed to countries reach the MDGs. These estimates have varied World 274 274 284 285 294 widely because of the sensitivity of cost esti- mates to assumptions about spending effi- ciency, the difficulty of factoring in the Source: WHO 2004. impacts of synergies from progress on other MDGs, and the sensitivity of global aid investment in water and sanitation needs to requirements to assumptions about countries' double. Roughly one-third of this investment own fiscal efforts in pursuit of the goals. Esti- is needed in East Asia and the Pacific, close to mates of external financing needs are also one-third in South Asia, and nearly one-fifth sensitive to assumptions about the efficiency in Sub-Saharan Africa. Even if progress in of aid in filling estimated funding gaps, an increasing private participation continues, issue that has received less attention. the bulk of this financing will have to come Table 3.2 summarizes the best available esti- from the public sector and ODA. mates of incremental spending requirements In all these sectors there is significant scope for the health and primary education MDGs. for lowering unit costs and increasing domes- While the range is large, even the most conser- tic financing for the MDGs in many coun- vative estimates of the external financing gap tries. But several costing studies have indicate the need to double or triple current lev- examined this potential carefully and con- els of official development assistance (ODA) for cluded that even with major increases in health and primary education. spending efficiency, a significant financing Investment needs in water supply and san- gap will remain.45 The estimates of invest- itation must be added to these requirements ment needs in water and sanitation presented as well, because expanding these services is above, for example, assume that investment essential to achieving health and education and operating efficiency will be higher than in goals. The overall incremental financing the past, due to reforms of sector manage- needs for infrastructure investments related ment being implemented in many regions. to the MDGs (including water and sanita- The Bruns, Mingat, and Rakotomalala tion) are discussed in chapter 2. It is estimated (2003) study of the costs of universal primary that to achieve the MDG target for water sup- completion goes even further. Not only does ply, annual investment must increase from $9 it model improvements in unit costs and billion to $12 billion--and for sanitation, spending efficiency to best practice levels for from $4 billion to $18 billion. Thus annual all low-income countries, it also models G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 91 C H A P T E R 3 TABLE 3.2 Significant additional financing is needed to achieve the health and primary education MDGs Additional Additional financing external financing Source of Countries covered needed annually needed annually estimate Health goals 83 low-income countries $57 billion (2007)­ $22 billion (2007)­ WHO 2001 $94 billion (2015) $31 billion (2015) 135 developing countries $25­70 billion Not estimated Preker and others 2003 155 developing countries $30 billion (2006)­ $18 billion (2006)­ UN Millennium Project 2005a $50 billion (2015) a $33 billion (2015) 151 developing countries $20­25 billion $15­25 billion Devarajan, Miller, and Swanson 2002 Universal primary completion 79 low-income countries $9.7 billion $3.7 billion b Bruns , Mingat, and Rakotomalala 2003 79 low-income countries Not presented $5.7 billion UNESCO 2002 155 developing countries $33­38 billion $5­7 billion c Bruns , Mingat, and Rakotomalala 2003 151 developing countries $10­30 billion Not presented Devarajan, Miller, and Swanson 2002 155 developing countries $9.1 billion Not presented Delamonica, Mehrotra, and Vandemoortele 2001 155 developing countries $9 billion Not presented Naschold 2002 155 developing countries $5­6 billion Not presented Colclough and Lewin 1993 a. UNMP (2005a) does not provide a disaggregated estimate of global financing requirements for health. The amounts here are rough pro-rated estimates based on its five country studies, which do show the health share of MDG costs. b. Total, not incremental, external financing requirement. Bruns , Mingat, and Rakotomalala (2003) estimate that baseline external funding for primary education to IDA-eligible countries is $1 billion a year. c. Total, not incremental, external financing requirement. Bruns , Mingat, and Rakotomalala (2003) do not provide a baseline estimate of external funding for pri- mary education in middle-income countries. increases in all countries' fiscal efforts to a jected external financing needs would not best practice norm (about 20 percent of the decline significantly until after 2020. recurrent budget and 4 percent of GDP In sum, the incremental aid requirements devoted to education, with half for primary). estimated in even the most conservative stud- But even under these best case assumptions, ies are large. But for the social sectors in par- the study estimates an external financing ticular, as important as increasing the shortfall of nearly $4 billion a year for low- quantity of aid is the need for profound income countries to reach the 2015 goal, and changes in its quality. The additional public a gap of $5­7 billion a year for all developing spending needed to scale up human develop- countries. ment service delivery is largely for recurrent As part of the Abuja Declaration in 2000, costs, especially personnel. This spending will African governments agreed that funding for need to be sustained and increased over health should increase to 15 percent of their time--in many countries for a 10­20-year budgets, up from the current average of 8 per- horizon. There is a near-complete disconnect cent. World Bank simulations for a sample of between this core need and the nature of five African countries indicate that even if this donor assistance to these sectors today in spending target were achieved from 2005 on, three major respects: aid flexibility, aid pre- countries would still not be able to finance the dictability, and transaction costs. increased recurrent salary and other costs associated with scaled-up service delivery (to A I D F L E X I B I L I T Y a target level of 2.5 providers per 1,000 pop- The financing gaps in health and education are ulation) by 2015 out of domestic resources for core budget expenses--largely local costs, alone. Indeed, for a few of the countries, pro- largely recurrent, and largely for personnel. 92 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S C A L I N G U P S E R V I C E D E L I V E R Y But a high share of aid to these sectors comes FIGURE 3.14 Seventy percent of bilateral education pre-packaged in the form of technical assis- aid is reported to be technical assistance tance. About 70 percent of ODA for education is extended as technical assistance--much Technical cooperation as a percentage of higher than the 30 percent share for ODA in education bilateral ODA general. From 2001­3, 10 bilateral donor commitments, 2001­3 countries devoted more than 80 percent of Sweden 4 their ODA for education to technical assis- Ireland 8 tance (figure 3.14). This picture may be slightly exaggerated Denmark 31 because some donors have difficulty isolating United Kingdom 34 the nontechnical cooperation inputs of agen- Norway 42 cies that predominantly extend technical Finland 42 cooperation. It may also be improving some- what, with the U.S. Millennium Challenge Japan 62 Account expected to start disbursing in 2005. Switzerland 66 Still, the bulk of aid for education cannot be Spain 70 used to pay the public sector workers that are Canada 73 the number one requirement for scaling up education services. No matter how important Netherlands 75 or even crucial the training, scholarships, tech- Greece 81 nical advisors, and studies supported by cur- Italy 85 rent education aid flows may be, they do not France 88 offset the estimated financing gaps. Virtually all education MDG costing exercises have New Zealand 89 focused on the inputs that are most straight- Australia 91 forward to cost, such as teachers, classrooms, Austria 92 books, student stipends, and other direct sys- Germany 93 tem operating costs. From the standpoint of filling those gaps and producing MDG results, Portugal 95 the current pattern of education assistance Belgium 96 represents a very inefficient transfer. United States 100 Although multilateral lenders such as the Percent World Bank's International Development Association (IDA) report lower shares of fund- ing for technical assistance, their funding tra- Source: Fast Track Initiative Secretariat based on OECD DAC data. ditionally has not been available for personnel costs either. World Bank policy has treated considered exceptional or occur on a declining financing of recurrent costs as exceptional and basis. But decisions on the use of such financ- allowed it only on a declining basis. Between ing must take into account its impact on the fiscal 2001 and 2004 the share of Bank invest- borrowing country's fiscal and debt sustain- ment lending used to finance recurrent costs ability, the country's commitment and ability averaged just 4­6 percent. Recognizing the to provide continued financing after Bank constraint this policy could impose on achiev- financing ends, and sustainability issues at the ing the MDGs, in 2004 the Bank's Executive sector and project levels. The new policy is in Directors approved a new policy on eligibility its first year of implementation, so it is early to of expenditures in investment lending, includ- judge its impact. But it is expected to have a ing recurrent cost financing. Under the new positive effect on the flexibility of IDA support policy, financing of recurrent costs need not be for MDG-related projects. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 93 C H A P T E R 3 FIGURE 3.15 Donor commitments can oscillate substantially Donor commitments for health as percentage of total health expenditure 90 60 80 50 70 60 40 50 30 40 30 20 20 10 10 0 0 1997 1998 1999 2000 2001 1997 1998 1999 2000 2001 Mauritania Tanzania Guinea Benin Mali Burundi Liberia Source: WDI and OECD DAC donor funding database and staff estimates. Aid is also poorly targeted to the regions is true that commitments may be disbursed and countries furthest from the MDGs. ODA over several years, leading to a smoother pat- for water supply and sanitation, for example, tern of disbursements, the volatility of com- is highly concentrated, with the 10 largest mitments still impedes long-term fiscal recipients receiving nearly half of all such aid planning. in 1997­2001. In 2000­1 only 12 percent of Although low-income countries eventually aid to the water sector went to countries need to be able to sustain their education, where less than 60 percent of the population health, and water and sanitation systems with has access to an improved water source-- domestic resources--avoiding developing long- which includes most low-income countries. term dependency on aid--that goal can be achieved only gradually in most countries, with A I D P R E D I C T A B I L I T Y economic growth and deepening of fiscal A second issue is the volatility of aid flows. capacity. In the short to medium term, coun- Bilateral aid commitments--which account tries face significant risks in expanding health for 70 percent of education ODA and 50 per- or education systems in an environment where cent of health ODA--are relatively short-term the level and continuity of donor support are (one-to-two year) commitments, and disburse- largely unpredictable. ments can lag or diverge substantially from These issues are particularly acute in the commitment amounts. Ministries of finance lowest-income countries, which have a high have raised understandable concerns about degree of aid dependency and would grow taking politically irreversible personnel actions even more aid-dependent in the period to that have long-term fiscal costs, such as hiring 2015 under most scenarios for attaining the additional personnel or adopting wage MDGs.46 In health more than 30 percent of increases to retain personnel, if it is not clear spending is already externally financed in 13 that financing will be sustained. As can be seen low-income African countries. In these coun- from the pattern of donor funding commit- tries (some of which appear in figure 3.15) aid ments for health in seven different African volatility has pushed sector spending into inef- countries, commitments can vary tremen- ficient stop-and-start patterns, constrained dously from year to year (figure 3.15). While it expansion, and disrupted service delivery.47 94 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S C A L I N G U P S E R V I C E D E L I V E R Y What is needed is both provision of more sta- In education, pooled donor support for ble and predictable financing by donors and single, agreed sector investment programs efforts by the recipients to gradually build has been a major thrust of the Education for their own fiscal capacities so as to reduce All Fast Track Initiative (see the next sec- dependence on aid in the long term. tion). This approach is increasingly being discussed in health as well. Harmonization is T R A N S A C T I O N C O S T S also being advanced more generally through A third issue is the high transaction costs that the Rome, Marrakech, and recent Paris countries bear in accessing foreign aid. Even meetings and ongoing work by OECD's small volumes of aid for small countries flow Development Assistance Committee to through hundreds of parallel bilateral, multi- implement country partnership and harmo- lateral, and global program channels, each nization agreements. with its own negotiation, reporting, and administrative requirements. In 2000 the typi- Are Global Programs Advancing the MDGs? cal bilateral donor provided ODA to about 115 nations. Mozambique has more than 100 Development assistance for health has risen development partners in its health sector steadily since 1990 and significantly since the alone. It is sobering to recognize that, from the MDGs were adopted in 2000 (figure 3.16). In standpoint of a health minister, the volatile contrast, support for education declined lines in figure 3.15 showing total external between 1990 and 2000, but increased by 35 financing for health are actually composites of percent in real terms between 2000 and 2003. many different financing sources and disburse- ment patterns, each with its own volatility and H E A L T H administrative requirements. In health much of the post-2000 increase in Donors often require assistance to be kept in ODA and private philanthropic funding parallel budgets outside the ministry of finance, (notably the Gates Foundation) can be cred- to facilitate their accounting of the direct ited to new global programs aimed at mobi- impact of their aid. But aid is fungible, and the lizing global awareness and funding to cumulative demands on recipients are heavy. eradicate major diseases. Major global pro- Low-income countries are forced to allocate grams in health include the Global Fund to limited human resources away from managing Fight AIDS, Tuberculosis, and Malaria service delivery to managing donors. (GFATM), the Global Alliance for Vaccina- There is a growing view that because aid is tion and Immunization (GAVI), the World fungible, donors should dispense with the Bank's Multi-country AIDS Program (MAP), notion that they can identify what their money the U.S. President's Emergency Plan for AIDS buys and focus on the entire public expenditure Relief (PEPFAR), and some 70 other global program and sectorwide results. In Uganda health initiatives. The impact on HIV/AIDS donors' willingness to increase the share of funding has been particularly large: By 2003, funding channeled through the government almost 80 percent of public spending on budget in the context of a sectorwide approach HIV/AIDS in low-income countries was to water has slashed transaction costs and sped financed by external grants.48 implementation of rural and town water sup- These new global initiatives have trans- plies. Donor support for water going through formed the landscape in the health sector. In the national budget increased from 14 percent just three to five years the programs have had in 2000 to 44 percent in 2002 and will reach 70 three major achievements: percent in 2006. In parallel, Uganda's annual investment in water points and town water · Raising global awareness of key diseases. supplies has reached twice that of similarly The global health initiatives have been very sized countries. effective in drawing donors' attention to G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 95 C H A P T E R 3 FIGURE 3.16 Total ODA for health and education is increasing Health ODA and private commitments Education ODA commitments to all developing countries, 1990­2002 to all developing countries, 1999­2003 2002 US$ billions 2002 US$ billions 7 7 6.5 6 5.8 5.9 6 5 4.8 5.0 4.6 5 4.6 4.4 4 3.8 4 3.6 3 3 2 1.8 2 1.1 1.2 1.4 1.1 1 1 0 0 1990 Average 2002 1999 2000 2001 2002 2003 1997­99 All donors DAC countries Multilateral Private non-profit Multilateral, excluding UN Bilateral Source: World Bank estimates from DAC database. communicable diseases such as malaria, have also stimulated production and helped tuberculosis, and HIV/AIDS that are major lower prices. In noncompetitive markets, killers in the developing world, as well as to such as those for vaccines against childhood less-known tropical diseases that dispro- illnesses, guarantees of future purchases portionately affect low-income countries-- and sharing of risks with producers have such as riverblindness, Chagas disease, and been used by the Global Alliance for Vac- dengue fever. This advocacy has had a cines and Immunization (GAVI), for exam- major impact on funding for malaria, tuber- ple. In competitive markets, programs such culosis, and HIV/AIDS, all of which are key as the Tuberculosis Global Drug Facility for MDG progress. Some of the resulting have been effective in expanding access to partnerships, notably for river blindness, high-quality drugs at reduced prices through have also been catalysts for the cross-border pooled financing and commodity purchases. collaboration needed to produce results. The Malaria Medicines Supply Service is The global programs have played an proposing to use globally pooled procure- equally important role at the country level, ment to increase purchaser leverage and in encouraging developing country govern- reduce prices, while at the same time creat- ments to revitalize programs for these ing demand for artemisinin combination sometimes neglected diseases. Finally, they treatment (ACT) and expanding markets. have helped improve the delivery of inter- · Making aid for health pro-poor. The ventions, often by contributing drugs. resources of global health initiatives are · Stimulating new drug and vaccine research. more focused on low-income countries than The global health initiatives have used inno- are donor commitments overall, and a high vative approaches and market power to proportion of their resources are dedicated stimulate research on the drugs and vac- to communicable diseases, which dispro- cines needed by developing countries; they portionately affect the poorest people in 96 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S C A L I N G U P S E R V I C E D E L I V E R Y low-income countries. Support from the recurrent and local nature of financing needs, initiatives is directly pro-poor, and they there is a strong case for providing the bulk have been very effective at leveraging addi- of funding as general or sectoral budget sup- tional funds from foundations. Finally, port. Equally important is that all donor sup- they promote cost-effective interventions. port be organized around a country-led health strategy that encompasses HIV/AIDS, Against these achievements, however, there malaria, and all other disease priorities in a is a growing realization that the "verticaliza- balanced and coherent way. The sector strat- tion" of health sector support through diverse, egy should be fully aligned with the country's specialized global initiatives is having adverse poverty reduction strategy and consistent effects. All the new global programs have put with its medium-term expenditure frame- substantial effort into establishing lean and work. No donor assistance should be "off technically proficient administrations, careful plan" or off budget, and the first priority for accounting of funding and results, and innov- donors should be to fill financing gaps in ative approaches to program delivery--includ- implementing the poverty reduction strategy. ing, for example, channeling funds directly to But for donors to accept flexible transfer of NGO providers. But their cumulative impact their funding through national budgets, there is to undermine the capacity of ministries of must be a quid pro quo: Country public health for coherent planning, financing, per- expenditure management and sector moni- sonnel deployment, and administration. toring must meet performance standards that A recent study of 14 low-income countries assure citizens of donor countries their money found that the multiplicity of global pro- is resulting in efficient service delivery--and grams, on top of existing multilateral and that those services, over time, are producing bilateral channels, is exacerbating transaction MDG results. costs and distorting sector priorities.49 There have been numerous instances of different E D U C A T I O N teams of technical experts with identical Such a "compact" between countries and terms of reference visiting a single country, donors figures prominently in the Education for and different donors promoting conflicting All Fast Track Initiative (FTI). Consistent with approaches and priorities. Citing recent pro- the Monterrey consensus, the initiative aims to posals in Guyana and Tanzania for ensure developing countries committed to uni- HIV/AIDS treatment programs that equal versalizing primary completion the technical half of existing health budgets, the report and financial support they need, in exchange for argues that such programs--driven by global increased accountability for results. In contrast financing availability rather than national to health, there is a single global partnership to poverty reduction strategy priorities--may support MDG progress in education, which all draw disproportionately on health sector education donors have formally agreed to. Also staffing and other resources.50 Of equal con- in contrast to the global health programs, the cern are reports of agency turf fights and core objectives of the FTI are to support coun- other coordination difficulties at the country tries' development of a coherent education level. An IMF mission recently concluded strategy and promote coordinated--and more that bureaucracy and infighting linked to dif- efficient--donor support. To make technical ferent specialized programs were the main assistance more efficient, donors have agreed to reason one African country was unable to dis- a pooled Education Program Development burse more than 20 percent of available aid Fund at the global level to help countries for health in 2004 (box 3.5).51 develop credible education strategies and If ODA for health in support of the MDGs costed programs--and reduce the welter of is to produce the desired results, a new frame- uncoordinated, overlapping studies and capac- work is needed. Given the predominantly ity building initiatives. At the country level, all G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 97 C H A P T E R 3 BOX 3.5 IMF programs and MDG progress The International Monetary Fund (IMF) has a clearly stated policy of ensuring appropriate flexi- bility in fiscal targets, including by seeking and accommodating higher aid flows in countries sup- ported by its Poverty Reduction and Growth Facility (PRGF). How is this policy being implemented? What impact is it having on government spending and MDG progress in low-income countries? Why do critics continue to assert that IMF programs constrain countries' ability to scale up health and education service delivery? Consider the facts in three African countries. Zambia. Some 16 percent of Zambia's adult population is HIV positive, and the government has set a target of reaching 100,000 Zambians with antiretroviral treatment by the end of 2005. In its fight against HIV/AIDS, Zambia is receiving support from the World Bank's Multi-country AIDS Program (MAP), the Global Fund to Fight AIDS, Tuberculosis, and Malaria, and the U.S. Presi- dent's Emergency Plan for AIDS Relief (PEPFAR). Resources from the MAP and Global Fund are mainly channeled through the National AIDS Council, while the PEPFAR operates largely outside the government budget. Efforts are now under way to compile a comprehensive database that tracks these inflows to improve coordination. Funding to combat HIV/AIDS is rising sharply, and there now appears to be a problem of absorp- tive capacity. This is not a result of any direct or indirect limit on spending or hiring under the IMF- supported program. No limit has been placed on external funding of HIV/AIDS programs or hiring of health workers in the program. The budget for 2005 makes special efforts to ensure the employ- ment and retention of available health workers. However, external sources of funding to HIV/AIDS typically do not cover personnel. Uganda. Uganda has achieved considerable success in reducing HIV prevalence rates through aggressive public sector efforts at prevention and, now, treatment. Between 1998 and 2005 the health budget increased from 1.8 to 2.6 percent of GDP. Additional annual health resources of up to 2.0 percent of GDP are available from the Global Fund and PEPFAR. Nearly 40,000 Ugandans are currently on antiretroviral therapy. The authorities hope that by the end of 2005, 60,000 peo- ple will benefit from this therapy (out of 120,000 who need it). The IMF's PRGF arrangement with Uganda includes a "ring fence" to protect health care and other poverty-related spending from within-year budget cuts, and promotes a progressive shift in resources to social programs--for example, by seeking to limit growth of nonpriority spending such as on public administration. But adequate budget resources are not the only issue. Improvements are needed in the management of Global Fund and other health resources to accelerate the use of approved funding (currently less than 20 percent of funding has been used). Capacity also needs to be enhanced in the health sector, notably through training additional nurses and doctors. Kenya. Kenya's HIV infection rate is estimated at 14 percent of the adult population. The fiscal framework underpinning the PRGF-supported program reflects Kenya's poverty reduction strategy priorities, including the fight against HIV/AIDS--including actions to increase the number of AIDS patients on antiretroviral therapy. The Global Fund, MAP, and PEPFAR are expected to disburse $32 million a year over 2005­6 to support the government's AIDS program--about 0.2 percent of GDP. The government estimates that AIDS treatment targets will require hiring 4,000 more nurses in addition to the estimated 2,000 additional nurses needed for the overall health system. The Global Fund has agreed to provide financing for 725 nurses on two-year contracts, under prevailing pay scales. While the current IMF program places limits on the size of the core civil service establishment, teaching, health, and secu- rity services are excluded. It has been agreed that these services may hire additional personnel to fill the 3,000 positions lost by the core civil service through natural attrition. Source: IMF Africa Region staff. 98 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S C A L I N G U P S E R V I C E D E L I V E R Y education donors participate in ministry of fit, and countries such as Nicaragua, Viet- education­led coordination groups, with a nam, and Yemen have credited the initiative rotating donor "lead" agency. While such with bringing the donor communities in groups had arisen in some countries previously, their countries together--and creating dis- they were not a systematic practice. cipline around a country-led, coherent Country-level donor groups have three key process of education planning and priority responsibilities: review and collectively setting linked to their poverty reduction endorse the sector plan, align their financing strategies. At the global level the FTI has with the country's priorities, and monitor promoted ongoing dialogue and informa- progress in improving education spending tion sharing among donors, through semi- efficiency, through a set of agreed perfor- annual meetings and working groups mance indicators. Indicators include key out- focused on priority issues such as tracking comes, such as the primary completion rate of aid flows and harmonization. and the gender ratio in education, and key · A continuing challenge for the initiative is intermediate indicators, such as the repetition countering skepticism about its ability to rate, the pupil-teacher ratio, the share of edu- mobilize substantially increased funding cation in public spending, and the share of for the education MDG. Although a first education spending on books, materials, and set of endorsed countries has received sig- other crucial quality-enhancing inputs. nificant additional support, the number of Making each dollar of education spending countries is small and the commitments go further is a joint priority under the initia- are fairly short term. Moreover, many tive's "compact." Donors have also agreed that more countries are poised to enter the ini- their progress in increasing aid efficiency tiative. As part of the global stocktaking of should be monitored annually and reported MDG progress in 2005, donors need to transparently. At the March 2005 High Level develop options for a more stable funding Forum on Harmonization and Alignment in framework for the FTI. Paris, donors committed to a specific set of har- monization indicators (see chapter 5). Progress In contrast to the global programs in on these indicators will be monitored by the health, the FTI started with little upfront OECD's Development Assistance Committee funding. Instead, donors pledged to commit (DAC). The FTI, which involves both country- additional resources to specific countries once level coordination groups and regular global their sector plans had been endorsed and meetings to monitor progress, offers a ready- financing needs established. The rationale was made channel for disseminating the indicators that channeling incremental funding through and working with education donors on these existing bilateral and multilateral mechanisms agreed areas of harmonization and alignment. would speed disbursements and avoid the The initiative's secretariat, for example, is help- increased bureaucracy and transaction costs ing to turn principles into good practice by of setting up new global funds. With initial developing sample memorandums of under- support from the Netherlands (subsequently standing and common guidelines for assessing joined by Belgium, Italy, Norway, and the the quality of education sector plans. United Kingdom), however, a $235 million The FTI was launched in June 2002. What trust fund was established in 2003, called the has it accomplished? There is general consen- Catalytic Fund. Given its size, the fund was sus on two conclusions: not designed to be the primary financing chan- nel for primary education support. Rather, it · The initiative is having a positive impact on provides transitional (two- to three-year) donor coordination at both the country and financing to endorsed countries with only a global levels. Honduras's minister of educa- small number of active donors ("donor tion called this the initiative's greatest bene- orphans") until larger and more sustained G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 99 C H A P T E R 3 volumes of aid can be attracted from new public sector performance in delivering services. bilateral or multilateral channels. The challenge is essentially political. The evi- While this approach has kept administra- dence that aid works best where policies and tive and transactions costs lower than in the governance are good is influencing aid flows, health sector, it is difficult to argue that it has and this trend will intensify. While some donors worked well from the perspective of mobiliz- suggest that a viable strategy in weak states is to ing the incremental aid volumes needed to bypass the public sector altogether, no OECD achieve the education MDG. The financing country has ever achieved universal health or gaps for the first seven countries endorsed by basic education coverage with mainly private the initiative have been closed, but it took systems--in fact, most are heavily public. Both almost two years to do so, and transitional for-profit and nonprofit private actors will likely support from the Catalytic Fund has played a play more important roles in the development of large role. The additional commitments for these sectors in low-income countries, especially these seven countries represent a 30­40 per- low-incomecountriesunderstress(box3.6),and cent increase in their ODA for primary edu- especially in water and sanitation. But even cation, but the new commitments extend only where services are privately provided, effective to the end of 2006. The gap-filling has not state capacity is required to perform the core been timely, and the assurance of sustained functionsofmobilizingrevenues,planning,cost- and predictable financing is largely absent. ing and prioritizing sector investments, setting Another five countries, endorsed in 2002­3, standards and policies, contracting with still have financing gaps totaling $260 million providers, and monitoring outcomes. (over three years). And in 2005 as many as 25 The World Bank's World Development additional countries could meet the FTI Report 2004 documents the many ways in endorsement requirements (having a poverty which the public sector in developing coun- reduction strategy and an agreed education tries fails in service delivery, particularly for plan), raising global financing needs for the poor people. Even where spending on educa- program to an estimated $1.7 billion in 2005 tion and health absorbs a high share of GDP, and more than $3 billion a year from 2006.52 key outcomes can be weak (figure 3.17). From a developing country standpoint, how- Studies consistently confirm the weak rela- ever, there has been no credible indication tionship between social spending and out- from the initiative's donors that these amounts comes--especially in health--and the two are being programmed. main causes. First, spending may not be allo- The FTI's country-driven model, its align- cated to the types of services that most ment with Poverty Reduction Strategy and directly affect outcomes. Health spending on Medium Term Expenditure Framework plan- hospitals, for example, does not have as much ning and budgeting, its focus on monitoring impact on child mortality rates and malaria results and spending efficiency, and its active incidence as does spending focused on immu- promotion of donor harmonization are all nization programs and malaria control. important achievements. Its donors now need The second issue is that even where to develop a fundraising model that ensures a resources are allocated to the basic education substantially increased volume of sustained, and primary health care services most closely predictable funding for countries with credi- linked to MDG outcomes, the chain of people ble education plans and good implementation and transactions through which resources flow performance. down to frontline providers is long, geograph- ically dispersed, dependent on the discretionary Making the Money Work behavior of many individuals, and open to leakage at many points. The core services that Achieving the MDGs will depend above all on frontline teachers and doctors provide are com- developing countries' ability to achieve stronger plex and individualized, making them difficult 100 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 BOX 3.6 Scaling up service delivery in low-income countries under stress (LICUS) Low-income countries under stress are defined by their weak policies and institutions. Many have recently emerged from or been affected by conflict. Achieving effective service delivery in these cir- cumstances is a challenge. Nevertheless, successful approaches are emerging, including some that feature the use of local institutions or that work with nonstate actors in ways designed for eventual transfer to state delivery. In countries where national institutions are weak, it may seem counterintuitive to look to the subnational levels of government to provide services. But in a number of low-income countries under stress, it is at the local level that formal and informal institutions often demonstrate the most capacity to manage and allocate resources. Community-driven development and social fund approaches have been widely used and proven well suited to these country contexts. The Northern Uganda Social Fund, for instance, supports construction and rehabilitation of social and economic infrastructure that is identified, managed, and implemented by local commu- nities in conflict-affected areas. In Afghanistan community forums helped ensure vital services and income generation opportunities in local areas during a period of state collapse. Supported by small grants to cover initial costs, the forums relied mostly on community mobilization and cost recov- ery to organize and finance services. They gradually developed relationships with local governments and donors to become key development actors at the local level. Their highly flexible approach allowed them to respond to community initiatives and local conditions, and later to become the basis for a social fund after the fall of the Taliban. Until recently their model of representative gov- ernance was unique in Afghanistan and contributed to the local reduction of ethnic tensions at a time when ethnicity became heavily politicized and a driver of conflict. The project laid the basis for the new National Solidarity Program, which operates at scale and has been instrumental in bringing both participatory processes and a positive state presence to many remote areas. Particularly in postconflict countries, experience shows that it is important to give early attention to building the capacity of government actors to take responsibility for service delivery, as well as to restoring basic services quickly. In Timor-Leste health indicators improved significantly in the four years following the country's crisis, through a strategy that balanced these two goals. The program worked simultaneously on short-term needs such as reconstruction of health facilities, through gov- ernment contracts with nongovernmental organizations (NGOs), and medium- to long-term goals such as developing a national health policy, pharmaceutical logistics systems, human resources for health, and gradual handover of NGO contracts to government. Source: World Bank LICUS unit. FIGURE 3.17 Higher spending on education and health does not always mean better outcomes Primary completion rate 1999 Under age five mortality rate 2000 150 150 te ra pita ca 100 100 om fr per 50 50 tion GDP 0 0 via by de ­50 ­50 cent ­100 ­100 erP edicted pr ­150 ­150 ­150 ­100 ­50 0 50 100 150 ­150 ­100 ­50 0 50 100 150 Per child public spending on education, 1990s average Per capita public spending on health, 1990s average (% deviation from expenditures predicted by GDP (% deviation from expenditures predicted by GDP per capita) per capita) Source: World Development Report 2004. Note: Regression line shown: Coefficient = .157, T-statistic = 1.70. Note: Regression line shown: Coefficient = ­.148, T-statistic = 1.45. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 101 C H A P T E R 3 to monitor and manage. Difficult working con- shifting to contract teachers to make the costs ditions, uncompetitive salaries, and higher sta- of expanding schooling more sustainable, at tus relative to illiterate and unempowered the price of opposition from teacher unions; families can undercut providers' accountability eliminating fees for basic health services for the to clients and foster absenteeism and low qual- poor while retaining them for upper-income ity. Inefficiency in the use of available resources, groups; shifting to low-cost construction of arising from all these sources, can be large. schools and clinics by communities rather than The case for additional aid, especially in more expensive national or international con- the form of flexible budget support, will tractors; and resisting pressures from teachers depend on countries' ability to show that and parents for smaller classes until universal funds are well managed and producing MDG coverage is achieved. results. And as the World Development All these actions to lower the unit costs of Report 2004 emphasizes, reforms to improve basic services or recover costs from those who service delivery must address not only its can afford them promote faster achievement proximate causes--no drugs in clinics, of universal coverage. Countries that have teacher absenteeism, no water connections in made the fastest MDG progress have given poor urban areas--but also the underlying priority to coverage for all, adopted cheaper power and accountability relationships link- but "good enough" service delivery models ing citizens, politicians, and service providers initially, and focused on improving quality that are the cause of persistent inequity and over time. These political choices are unlikely inefficiency in the use of public resources. in contexts where the voices of the groups Progress in many settings will require actions that would benefit from universal access are on all three dimensions of the "accountabil- weak and the influence of institutional stake- ity triangle" linking citizens, politicians, and holders, such as medical or teacher unions, is service providers. It will require broad strong. A recent study of Georgia concluded reforms to improve governance and increase that slow progress on the health MDGs and the responsiveness of elected officials to citi- underfunding of MDG-related health services zens, strategic actions to improve the man- were much more a "failure of citizens to exer- agement of resources and performance along cise their voice power and the ability of politi- the service delivery chain, and strengthening cians to remain largely unresponsive to the of "client power," or citizens' ability to poorly expressed demands than of resource demand better basic services directly from limitations per se."53 frontline providers. But progress is being made. In most devel- oping regions, two decades ago democracy was the exception; now it is the rule. Political Improving Governance representation, transparency, corruption, and The broad structures at the foundation of the quality of public administration are being good government--the rule of law, control of openly evaluated with a number of interna- corruption, sound economic management, tional indexes, and most are steadily improv- representative governance, and independent ing. Since 1999 the average ratings for media--are crucial for macroeconomic Sub-Saharan African countries on the World growth and foreign direct investment. They Bank's policy and institutional assessment also have direct repercussions on the equity index (CPIA) have been stable or increasing and efficiency of public services. in all five areas (quality of budgetary and Jump-starting progress toward the MDGs financial management, efficiency of revenue can require decisive actions to prioritize uni- mobilization, quality of public administra- versal coverage of basic services over the inter- tion, property rights, rule-based governance). ests of politically influential stakeholders. It The New Partnership for Africa's Develop- has involved such politically difficult actions as ment (NEPAD) has developed a peer review 102 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S C A L I N G U P S E R V I C E D E L I V E R Y mechanism that uses transparent national financing into coverage and coverage into out- assessments by teams from neighboring coun- comes. Substantial country evidence shows tries to highlight governance weaknesses in that both links can be problematic. But coun- African countries and encourage improve- try experience also points to four important ments (see chapter 2 for more on NEPAD and strategies for strengthening provider account- the African Peer Review Mechanism). ability and system efficiency. One of the most critical areas for progress is public expenditure management. Achieving M E A S U R E R E S U L T S , P E R F O R M A N C E , the health and education MDGs will require A N D I M P A C T greatly increased volumes of flexible aid chan- Fundamental for progress is measurement of neled through national budgets. But in many performance and results. At present, coun- of the low-income countries in greatest need tries are far from real-time tracking of MDG of external recurrent cost support, budget sys- progress for virtually all the goals and indica- tems are too weak to give donors confidence tors. To focus health and education systems that resources can be tracked and well used. on key results, countries need better and more Systems for budget formulation, execution, timely administrative data. Capacity building and reporting must be able to meet threshold in this area should be a priority, but it must standards of integrity and efficiency. be carried out in new ways that avoid the Under the Heavily Indebted Poor Coun- wastefulness of incompatible management tries initiative the IMF and World Bank have information systems financed by different worked with countries on benchmarks for donors and technical assistance that fails to measuring capacity to manage priority public build true local capacity. Countries also need spending. Although a first assessment of 24 household surveys at regular intervals--such countries in 2002 found no country with a surveys are essential for tracking MDG out- fully adequate system and most in need of comes by income quintile, gender, ethnicity, substantial upgrading, many countries or region. showed progress when they were reassessed The World Bank and the United Nations in 2004 (see chapter 2 for more details). Mali Educational, Scientific, and Cultural Organi- and Tanzania advanced to the category of zation's Institute of Statistics should put coor- "little upgrading needed," and Ghana and dinated emphasis on building countries' Senegal showed substantial progress. For the capacity for consistent annual reporting of pri- group as a whole the average number of mary school completion and build up the Pri- benchmarks met increased from 6.0 to 6.5 mary Completion Database they have jointly out of a possible 15. Much more is needed, launched. The targets for the second MDG, on obviously, but trends are in the right direc- primary school completion, should also be tion. But countries' performance against expanded to include some measurement of stu- these indicators can be expected to play a dent learning. Universal primary completion is major role in their access to expanded aid in a meaningful goal only if it signals that chil- the form of budget support. dren have learned, and in an economically integrated world this threshold level of skills and knowledge should be a globally relevant Managing the Service Delivery Chain one. Donors should support work by a con- Broad improvements in political responsive- sortium of international testing agencies on a ness to citizens and in public expenditure man- culturally neutral global "core curriculum" agement should increase the resources that can be embedded in the various regional available for MDG-related services. But it is learning assessments in use today. Countries the service delivery chain--institutional per- not participating in regional assessments formance and policies in the education, health, should be encouraged to do so. And strength- water, and sanitation sectors--that transforms ening national assessment systems should be a G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 103 C H A P T E R 3 priority area of support. Equally important is impact evaluations of key types of education, making results known to parents and com- health, youth employment, and early child munities. Albania, Romania, and Turkey, development programs, there has been a among other countries, have recently made sharp increase in attention to this area over important strides in broad public diffusion of the past year. It should be strengthened fur- student learning results. ther, with expanded support from donors to Most MDG outcomes improve relatively build capacity in low-income countries for slowly, so intermediate indicators of progress data collection and analysis and to broadly are also important--above all, measures of diffuse evaluation results. Developing coun- system efficiency. The FTI "indicative frame- try policymakers and their donor partners work" for monitoring education sector per- should also provide a "demand side" stimu- formance is transparent and permits direct lus to impact evaluation, by systematically comparisons of countries' progress; a similar asking for the evidence base when consider- framework is being developed by a donor con- ing new programs or policy proposals. sortium in health (Health Metrics Network). These new approaches will work to the U S E T R A N S P A R E N T A L L O C A T I O N advantage of countries committed to better R U L E S A N D T H E P O W E R performance. O F I N F O R M A T I O N Finally, rigorous evaluation of the impact of A core issue in education and health service development programs builds the knowledge delivery is getting funds to the frontlines, base for better policies. Considerable resources where services are delivered. Setting simple, are devoted to evaluation studies today, but the clear norms for the allocation of funding has failure to establish clear baseline data or been a boon to more efficient and equitable appropriate controls often compromises the service provision in both developed and devel- quality and policy value of the results. Several oping countries. In education, "funding fol- recent examples, including the Progresa/Opor- lows the student" reforms have had dramatic tunidades conditional cash transfer program in effects in countries ranging from Brazil to Mexico and school health interventions in Australia. In Brazil a 1997 reform that set a Kenya, attest to the role that well-designed minimum floor on education spending in all evaluations can play in persuading policymak- regions sharply increased resources for the ers to expand or sustain programs, even across poorest (Northeast) region, and nationally changes of government. caused primary enrollments of children from One of the most crucial questions for pol- the lowest income quintile to rise from 55 per- icymakers is how a program or policy's cent to 85 percent--in the space of six years. design will play out in different country cir- Norms for the allocation of personnel or cumstances. This kind of knowledge, which other inputs (such as medicines or books) can can be derived only from comparable evalua- also be established and clearly communicated tions across countries, is a global public to each facility. In addition, fees for health good--and the costs of generating it need to services and drugs should be posted transpar- be broadly shared by the international devel- ently, to ensure that patients are charged opment community. The World Bank is espe- fairly and collected funds are not diverted. In cially well-positioned to identify programs Georgia prominent posting of the fee sched- with similar objectives and design features ule in the children's hospital in Tbilisi has being implemented in different parts of the curbed excessive payments and significantly world, and to support systematic and rigor- increased hospital revenues.54 In water and ous evaluations of their impact. Through the sanitation, Burundi and other countries have Bankwide Development Impact Evaluation significantly increased investment efficiency (DIME) initiative and efforts by the Bank's by setting clear guidelines, disbursement pro- Human Development Network to organize cedures, and performance indicators for civil 104 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S C A L I N G U P S E R V I C E D E L I V E R Y FIGURE 3.18 Leakage of funds can be high but is not inevitable Degree to which funds reach frontline facilities Ghana: non-wage transfers 51 to primary schools (1997­8) Ghana: non-wage transfers 20 to health clinics (1998) Madagascar: fixed per- 62 school grant (2003­4) Papua New Guinea: 84 education sudsidy (2001) Tanzania: non-wage transfers 43 to primary schools (1999) Tanzania: non-wage transfers 59 to health clinics (1999) Uganda: per student 13 capitation grant (1991­5) Uganda: per student 82 capitation grant (2001) Zambia: fixed 90 per-school grant (2001) Percent Education Health Source: Kushnarova 2005. works contractors, with oversight provided Clear allocation rules have the greatest by nonprofit contract management agencies. impact if they are widely known. Uganda As a result water and sanitation project exe- raised the share of per student capitation cution has improved dramatically in Burundi, grants that made it to schools from 13 per- with invoice payment time averaging 5 cent in 1991­5 to 82 percent in 2001 by pub- days--compared with 90 days elsewhere in lishing monthly data on the transfers in the central government. newspapers, broadcasting it on the radio, and The positive impact of clear funding rules having primary schools post notices of their on leakage is shown by public expenditure entitlements and the amounts actually tracking studies, which document enormous received. For the first time, parents had the variations in the degree to which funds information they needed to understand and intended for frontline facilities actually monitor the grant program. reach them (figure 3.18). Leakage estimates Subsequent research in Uganda has docu- are not comparable across countries and mented that throughput to the school level is sometimes simply reflect a failure to record most efficient in areas where newspaper pen- transfers properly, not a failure of resources etration is highest--pointing to the power of to arrive. But the studies show that even in information.55 And a new study shows that, the same country, results can vary substan- controlling for other factors, schools with tially under programs with different designs. higher transfers show more improvement in Leakage is not an inevitable feature of low- student learning.56 Uganda's story points to income settings. three key messages for MDG progress: G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 105 C H A P T E R 3 · Clear, equitable norms for managing key dents per teacher, in São Tomé and Principe inputs--be it personnel allocations or fund- only 3 percent do. Deviations from official ing for books or drugs--are important. norms almost always reflect an oversupply of · Broaduseofthemediaandtransparentreport- teachers in more appealing urban areas and ing at the facility level can unleash "client low service provision in rural zones.60 Coun- power" and pressures for improvement. tries seeking better MDG outcomes can start · It is important to go the extra step to ana- by examining factors like these. lyze not just progress in reducing leakage, Even when providers are deployed rela- but also its impact on outcomes, such as tively efficiently, poor incentives, weak man- student learning or community health agement, widespread illness, and other indicators. factors can cause high rates of provider absence. Surveys of service delivery that make Few countries have done all these things, unannounced visits to a sample of facilities but the growing number of countries using show consistently high absence rates among Public Expenditure Tracking Surveys (PETS) teachers and health workers (figure 3.19). and Service Delivery Surveys to measure The problem is especially acute among doc- frontline funding and service quality is tors, who have a ready private market for encouraging. their services. In Bangladesh absentee rates for physicians average 74 percent at small F O C U S O N P R O V I D E R Q U A L I T Y, rural posts.61 Provider absence seriously dis- D E P L O Y M E N T , A N D I N C E N T I V E S rupts service delivery and undermines MDG Skilled providers are the most expensive ele- outcomes. In Nigeria a 2003 project to track ment of health and education systems; recruit- effective hours of instruction found that ing, deploying, equipping, and supervising almost half the annual school hours in Kano, them carefully are key to maximizing the pro- Nasarawa, and Lagos were lost because of ductivity of spending. Yet very few countries teacher and pupil absences.62 recruit teachers on the basis of tests measuring Studies that have examined this issue in their subject mastery and what they can do in detail have found that it is not simply a ques- the classroom. Far more common are the prac- tion of salary incentives. In Bangladesh the tices of Colombia, where teachers and head- highest-paid teachers were most likely to be masters are routinely hired based on party absent.63 And in India, as well as Bangladesh, affiliation regardless of their experience, train- a large share of teacher absences were ing, or knowledge,57 or Cameroon, where excused absences for training and other headmaster posts are sold.58 administrative processes. Many providers Deployment is also poorly managed in posted to remote rural areas, for example, many settings. In Ethiopia each health worker must travel long distances to pick up their in the Afar region handles 1,200 outpatient pay--and must do so on business days. visits a year, in Addis Ababa 680, and in Gam- Countries concerned about MDG outcomes bella just 82.59 The implication? If health care need to address these managerial issues. workers were posted more efficiently across Average salaries for skilled providers may the system, achieving Afar's degree of produc- need adjustment in many contexts, to counter tivity everywhere, the Ethiopian health care providers' incentives to migrate internationally system could dramatically increase service in health or to extract informal payments. But delivery with the current number of workers. there is abundant evidence that effective incen- Similarly, studies in Sub-Saharan Africa tives are not just a question of average salaries, find some countries doing a far better job of or even salary dispersion, although--if tied to allocating teachers equitably across schools. performance evaluation systems perceived as Whereas in Benin 39 percent of teacher post- fair--this can help. Nonsalary inducements ings deviate from the official norm of 40 stu- (such as housing, research and training oppor- 106 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S C A L I N G U P S E R V I C E D E L I V E R Y FIGURE 3.19 Absence rates can be very high, especially in health Absence rates of teachers Bangladesh 16 Ecuador 14 Honduras 14 India 25 Indonesia 19 Papua New Guinea 15 Peru 11 Uganda 27 Zambia 17 Absence rates of health workers Bangladesh 35 Honduras 27 India 40 Indonesia 40 Mozambique 19 Papua New Guinea 19 Peru 23 Uganda 37 Percent Source: Kushnarova 2005. Note: Based on studies/surveys conducted between 2000 and 2004. tunities, and public recognition) are important, staff, it handles 41 percent of hospital patient as are accountability pressures through, for visits (outpatient and inpatient) and 27 per- example, effective supervision. In Karnataka, cent of health clinic visits.64 Evaluations of India, the Learning Guaranty Program is an Jesuit-run Fe y Alegria schools in nine Latin innovative attempt to strengthen incentives for American countries have found that the public education providers to focus on out- schools systematically outperform public comes that really matter--how well they serve schools, with lower repetition and dropout all children in the community, and how much rates and higher graduation rates--despite children learn (box 3.7). the fact that resources per student are the same or lower in Fe y Alegria schools and the M A K E G O O D U S E O F T H E schools cater to disadvantaged students.65 P R I V A T E S E C T O R The higher efficiency of private providers Comparisons of service delivery norms and can have major benefits for poor people's outputs in public and private facilities often access to services and for MDG progress. In reveal large differences in efficiency. Although Barranquilla, Colombia, after water and san- the Christian Health Association of Ghana itation services were contracted out in 1993, employs only 17 percent of health sector water supply coverage increased from 68 to G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 107 C H A P T E R 3 BOX 3.7 Rewarding schools for MDG outcomes The Learning Guaranty Program, launched in 2002 by the government of Karnataka, India, in col- laboration with the Azim Premji Foundation, aims to strengthen incentives for schools to enroll all children and ensure that they learn. All of the approximately 10,000 public primary schools in the poor, northeastern districts of the state are eligible to participate in the program, which is essen- tially a competition. Using a novel approach, the program rewards schools on the basis of learning outcomes for all children in their catchment area, whether or not they are enrolled. If 60 percent of children can demonstrate on assessment tests that they have acquired 90 percent of prescribed com- petencies in mathematics and language, the school receives 5,000 rupees. If 70 percent of children do well, the reward is 10,000 rupees. And with 80 percent, the reward is 20,000 rupees. Over a three-year period a school can win a maximum of 60,000 rupees. In the program's first year, about 10 percent of schools competed, but the number has since risen dramatically. The program provides direct financial incentives for government schools to deliver better education services to their communities. It is expected that the program will enable parents and communities to put pressure on their children's schools to become a certified Learning Guar- anty School. It is also expected that such schools will develop more creative ways of encouraging children to enroll and stay in school. The Learning Guaranty Program is an interesting attempt to more closely align schools' incentives and MDG outcomes. Source: Azim Premji Foundation 2002, cited in World Bank 2004b. 99 percent by 2002, and sanitation coverage for-profit providers to serve the top segments increased from 54 to 96 percent. In addition, of the income distribution and making strate- unaccounted-for water fell, taps began func- gic use of contracting with for-profit and tioning 24 hours a day, and response times NGO providers to serve other income for consumer complaints improved dramati- groups. NGO providers are often associated cally. Poor consumers benefited most from with local innovation and community the increased efficiency: more than 80 percent involvement in service delivery, which of new connections were in low-income increase quality, targeting, and cost-effective- neighborhoods. ness. El Salvador, Guatemala, Honduras, and After Argentina privatized local water com- Panama are increasingly contracting with panies in about 30 percent of its municipalities NGOs to provide health services to remote in the early 1990s, child mortality fell by 5­7 (often indigenous) populations on the basis of percent in those areas. The largest gains fixed annual capitation payments. In most occurred in the poorest municipalities, where cases the NGOs use networks of itinerant child mortality fell by 24 percent. Researchers teams, complemented by community-based estimate that privatization of water services paramedics. In Guatemala, where the experi- has prevented 375 child deaths a year.66 Data ence is longest, about 90 NGOs serve more from Bolivia and Chile confirm this pattern: than 3 million people--30 percent of the private companies' capacity to generate national population. Impact evaluations have income from efficiently operated services and shown more cost-effective health outcomes promote faster system expansion led to pro- under this approach than under traditional poor expansion of water supply, with 25­30 public sector delivery.67 percent of network expansion targeted to the That Bangladesh has made faster progress poorest fifth of the income distribution. on MDG outcomes than other South Asian Countries can capitalize on what private countries, despite its lower per capita income, providers do best by allowing high-quality is attributed by many observers to its wide- 108 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S C A L I N G U P S E R V I C E D E L I V E R Y spread use of partnerships between the gov- hundreds of millions of poor people. Even ernment and innovative NGOs. In health the more widespread is the failure to listen to country's largest NGO, BRAC, developed a low-income clients' needs in order to make system for teaching mothers how to use oral services work better. rehydration therapy for children with diar- Countries are experimenting with ways to rhea, under which more than half of outreach strengthen client power in frontline relation- workers' compensation is paid as bonuses. ships, and the results are encouraging. While Bonuses are based on sample surveys of increasing client choice among providers is a mothers, and the greater the number of core strategy, it is most feasible in relatively women in a village who can explain how to developed settings--urban areas in middle- make and use the rehydration solution, the income countries--where provider density is higher the payment. Within the first two years relatively high. Approaches that increase of the program, two-thirds of mothers sam- voice appear to hold more promise for pled could use the therapy--a much higher expanding MDG-related services in low- success rate than outreach and communica- income countries, at least for the near future. tion efforts usually achieve. Researchers also observed a wide range of practical and effec- I N V O L V E C O M M U N I T I E S tive teaching techniques developed by the I N T A R G E T I N G , M O N I T O R I N G , outreach workers in response to what A N D M A N A G E M E N T worked best for clients.68 Experiences with community-run schools, But private service delivery does not auto- health clinics, and rural water systems in a matically lead to better accountability. Also diverse group of countries suggest that direct in Bangladesh, researchers have found higher client involvement in the design and manage- rates of teacher absence in privately run, gov- ment of services can yield positive results. The ernment-subsidized secondary schools than water supply and sanitation sector has been in schools run by the government directly. at the fore of more efficient targeting of Even though continued public funding is sup- subsidies by involving communities--and posed to be tied to school performance, gov- especially women--in designating which ernment supervisors rarely visit schools, and households qualify as poor. In Cambodia there are few institutional mechanisms to water operators compete for contracts to con- ensure accountability.69 The issue is not pub- nect designated households and are paid per lic or private; it is the degree to which the connection; this "output-based aid" has institutional framework creates incentives for resulted in connection costs for poor house- good performance and the capacity to hold holds that are about one-quarter below the providers accountable. average for public bids. After being con- nected, households pay the full costs of oper- ating and maintaining the systems--which Strengthening "Client Power" ensures their sustainability. In many settings slow progress toward the In education, evaluations in numerous MDGs mainly reflects the failure of services Latin American countries and Indian states to reach or meet the needs of poor people. have found that parental and community Poor regions are the last to receive access to involvement in schools is correlated with social services. And even when they do, deep lower teacher absenteeism, higher student test social inequalities and rampant illiteracy can scores, and in some cases lower dropout and produce such imbalances in client-provider repetition rates. Three Central American relationships that abusive or alcoholic teach- countries--El Salvador, Honduras, and ers, nurses hitting mothers during childbirth, Nicaragua--have more than a decade of expe- and doctors refusing to treat patients of a rience with relatively strong devolution of lower caste constitute "service delivery" for autonomy to primary schools and substantive G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 109 C H A P T E R 3 engagement of parents in school manage- The report cards empowered citizens to ment, including the ability to hire and fire directly evaluate the civil service and pushed principals and teachers. These reforms have managers of public agencies to act.71 By 1999 resulted in less teacher absenteeism, longer a report card rated some Bangalore services teacher work hours, more homework assign- substantially higher. Citizen report cards have ments, and closer parent-teacher relation- since been used in Colombia (where a pro- ships. Such changes are promising, especially gram called Como Vamos is supported by in contexts where education quality is low, major media groups that disseminate results), teacher absenteeism is high, and schools are Peru (where they are built into the national often not functioning.70 household survey), the Philippines, Vietnam, But evaluations in these countries have also and most recently Albania. They are also shown that the degree of effective control being developed in Argentina, Bolivia, varies across schools. Although El Salvador's Ecuador, Honduras, Mexico, and Ukraine. A community-managed schools program similar tool is community scorecards, which (EDUCO) has shown that illiterate parents focus on service performance at the facility or can manage school budgets and key personnel community level. Rwanda is developing com- decisions, researchers in Nicaragua found munity scorecards for health and education many schools where parents' de jure involve- facilities. In Parana, Brazil, a school report ment in school councils was not matched by card allows parents to rate their children's de facto voice. Communities often need schools, teachers, and overall performance. capacity building and support in taking on These approaches have the potential to these new functions. Finally, evaluations of alter accountability relationships between student learning outcomes provide a reminder clients and providers, but in many settings it that improving teacher attendance and work will take time for client power to develop. In hours are only first steps toward improving Parana state officials observed that parents education quality. The impact of school-based were often unsure about what to assess and management on learning outcomes is mixed, found it difficult--particularly in face-to-face with Honduras showing the most improve- meetings--to criticize the school establish- ment, El Salvador some improvement, and ment. Still, as a signal from the public sector Nicaragua declines. For better outcomes, that citizens' views are considered important teachers also need to be knowledgeable in the for improving the quality of service delivery subjects they are teaching and to use effective and the accountability of providers, these teaching methods. School-based management approaches are an important step in the right has not affected these areas. direction. Their effectiveness will be enhanced if communities have regular access to basic L E T C I T I Z E N S E V A L U A T E P R O V I D E R S information on school, clinic, district, and A second tool for promoting voice is citizen national performance on key MDG and other report cards or other surveys to gain client indicators. feedback on the performance of public ser- vices. Report cards enable clients to signal S T R E N G T H E N D E M A N D needed reforms and can increase account- W I T H C O N D I T I O N A L C A S H T R A N S F E R S ability pressures through media coverage and Conditional cash transfers provide cash grants civil society advocacy. Report cards on pub- directly to poor families, conditional on their lic services were first tried in Bangalore, India, children's regular school attendance and health in 1993. The feedback--revealing poor qual- clinic visits for immunizations, nutrition sup- ity, petty corruption, lack of access for slum port, and growth monitoring. They have been dwellers, and the large hidden private coping adopted in a number of Latin American coun- costs of deceptively cheap public services-- tries over the past 10 years and are spreading to were widely publicized by an active press. other regions. 110 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S C A L I N G U P S E R V I C E D E L I V E R Y Such transfers have a number of selling Quick Wins Are Not Enough points. First, rigorous impact evaluations have shown that they work--they are effective both Many developing countries must promote in raising the immediate incomes of poor fam- MDG progress as rapidly and cost-effectively ilies and developing their longer-term human as they can over the coming years. There is capital.72 Second, conditional cash transfers understandable interest in interventions that have political advantages: They allow central produce results quickly--such as insecticide- governments to have a direct relationship with treated bednets and the elimination of school a target population and to provide a visible fees. But there are some important cautions. and popular form of assistance. The programs First, even "quick" interventions require sys- can operate with small technical teams, tem capacity to deliver, and it is crucial that focused on designing and maintaining the tar- capacity be built in efficient and sustainable geting system and ensuring timely payments ways. In pursuit of faster progress, donors by post or local bank accounts to large num- have too often succumbed to the temptation bers of families. Compared with the alterna- to "parachute in" capacity or develop paral- tive of channeling incremental public funds lel delivery channels that may not be sustain- through inefficient public agencies or decen- able over the long term. Even the quickest of tralized levels of government, the political wins needs to be part of a long-term process attraction for national politicians is clear. of capacity building. But from the standpoint of MDG progress, Deworming pills, for example, work very conditional cash transfers' third asset is by far quickly, but it has taken four years--after the most important. They can protect the funding became available--to get deworming health and brain development of children dur- mainstreamed across primary schools in ing the period when these investments are most Guinea and Senegal. Water and sanitation crucial--the first three years of life. Losses in access for clinics and schools can bring vital brain development from undernutrition, gains in their effectiveness, but while the phys- micronutrient deficiencies, illness, and lack of ical access may be relatively easy to achieve, cognitive stimulation in this period are irre- the capacity to operate and maintain the hard- versible. Investments supported by conditional ware is not: Witness the large number of non- cash transfers in early child development are functioning school toilets in developing the most highly leveraged investments coun- countries. "Quick wins" are not necessarily tries can make toward MDG progress.73 They quick or easy to implement at scale. And even affect nutrition, infant and child mortality, and harder and longer-term is building the capac- subsequent performance in primary school. ity and systems to sustain them. The evidence from Latin America is robust Second, some powerful and cost-effective that conditional cash transfer programs interventions may have longer-term impacts, increase clients' use of education, health, and such as conditional cash transfers that stimu- nutrition services. Some researchers also point late early child nutrition and health care, or to empowerment effects on poor clients, who the building of a new medical school. The key gain a sense of legitimacy in approaching pub- for any country is to prioritize investments lic services because the transfers rest on an that will have the highest overall returns in its explicit expectation that they should use such context. This needs to emerge from a careful services. A major question in adapting such diagnosis of the national context, through the transfers to other countries is how efficient they poverty reduction strategy process, supported are in settings where service quality is poor. by sound sector planning, costing, and iden- Conditional transfers cannot fix the supply side tification of binding constraints. of service delivery. But where supply is ade- Still, the "quick wins" recommended by the quate, they are an effective tool for stimulating Millennium Project offer a useful menu for demand among target vulnerable groups. countries to consider. Most of the recommended G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 111 C H A P T E R 3 interventions are backed by robust microlevel Scaling Up Skilled Providers research. Some will be relevant in a number Expanding education and health services on of different country contexts. the scale needed to achieve the MDGs will But they will not be enough. Quick wins require major increases in teachers, doctors, are no substitute for context-specific identifi- nurses, and community health workers, espe- cation of priorities. Nor do they constitute cially in Sub-Saharan Africa. Human resource the full range of high-return investments in a shortages are likely to be a binding constraint given context, some of which are inherently on system expansion, especially in health, longer term. Finally, even where they are unless countries adapt policies and increase adopted as relevant strategies, they do not provider productivity. Strategies that are prov- solve the biggest challenge: building capacity ing effective include: for effective, large-scale implementation. · Pragmatic adjustments to recruitment stan- Priorities for Global Action dards, to increase production of alternative teachers and community health workers. For many countries, especially in Sub-Saha- · Careful deployment and management of ran Africa, the MDGs will not be met with- providers, to avoid underutilization. out unprecedented expansion of health and · Effective use of incentives to make public education service delivery. The private sector sector positions attractive, especially in will play an important role, particularly in rural areas. health, but most incremental funding will be · Selective salary adjustments for the high- channeled through the public sector--and in est-skilled workers (such as doctors) in the many countries deep changes in public sector public sector, to diminish migration. functioning are needed for funding to pro- · Cost-effective investments in medical, nurs- duce results. The challenge is great, but prag- ing, and teacher training capacity, to com- matic strategies are being shown to work. plement the shorter-term strategies above. As discussed elsewhere in this report, the pri- orities for public action in education, health, Donors have an important role to play in water supply, and sanitation must be deter- addressing the crisis in human resources for mined in the context of a country-owned health in many developing countries. Health poverty reduction strategy that is at the center sector wage adjustments in OECD countries of national planning and budgeting processes. If could attract more of their own nationals into the MDGs are to be reached, poverty reduction service. Developed countries that benefit from strategies must include well-costed, coherent African-trained medical personnel could help sector strategies aimed at these goals--which finance expanded training facilities in those has not always been the case. Individual inter- countries and assist them in recouping med- ventions--such as "quick wins"--need to be ical students' loans. A donor working group evaluated in this country-specific framework. has begun to develop proposals in this area, To cope with uncertainties in aid levels, coun- which should get priority attention. tries can draw on sector plans to prepare two or three alternative "stretch" scenarios that can be implemented if additional funding is available. Mobilizing Sustained Recurrent Special actions are needed in the three crit- Cost Financing ical areas analyzed in this chapter: scaling up skilled providers in health and education, To achieve the MDGs, many developing coun- ensuring the sustained financing required to tries will need to allocate more of their own expand these recurrent cost intensive services, fiscal resources to education and health. For and making sure that money produces effec- education, 20 percent of the recurrent budget tive service delivery and results. is the benchmark under the Fast Track Initia- 112 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S C A L I N G U P S E R V I C E D E L I V E R Y tive, while Sub-Saharan African countries, for largely through multilateral channels and example, currently average 15 percent. For coordinated global efforts would lower health, African governments have set a target transaction costs and contribute to MDG of 15 percent of the recurrent budget, well progress. above their current average of 8 percent. · Harmonizing assistance. At the recent Paris But every MDG analysis has concluded that Forum, donors committed to specific har- countries' own efforts will not be enough, and monization indicators, with progress to be a large increase in external financing is required. monitored by the OECD's Development Equally or more important for the human Assistance Committee. But the EFA FTI, development MDGs are deep changes in the which involves both country-level coordi- nature of donor support. A significant share of nation groups and regular global meetings bilateral assistance falls outside national plan- to monitor progress, and the High Level ning and budgeting processes. Transaction costs Forum in Health and country level coordi- severely strain recipient countries' limited nation groups offer ready-made channels administrative capacity. And there is a near- for disseminating the indicators and work- complete disconnect between the type of expen- ing within the respective sectors toward diture needed to scale up service delivery in better harmonization and alignment. education and health--recurrent, local, largely · Creating a stable funding framework for personnel costs--and what bilateral donors are the Fast Track Initiative. To strengthen the actually providing--short-term, in-kind, and Fast Track Initiative, its partners should largely technical assistance financing. make a monitorable, public commitment Most MDG cost estimates have focused on to sustained funding for primary educa- countries' core financing requirements, but tion. The target should be a significant most aid today--bilateral and multilateral-- annual increase from each partner's 2005 cannot be flexibly used for these. Support for base, which the initiative's secretariat capacity building is important, but it must be should monitor. This kind of predictable costed over and above the core requirements. funding framework is essential to signal to Technical assistance should also be carried actual and potential recipient countries out in new ways, to eliminate the all too com- that the initiative has sustained financial mon pattern of uncoordinated and overlap- backing. Each partner's annual funding ping studies, training, and technical advisers commitment should help fill agreed financ- being provided to the same country by differ- ing gaps for endorsed countries where they ent donors. have a bilateral presence or interest; any The MDGs will not be achieved unless all residual should be allocated to the FTI development partners rethink the way they Catalytic Fund. Donors should also show do business. Specific priority actions include: that expanded support for primary educa- tion is not coming at the expense of fund- · Aligning aid with PRS priorities. All aid ing for other levels of education, especially should support priorities identified in the secondary education. poverty reduction strategy and endorsed · Supporting increased funding for health. sector plans--nothing should be "off Additional external resources are needed to plan." In countries meeting public expen- prevent and treat childhood diseases and diture management standards, all aid maternal conditions, sustain HIV/AIDS should flow through national budget and treatment, and make progress against procurement systems. malaria and tuberculosis. Increased donor · Limiting the number of recipient coun- funding must be longer-term and more pre- tries. A twofold strategy of narrowing the dictable, aligned with country priorities, number of countries of bilateral interest and increasingly made available through and channeling future increases in ODA budget support. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 113 C H A P T E R 3 · Aligning global health initiatives with public, proactive stance in helping govern- national policies and priorities. The global ments increase absorption of external health community urgently needs to exam- grants linked to the MDGs. IMF policy is ine all options for ensuring that global pro- that program ceilings should be flexible in grams organized around specific health accommodating such additional spending priorities do not undermine the coherence when grant financing is available. The IMF of countries' health strategies, the balanced should help country authorities work with allocation of resources, and the strengthen- development partners and civil society ing of health systems. Scenarios should pre- groups to clarify how fiscal and wage bill serve the mandates these programs ceilings are derived, and provide reassur- currently have for resource mobilization, ance that program ceilings are in fact flex- awareness raising, results monitoring, and ibly accommodating spending supported financing of global public goods with by grants. Staff reports should also explic- respect to individual disease priorities. But itly discuss how IMF-supported programs these functions must be much better coor- have addressed key macroeconomic issues dinated at the global level, to achieve that affect MDG progress. greater convergence of policies and strate- gies, and especially at the country level, Translating Resources with harmonized procurement, disburse- into Service Delivery and Results ment, and reporting. Each country should have a country-led Achievement of the MDGs is in the hands of health sector working group involving all developing countries. Increased aid--espe- development partners--including the cially in the form of flexible budget support-- national HIV/AIDS coordinator and a rep- is unlikely to materialize unless countries resentative from the education sector--to demonstrate both sound public expenditure coordinate school health and prevention management and MDG results. The first programs. This group should agree on the requires systems for budget formulation, allo- overall sector strategy and medium-term cation, and reporting that meet threshold investment plan for health, and on key standards of integrity and efficiency. In many outcome and intermediate indicators to be of the countries in greatest need of external monitored annually. The most efficient recurrent cost support, these systems are too strategy is to create a single pooled fund to weak to give donors confidence that provide budget support linked to imple- resources can be tracked and used well. mentation of the agreed sector program. Donors are giving high priority to capacity Within such a framework, global pro- building in this area, but the deepest con- grams could pursue the same objectives-- straints to country progress are political. but without the high transaction costs of The second requires the capacity for real- separate programming missions and pro- time data on MDG progress. Countries curement and reporting requirements. need to be able to track the primary com- The High Level Forum for the Health pletion rate and use regular household sur- MDGs, established in 2003, offers a plat- veys and sentinel monitoring to generate form for this collaborative "rethink" of data on child and maternal mortality and the current global architecture in health major communicable diseases. Data must and for the development of common prin- be disaggregated by gender, region, and ciples and standards of good practice for income to ensure that MDG progress is the engagement of global health partner- reaching vulnerable groups. Because out- ships at the country level. come indicators improve relatively slowly, · Aiding countries to absorb more aid effec- intermediate indicators of progress are also tively. The IMF should continue to take a important--above all, measures of system 114 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S C A L I N G U P S E R V I C E D E L I V E R Y efficiency, such as those for education developed by the Fast Track Initiative. A Notes similar framework is being developed by a 1. Hoddinott, Haddad, and Alderman (1997). donor consortium in health (Health Metrics 2. UN Research Institute for Social Develop- Network). These new approaches will work ment (2005). to the advantage of countries demonstrating 3. Clemens (2004) improved performance. 4. Black (2003). Progress will also require a better evi- 5. Wagstaff and Claeson (2004). dence base for policy, built on rigorous 6. UNAIDS (2004b). impact evaluation of key programs. Pro- 7. WHO (2002). 8. Lanjouw and Ravallion (1999). grams should be rolled out in ways that per- 9. Joint Learning Initiative (2004). mit the use of control groups. Countries 10. Joint Learning Initiative (2004). should develop local capacity for carrying 11. Anand and Barnighausen (2004). out quality evaluations and using results. 12. Rivkin, Hanushek, and Kain (2005). But knowledge on how interventions play 13. World Bank (2004b). out under different country circumstances is 14. Gertler and Barber (forthcoming). a global public good--and the costs of gen- 15. Joint Learning Initiative (2004). erating it need to be broadly shared by the 16. Dugger (2004). international development community. The 17. Dovlo and Martineau (2004). World Bank has an important role to play, 18. Bang and others (1999), cited in World through the Development Impact Evalua- Bank (2004a). 19. Lehmann, Friedman, and Sanders (2004). tion initiative, in organizing more--and 20. Lehmann, Friedman, and Sanders (2004). more systematic--evaluation of innovative 21. Ethiopia Federal Ministry of Health (2004). programs across countries, supporting 22. Stekelenburg, Kyanamina, and Wolffers metastudies in key areas, ensuring broad dif- (2003). fusion and use of results, and supporting 23. WHO (2004). country-level capacity building. 24. World Bank (2005a). Ultimately, strengthening service delivery 25. Mingat (2003). requires action to improve core accountabil- 26. Jalan and Glinskaya (2004). ity relationships: the responsiveness of gov- 27. Vegas and De Laat (2004). ernments to citizen demands through the 28. Crouch and Fasih (2004); UNESCO political process, the responsiveness of ser- (2004). 29. Dovlo and Martineau (2004); Joint Learn- vice providers to clients, and the effective- ing Initiative (2004); Vujicic and others (2004); ness of government agencies in turning Buchan, Parkin, and Sochalski (2003). resources into results. These weaknesses are 30. Dovlo and Martineau (2004). the deepest threat to MDG progress. There 31. Dovlo and Martineau (2004). are no panaceas. But countries are making 32. Joint Learning Initiative (2004); Stilwell progress in improving governance. Sector and others (2003). management can be helped by clear funding 33. Wibulpolprasert and Pengpaibon (2003). norms, competency-based recruitment, 34. Vujicic and Sagoe (2004). results focus, attention to cost-effective stan- 35. Wibulpolprasert and Pengpaibon (2003). dards, and strategies to make effective use of 36. Vujicic and Sagoe (2004). the private sector. Above all, governments 37. UNDP (2002), cited in World Bank (2005a, p. 98). can strengthen the voice of clients at the 38. Bennell (2005). point of service delivery--through the 39. Grant, Gorgens, and Kinghorn (2004); power of information, direct involvement in Grassly and others (2003). school and health facility monitoring and 40. Joint Learning Initiative (2004) management, and the use of conditional 41. Zambia Ministry of Health (2004); Vujicic cash transfers. and Sagoe (2004); Joint Learning Initiative (2004). G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 115 C H A P T E R 3 42. Wagstaff and Claeson (2004). 57. UNMP (2005c, p. 49). 43. Duflo, Kremer, and Dupas (2004). 58. Bennett (2001). 44. Hinchliffe (2004). 59. WHO (2004). 45. Bruns, Mingat, and Rakotomalala (2003); 60. Mingat (2004). Colclough and Lewin (1993); Wagstaff and Clae- 61. Chaudhury and Hammer (2004). son (2004). 62. Rodd (2004). 46. Bulir and Hamann (2003); Bruns, Mingat, 63. Chaudhury and others (2005). and Rakotomalala (2003). 64. Vujicic and Sagoe (2004). 47. Gottret and Schieber (forthcoming). 65. Fiszbein (2005). 48. Haacker (2004, p. 63); IMF (2004). 66. Galiani, Gertler, and Schargrodsky (2005). 49. Foster (2004). 67. La Forgia, Mintz, and Cerezo (2004), cited 50. Foster (2004). in Fiszbein (2005). 51. Data are from the IMF's Africa desk. 68. World Bank (2005c). 52. FTI Secretariat (2005). 69. Chaudhury and others (2005). 53. World Bank (2005b). 70. Vegas and Umansky (2004). 54. World Bank (2005b, p. 38). 71. Fiszbein (2005). 55. Reinikka and Svensson (2003). 72. Rawlings and Rubio (2005). 56. Bjorkman (2005). 73. Carneiro and Heckman (2003). 116 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 4 Realizing the Development Promise of Trade R emoving barriers to trade that discrim- agricultural trade policies in OECD countries, inate against developing countries is devoting greater attention to reducing the potentially a powerful tool to help trade-restricting effects of nontariff measures, achieve the Millennium Development Goals and safeguarding and expanding the scope for (MDGs). Multilateral, reciprocal, nondis- developing countries to contest services mar- criminatory trade liberalization offers the best kets. Given that trade restrictions are much approach for supporting development. Rapid higher in developing than developed countries, conclusion of an ambitious Doha Round is significant further liberalization by developing therefore of great importance. As noted in countries will also be required to realize the Global Monitoring Report 2004, the round full potential of trade for development. Indeed, should spawn a major reduction in trade- about half of the potential developing country distorting policies. Ambitious reference points gains from merchandise trade reform will could be helpful in guiding the negotiations, come from reforms by developing economies. such as capping the agricultural tariffs of An ambitious Doha Round would benefit developed countries at 10 percent, eliminating the world as a whole and developing countries their agricultural export subsidies and manu- as a group. But it would not be a panacea, and facturing tariffs, fully decoupling domestic it would not be costless. Trade is a key driver agricultural and rural support policies from of growth, but it needs to be complemented by production, and pursuing meaningful liberal- many other policies. In many developing ization of trade and investment in services, countries "behind-the-border" policies and including through temporary migration of ser- the investment climate are binding constraints vice providers. Equally important, developing on the ability to realize the benefits from countries need to set ambitious targets to fur- greater trade opportunities. All countries will ther reduce the average level and dispersion of incur adjustment costs from deep trade protection and substantially expand their reforms, and some developing countries will World Trade Organization (WTO) commit- confront erosion of current tariff preferences. ments. To assist in attaining the MDGs, such Such changes should be considered within the actions should be fully implemented by 2015, broader context of development and poverty with significant progress before 2010. reduction strategies, with special attention to A surge in ambition is needed to realize the the concerns of poor households. The stan- promise of the Doha Development Agenda. dard argument for trade liberalization is that The ambition must focus on transforming total gains exceed total losses--especially over G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 117 C H A P T E R 4 time--and that gainers can compensate losers and services of export interest to low-income while still improving their welfare. But in prac- countries, financial assistance, and actions to tice such compensation does not occur. An minimize the incidence of nontariff measures ambitious Doha Round would generate sub- on exports from low-income countries. stantial gains, providing a basis for transferring "Aid for trade"--assistance to bolster additional resources to low-income countries trade capacity and reduce trade costs--can to enhance trade capacity. Given that lack of have high returns in terms of increasing competitiveness due to high operating costs growth, reducing poverty, and facilitating the and weak investment climates is the primary realization of ambitious global trade reforms. factor limiting trade potential in many poor The share of aid for trade in total aid com- countries, actions to lower such costs are mitments increased from 3.6 percent in 2002 urgently needed, especially in Africa. The to 4.2 percent in 2003.1 A concerted effort to agenda includes supporting trade logistics and further expand such assistance could do facilitation, strengthening transport infrastruc- much to improve developing countries' ture, and further reforming policies that create capacity to benefit from both global and antiexport bias--including import tariffs. domestic reforms. Numerous trade integra- An ambitious Doha outcome--significant tion studies undertaken for the LDCs under liberalization commitments by both developed the Integrated Framework for Trade-Related and developing countries--complemented by Technical Assistance, as well as similar analy- a credible commitment to convert part of the ses done in other developing countries, have resulting gains into increased aid to the poor- identified areas where such aid can be used est countries to enhance their trade capacity-- effectively. The Integrated Framework, a col- would send a strong signal that political will laborative venture between six multilateral exists to leverage trade to help achieve the agencies, bilateral donors, and governments MDGs. This would help countries that have of LDCs, offers a mechanism to identify pri- the capacity to export but are now constrained orities and allocate additional assistance to (such as middle-income agricultural exporters) trade-related investments and policy reforms. as well as countries that have much less capac- To date, dedicated resources to support ity and are unlikely to benefit much from the implementation of the framework have been standard reciprocal exchange of market access limited to small-scale technical assistance. commitments in the WTO. Funding for trade priorities is considered in Recent policy in OECD countries has the context of the resource allocation and emphasized tariff preferences for small, low- prioritization process related to country income countries, especially the least devel- development strategies--poverty reduction oped countries (LDCs) and Sub-Saharan strategies (PRSs) or equivalent national devel- African countries. While actions to make tar- opment strategies--with donor assistance iff preferences more effective in the short run complemented by loans and other support could be beneficial--for example, through from international financial institutions. adoption of common, liberal rules of origin-- While this should continue to be the case, the consideration should be given to alternative Integrated Framework could be used more forms of trade assistance that generate greater extensively to both bolster the trade capacity benefits for recipients and are less trade-dis- of poor countries and help address the adjust- torting. Tariff preferences have been of lim- ment costs from an ambitious Doha Round. ited value to many African countries and have Regional cooperation is another potentially negative effects on the functioning of the powerful instrument to leverage trade for global trading system. Alternative measures development--as long as it does not detract include sharp reductions in most favored from the pursuit of an ambitious Doha Round nation (MFN) tariffs and other barriers by and focuses policy attention on domestic high- and middle-income countries on goods (intraregional) policy-related trade constraints. 118 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 R E A L I Z I N G T H E D E V E L O P M E N T P R O M I S E O F T R A D E In Sub-Saharan Africa there is a strong regional TABLE 4.1 Trade has grown rapidly in recent years, especially in dimension to growth, absorptive capacity, and developing countries (average annual growth rate, percent) the widening of economies of scale needed to lower infrastructure costs and facilitate trade. Country group 1991­95 1996­2000 2001­03 To fully realize the development promise of Exports both North-South and South-South regional integration arrangements, developing country World 8.7 4.8 5.8 members of trade agreements should imple- Developing countries 12.2 7.7 7.4 Least developed countries 3.8 10.1 8.4 ment significant liberalization on a nondis- African least developed countries 0.1 7.3 10.2 criminatory basis in addition to granting Low-income countries 8.7 9.6 8.1 preferential access to partner countries. Many African low-income countries 2.8 12.6 4.2 Sub-Saharan countries still rely on import Imports duties for a significant portion of government receipts, so revenue concerns and the ability to World 8.1 5.2 6.0 put in place alternative revenue sources are fac- Developing countries 13.3 5.3 8.1 Least developed countries 5.8 3.3 12.0 tors that need to be taken into account in deter- African least developed countries 3.1 1.9 13.3 mining the speed of liberalization. Low-income countries 9.2 4.4 12.8 African low-income countries 5.2 0.9 16.1 Trade Performance of Low-Income and Least Source: IMF, Direction of Trade Statistics. Developed Countries The past two decades saw a boom in world TABLE 4.2 Developing countries account for a growing share trade. Non-oil exports from developing coun- of non-oil exports (percentage of total) tries grew faster than those from developed countries (table 4.1), and their global market Country group 1975 1980 1990 1995 2000 2003 share rose from 21 percent in 1980 to 37 per- cent in 2003 (table 4.2). This increase reflects Developed countries 80.3 78.9 76.5 70.6 65.1 62.6 the growing openness of developing countries Developing countries 19.7 21.1 23.5 29.4 34.9 37.4 Least developed countries 0.8 0.6 0.6 0.4 0.5 0.6 to trade and the competitiveness of their African least developed exports in global markets. Openness ratios (the countries 0.6 0.4 0.4 0.2 0.3 0.3 sum of exports and imports as a share of GDP) Low-income countries 3.1 1.7 2.0 1.9 2.3 2.5 have increased for most developing regions and African low-income range from a low of 25 percent in South Asia to countries 2.1 0.8 1.0 0.7 0.9 0.9 64 percent in Europe and Central Asia. The foreign exchange earnings of the poorest Source: IMF, Direction of Trade Statistics. countries depend on agricultural commodities and labor-intensive manufactures. Although its average annual export growth has increased foreign direct investment performance of since the mid-1990s, Sub-Saharan Africa's share many low-income countries. Civil conflicts of world trade remains far below what prevailed have undermined economic performance in a in the 1970s (see table 4.2). Reasons include the score of African countries, and in others poor region's high dependence on agriculture, limited macroeconomic policies have often led to trade opportunities caused by highly distorting price disadvantages as a result of overvalued policies in OECD countries, and downward currencies.2 Moreover, governance problems, global price trends for some commodities (such corruption, and institutional weaknesses as coffee) due to expanding supplies. have worsened the local investment climate Problems on the supply side of the market and inhibited local entrepreneurs from taking also help explain the below-average trade and advantage of market opportunities. Those G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 119 C H A P T E R 4 same factors have also induced instability in heavily dependent on oil exports.4 This is commodity prices and had adverse effects on almost twice the figure for East and South Asia, the demand for commodity exports. and 50 percent higher than in Latin America. Since the mid-1990s exports from low- Agricultural products account for at least a income countries and the LDCs have grown quarter of exports from Sub-Saharan Africa faster than the average for the world and for and Latin America. As a result countries in developing countries (see table 4.1). This both regions are subject to greater commodity largely reflects an increase in commodity prices price (terms of trade) volatility. The decline in and more recently the decline in the U.S. dollar, nonfuel commodity prices and the increase in as well as an increase in exports of manufac- energy prices since 1995 have contributed to a tures (textiles). These developments con- decline in the shares of food and raw materials tributed to a minor recovery in these countries' and an increase in the share of fuels in exports world market shares, though these remain from the LDCs (figure 4.1). Expanding apparel below those of the 1970s (see table 4.2). Global exports from Africa are a noteworthy develop- export shares for low-income African countries ment of recent years. While reliable data on the and for the LDCs as a group exceed their shares composition of exports for 2003 are not yet in world GDP.3 Average import growth rates available, the sharp increase in fuel prices dur- have also picked up recently for low-income ing 2003­4 will likely further increase the share countries and the LDCs, outpacing growth in of fuels in LDC exports. imports for the world and for developing coun- tries during 2001­3. Recent Developments Exports from the poorest countries remain in Trade Policy concentrated in primary commodities. In 2001 the concentration index of Sub-Saharan Global trade policy developments in 2004 pro- Africa's exports was 0.47--similar to that of vide a mixed picture. After a disappointing out- the Middle East and North Africa, a region come at the WTO ministerial conference in Cancun, Mexico, in September 2003, FIGURE 4.1 LDC Exports: Less food and raw materials, more energy and apparel there was considerable gloom about the prospects of the multilateral trad- ing system. But in 2004 WTO negoti- ations came back on track, with a Fuel package of agreements reached in August. The WTO agreed on a frame- Clothing work for negotiations on agriculture Food and industrial products, a set of rec- ommendations on services, and Raw materials modalities for negotiating improved customs procedures. Other positive Other semi-manufactures developments included proposals for reforming EU sugar and banana Textiles regimes, and an end--after some 40 years--to the regime of managed Other trade in textiles and clothing. The proliferation of reciprocal 0 5 10 15 20 25 30 35 preferential trade arrangements con- Share in total exports, percent tinued in 2004, with activity spread 2002 1995 across all regions and countries. Since 1990 the number of preferential Source: WTO (2004). trade arrangements in force and noti- 120 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 R E A L I Z I N G T H E D E V E L O P M E N T P R O M I S E O F T R A D E fied to the WTO has risen from 50 to nearly with China, India, and Japan, among others. 230,5 and another 60 are being negotiated. Japan, the Republic of Korea, Singapore, But there is growing concern that such South Africa, and Thailand have also been arrangements create trade diversion and sub- negotiating bilateral accords.6 The rising stantial administrative costs due to compli- regional activity in East Asia is particularly cated rules of origin. Although many of the noteworthy given these countries' historical countries most active on this front are strong noninvolvement in preferential trade and proponents of the Doha Round and consider reliance on the multilateral trading system. An the agreements a form of "competitive liber- increasing number of developing countries are alization" that reinforces WTO-based liberal- seeking membership in regional agreements. ization efforts, preferential trade may create Developments also occurred for nonrecipro- interests opposed to multilateral extension of cal preferences. The European Commission market access opening and divert scarce nego- introduced a new Generalized System of Pref- tiating resources. Moreover, while the agree- erences scheme offering duty-free access to the ments can help developing countries by EU market for 80 percent of dutiable tariff lines reinforcing internal reforms and lowering to countries that adhere to a number of inter- trade costs, such benefits do not require pref- national conventions on human rights, labor, erential access to markets. As discussed later the environment, and governance. The new in this chapter, minimizing discrimination and scheme enters into force in April 2005 and pro- focusing attention on cooperation to lower vides for better product coverage, more relaxed regulatory trade barriers is an important chal- rules of origin, and greater certainty and pre- lenge from a development perspective. dictability in the granting of preferences. In the The recent accession of 10 new members to United States the passage of the African the European Union consolidated the extensive Growth and Opportunity Acceleration (AGOA network of intra-European trade agreements III) Act extended the general timeframe for and expanded the EU internal market. The AGOA preferences until 2015. It also extended European Union is also pursuing association the third-country fabric manufacturing provi- agreements with Common Market for the sion for least developed AGOA beneficiary Southern Core (Mercosur) and Mediterranean countries until 2007--an important provision countries,andisnegotiatingreciprocaleconomic since few AGOA beneficiary countries have partnership agreements with regional subsets of adequate capacity to manufacture fabric. The African,Caribbean,andPacific(ACP)countries. legislation provides temporary respite to textile Over the past year the United States has also and clothing sectors in several Sub-Saharan been active in concluding preferential trade countries (including Lesotho, Madagascar, and agreements, including with Australia, Bahrain, Swaziland) as competitive pressures intensify Central America, the Dominican Republic, following the elimination of all quantitative and Morocco. Several more are under negoti- export restraints in January 2005. ation. In Latin America, Mercosur signed an agreement with Andean countries and is nego- Tariffs, Nontariff Measures, tiating with India, Mexico, and South Africa and Contingent Protection (in addition to the European Union). Mexico has entered into a trade agreement with Japan In recent years there has been a decline in tariff and is negotiating one with Singapore. Simi- barriers worldwide, reflecting autonomous larly, a South Asia free trade area is being nego- reform, regional agreements, and WTO acces- tiated between seven countries, and in Africa sion (including by Cambodia, China, Egypt, the customs union of the East African Com- India, Iran, Pakistan, Tunisia, and Zimbabwe). munity has been launched. The Association of Globally, average tariffs fell by 2 percentage South-East Asian Nations (ASEAN) has points between 1997 and 2000 and by 1 point agreed to negotiate preferential agreements between 2000 and 2003. As measured by MFN G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 121 C H A P T E R 4 TABLE 4.3 Applied most favored nation tariffs are highest in South requirements that apply in principle to both Asia and Sub-Saharan Africa (simple average, percent) imports and domestic products; see below.) Nontariff measures apply to a large share of Region/income group Late 1980s 2004 (preliminary) trade,withthehighestratiosindevelopingcoun- tries (table 4.4). But as discussed below, when East Asia and Pacific 18.8 9.6 converted to ad valorem equivalents, nontariff Europe and Central Asia 10.2 7.3 Latin America and the Caribbean 22.4 10.4 measures are more important in rich countries. Middle East and North Africa 17.3 12.4 The use of instruments of contingent South Asia 68.9 17.7 protection--antidumping and safeguard Sub-Saharan Africa 25.1 15.3 actions--against imports by WTO members High-income OECD 7.0 4.1 has grown steadily, with more than 2,400 High-income non-OECD 9.0 6.6 Developing countries 25.4 11.7 antidumping investigations launched since Least developed countries 28.4 15.1 1995 (table 4.5). This instrument is increasingly Low-income countries 31.7 12.9 being used by developing countries against Middle-income countries 21.8 10.5 other developing countries. Indeed, developing countries have overtaken developed countries in Sources: UNCTAD TRAINS database; World Bank, World Development Indicators; IMF Trade the number of cases launched: between 2002 Policy Information Database; WTO Trade Policy Reviews. and June 2004 developed countries initiated Note: Classification of regions and income groups based on World Bank 2004b. 190 cases, compared with 441 by developing countries. India has passed the United States as TABLE 4.4 Nontariff measures remain high in several regions, 2002 the top initiator, and Argentina and South (percent) Africa have an even higher incidence of antidumping use relative to the value of their imports (table 4.6). Frequency ratio Coverage ratio Region/income group (share of tariff lines) (share of imports) Another important nontariff measure affecting exports and imports are health- and East Asia and Pacific 44.0 32.8 Europe and Central Asia 14.6 23.9 safety-related product standards. In contrast Latin America and the Caribbean 26.9 44.4 to antidumping efforts, which by definition Middle East and North Africa 49.5 51.6 are intended to protect domestic import- South Asia 12.1 28.6 competing industries, health and safety regu- Sub-Saharan Africa 24.4 28.8 lations (mandatory product standards) are High-income OECD 22.0 24.1 High-income non-OECD 45.1 46.9 often applied equally to domestic and foreign Developing countries 27.2 34.3 (imported) products--so in principle they are Least developed countries 20.0 36.7 not (or should not be) intended to protect Low-income countries 25.5 36.4 domestic industries. Indeed, WTO rules pro- Middle-income countries 28.3 34.0 hibit the protectionist use of technical prod- uct regulations. As discussed below, such Sources: UNCTAD TRAINS database; WTO Trade Policy Reviews; EU Product Standards Data- norms affect trade by increasing the costs of base; Groupe d'Economie Mondiale, Institut d'Etudes Politiques. entering a market, with the incidence of the Note: Classification of regions and income groups based on World Bank 2004b. Nontariff measures include price controls, quantity restrictions, state trading monopolies, and techni- associated costs differing across countries cal product regulations as classified in the UNCTAD TRAINS database. depending on the composition of their exports and the ease of satisfying (document- tariffs, South Asia is the most restrictive region, ing compliance with) a specific norm. followed by Sub-Saharan Africa (table 4.3). By contrast, there has been no decline in non- Textiles and Clothing, Bananas, and Sugar tariff measures affecting trade, such as licensing requirements and antidumping investigations. A major trade policy change in 2004 was the (Licensing requirements are often associated phase-out of bilateral quotas on exports of tex- with health- and safety-related regulatory tiles and clothing at the end of the year, as 122 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 R E A L I Z I N G T H E D E V E L O P M E N T P R O M I S E O F T R A D E required by the Uruguay Round Agreement on TABLE 4.5 Developing countries initiate more antidumping Textiles and Clothing. Because the quotas were investigations, 1995­2003 bilateral and not based on competitive consid- erations, their removal is likely to lead to Target region export declines and balance of payments Developed Developing Transition swings for several countries. China and India Initiating region countries countries economies Total are expected to gain from this liberalization, as Developed countries 226 574 (129) 132 932 they are considered the most competitive pro- Developing countries 453 827 (225) 173 1,453 ducers. But the actual effects will depend on Transition economies 4 7 (2) 20 31 market sourcing decisions by retailers and buy- Total 683 1,408 (356) 325 2,416 ers, as well as the extent to which safeguard measures are invoked and U.S. quotas are Share of total (percent) maintained under the provisions of China's Developed countries 24.2 61.6 (13.8) 14.2 100.0 WTO membership. In January 2005 China Developing countries 31.2 56.9 (15.5) 11.9 100.0 imposed a low MFN tax--ranging from 2­4 Transition economies 12.9 22.6 (6.5) 64.5 100.0 Total/average 28.3 58.3 (14.7) 13.5 100.0 percent--on its textiles and clothing exports, to remain in place through the end of 2007.7 Although this will attenuate the expected shift Source: WTO Antidumping Committee data. in sourcing to Chinese producers, the elimina- Note: Numbers in parentheses are actions against China. Developed countries are Australia, Canada, EU15, Iceland, Japan, New Zealand, Norway, Switzerland, and United States. Transi- tion of the quotas will still force significant tion economies are Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, adjustments in less efficient countries (box 4.1). Croatia, Czech Republic, Estonia, FYR Macedonia, Georgia, Hungary, Kazakhstan, Kyrgyz Republic, Latvia, Lithuania, Moldova, Poland, Romania, Russian Federation, Slovak Republic, In July 2004 the European Union announced Slovenia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan, and Yugoslavia. that it will substantially reduce its sugar pro- TABLE 4.6 A few large developing countries have launched the most duction and exports over a four-year period.8 antidumping investigations, 1995­2003 The cut in output is to be accompanied by a reduction in domestic support prices of about one-third, implemented over a three-year Index of initiations Initiating Number Share of total per US$ of imports period. Import quotas from African, Caribbean, country/region of cases (percent) (United States = 100) and Pacific countries and India will be main- India 379 15.7 2,416 tained at current levels. Farm support payments United States 329 13.6 100 will be decoupled from production and linked European Union (15) 274 11.3 101 to environmental and food safety standards. Argentina 180 7.5 2,577 While this reform will benefit EU consumers South Africa 166 6.9 2,634 Australia 163 6.7 719 and competitive developing country suppliers, it Canada 122 5.0 170 will reduce benefits from sugar production for Brazil 109 4.5 590 several African, Caribbean, and Pacific coun- Mexico 73 3.0 155 tries as the value of their quotas declines. The China 72 3.0 109 European Union has made provisions for adjustment assistance for such countries. Sources: WTO Antidumping Committee data; IMF, Direction of Trade Statistics. In October 2004 the European Union announced a proposal to change its import which it argues is equivalent to the level of pro- regime for bananas. Under a WTO-backed tection now in place. This move has disap- agreement with Ecuador and the United States, pointed producers in several Latin American the Union is required to move away from its countries, who are concerned that such a high quota-based system of controlling imports to a tariff will make them unable to compete in the tariff-only system by January 2006. Under the EU market, as well as producers in African, proposal the Union would levy a tariff of 230 Caribbean, and Pacific countries, who fear that euros a ton on banana imports from non- the proposed tariff is not high enough to main- African, Caribbean, and Pacific countries, tain their existing market shares. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 123 C H A P T E R 4 BOX 4.1 The varying effects of the Agreement on Textiles and Clothing The Agreement on Textiles and Clothing, agreed to as part of the Uruguay Round, was designed to progressively phase out quotas that limited developing countries' opportunities to export textiles and clothing. Quotas were to be gradually abolished, and the growth rates of export volumes sub- ject to quotas steadily increased, over a 10-year period ending on 1 January 2005. Importing coun- tries were allowed to choose which products to make quota free at three stages (1995, 1998, and 2002) set out in the agreement. They chose products in which developing countries did not have a comparative advantage--or even face quotas. The acceleration of quota growth did succeed in mak- ing quotas nonbinding for some exporters, but for some dynamic exporters--particularly China-- the quota growth rates of around 3 percent a year were much lower than their supply capacity. As a result quotas became more restrictive. Quota abolition will lower prices for consumers in markets that had restricted textile and cloth- ing imports. Prices in unrestricted markets can be expected to rise, absent the incentive for efficient exporters to divert products shut out of U.S. and EU markets into these markets. In addition, less competitive suppliers--including small, low-income countries that became exporters of textiles and clothing in part because dynamic exporters were fettered by quotas--may be confronted with lower prices for their products. The impacts on individual exporters will depend on the destination of their exports. One way to identify countries that might lose from this change is to examine what per- centage of their exports comes from exports of textiles and clothing to restricted markets. The 18 most vulnerable countries are those for whom exports of textiles and clothing to Canada, the Euro- pean Union, and the United States exceeded 35 percent of total exports in 2003 (see figure). Most of these are small economies. Francois and Spinanger (2004) estimate that for China the quotas had the same effect as a tax of about 25 percent on clothing exports to the European Union and United States. Most other exporters faced much lower barriers. The adverse effect on the prices received by vulnerable exporters would be much smaller than 25 percent, partly because textiles and clothing are differ- Exports of textiles and clothing to Canada, the EU, and the United States as a share of total Percent 100 80 60 40 20 0 a ves pal Haiti istan elau PDR Rep. olia Lank Chad Ne Lesotho Macao Tok Lao Tunisia temala Cambodia HondurasSalvador MauritiusPak Sri Maldi Nicaragua Bangladesh El MongGua Dominican Source: Manole (2004). 124 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 R E A L I Z I N G T H E D E V E L O P M E N T P R O M I S E O F T R A D E entiated products (exports from different countries are very different; see Martin, Manole, and van der Mensbrugghe 2004) and partly because prices in unrestricted markets can be expected to rise following abolition of the quotas. Continuation of quotas against China is a possibility because of the safeguard provisions included when China acceded to the WTO in 2001 (Bhattasali, Li, and Martin 2004). But these apply only against China: if invoked, they would allow other efficient exporters to fill the gap. A safeguard system--or an equivalent export tax on China's exports--would create global costs of around $13 billion, while transferring some $3 billion to competing exporters (Manole 2004). Most of this benefit would go to countries that are not heavily dependent on exports of textiles and cloth- ing to restricted markets. Initial indications are that exports of many smaller countries dependent on textiles and clothing are holding up better than had been widely feared. This partly reflects reforms to raise productiv- ity in these countries and partly reflects China's reluctance to expand its production of textiles and clothing, rather than more sophisticated products. In addition, as noted by Nordas (2004), stan- dard modeling results do not fully incorporate the special features of the supply chain--particularly the advantages of proximity for geographically favored countries in a marketing environment of just-in-time ordering. Still, this initial assessment should not lead to complacency. Countries depen- dent on textile and clothing exports and their development partners need to focus on how these countries can raise their productivity and improve their trade policies and investment climates to encourage diversification away from dependence on a single sector. Restrictiveness and Incidence iffs and the ad valorem equivalent of nontar- of Trade Policies iff measures at the tariff line level.9 The contribution of nontariff measures to As noted in Global Monitoring Report 2004, the overall level of trade restrictiveness the trade policy measures reviewed above increases with GDP per capita (figure 4.2). cannot be readily compared across countries. One reason is that average tariffs in rich Such comparison is possible only on the basis countries tend to be lower and are bound in of an index that measures the overall trade the WTO and through regional trade agree- restrictiveness implied by trade policy. The ments. As a result protectionist pressures, if measure used is the overall trade restrictive- successful, will by necessity be reflected in ness index (OTRI), which represents the uni- other instruments--antidumping being a form tariff equivalent of the different policy major example. Most developing countries instruments observed for a country that have tariff bindings (commitments) in the would generate the prevailing level of trade. WTO that are well above their applied tariffs, When the focus is on measuring the trade and may not have bound tariffs at all, allow- effects of policies on an importing economy, ing for the use of tariffs when desired. the trade restrictiveness index can be defined as the equivalent uniform tariff that would Trade Restrictiveness, Income, keep imports constant. When the focus is on and Poverty an exporting country's perspective (market access), the index is the equivalent uniform OTRIs are negatively correlated with GDP tariff implied by the set of policies maintained per capita--the higher is a country's GDP per by each country (or all importers) on that capita, the lower is its trade restrictiveness as economy's export bundle. The OTRI is cal- measured by the OTRI (figure 4.3). Similarly, culated as the weighted sum of nominal tar- the higher is a country's GDP per capita, the G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 125 FIGURE 4.2 Nontariff measures are more important in rich countries, 2002 AVE of NTM/total protection 1.2 1 HKG PHL NZL 0.8 MYS EUN SENCIV TZA LVA USA DZA KAZ 0.6 SDN LTU LBN AUS JPN NGAVNM NIC UKR SLV LAO GTM RUS EST URY BRA MAR JOR COL CAN PRY MEXHUN SVN IDN BLR ISL PNG BOL CHL 0.4 TUR VEN NOR MDA SAU EGY CHE PER OMNARG CHN ECU TUN BRN MUS POL MWIMOZMLI BFA IND ROM 0.2 GHABTN PAK ZAFCZE BGD ZMB THA MDG ZWE HND TTO RWACAF KGZ CMR CRI BHR KEN ETH TCD ALB LKA GNQ GAB 0 UGA 4 5 6 7 8 9 10 11 12 Log GDP per capita Source: Kee, Nicita, and Olarreaga 2005b. Note: AVE stands for ad valorem equivalent. FIGURE 4.3 Trade restrictiveness at home and abroad falls as countries become richer e(log of GDP per capita|X) e(log of GDP per capita|X) 4 4 JPN 3 3 CHE EUN ISL CANNOR USA CHEAUSJPN EUN NZL NORUSA AUS ISL BRN NZL CAN SVN 2 BRNSVNURY ARG 2 BHR ARGURY BRA TTOHUNPOL CHL MUSBRA SAU MYSOMNBHR MEX GAB 1 EST TUN CRI HUNCHLMUS LTU CZE ZAF LVA TURGTM PRY 1 LBN POLTTO SLV OMN ZAFTUR MAREGY THAPER ECU COL VENDZALBNCOL RUSTHAPER VENMYS TUN CZE RUSMEX JOR PRY CRI 0 0 GNQ PHL KAZ BLR ROMLVA GTMECU CIV MDAIDN HNDNIC LKAPNG SAUKAZ BOL ROM BLR JOR CIVDZA MAREGY ALB GABPAKPHL UKR EST SEN ZWELAO BTN UKR CHN BOL LTU SEN CMR IDNSDN ZWE ALB VNM IND LAOPAK VNM ­1 ZMB CMRBGD GNQ NGA PNGINDBTN KGZ ­1 BGD LKA GHA MDG HND MOZGHA MWICAF KEN CHN UGA BFATCD TZA SDN NIC NPL MLI CAFZMB TZAMDA KEN RWAUGANPL TCD BFA KGZ ­2 RWAMLI ­2 MOZ MWI ETH ETH MDG ­3 NGA ­3 ­4 ­4 ­2 ­1.5 ­1 ­0.5 0 0.5 1 1.5 ­2 ­1.5 ­1 ­0.5 0 0.5 1 e(log of OTRI home|X) e(log of OTRI abroad|X) Regression line shown: coefficient = ­0.71; standard error = 0.23; Regression line shown: coefficient = ­1.16; standard error = 0.32; t-statistic = ­3.05. t-statistic = ­3.52. Source: Kee, Nicita, and Olarreaga 2005c. Note: Partial correlation plots obtained by regressing log GDP per capita on constant, log OTRI at home, and log OTRI abroad. 126 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 R E A L I Z I N G T H E D E V E L O P M E N T P R O M I S E O F T R A D E FIGURE 4.4 Trade restrictiveness at home and abroad rises with poverty headcount e(log of poverty headcount|X) e(log of poverty headcount|X) 2 2 MLI MDG ZMB ZMB MLI MOZ TCDKGZ BOLGTM MOZ COL MWI 1 MDG CMR COL TCDPHL UGA KGZ KEN NIC BLR BOLPER ETH GHA 1 BGD BFA NPL GTM BGD CMR GHAUGAETHPERKEN BLR NPLPNGBFA KAZ IDNALB PNGKAZMWIUKRLAO PHL ZWE NIC SLVZWE INDTZA LKASLMDA LAOVPAK TZA IDNUKRALB IND 0 LKA HUN PAK MAR MDACHL MEX 0 HUN DZA EGY MARCHL ZAF JOR DZAZAFJOR EST EGY EST MEX ­1 CHNRUSBRATUN ­1 RUS TUN BRA CHN ARG ­2 ARG ­2 CRI THA ROM THA CRIROM ­3 TUR ­3 TUR LTU ­4 LTU ­4 ­2 ­1 0 1 2 ­0.5 0 0.5 e(log of OTRI home|X) e(log of OTRI abroad|X) Regression line shown: coefficient = 0.24; standard error = 0.25; Regression line shown: coefficient = 0.91; standard error = 0.52; t-statistic = 0.94. t-statistic = 1.74. Source: Kee, Nicita, and Olarreaga 2005c. Note: Partial correlation plots obtained by regressing log poverty headcount on constant, log OTRI at home, and log OTRI abroad. The Incidence of OECD Trade Policies lower are the trade barriers imposed by the rest of the world on its exports. Thus there is a neg- Estimated OTRIs for high-income OECD ative association between GDP per capita and countries average 12 percent for all trade. the trade restrictiveness that countries impose They are much higher for agricultural trade on their imports and that imposed by the rest than other merchandise--44 percent com- of the world on their exports. pared with 6 percent (figure 4.5). This dis- For developing countries for which such parity reflects high levels of support for data are available, OTRIs are positively agricultural production: the OECD Producer correlated with poverty headcounts: the Support Estimate rose to 32 percent in 2003, higher is a country's trade restrictiveness, up from 31 percent in 2002.12 A similar sec- the poorer it tends to be (figure 4.4). Higher toral pattern applies to OTRIs for imports trade restrictiveness on exports is also pos- from developing countries, although the itively correlated with poverty head- absolute level of trade restrictiveness is sub- counts--that is, the higher is the OTRI stantially lower for trade with Sub-Saharan confronting a country's exports, the more Africa as a result of bilateral tariff preference poor households that country is likely to programs (but still high in agriculture). have.10 The implication is that reductions in Nontariff measures account for a large protection at home and abroad are likely to share of these OTRIs.13 Thus, taking the be pro-poor. Although such correlations of effects of such measures into consideration is average trade restrictiveness and the num- important in accurately assessing the extent ber of poor people in a country suffer from to which policies affect trade, both imports aggregation bias and do not imply a causal and exports. It is important to bear in mind relationship, more detailed microeconomet- that not all nontariff measures have explicit ric studies of trade reforms in developing protectionist objectives. Particularly in the countries find that liberalization tends to case of health- and safety-related product benefit poor people.11 standards, the intention generally is not (and G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 127 C H A P T E R 4 FIGURE 4.5 Agricultural protection is high in OECD countries, and border barriers account for most of it Percent 50 45 40 35 30 25 20 15 10 5 0 OTRI OTRI OTRI OTRI OTRI OTRI agriculture manufacturing agriculture manufacturing agriculture manufacturing low-income low-income Sub-saharan Sub-saharan countries countries Africa Africa Tariff Non-tariff meaures Agricultural subsidies Source: Kee, Nicita, and Olarreaga 2005c. should not be) to protect domestic producers. foreign affiliates are included.17 But statisti- To varying degrees, all countries maintain cal agencies do not compile the type of such regulations. WTO rules on such policies detailed data on bilateral trade in services require that they be justified by scientific evi- that exist for merchandise. Nor is there a dence and a process of risk assessment, and comprehensive global database on services- based on international norms if any exist. related trade policies. Such standards should also apply to domestic The trade policies of high-income OECD goods, although WTO case law and numer- countries imply higher restrictions on imports ous bilateral disputes over many years regard- from low-income countries than from other ing their enforcement illustrate that in sources (table 4.7). In part this simply reflects practice these standards may be used to shield the sectoral structure of protection--most domestic producers from import competi- intra-OECD trade is in manufactures that tion.14 However, it is not possible to discern confront low barriers. Barriers are highest for intent in the data--OTRIs simply show that agricultural imports from middle-income these types of policies have a major effect on countries, which do not benefit from the pref- trade, especially in agricultural products.15 erences accorded to poorer countries (table No presumptions exist or are implied regard- 4.8). Still, even after taking into account the ing the intent or scientific basis of any of the fact that developing countries benefit from nontariff measures captured in OTRIs.16 tariff preferences under the Generalized Sys- Because the OTRI does not include ser- tem of Preferences and that Sub-Saharan vices trade and policies, it likely underesti- Africa and the LDCs have highly preferred-- mates countries' actual trade restrictiveness. often duty- and quota-free--access to many Trade in services has been growing rapidly OECD markets as a result of programs such for the past two decades and now accounts as the EU Everything But Arms initiative and for some 40 percent of world trade if sales of the U.S. African Growth and Opportunity 128 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 R E A L I Z I N G T H E D E V E L O P M E N T P R O M I S E O F T R A D E TABLE 4.7 OECD trade restrictiveness is highest toward low-income countries, 2002 (percent) OTRI for OTRI for OTRI for Share of Share of low-income Importing income OTRI for all low- income least developed Sub- Saharan low-income countries in total imports group/country countries countries countries Africa country exports from developing countries High-income OECD 12 14 12 11 68 11 Canada 6 7 6 5 1 8 European Union 13 15 13 14 27 11 Japan 14 24 21 18 10 13 United States 8 6 5 4 23 10 Source: Kee, Nicita, and Olarreaga 2005a. Note: OTRI stands for overall trade restrictiveness index. TABLE 4.8 Globally, trade restrictiveness is highest for agriculture, 2002 (overall trade restrictiveness index, percent) Importing region/income group Exporting region/ High-income Middle- Low- Least Sub-Saharan income group OECD Quad income income developed Africa World Total trade High-income OECD 9 8 19 23 21 23 14 Quad 8 8 19 23 21 23 14 Middle-income 9 9 22 25 22 25 15 Low-income 14 14 25 26 22 26 20 Least developed 12 12 24 25 22 26 18 Sub-Saharan Africa 11 11 23 24 21 24 17 World 12 12 20 22 21 23 18 Agriculture High-income OECD 36 35 45 36 28 34 39 Quad 31 30 46 37 29 34 37 Middle-income 49 49 42 36 28 33 43 Low-income 43 43 40 34 27 31 39 Least developed 38 38 39 32 26 30 37 Sub-Saharan Africa 34 35 38 33 26 30 35 World 44 43 36 30 26 32 35 Manufacturing High-income OECD 5 5 15 21 19 21 10 Quad 6 6 15 21 20 21 11 Middle-income 4 4 19 23 21 24 11 Low-income 4 4 20 22 21 24 13 Least developed 3 3 20 22 21 24 12 Sub-Saharan Africa 2 2 16 19 18 21 9 World 6 6 17 20 20 22 12 Source: Kee, Nicita, and Olarreaga, 2005a. Note: The Quad are Canada, the European Union, Japan, and the United States. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 129 C H A P T E R 4 Act, OTRIs for low-income countries average Another striking feature of the OECD 14 percent (figure 4.6). OTRI estimates is that agricultural subsidies A reason for this is that the incidence of play only a small role in determining the nontariff measures in a number of OECD magnitude of OTRIs for most countries that countries tends to be disproportionately high employ them (see figure 4.5). That is because, on products that developing countries from a market access perspective, subsidies export--especially agricultural products. are often redundant--because border barriers Thus the higher OTRIs against low-income such as tariffs and tariff rate quotas are the countries primarily reflect the product com- instruments that determine the (world) price position of imports--developing countries impacts. If border barriers were to be reduced happen to export the goods most affected by significantly, agricultural subsidies would nontariff measures--and the fact that not all become much more important determinants low-income countries benefit equally from of trade restrictiveness; thus they are not the preferential access regimes offered by the innocuous. But the implication is that policies OECD members concerned.18 An implication (and negotiations) should focus on removing is that nontariff measures matter, in that they border protection. Lowering agricultural sub- tend to reduce the effective value of the pref- sidies without lowering border protection erential access granted through tariff exemp- will not have much effect.19 tions. Insofar as the incidence of nontariff Although market access dominates in measures is higher in developing countries, terms of affecting world prices and distorting there is a case for additional assistance to be domestic markets, subsidies are very impor- directed at these countries to help them tant for some developing countries.20 Cotton address the underlying regulatory require- is an example where global trade barriers are ments. The need for this increases the more low, but subsidies in several OECD countries ambitious the outcome of the Doha Round are large--with well-documented detrimental will be, as deep multilateral liberalization will effects on West African and other developing reduce the value of existing tariff preferences. country producers. Cotton accounts for about 30 percent of exports from the four West FIGURE 4.6 OECD trade restrictiveness remains high for developing African nations that proposed a cotton initia- countries tive in the WTO, and for a significant share of income for millions of poor farming house- Percent holds in the region.21 Recent U.S. cotton sub- 30 sidies have ranged from $1.5 billion to almost $4.0 billion a year, depending on market con- 25 ditions.22 Eliminating U.S. cotton programs, 20 while leaving in place other farm programs, 15 would reduce U.S. production by 25­30 per- cent, reduce U.S. exports by about 40 percent, 10 and raise world prices by about 10 percent. 5 The annual losses for LDC cotton producers resulting from U.S. and EU support policies 0 High- QUAD Canada European Japan United are in the range of $120­240 million.23 income, Union States OECD countries The Incidence of Developing OTRI in terms of low-income countries Country Trade Policies OTRI in terms of Sub-Saharan Africa Developing countries have higher average OTRIs than do high-income OECD countries. Source: Kee, Nicita, and Olarreaga 2005c. Note: Quad countries are Canada, the EU, Japan, and the United States. Among regions, the Middle East and North 130 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 R E A L I Z I N G T H E D E V E L O P M E N T P R O M I S E O F T R A D E Africa have the highest OTRIs, followed by are higher for exports from other developing Sub-Saharan Africa, South Asia, and East Asia countries (though the LDCs confront slightly (table 4.9). Eastern European and Central lower average OTRIs than do other low- Asian countries, many of which acceded to the income countries; see table 4.8). Thus, in European Union in 2004, have the lowest addition to facing high barriers in OECD OTRIs. The average OTRI for all developing countries, developing countries impose high countries is 20 percent. As with high-income barriers on trade with one another, and the OECD countries, manufacturing protection incidence of these intra-developing country tends to be lower than restrictions applied to trade restrictions is higher for poorer coun- agricultural trade, though the differences are tries--just as the incidence of OECD trade smaller than in the OECD countries (see table restrictions is higher for poorer countries. 4.8). On average the world has an OTRI in These estimates show that the protection- agriculture that is three times that in manufac- ist trade policies of high-income OECD coun- turing--35 percent compared with 12 per- tries are not the only external problem cent--with high- and middle-income countries undermining the ability of developing coun- being more restrictive than low-income coun- tries to use trade for development and tries. The LDCs have the lowest agricultural poverty reduction. Indeed, middle-income OTRIs of all income-based country groups. countries maintain much higher levels of pro- Conversely, developing countries have much tection. Reducing such protection would be higher manufacturing OTRIs, with the high- in their own interest and that of poorer coun- est average levels observed in Sub-Saharan tries--which often confront higher barriers in Africa. This generally reflects either a desire to global markets than do rich countries, imply- protect local industries or to achieve fiscal ing that the structure of trade policies in mid- objectives; tariffs account for a substantial dle-income countries is antipoor. Thus reform share of government revenues in many Sub- of trade policies in developing countries Saharan countries. should be a central part of the trade reform In terms of the incidence of OTRIs, a pat- agenda. This conclusion also emerges from tern similar to that for OECD countries is the research summarized below assessing the observed for developing countries--OTRIs potential gains from the Doha Round-- TABLE 4.9 Developing countries impose high restrictions on trade with one another, 2002 (overall trade restrictiveness index, percent) OTRI for OTRI for least OTRI for OTRI for all low-income developed Sub-Saharan Importing region/income group countries countries countries Africa East Asia and Pacific 21 26 26 26 Europe and Central Asia 12 16 15 16 Latin America and the Caribbean 18 21 20 20 Middle East and North Africa 31 48 47 40 South Asia 23 29 27 28 Sub-Saharan Africa 23 26 26 24 Developing countries 20 25 25 23 Least developed countries 21 22 22 21 Low-income countries 22 26 25 24 Middle-income countries 20 25 24 23 Source: Kee, Nicita and Olarreaga, 2005a. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 131 C H A P T E R 4 which are potentially large only if the round applied policies. WTO negotiators focus not encompasses significant further liberalization on applied tariffs and subsidies but on the lev- of trade by developing countries. els of import tariffs, export subsidies, and domestic support for agriculture that countries The Doha Round Challenge commit not to exceed. These so-called bind- ings are often much higher than applied levels The WTO is the primary multilateral instru- of protection, especially in developing coun- ment through which countries can reduce the tries. Thus, if cuts to bound tariffs or subsidy trade protection summarized above. In August rates are not very large, or the gap between 2004 the WTO General Council reached sev- bound and applied rates is large, the reforms eral agreements to guide future negotiations required by a Doha deal may be minimal. So, under the Doha Round. The agreements were much depends on the extent to which changes a welcome step forward after the setback at in bindings translate into real reductions in Cancun, but they leave key questions unan- applied protection levels. Much also depends swered and extend the timeframe of the on the magnitude of exceptions and exemp- round. The agreements include a framework tions for specific instruments or products. for negotiations on agriculture and industrial Deep trade reform could generate large products, recommendations on services, and global gains. Freeing all merchandise trade modalities for negotiating improved customs and abolishing all trade-distorting agriculture procedures (trade facilitation; table 4.10). subsidies would boost global welfare by $80­280 billion a year by 2015, depending on whether exogenous population and labor Why Ambition Matters: Likely Impacts supply growth, savings-driven capital accu- of Different Doha Round Outcomes mulation, and labor-augmenting technologi- The extent to which reform commitments cal progress are taken into account.24 These under the Doha Round will have economic estimates ignore possible dynamic productiv- repercussions depends on whether they affect ity gains, exploitation of economies of scale, TABLE 4.10 Key elements of the August 2004 WTO framework agreement Agriculture subsidies All forms of agricultural export subsidies to be eliminated. Overall bound level of trade-distorting domestic support to be reduced over time, with a 20 percent reduction in the first year. Members with higher levels of support to commit to larger reductions, with product-specific caps on the most trade-distorting forms of agricultural support. Market access in agriculture Nonlinear formula to ensure deeper cuts in higher tariffs. A category of "sensitive" products to be subject to greater flexibility. Possibility of trading off more modest tariff reductions against larger tariff rate quotas. Cotton To be dealt with "ambitiously and expeditiously" within the agriculture negotiations, by a special subcommittee. Non-agriculture market access No a priori exclusions. Recognition that credit should be given for autonomous liberalization. Nonlinear formula to tackle tariff peaks, high tariffs, and tariff escalation, to be applied on a line-by-line basis. Services Revised offers to be tabled by May 2005, and developing countries to be given technical assistance to help them participate in the negotiations. Trade facilitation Negotiations to be part of the Doha Round, with a focus on expediting the movement, release, and clearance of goods, with implementation by developing countries linked to provision of technical assistance. 132 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 R E A L I Z I N G T H E D E V E L O P M E N T P R O M I S E O F T R A D E effects of increased competition on markups is partly because of their relatively high tar- and X-inefficiency in production, and liberal- iffs--meaning, they would reap substantial ization of trade in services--including efficiency gains from reforming their protec- through greater temporary international tion--and partly because their exporters face mobility of service suppliers. They also much higher farm and textile tariffs in devel- assume that beneficiary countries make full oped countries than do exporters from other use of preferences and that any resulting rents developed countries, notwithstanding non- accrue to exporters. Taking such factors into reciprocal tariff preferences for many devel- account greatly increases the potential aggre- oping countries.26 gate gains and affects the distribution of net Agriculture is the most important sector in effects across countries.25 realizing these potential gains, reflecting the Recent research suggests that developing extensive assistance it receives relative to countries would obtain about one-third of other sectors. Food and agriculture policies the global gain from freeing all merchandise are responsible for more than three-fifths of trade, well above their one-fifth share of the global gain forgone by merchandise trade global GDP. Recent analyses using global distortions (table 4.11)--despite the fact that general equilibrium models and the latest agriculture and food processing account for databases on trade protection and prefer- less than 10 percent of world trade and less ences suggest that developing countries than 4 percent of global GDP. Agriculture is would receive a 1.2 percent static gain over as important for the welfare of developing initial welfare (real income) levels, compared countries as it is for the world as a whole: with just 0.6 percent for developed countries their gains from global agricultural liberal- (assuming an overall global gain of $280 bil- ization account for almost two-thirds of their lion). The larger gain for developing countries total potential gains, compared with one- TABLE 4.11 Most economic welfare benefits of full merchandise trade liberalization would come from agriculture, 2015 (percent) Global welfare benefits Sector liberalized Source of Agriculture Textiles Other benefits and food and clothing manufactures All goods Developed countries' policies 46 6 3 55 Developing countries' policies 15 9 21 45 Total 61 15 24 100 Developing countries' welfare benefits Sector liberalized Source of Agriculture Textiles Other benefits and food and clothing manufactures All goods Developed countries' policies 28 16 6 50 Developing countries' policies 35 9 6 50 Total 63 25 12 100 Source: Anderson, Martin, and van der Mensbrugghe 2005, table 12.4. Notes: (1) These data are shares based on a simulated global gain of $280 billion that takes into account exogenous population and labor supply growth, savings-driven capital accumulation, and labor-augmenting technological progress between 2001 (base year) and 2015. Developed countries include the transition economies of Eastern Europe and the former Soviet Union. (2) The share of global welfare gains due to liberalization by middle- income countries is 12 percent for agriculture and food liberalization; 7 percent for textiles and clothing; and 13 percent for other manufactures. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 133 C H A P T E R 4 quarter for textiles and clothing and one- a developing country perspective, disciplin- eighth for other merchandise liberalization ing domestic production subsidies and phas- (see table 4.11). ing out export subsidies is also important. In Stronger subsidy disciplines are important, part these steps are needed to prevent "re- but increased market access in agriculture is instrumentation" of assistance from tariffs crucial. High applied tariffs on agricultural to domestic subsidies. Moreover, some relative to nonfarm products are the main OECD subsidies are very important for reason food and agriculture policies account developing countries. Removing cotton sub- for 61 percent of the welfare cost of mer- sidies would raise the price of cotton in chandise trade distortions. Aggregating international markets and benefit develop- across all products, subsidies for farm pro- ing country exporters. For Sub-Saharan duction and exports are only minor contrib- Africa, recent research suggests that the utors: 4 and 1 percentage points, respectively, increase in export prices relative to manu- compared with 56 points due to agricultural factures overall would be small. But cotton tariffs.27 Tariffs are more important in devel- exports from Sub-Saharan Africa would oping than in developed countries, because increase 75 percent. The share of all devel- subsidies are much less prevalent. Given that oping countries in global cotton exports bound tariff rates are high in agriculture, would expand to 85 percent, instead of the large cuts are needed to make a difference. 56 percent projected for 2015.30 The average bound tariff rate in developed The foregoing analyses of possible out- countries is almost twice the average applied comes of negotiations consider policy instru- rate; in developing countries the difference is ments such as tariffs, preferences, subsidies, even greater. To lower the average global agri- and tariff rate quotas in agriculture. But they cultural tariff by one-third, bound rates do not consider the effects of nontariff mea- would have to be reduced for developed sures and mostly ignore the implications of countries by at least 45 percent and the high- removing barriers to trade and investment in est tariffs by up to 75 percent.28 services. Given that nontariff measures play Even large cuts in bound tariffs will do lit- an important role in determining the overall tle if exemptions for "sensitive" products are trade restrictiveness of countries, reducing the allowed. If WTO members limit tariff cuts for incidence of such policies could generate "sensitive" farm products such as rice, sugar, additional gains for developing countries and milk, beef, fruits, and vegetables, the prospec- the world as a whole. Using a partial equilib- tive gains from Doha could be greatly dimin- rium framework that allows much greater ished. Classifying 2 percent of six-digit disaggregation across products and countries Harmonized System agricultural tariff lines in than is possible in global computable general developed countries as sensitive (and 4 per- equilibrium models, a recent study compared cent in developing countries, to reflect the likely effects of an unambitious Doha demands for differential treatment) and sub- Round and an ambitious one that addresses jecting them to just a 15 percent tariff cut nontariff measures.31 The low-ambition would shrink by three-quarters the welfare round is defined as causing a 40 percent cut gains from global agricultural reform.29 in bound tariffs, a reduction in tariff peaks to These findings illustrate the importance of the a maximum of 50 percent, a 40 percent call made in Global Monitoring Report 2004 reduction in domestic agriculture subsidies, for ambitious targets with respect to lowering elimination of export subsidies, and an agricultural tariffs, for example, to no more improvement in trade facilitation that than 10 percent. increases world trade by an average of 2 per- While agricultural market access liberal- cent.32 Conversely, an ambitious Doha ization is by far the most critical merchan- Round would result in free trade (elimination dise trade issue on the negotiating table from of all applied tariffs), a 50 percent cut in the 134 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 R E A L I Z I N G T H E D E V E L O P M E N T P R O M I S E O F T R A D E restrictiveness of nontariff measures, elimina- FIGURE 4.7 A low-ambition round vs. deep WTO reforms tion of trade-distorting agriculture produc- tion and export subsidies, and the same Impact in terms of increase in GDP Percent improvement in trade facilitation. 2.5 An unambitious Doha Round would not do much to improve developing country wel- 2.0 fare or help achieve the MDGs. Static global welfare gains would be about $59 billion. In 1.5 contrast, an ambitious Doha agenda could nearly quintuple these gains, to $269 billion. 1.0 Full tariff and subsidy reform without any changes in nontariff measures would generate 0.5 "only" $111 billion.33 Sub-Saharan Africa would see its welfare increase by an estimated 0.0 $2.8 billion under the ambitious scenario, High-income Middle- Low-income Sub- Saharan compared with only $140 million under the countries income countries Africa type of agreement that current trends suggest countries (excluding (excluding Sub- Saharan South Africa) is likely to emerge. The low-ambition sce- Africa) nario would raise Sub-Saharan GDP by 0.1 Low Ambition Ambitious Doha percent. In contrast, an ambitious Doha Round outcome could boost GDP by 1.3 per- Source: Hoekman, Nicita, and Olarreaga (2005). cent. Around 40 percent of the gains from the round would accrue to developing countries revolves around "aid for trade" to improve under both scenarios, with the greatest quality, testing, conformity assessment absolute amount going to middle-income capacity, and so on. nations. Low-income countries would obtain Prospects for realizing the potential of 14 percent of the developing world welfare trade to support development are also condi- gains. Under both scenarios welfare gains rel- tional on further liberalization by developing ative to GDP are largest for low- and middle- countries. As revealed by the OTRIs, devel- income countries (figure 4.7). oping countries maintain much higher trade This analysis suggests that efforts to barriers against nonagricultural products reduce the incidence of nontariff measures than do OECD countries and impose high are important. But as noted, not all these trade barriers on each other. Combined with measures are discriminatory. In the case of the fact that many (especially middle-income) regulatory product requirements--which developing countries have been growing account for a large share of nontariff mea- more rapidly, prospects for greater trade sures in many high-income countries-- flows are greatest between developing coun- attenuating the effects of enforcement is tries. Moreover, most of the benefits of trade unlikely to be costless. Thus the additional reform derive from what countries do them- $150 billion that could be attained by halv- selves--as discussed in Global Monitoring ing the ad valorem equivalent of nontariff Report 2004 and numerous recent reports, measures is an upper bound estimate of including the United Nations MDG taskforce potential net gains. Determining how to report on trade, maintaining high barriers to attenuate the impacts of nontariff measures trade imposes costs on an economy. at the lowest cost requires both country- If developing countries as a group were not specific analysis and a concerted effort to to participate in liberalizing trade under the improve the global information base on Doha Round, not only would global gains applied nontariff policies. But it is probable fall significantly--by close to one-half--but that much of the appropriate response potential gains to developing countries would G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 135 C H A P T E R 4 fall by 50 percent.34 Sub-Saharan Africa and with merchandise export growth, and account the LDCs could even end up losing from the for 18 percent of total exports--the largest Doha Round if they do not pursue reforms. share of all developing regions.35 The reason is that the efficiency gains from Developing countries have called for spe- own liberalization are needed to help offset cific commitments on improving access to terms of trade losses that may arise because OECD markets for service suppliers, espe- food prices rise (in the case of net food cially through temporary migration (mode 4 importers), tariff preferences are eroded, or in the General Agreement on Trade in Ser- market share is lost to other developing coun- vices, or GATS). This is the main area where tries that pursue reforms (or have already virtually no commitments have been made done so). (figure 4.8). As noted in Global Monitoring Report 2004, it is also the area with the great- est potential for increased exports from devel- Services oping countries (figure 4.9). The foregoing discussion largely ignores To date, little progress has been made on domestic reform and liberalization of service services negotiations. Although numerous sector policies, an area where research suggests requests have been put on the table, only 47 there is great potential for gains, in terms of first-round offers have been put forward by both efficiency and equity. Countries such as WTO members.36 Most of these are of lim- Brazil and India have seen exports of business ited value as they do not go beyond status process services such as call centers, software quo policies. The LDCs have made the fewest development, and back-office services expand commitments on services in the WTO--in rapidly. African exports of commercial services contrast to recently acceded countries, which grew by more than 20 percent in 2003, in line have been asked to make far more commit- FIGURE 4.8 WTO Market access commitments for services by mode of supply Percent of commitments 100 80 60 40 20 0 DC Tran Dev LDCs DC Tran Dev LDCs DC Tran Dev LDCs DC Tran Dev LDCs Mode 1 Mode 2 Mode 3 Mode 4 Full Partial Unbound Source: Marchetti (2004), updating WTO document S/C/W/99. Note: The above information is as of August 2004 and is based on a sample of 37 representative sectors. DC (developed countries); Tran (transition economies); Dev (developing countries). Full implies a binding commitment to market access and national treat- ment; unbound implies no commitments were made; and partial implies specific policies limiting access or involving discrimina- tion were bound. 136 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 R E A L I Z I N G T H E D E V E L O P M E N T P R O M I S E O F T R A D E ments than most existing members (table FIGURE 4.9 Foreign direct investment and cross-border exchange 4.12). There is great scope for more advanced account for most trade in services countries to lock in liberal trade and invest- ment policies in areas that matter to develop- Value of world trade in services by mode ing countries--especially on cross-border Mode 4 trade (mode 1)--and to increase the extent to (movement of natural persons) which service markets can be contested 1% through temporary migration of service Mode 1 providers. Conversely, developing countries (cross-border supply) can do much more to use the WTO as an 35% instrument to commit to greater liberaliza- tion of their services. While considerations of "balance" create incentives not to do so until greater clarity has emerged on what is likely to be feasible in other areas (such as agricul- ture), services are an area where a quid pro quo can be offered that is likely to benefit the Mode 3 Mode 2 committing country. Much of the agenda here (commercial presence) (consumption abroad) revolves around making commitments tar- 50% 14% geted at attracting greater foreign direct investment (FDI) in services (mode 3 of the GATS). Encouraging such investment in both Source: Maurer (2004) goods and services production is a direct way to improve the investment climate. TABLE 4.12 Developing countries have made fewer market access and FDI can do much to enhance an economy's national treatment commitments for services under the WTO productivity, because foreign service suppliers offer new technologies, new products, and Average number Range more differentiated and higher-quality ser- of subsectors (lowest/highest vices. The increased competition associated committed number of committed Country group per country subsectors) with open access to service markets also puts pressure on the prices and performance of Developing countries 54 1­154 Least developed countries 20 1­110 incumbent firms, reducing input costs for Transition economiesa 106 58­154 firms that buy the services. Moreover, the Developed countries 108 87­117 importance of an efficient services sector goes Countries acceded since 1995 106 37­154 beyond the sector's contribution to a country's balance of payments; such efficiency is also a Source: Marchetti 2004. key determinant of domestic firms' competi- Note: Data as of August 2004. The total number of subsectors in which commitments can be tiveness. Key services that influence firms' made is 160. These commitments may be full or partial bindings; see note to figure 4.8. a. Includes only European and Central Asian transition economies. ability to participate in world trade include telecommunications, transportation, finan- cial, and other business services such as higher service costs reduce export prices and accounting and legal services. increase import prices. As a result exporting In many of the LDCs, inefficient business industries must pay lower wages or accept services are an important barrier to effective lower returns on capital. For example, freight integration with world markets. High-cost rates for goods originating in Sub-Saharan trade support services act as a tax on African countries are often considerably exporters and ultimately on growth and higher than for similar goods originating in poverty reduction. For a small economy con- other countries, and thus have contributed to fronting given world prices of traded goods, the region's weak trade performance and high G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 137 C H A P T E R 4 poverty in recent decades. High transporta- would have limited impact on poverty. Domes- tion costs are partly due to shortcomings in tic markets are poorly connected, limiting the infrastructure, geography, and the economic price and quantity effects of any trade policy size of markets, but they may also reflect poli- changes in rural areas, where most poor people cies that restrict competition--such as cargo live. If price signals fail to reach households, reservation schemes or entry barriers into air supply responses to international shocks will be and maritime transport. low. In addition, low agricultural productivity implies that supply responses will be associated with higher production costs, reducing net ben- The Doha Round, Low-Income Countries, efits. Finally, Ethiopian households, especially and Sub-Saharan Africa the poorest, are insulated from market shocks Market access is a necessary but insufficient (and thus effects of trade policies) because they condition for harnessing trade for develop- are widely engaged in subsistence activity. ment. As noted in Global Monitoring Report More than half the average budget of poor 2004, domestic supply constraints are the households is from subsistence. main reason for the lack of trade growth and This does not mean that an ambitious diversification in many developing countries. Doha Round would not bring opportunities Without action to improve supply capacity to Ethiopia. It would increase international and reduce transactions costs, trade opportu- demand for Ethiopian products. But for that nities cannot be fully exploited and the poten- to translate into quantifiable benefits, the tial gains discussed previously will not be increased demand would have to be accom- realized. The agenda spans many areas, many panied by improved productivity (rather than of them "behind-the-border." Dealing with a simple increase in production), to also spur these issues will require action in developing nonexported agricultural production (espe- countries and assistance from developed cially staple crops). And given that most poor countries, including both finance and efforts Ethiopians live in remote areas, increased to reduce the costs of nontariff measures. productivity alone may not have a large effect Recent country studies that analyze the on poverty in the absence of complementary potential impacts of global reforms on African policies. Better infrastructure and access to poverty, using information from household sur- credit are two preconditions for integrating veys, show that trade policy actions by them- the rural poor with domestic markets and selves will have limited effects--positive or reducing subsistence. negative. Complementary reforms and invest- A similar conclusion arises from a recent ments are needed to stimulate the desired sup- study on Zambia.38 In 1998 more than 70 per- ply response to changed incentives. In Ethiopia, cent of the country's population lived in one of the world's poorest countries (with more poverty. Using an approach similar to the than two-thirds of the population living on less analysis of Ethiopia, in terms of projecting the than $2 a day), the Doha Round alone will not likely effects of a Doha Round on world prices, have much significant effect on poverty.37 That the authors investigate the impact of trade is because any impact on the prices and quan- reforms on household welfare through effects tities of Ethiopia's main exports--coffee, qat (a on consumption and income. They conclude mild stimulant exported mostly to neighboring that only small impacts can be expected from countries), and livestock--will not be large. a Doha Round set of trade reforms. This Moreover, exports represent a small part of reflects the fact that the round will likely gen- GDP: annual exports are about $600 million, erate only a small change in prices, so gains or $10 per capita, equal to 15 percent of and losses for producers and consumers will be GDP--one of the lowest shares in Sub-Saharan small as well. Moreover, for Zambian house- Africa. Thus even a hypothetical doubling of holds large shares of spending and income are international demand for Ethiopian products related to home-produced goods--which are 138 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 R E A L I Z I N G T H E D E V E L O P M E N T P R O M I S E O F T R A D E unlikely to be affected by trade liberalization. stones), most poor people live in rural areas Larger effects are predicted on the income side, not connected to markets (preventing the pass- particularly in terms of higher wages, employ- through effects of border price changes on ment opportunities, and a move from subsis- supply), and productivity is low. Moreover, tence to market-oriented agricultural activities. limited competition in domestic markets is Again, a key finding is that trade policy by likely to concentrate gains from trade in the itself is not enough. Complementary policies hands of traders and exporters, as opposed to are important in allowing households to take poor farmers.41 Global liberalization would full advantage of trade liberalization and increase international demand for Madagas- global market opportunities. This result is car's exports, but to take full advantage of this illustrated by two recent case studies: one on it would be necessary to raise productivity and the role of extension services in boosting pro- reduce the transportation costs of getting ductivity among poor Zambian farmers, and products to urban areas and export hubs. Past another on the role of job programs in provid- unilateral reforms and improved access to ing employment for heads of households.39 export markets show that trade can reduce An analysis for Madagascar similarly con- poverty--although given their low initial base, cludes that global trade reforms by themselves the impact of greater exports can be limited may have limited impact.40 Many of the coun- only in the short to medium term (box 4.2).42 try's exports do not confront high protection In sum, country-based analysis of the (vanilla, cloves, crustaceans, semiprecious poverty impacts of global trade reforms in BOX 4.2 Why has rapid export growth failed to significantly reduce poverty in Madagascar? Fueled by low labor costs, relocation of textile and apparel firms from neighboring Mauritius, pref- erences granted by the U.S. African Growth and Opportunity Act, and the creation of export pro- cessing zones, Madagascar's textiles sector experienced dramatic growth in the late 1990s. Textile and apparel exports increased from $100 million in 1995 to almost $500 million in 2001. In the same period employment in the sector grew from 30,000 to 200,000 individuals. Expansion of the textiles and apparel industry has enabled many individuals and households to increase income and in some cases escape poverty. But the welfare effects of this expansion have been geographically confined: most of the employment has been created in a few urban areas with relatively low poverty. Most of the gains, in both absolute and relative terms, have accrued to nonpoor households. As a result this export-led growth has increased inequality between poor and nonpoor people, between urban and rural areas, and between skilled and unskilled workers. Skilled workers have experienced rapidly increasing wages, while rural areas have largely been cut off from the effects of the growing textiles and apparel sector. Unskilled workers have benefited only marginally, because a large pool of unemployed and underemployed workers has kept their wages from rising. But poor households located in the cap- ital, where most of the employment was created, have benefited. It is estimated that five years of expan- sion of the textiles sector reduced poverty by almost 1 percentage point, or about 150,000 individuals. These results suggest that two factors are required if export-led economic growth is to reduce poverty significantly. First, growth and job creation must not be restricted to a few geographic areas. Disper- sion could be achieved by creating geographically diverse export processing zones to generate job oppor- tunities for a wider range of the population. Second, to facilitate their absorption into the formal labor force, poor people must be assisted in obtaining the skills sought by expanding industries. This can be achieved by providing government-sponsored training or incentives for firms to provide training. Source: Nicita 2005. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 139 C H A P T E R 4 very poor countries suggests that the first- Trade and Development-- order (or static) effects are small. Price effects, Toward a Concerted Response whatever the magnitude, will be passed through incompletely, little will be done to The traditional international policy response attenuate the effects of nontariff measures, to the challenge of expanding trade in devel- and many LDCs have concentrated export oping countries has been a mix of preferential bundles involving products that often are not access and development assistance. In recent heavily protected in world markets (such as years preferential access has been deepened vanilla in Madagascar and coffee in and made more meaningful through the EU Ethiopia). Second-order effects--allowing for Everything But Arms initiative and the U.S. adjustments on the supply side through African Growth and Opportunity Act. movements from subsistence into market par- Efforts have also been strengthened to pro- ticipation, changes in crops, and moves out of vide more aid for trade. unemployment--can be larger. But for any All these programs have been beneficial. positive effects to be significant, global trade But preferences are an eroding asset: they reforms must be accompanied by comple- have become less valuable as importing coun- mentary actions targeted at increasing the tries have liberalized their trade--both on a supply response. Such actions could center on nondiscriminatory MFN basis and as a result reducing transportation costs from remote of regional trade agreements. The value of areas, increasing farm productivity through preferences will be further eroded the more extension services, and so on. the Doha Round results in significant further This conclusion is supported by the many liberalization. The answer is not to stop Diagnostic Trade Integration Studies con- global liberalization to maintain the value of ducted under Integrated Framework auspices preferences. Instead, action is required on for the LDCs, as well as similar assessments complementary instruments to help countries for other developing countries. These find address competitiveness challenges and that trade cannot play much of a positive role exploit market access opportunities. This if the macroeconomic climate is unstable and includes measures to reduce the incidence of the business environment is hostile, and that nontariff measures. for many countries the key challenges are to reduce constraints on competitiveness and Market Access: Beyond Tariff Preferences supply responses--especially lack of trans- port, energy, and water infrastructure, lack of To some extent tariff preferences offset the access to finance, and weak worker skills. explicit discrimination against developing Improving trade policies and taking action to country trade reflected in higher tariffs on key facilitate trade by strengthening and stream- exports and the higher incidence of nontariff lining customs can have a significant payoff, measures revealed by the OTRIs discussed but a major impact on poverty requires previously. Given that developing countries reducing domestic supply constraints. generally do not give significant tariff prefer- Thus trade may make only a limited con- ences to other poor countries, preferences tribution to reducing poverty in the short to only significantly affect the incidence of trade medium run. And though its potential is sub- policies in developed countries. A seemingly stantial, especially in the long run, trade is logical implication of this is that advanced just part of the solution.43 Even in Kenya and developing countries should also offer prefer- Lesotho, African countries with dynamic ential access to their markets to the poorest export sectors (cut flowers and apparel, countries. At the 2004 meeting of the United respectively), booming exports have not had Nations Conference on Trade and Develop- major benefits for employment, and develop- ment in Brazil, it was agreed that countries ment of supply industries (backward link- would seek to do so in the framework of the ages) has been slow.44 Global System of Trade Preferences.45 140 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 R E A L I Z I N G T H E D E V E L O P M E N T P R O M I S E O F T R A D E Much of the literature on this subject con- initiative for the LDCs, the U.S. African cludes that preferences have not resulted in Growth and Opportunity Act for eligible the desired export expansion and diversifica- Sub-Saharan countries, and Canada's duty- tion in many countries. There have been sev- and quota-free access program for the eral notable exceptions, but these are LDCs--provide more comprehensive cover- associated with quantitative restrictions age than do traditional General System of being imposed on competitive suppliers. Rea- Preferences-type programs. In the case of the sons why benefits have often proven limited African Growth and Opportunity Act, they include restrictive rules of origin--reducing also apply more liberal rules of origin and utilization of preferences below 100 percent, have allowed exports of textiles to expand especially for key manufactures such as cloth- rapidly from eligible countries. ing,46 and excluding "sensitive" products While preferential access may generate rents from the coverage of arrangements. Recent and stimulate export-oriented production in preference schemes for the poorest coun- countries that are granted liberal origin rules, tries--such as the EU Everything But Arms any rents are shared with importers (box 4.3).47 BOX 4.3 Many of the rents created by trade preferences accrue to importers For exporters, benefits from trade preferences depend on the size of the rents associated with being able to sell into protected markets and on their capacity to capture those rents. Recent research has found that importers may be able to capture some, if not most, of such rents. For example, one study found that the average export price increase for products benefiting from preferences under the African Growth and Opportunity Act was about 6 percent, whereas the average MFN tariff for these products was some 20 percent (see figure). Thus, on average exporters received around one-third of the tariff rent. Moreover, poorer and smaller countries tended to obtain smaller shares. The estimates ranged from 14 percent in Malawi to 46 percent in South Africa. Reasons why importers and retail- ers capture a large share of the rents include the monopsony power of buyers and limited bargain- ing power of African exporters--perhaps reflecting limited or asymmetric information. Percent 25 20 15 10 5 0 nya wi Ke ascar Africa Lesotho Mala aziland countries Mauritius Sw All Madag South Export price increase U.S. importers tariff rent Source: Olarreaga and Özden 2004. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 141 C H A P T E R 4 More important, such rents are highest where do not live in the poorest countries, and pref- there are also quantitative restrictions on erences for some come at the cost of equally competitive suppliers (as under the now- poor households in other, less preferred expired Agreement on Textiles and Clothing developing countries. and the EU sugar regime). These regimes are Given the systemic downsides, limited being (or have been) dismantled, implying benefits, and historical inability of many poor erosion of rents even before the conclusion of countries in Africa and elsewhere to use pref- the Doha Round. One response is to deepen erences, a decision to shift away from prefer- and extend preferences to additional coun- ential "trade as aid" toward more efficient, tries. The experience under AGOA or EBA effective instruments to support poor coun- suggests that existing tariff preference pro- tries could both improve development out- grams could be made more effective by comes and help strengthen the multilateral adopting common, liberal rules of origin. Sev- trading system. More effective integration of eral OECD countries have also proposed that the poorest countries with the trading system middle-income countries apply access requires instruments aimed at improving the schemes like those under the act. productivity and competitiveness of firms and While a decision to adopt common, lib- farmers in these countries. Supply constraints eral rules of origin would be desirable if put are the primary factors that have constrained in place rapidly, and preferential access to the ability of many African countries to ben- large middle-income markets would be of efit from preferences.48 This suggests that the value, it must be recognized that such "affir- main need is to improve trade capacity and mative action" is not a panacea for poor facilitate diversification. In part this can be countries to expand and diversify their trade. pursued through a shift to more (and more One reason is the earlier observation that effective) development assistance that targets preferences that have generated rents have domestic supply constraints as well as mea- largely been accompanied by quotas. With sures to reduce the costs of entering foreign the implementation of the Agreement on markets. Such aid for trade is particularly Textiles and Clothing, these have largely urgent for countries that confront preference been removed. A second reason is that many erosion as a result of multilateral reforms. countries have not been able to benefit from This is a significant economic issue for small existing deep preferences, so extending these countries dependent on sugar, bananas, and may not have much effect. Third, there is a to a lesser extent clothing exports--products global negative externality associated with where protection and thus preference mar- preference programs--they create incentives gins are high. Importantly, most of these are not to pursue global liberalization, especially not the poorest countries, but middle-income in sectors where distortions are highest. Pref- economies.49 erences for some countries by definition imply greater discrimination against other, Aid for Trade less preferred developing countries, and thus trade diversion--because the set of goods Bolstering trade capacity by linking farmers that beneficiary developing countries pro- to markets and improving their productivity, duce overlaps with those of other developing lowering transaction costs by identifying and countries that are not beneficiaries. This removing red tape and improving customs trade diversion and discrimination has cre- clearance, or putting in place the regulatory ated significant tension between developing preconditions for benefiting from and man- countries and has recently given rise to sev- aging liberalization--especially in the area of eral formal WTO disputes. Finally, in terms services--are all institution-intensive. The of numbers, most of the world's poor people needs are not just for trade infrastructure and 142 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 R E A L I Z I N G T H E D E V E L O P M E N T P R O M I S E O F T R A D E trade facilitation, but also involve comple- total aid commitments that went to support mentary actions to implement safety nets, trade policy and regulations and trade devel- enhance access to credit, improve health and opment rose from 3.6 percent in 2002 to 4.2 education services, and pursue effective regu- percent in 2003.51 About one-third of this lation to attain efficiency and equity objec- support went to the LDCs. Aid has been tives. This agenda extends well beyond trade expanding most rapidly for trade policy and integration. It is largely "additive" in that regulations (figure 4.10), reaching almost $1 actions on these fronts can be pursued in par- billion in 2003, with the amount allocated to allel.50 On all these fronts development assis- Africa tripling between 2001 and 2003. tance can play an important role in enhancing Commitments for trade development activi- the overall gains from trade and managing ties, which amounted to some $1.35 billion a costs and downside risks. A specific area year in 2001 and 2002, reached $1.8 billion where assistance may have high payoffs is in in 2003.52 Infrastructure assistance was sta- reducing the costs of satisfying nontariff reg- ble at around $8 to $9 billion a year between ulatory policies in export markets. 2001 and 2003, with Asia by far the largest In recent years progress has been made in recipient region. In 2002 Africa's share of expanding trade-related technical assistance infrastructure aid diminished, reflecting an and capacity building. The WTO and OECD emphasis on social sectors. database that tracks such assistance distin- The World Bank has continued to expand guishes between trade policy and regulations its activities and support for trade, focusing (technical assistance for product standards, on trade integration broadly defined to integration of trade with development plans, encompass trade policy, infrastructure, and trade facilitation), trade development (trade customs and trade facilitation. Trade diag- promotion, market development activities, nostic work is being carried out in more than and so on), and infrastructure. Infrastructure 35 countries and is complemented by is the largest of these categories but is not lim- regional studies that examine issues for sev- ited to trade-related projects. The share of eral countries at a time. There is a growing FIGURE 4.10 Distribution of ODA for trade-related activities and infrastructure by region and main category Trade policy and regulations Trade development Infrastructure US$ millions US$ millions US$ billions 1200 2000 10 1800 9 1000 1600 8 1400 7 800 1200 6 600 1000 5 800 4 400 600 3 400 200 2 200 1 0 0 0 2001 2002 2003 2001 2002 2003 2001 2002 2003 Africa America Asia Europe Oceania Global programs Source: WTO and OECD, 2004. Note: These regions were defined using U.N. classification. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 143 C H A P T E R 4 lending program for trade-related activities of net food importers, or expiration of quo- (figure 4.11). Projected commitments for new tas following full implementation of the trade operations between fiscal 2004 and WTO Agreement on Textiles and Clothing. In 2006 are significantly larger than in previous July 2004 Bangladesh became the first mem- years, with trade facilitation lending being a ber to obtain support from the Trade Inte- major growth area. gration Mechanism, followed in January Trade policy has been a frequent compo- 2005 by the Dominican Republic. nent of programs supported by the Interna- These activities reflect the growing recog- tional Monetary Fund (IMF). In April 2004 nition that trade-related reforms and infra- concerns about the balance of payments structure--both hard and soft--can have high impacts of trade policy changes motivated the rates of return in increasing economic growth introduction of the Trade Integration Mech- rates. Realizing an ambitious Doha Round anism. Although the core of the IMF's man- and addressing trade capacity priorities in date involves support for orderly external poor countries calls for more to be done. Not adjustment in the face of shocks, the mecha- only will the associated trade and related nism provides added assurances and repre- reforms give rise to adjustment costs, but to sents the first explicit attempt to help enhance the benefits for poor households in members adjust to shocks that emanate from poor countries, as argued previously, invest- multilateral trade liberalization. The mecha- ments are needed to facilitate trade, lower nism is designed to help mitigate the stated transport costs, link farmers and producers to concerns (by many developing countries) that markets, and improve productivity. Strength- implementation of WTO agreements might ening "aid for trade" mechanisms to pursue give rise to temporary balance of payments this agenda would help improve the develop- shortfalls--through the erosion of tariff pref- ment relevance of both the WTO and regional erences, adverse changes in the terms of trade integration agreements. An expanded alloca- FIGURE 4.11 Bank trade-related lending Total trade lending Trade facilitation component (left axis) (right axis) US$ billions US$ millions 4.0 3.8 1200 1049 3.5 1000 3.0 2.4 800 2.5 2.0 600 1.5 400 304 1.0 200 0.5 0.0 0 Approved Approved Approved Approved FY 1996­2003 and FY 1996­2003 and projected projected FY 2004­6 FY 2004­6 Source: The data comes from the Bank's Business Warehouse, which consolidates information recorded in SAP and other Bank Systems. 144 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 R E A L I Z I N G T H E D E V E L O P M E N T P R O M I S E O F T R A D E tion of aid for trade would also help build sup- ernments. To determine this requires that port for the gradual elimination of discrimi- trade be considered when designing national natory tariff preferences. Indeed, such support development and poverty reduction strategies. is likely to be a precondition for attaining an Progress has been made in this direction and ambitious Doha outcome that benefits all continues to be pursued, but much more can developing countries. be done to better integrate trade considera- In considering options for expanding tions into this process. Equally important, financial support for trade adjustment and demands for funding to address trade and integration, two issues are particularly perti- supply capacity constraints need to be met by nent: the "additionality" of aid resources and the donor community in instances where trade the operational framework through which is considered a priority and requests for assis- additional funds are made available. Addi- tance have been put on the table. tionality may be achieved by recognizing that The institutional mechanism to identify the Doha Round, especially an ambitious priorities and allocate additional aid for trade one, will generate substantial gains for the could build on the Integrated Framework for world as a whole, and that much of these Trade-Related Technical Assistance. This gains will accrue to developed countries. The mechanism has already been established, potential gains create an opportunity for piloted, and subjected to external evaluation, donor countries to consider transferring an and has broadly based donor and recipient increment of the net gain from trade liberal- support. The framework is a unique collabo- ization to help address adjustment costs and rative venture between 6 multilateral agen- improve trade capacity in developing coun- cies--the IMF, International Trade Centre, tries. Various options could be considered in United Nations Conference on Trade and this connection, in addition to more official Development, United Nations Development development assistance and stronger public- Programme, WTO, and World Bank--17 private partnerships: a commitment to trans- bilateral donors, and LDC governments. The fer a proportion of the tariff revenue primary objective is to integrate assistance in currently collected on imports from develop- alignment with national development strate- ing countries, capturing some of the con- gies and priorities (including poverty reduc- sumer gains resulting from lower agricultural tion strategies), based on diagnostic country support for specific products, or partial real- studies and national consultations. Demand location of current subsidies and income sup- for the framework's trade assessments is port to development assistance.53 In all such high--14 LDCs have completed the assess- cases explicit earmarking of additional fund- ments and another 14 are under way or ing for trade is not desirable--instead the planned.54 goal would be to establish a framework to Progress in subsuming the Integrated commit to redistributing some of the gains Framework's recommendations into country from global trade reforms. growth strategies has been slower than antic- The operational framework for allocating ipated. Without additional assistance, over aid for trade must ensure harmonization of time, legitimate questions can be raised donor efforts (bilateral and multilateral) and about the efficacy of the program in provid- place assistance for trade reform, adjustment, ing a more effective enabling process of inte- and competitiveness within the broad context gration with the global trading system. The of a country's development program. The dedicated resources associated with the Inte- attention given to the trade and investment grated Framework have been limited to agenda in a country's national development small-scale technical assistance. Funding for strategy depends on many factors. Whether trade priorities is considered in the context of trade capacity and trade policy reforms should the poverty reduction strategy resource allo- be given greater priority is a decision for gov- cation and prioritization process, with donor G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 145 C H A P T E R 4 assistance (grants) complemented by loans gration provides a means to increase aid flows and other support from international finan- in order to open markets and enhance growth cial institutions and regional development prospects in developing countries. Some poor banks. While that should continue to be the African countries are too small to raise sav- case, the Integrated Framework could be ings for investment on their own, improve used more extensively to both bolster the growth given limited national markets, or trade capacity of poor countries and help effectively absorb large aid flows for infra- address the adjustment costs from an ambi- structure. A regional strategy--such as that tious Doha Round. To do so, consideration foreseen by the New Partnership for Africa's should be given to expanding the frame- Development (NEPAD), revolving around work's reach beyond LDCs to include other improving policies and governance and devel- low-income countries and consider regional oping regional programs for groups of coun- trade cooperation priorities. (In Africa, for tries to cooperate on infrastructure (power, example, members of regional integration roads, transportation)--can do much to initiatives span both LDCs and non-LDCs.) increase the capacity of the countries con- Given the strong case for additional funding cerned to effectively use greater aid flows. As to meet trade adjustment and integration discussed in a number of recent studies,55 nar- costs, building on the Integrated Framework row trade agreements between developing could improve aid effectiveness in the trade countries have limited potential to foster eco- area and ensure that identified trade priority nomic growth, because preferential liberal- projects are implemented. ization of trade policies offers substantial scope for costly trade diversion. For regional integration to be beneficial, external barriers Leveraging Regional Integration must be low. as a Tool for Development North-South agreements can help provide Regional agreements among neighboring both a focal point for behind-the-border developing countries can help lower trade trade reforms in developing countries and transaction costs and remove policy barriers mechanisms through which to engage stake- to intraregional trade. Achieving this is par- holders and policymakers in the design and ticularly important for landlocked economies implementation of reforms. Because they that must transport goods through neighbor- require trade liberalization by their develop- ing countries. The agenda extends beyond ing country members, such agreements can tariffs and nontariff barriers imposed at bor- also help reduce trade diversion created by ders--it includes regulatory cooperation and South-South agreements among the countries joint provision of infrastructure to facilitate concerned. They also create more opportuni- trade. South-South integration can also play ties for economic benefits to be realized given a beneficial role in helping to create the pre- larger Northern markets and higher income conditions for agglomeration, clustering, and levels. the linkages that are critical in diversifying Preferential trade agreements revolve productive activities and sustaining growth. around trade discrimination: this is an explicit In Africa in particular, there is a strong objective. Because global development regional dimension to growth, absorptive prospects are best served by nondiscrimina- capacity, and the widening of the economic tion,56 from a development perspective the space needed to lower infrastructure costs best outcome would be if regional agreements and facilitate trade. This goes well beyond the promoted the principle of nondiscrimination. trade agenda narrowly defined and includes Achieving this is a major challenge given that improving natural resource management and the driving force of trade agreements is in part increasing energy supplies and reliability. In mercantilist--improving (preferential) access terms of absorptive capacity, regional inte- to markets. This specific challenge is an illus- 146 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 R E A L I Z I N G T H E D E V E L O P M E N T P R O M I S E O F T R A D E tration of a more general one: to change the The policy agenda confronting developing modus operandi of designing and implement- countries at the regional level is similar to ing trade agreements to place development that at the multilateral level: in both cases (economic efficiency and equity) considera- much of the challenge is to use these instru- tions more at the center of deliberations. ments to help address specific national and Agreements that the European Union and foreign trade constraints. A major difference United States are negotiating with developing is that in the case of regional agreements, countries can do much good if designed in a reducing external barriers is important to way that puts development first. The ongoing reduce trade diversion. Another difference is Economic Partnership Agreement (EPA) that in the case of North-South agreements negotiations are the most important in terms there may be significant development assis- of scale and country coverage, but Japan, the tance commitments associated with the United States, and other large traders are also implementation of agreements. Allocating negotiating agreements with other developing and channeling such aid for trade through a countries.57 Taking development seriously in multilateral mechanism--such as the Inte- such negotiations has a number of implica- grated Framework--would ensure explicit tions, including identifying the most appropri- recognition that the trade agenda is (and ate form of, and membership in, counterpart should be) largely a national, country-specific regional arrangements, addressing trade bar- one, and that technical and financial assis- riers with neighboring countries, and identify- tance should be directed toward trade-related ing actions to reduce trade costs--something areas identified as priorities by countries. of great importance for landlocked coun- tries.58 Perhaps most important in the context of EPAs and Africa is to avoid trade diversion Notes costs and attenuate tariff revenue losses asso- 1. WTO and OECD (2004). ciated with a move to reciprocal free trade 2. World Bank (2001). with the European Union.59 If African, 3. In 2003 shares in global GDP for all LDCs, Caribbean, and Pacific partner countries African LDCs, all low-income countries, and maintain current levels of protection against African low-income countries were 0.5, 0.3, 3.4, the rest of the world, the effect of moving to and 0.6 percent, respectively. free trade with the European Union will be to 4. The measure of concentration reported transfer part of what is now collected in rev- here is the Herfindahl-Hirschmann index (the sum of squared shares). enue on imports to EU producers in the form 5. World Bank (2004a). of higher prices. This points to the importance 6. World Bank (2004a) provides a compre- of complementing reciprocal liberalization hensive discussion of the ongoing proliferation of with reductions in external barriers to trade, regional trade agreements. as well as effective assistance to facilitate trade 7. These are reportedly specific taxes, not ad and improve services and related behind-the- valorem, and thus imply an incentive to upgrade border regulation. Pursuit of nondiscrimina- quality (produce higher-value products). These tory tariff liberalization by developing taxes may seem low, but because they apply to all countries where such barriers are still signifi- exports (not just exports to restricted markets), cant would be better than full preferential lib- they are significant. eralization relative to the developed partner 8. In a case brought by Australia, Brazil, and Thailand against the EU sugar regime, a WTO dis- only. Many Sub-Saharan African countries pute settlement panel ruled that a number of still rely on import duties for a significant por- aspects of EU sugar policy violated WTO rules, tion of government receipts, so revenue con- including on export subsidies. African, Caribbean, cerns and the ability to implement alternative and Pacific countries opposed the case on the basis revenue sources are a factor influencing the that reforms in the EU regime would erode exist- speed of liberalization. ing preferential access arrangements. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 147 C H A P T E R 4 9. The OTRI belongs to the family of trade between OTRIs on exports and poverty is stronger restrictiveness indexes developed by James Ander- (both the coefficient and its statistical significance). son (Boston College) and Peter Neary (University 11. See Nicita (2004c) on Mexico and Porto College, Dublin) for the World Bank in the early (2003) on Argentina, as well as the Africa-specific 1990s. A welfare-based measure was originally work summarized below. Hertel and Winters developed in Anderson and Neary (1994, 1996); (2005) contains a review of recent evidence. an import volume-based measure was first defined 12. That is, 32 percent of the gross receipts of in Anderson and Neary (2003). The OTRI is a farmers were generated by transfers from con- theoretically well-grounded measure of protec- sumers and taxpayers (OECD 2004). tion. It does not suffer from the well-known draw- 13. Relative to the Global Monitoring Report backs of simple or import-weighted tariff 2004, the OTRIs reported here are higher on averages, and allows the effects of both tariffs and average due to the inclusion of information on nontariff measures to be estimated. The method- mandatory product standards. These were not ology used for the measure comprises four steps. included in last year's report due to an absence of First, import demand elasticities by country and data for EU members in the UNCTAD TRAINS by product are estimated at the 6-digit level of the database. Such data were collected in preparation Harmonized System (HS) of commodity classifi- for this report. Detailed information, including cation (some 4,200 product categories). Second, OTRIs by country that use tariff data only, and an estimate is made of the impact on imports, welfare-based measures of trade restrictiveness, again at the 6-digit HS level, of core nontariff bar- can be found at www.worldbank.org/trade; click riers (quotas, nonautomatic licensing, minimum on Data & statistics. prices, and similar policies), measures of a regula- 14. See Sykes (1995). tory nature (particularly technical, product- 15. Whether the intent of these measures is pro- specific regulations, and sanitary and phytosani- tectionism or based on sound scientific evidence is tary measures), and domestic support granted to an important question, but one that is difficult to agriculture. Third, using these demand elasticity address. Does the ban on hormone beef imports or and impact estimates, the product-level ad val- restrictions on genetically modified food products orem equivalent of the nontariff measures and in Europe have a protectionist element? Is the ban agricultural subsidies is calculated for each coun- on Iberico ham "pata negra" or on some types of try in the sample. Finally, tariffs and ad valorem French epoisse cheese in the United States protec- equivalents of nontariff policies at the product tionist? Are they legally and scientifically defensi- level are aggregated to produce an overall mea- ble on health grounds? The answers to these sure of trade restrictiveness. The index is calcu- questions will clearly vary depending on which lated bilaterally for every country and its partners. side of the Atlantic they are asked, influenced by The OTRI calculations use the most recent mea- risk perceptions and attitudes of those who sures of applied preferential tariffs--both recip- answer, regulatory requirements, and so on. The rocal and nonreciprocal--as well as ad valorem OTRI simply measures the impact that these poli- equivalents of specific tariffs. In both instances the cies have on imported quantities and prices. source of these data is the Centre d'Etudes 16. It is not possible to make clear-cut distinc- Prospectives et d'Informations Internationales tions in the data between discriminatory and reg- (CEPII, France). It is assumed that tariff prefer- ulatory measures. Even so-called core nontariff ences are fully utilized by eligible countries and barriers identified in the UNCTAD database-- that any associated rents accrue to the exporting such as nonautomatic licensing--may be used as a countries. As discussed below, however, in prac- measure to enforce regulatory requirements. tice a significant share of such rents often accrues 17. This comprises trade as defined by the WTO to the countries providing preferential access. General Agreement on Trade in Services (GATS). 10. The statistical robustness of these relation- 18. These preference regimes generally target ships is not strong, especially for own trade restric- the LDCs, which are a subset of the broader low- tiveness imposed on imports. Removing just a income group. Note also that many African coun- small number of (outlier) countries results in the tries are not LDCs. relationship either disappearing or becoming a 19. As discussed below, this conclusion regard- negative association--that is, more protection is ing the relative impact of subsidies on global prices associated with less poverty. The relationship is supported by both partial and general equilibrium 148 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 R E A L I Z I N G T H E D E V E L O P M E N T P R O M I S E O F T R A D E analysis. See Hoekman, Ng, and Olarreaga (2004); 35. WTO (2004). Anderson, Martin, and van der Mensbrugghe 36. These are mostly confidential; only some (2005); and Hertel and Keeney (2005). countries have derestricted them. 20. Argentina is an example of a country that 37. Nicita (2005). is significantly affected by OECD agricultural sub- 38. Balat, Brambilla, and Porto (2004). sidies--they account for about half of the OTRI it 39. Balat, Brambilla, and Porto (2004). confronts in the EU market. 40. Nicita (2004b). 21. Minot and Daniels (2002). 41. Regarding cereal and particularly rice, 22. Baffes (2004). which are largely produced and consumed in 23. Sumner (2005). Madagascar, predicted price increases following 24. Anderson, Martin, and van der Mensbrug- an ambitious Doha Round would have mostly ghe (2005); Hertel and Keeney (2005). neutral effects from a poverty perspective because 25. For example, Walmsley and Winters (2003) the poorest households are both producers and conclude that allowing inflows of service suppliers consumers of rice. An increase in the price of rice (natural persons) equivalent to 3 percent of the would likely produce a redistribution of income labor force would generate global (static) gains of between geographic areas, with rural areas bene- more than $300 billion. Estimates of global gains fiting at the expense of urban areas. Given that from deep liberalization that include induced pro- Madagascar is a net importer of rice (although ductivity effects and services liberalization exceed only 7 percent of consumption is imported), an $1 trillion (Anderson 2004a; Anderson, Martin, increase in the price of rice would have a small and van der Mensbrugghe 2005) and range to up negative effect on overall welfare. to $2.1 trillion (Brown, Deardorff, and Stern 42. Similar conclusions emerge from other 2003). The extent to which such gains can be real- LDC country case studies undertaken as back- ized depends on complementary actions being ground research for the MDG taskforce report on taken to improve the investment climate and busi- trade (Soloaga 2004), as well as a number of recent ness environment so as to allow factors of produc- country cases collected in Hertel and Winters tion to be allocated to their most productive uses, (2005). markets to clear, and so on. This "behind-the-bor- 43. Previous reports, including the Global der" complementary agenda will require invest- Monitoring Report 2004, have argued that trade ment and is an area where development assistance has significant potential to help achieve poverty can play an important role in allowing countries to reduction and support higher growth rates. As capture the potential dynamic gains from trade. noted in those reports, however, trade offers an 26. Anderson, Martin, and van der Mensbrug- opportunity, not a guarantee. Realization of sig- ghe (2005). nificant reductions in poverty rates is dependent on 27. Hoekman, Ng, and Olarreaga (2004); Her- functioning markets, linking farmers to markets, tel and Keeney (2005, table 2.7). and so forth. Dealing with the complementary 28. Anderson, Martin, and van der Mensbrug- "behind-the-border" and investment climate ghe (2005). agenda is critical. 29. The potential loss can be reduced by requir- 44. OECD (2005). ing any product with a bound tariff in excess of 200 45. The Global System of Trade Preferences percent to be reduced to the cap rate. See Anderson, (GSTP) was established in 1988 as a framework Martin, and van der Mensbrugghe (2005). for negotiations aimed at the exchange of trade 30. Sumner (2005); Baffes (2004). preferences. It is based on (differentiated) reci- 31. Hoekman, Nicita, and Olarreaga (2005). procity--that is, is not unilateral. 32. Based on estimates reported in Francois, 46. Recent research suggests that rules of origin van Meijl, and van Tongeren (2005). generate costs on the order of 3­5 percent of the 33. This is larger than the $80 billion found by value of the goods (Brenton 2003; Anson and oth- Hertel and Keeney (2005) using a static computable ers 2003). Given that many MFN tariffs in OECD general equilibrium (CGE) model and the latest countries are less than these levels, this has obvi- GTAP database (which also includes preferences) ous implications for the effective value of tariff because of the greater disaggregation of products. preferences. Candau, Fontagne, and Jean (2004) 34. Anderson, Martin, and van der Mensbrug- find that underutilization is highest in textiles and ghe (2005). clothing (for EU imports under both the Global G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 149 C H A P T E R 4 System of Preferences and Everything But Arms declines ranging from 7.8 percent for Fiji to 11.5 programs). In the case of the Everything But Arms percent for Mauritius. initiative, exporters in principle benefit from 100 50. Winters (2004). percent duty-free access, but are found to pay up 51. WTO and OECD (2004). to 6.5 percent average tariffs. The authors also find 52. Examples mentioned in WTO and OECD that the utilization of trade preferences is lower (2004) include a regional trade facilitation program when the preferential margin is small, suggesting of the United Kingdom that aims to increase trading that compliance costs (rules of origin) are a factor. opportunities for small-scale farmers and traders 47. See Olarreaga and Özden (2004) on the through the development of common standards Africa Growth and Opportunity Act, Özden and across goods and services and the streamlining of Sharma (2004) on the U.S. Caribbean Basin pref- customs procedures in Southern Africa. Another erence program, and Tangermann (2002) on agri- example is France's regional program that aims to cultural preferences in general. develop "fair trade" in Africa. Increases in trade 48. Stevens and Kennan (2004). development activities have centered on regional 49. IMF (2003) estimates the potential loss programs, such as an International Development from preference erosion resulting from a 40 per- Association (IDA) credit to assist the development of cent cut in protection in the Quad at 1.7 percent power exports between Southern African countries of total LDC exports. However, individual LDCs and an EU multisector small and medium-size enter- may suffer bigger losses due to the concentration prise development project in Latin America. of their exports in products that enjoy deep pref- 53. Hoekman (2005a); Prowse (2005). erences. Of these, Cape Verde, Haiti, Malawi, 54. For information on the Integrated Frame- Mauritania, and São Tomé and Príncipe are the work and the status of its activities, go to most vulnerable to preference erosion. The total www.integratedframework.org. (aggregate) value of export revenue that would 55. Schiff and Winters (2003); World Bank be lost by LDCs as a whole is estimated at some (2004a). $530 million--similar to the $600 million figure 56. World Bank (2004a). found by Limão and Olarreaga (2005). This 57. World Bank (2004a). assumes that preferences are fully utilized and 58. These issues are discussed at greater length that developing countries get all the associated in Hinkle and Newfarmer (2005) in the specific rents, so this is an upper bound. Alexandraki case of the EPAs. For example, the form of and Lankes (2004), focusing on middle-income African, Caribbean, and Pacific agreements is an countries, conclude that potential erosion issue because a customs union--the preference of impacts are less than 2 percent of total exports the European Union--may be difficult to imple- for countries that are most "preference depen- ment given overlapping regional agreements in dent." Six countries--Belize, Fiji, Guyana, Mau- Africa and the need to develop revenue sharing ritius, St. Kitts and Nevis, and St. Lucia--would mechanisms. be significantly affected, with predicted export 59. Hinkle and Schiff (2004). 150 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 5 Increasing Aid and Its Effectiveness D eveloped countries can help develop- As a result of the 2002 United Nations ing countries achieve the Millennium Conference on Financing for Development in Development Goals (MDGs) by pro- Monterrey, Mexico, donors committed to viding more and better aid. Development providing more--and more effective--aid. assistance can ease the short- and medium- What progress has been made? The recovery term resource constraints facing poor coun- in official development assistance (ODA) that tries, enabling them to make much-needed started in 2001 is continuing, but recent lev- investments in infrastructure and social ser- els and near-term projections fall far short of vices. In many low-income countries, espe- what is needed to meet the MDGs. Among cially in Sub-Saharan Africa, aid dominates members of the OECD's Development Assis- external development flows. Accordingly, tance Committee (DAC), ODA as a share of these countries are particularly dependent on national income remains low relative to the higher levels of assistance if they are to 1990s and before. Moreover, much of the achieve the MDGs--and are more vulnerable recent increase in bilateral ODA reflects to aid shortfalls. The issue that arises is donor concerns about regional and global whether aid can be scaled up effectively in security. Donor attention to geopolitically countries that need it most. Low-income significant countries appears to be crowding countries that implement sound economic out assistance to countries that need the most policies, strengthen institutions, and pursue help in achieving the MDGs. A better balance good governance can absorb additional aid is needed between poverty reduction and rapidly and effectively. other donor objectives. Aid policy should How aid is allocated and delivered is as reflect the growing recognition that reducing important as its volume for achieving the poverty and human deprivation is perhaps MDGs. Aid is more effective in fostering the most effective way of promoting long- growth and improving service delivery in term peace and security. countries with better policies and institutions. Although the proportion of aid going to It is also more effective when it is aligned with Sub-Saharan Africa is rising, much more recipients' priorities, when it reduces transac- could be done. On average, ODA equaled 6.2 tion costs through harmonized and coordi- percent of recipients' GNI in the region in nated donor processes, when it is predictable, 2003--high relative to other regions, but and when there is a clear focus on results. below the levels of the early 1990s. Most of G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 151 C H A P T E R 5 the $8.5 billion nominal increase in bilateral nal financing needs, identify and address ODA to Sub-Saharan Africa between 2001 capacity constraints, and appropriately and 2003 was in the form of debt relief; pro- sequence incremental financing. Absorptive gram and project assistance grew by just $0.6 capacity is a dynamic concept, so even though billion. While debt relief helps relieve prob- capacity may be limited today, it can be built lems associated with heavy debt burdens and over time--and aid can play an important creates fiscal space, it is not enough. Substan- role in that as well. tial increases in program and project financ- Donors are allocating more aid to better ing are needed as developing countries scale performers--those with stronger policies and up their efforts to achieve the MDGs. Sub- institutions--and to poorer countries. But Saharan countries have seen a decline in ODA there is considerable variation among donors, for infrastructure and rural and agricultural and some large donors are not very selective development. Investments in these countries' on these dimensions. A sharper performance- social sectors have also been inadequate (see based focus by these donors could strengthen chapter 3). Large shortfalls in financing for the overall quality of aid. Increasing attention these sectors--which are key to spurring is being paid to the special needs of difficult growth and scaling up MDG-related ser- partnership countries (including low-income vices--point to the need for much higher countries under stress), which receive less aid ODA. than predicted by their policy and institu- Discussions continue on proposals to aug- tional environments and poverty levels. Thus ment higher aid flows with innovative financ- a modest increase in aid to this group might ing mechanisms, such as the International be possible without compromising the per- Finance Facility, global taxes, voluntary formance basis of aid. Recent evidence also mechanisms, and blending arrangements. suggests that well-coordinated and appropri- The International Finance Facility, proposed ately sequenced and directed aid can be effec- by the U.K. Treasury, is designed to frontload tive in supporting the recovery of countries aid flows in the short term to help reach the from conflict and from situations of excep- MDGs. In addition, a wide range of propos- tionally weak policies and governance. als has been made on ways to raise additional Appropriate and adequate support for capac- resources through new global tax instru- ity building is a priority in these situations. ments. If technical and political challenges Progress on harmonization and alignment can be resolved, global taxes could comple- has been mixed, and that on managing for ment the International Finance Facility, gen- results is just beginning. The 2003 High Level erating additional aid funds in the medium to Forum on Harmonization in Rome and the long term, when flows under the facility 2004 Roundtable on Managing for Develop- would diminish. ment Results in Marrakech strengthened the Policies and institutions in developing focus on aligning donor assistance with recip- countries continue to improve, promoting a ients' national strategies and priorities as better enabling environment for scaling up articulated in PRSs or equivalent national aid. Although low-income countries as a strategy documents, harmonizing donor group can effectively absorb much more aid, processes and procedures with those of part- the amount varies by country. A number of ner countries, and managing aid programs countries could manage a doubling of assis- for development results. Yet efforts to imple- tance in the short to medium term, but capac- ment good practices in these areas have been ity constraints pose a significant obstacle in slow and uneven. Progress on harmonization countries with weak policies and institutions. and alignment is most evident in countries In all cases a country-specific approach, where governments have worked longest and anchored in a poverty reduction strategy hardest to take ownership of the aid process. (PRS) framework, is required to assess exter- Some early progress on managing for results 152 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 I N C R E A S I N G A I D A N D I T S E F F E C T I V E N E S S is also evident, as the development commu- countries have committed to expanding nity moves toward implementing the results aid efforts beyond 2006, half of DAC agenda. Participants at the March 2005 High members have not, including some of the Level Forum on Aid Effectiveness in Paris largest donors. They should do so in 2005. reaffirmed their commitment to the global · PRSs should provide the framework for agenda on harmonization, alignment, and scaling up aid--assessing financing needs, results. The forum's Paris Declaration defines identifying and addressing capacity con- 12 indicators for monitoring reforms of aid straints, and appropriately sequencing delivery and management. incremental financing. Where absorptive The potentially large financing needs asso- capacity is an obstacle to scaling up, aid ciated with the MDGs pose a challenge to can still be effective by focusing on build- low-income countries in maintaining sustain- ing capacity and improving service deliv- able debt positions. The enhanced Heavily ery through innovative mechanisms. Indebted Poor Countries (HIPC) initiative · Donors need to further sharpen their focus has lowered debt burdens for participating on providing aid to better-performing countries: 27 countries have reached their poor countries. For their part, recipient decision points and are receiving debt relief, countries should expedite efforts to and 15 of these have reached their completion enhance their capacity to make effective points--when creditors provide the full use of incremental aid flows. amount of debt relief committed at the deci- · Donors need to address more effectively sion points. Nevertheless, continued mea- the special needs of difficult partnership sures are needed by HIPCs and their creditors countries (including low-income countries to ensure that financing the MDGs will not under stress), exerting greater efforts to lead to excessive buildup of new debt. This better coordinate, align innovatively, and issue of debt sustainability is not limited to sequence aid. HIPCs; it extends to other low-income coun- · Progress on implementing the harmoniza- tries with existing or prospective debt pres- tion, alignment, and managing for results sures. The World Bank and International agenda should be accelerated. Bottlenecks Monetary Fund (IMF) are developing a for- to progress--captured in the 12 indicators ward-looking debt sustainability framework defined by the Paris Declaration--need to for low-income countries that incorporates be addressed by donor and partner coun- systematic analysis of the evolution of key tries, and continued focus at the highest debt burden indicators (under baseline levels in these countries will be required to assumptions and in the event of plausible accelerate change. Developing countries shocks) and that establishes indicative thresh- need to take more ownership of the aid olds for these indicators, based on the quality harmonization and alignment process. of a country's policies and institutions. In And donors need to encourage and sup- addition, G-7 members have recently offered port this process, especially through capac- a number of new proposals, beyond the HIPC ity building. initiative, for debt relief to low-income and · On debt relief, continued effective imple- highly indebted countries. mentation of the HIPC initiative remains Looking ahead, there are numerous prior- key. On proposals for additional debt ity areas for action on aid: relief for poor countries with heavy debt burdens that are pursuing credible · Donors need to implement their post- reforms, efforts should be made to reach Monterrey commitments and substantially closure in 2005. Additional debt relief raise and extend them beyond 2006--say, should not cut into the provision of needed to 2010--with a view to at least doubling new financing, which for these countries ODA in the next five years. While several should primarily be in the form of grants. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 153 C H A P T E R 5 Recent Trends in Aid aid commitments.1 Development assistance increased by 5 percent in real terms in 2003, Despite positive trends, donors' recent aid down from 7 percent in 2002. Taking into efforts lag those of the early 1990s. And though account exchange rate movements and infla- donor commitments announced at and after tion, which accounted for nearly $8 billion of the Monterrey conference point to the prospect the increase, nominal ODA rose by almost of higher aid, far more is needed. Moreover, $11 billion in 2003, to $69 billion. Prelimi- much of the recent increase in development nary OECD DAC estimates indicate that net assistance reflects donors' strategic concerns. ODA rose to $78.6 billion in 2004; the Only a modest amount is available in cash and increase in real terms was much smaller--to more flexible forms to meet countries' financ- $72.2 billion (at 2003 prices and exchange ing requirements for the MDGs. Thus far more rates). If announced aid commitments are aid is needed to meet the MDGs, and a better delivered, ODA is expected to grow by nearly balance is needed between donors' poverty 30 percent in real terms between 2003­6 and reduction and other objectives. could rise to more than $100 billion by 2010 As with overall ODA, flows to Sub-Saharan (figure 5.1).2 Several countries have commit- Africahavebeenrising.Aiddwarfsothersources ted to higher aid efforts beyond 2006, the tar- of foreign financing for the region, underscoring get date for the commitments made at the its importance. Still, a major increase in aid will Monterrey conference, but some of the largest be required if the region is to achieve the MDGs. donors have not done so. Despite the progress in expanding ODA Aid--Rising But Insufficient for MDG Needs since Monterrey, donors' aid efforts lag behind those of the early 1990s and before.3 The recovery in ODA that started in 2001 is At 0.25 percent in 2003, ODA as a share of holding as donors deliver on post-Monterrey donors' average gross national income (GNI) FIGURE 5.1 ODA is rising but is well short of what is needed; donors was three-quarters the level in the 1970s, need to raise their post-Monterrey commitments and 1980s, and early 1990s, and only about half extend them beyond 2006 the level in the 1960s.4 Five countries--Den- mark, Luxembourg, the Netherlands, Nor- way, and Sweden--have achieved ODA DAC members' net ODA: 1990­2003 and prospects for 2006 and 2010 shares of 0.7 percent of GNI or more (figure 2003 US$ billions Percent 5.2), and six--Belgium, Finland, France, Ire- 120 ODA as percent of donors' GNI 0.35 land, Spain, and the United Kingdom--have 0.32 (right axis) 0.30 announced timetables for achieving that level. 0.30 100 Implementation of such pledges will be vital 0.25 0.25 to raising aid flows to poor countries; the tar- 80 get of $5 billion in annual assistance by fiscal Total ODA (left axis) 0.20 2006 under the U.S. Millennium Challenge 60 Account is now unlikely to be reached until 0.15 fiscal 2007 (box 5.1). Even on announced 40 pledges, DAC donors' aid effort is expected to Total ODA to Sub-Saharan Africa 0.10 reach only 0.3 percent of GNI by 2006 and 20 0.05 0.32 percent by 2010, below the level of the early 1990s. Among the actions being consid- 0 0 1990 1995 2000 2005 2010 ered by the European Commission is the set- ting of new--and higher--interim targets for ODA relative to members' GNI for the period Source: OECD 2005a. beyond 2006, with the goal of reaching the Note: Prospects for ODA in 2006 and 2010 are based on DAC members' post-Monterrey announced commitments. Not all DAC members have made commitments beyond 2006. target of 0.7 percent as soon as possible.5 154 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 FIGURE 5.2 Wide variation in donor effort ODA as a percent of donor GNI and ODA volumes: 2003 and prospects for 2006 ODA/GNI Net ODA Norway Norway Sweden Sweden Luxembourg Luxembourg Denmark Denmark Netherlands Netherlands Belgium Belgium Ireland Ireland France France United Kingdom United Kingdom Finland Finland Switzerland Switzerland Austria Austria Germany Germany Greece Greece Italy Italy Portugal Portugal Spain Spain DAC total Canada Canada Australia Australia New Zealand New Zealand Japan Japan United States United States 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 0 5 10 15 20 25 Percent 2003 US$ billions 2003 2006 Source: OECD DAC database. BOX 5.1 The U.S. Millennium Challenge Account--poised to deliver The Millennium Challenge Account (MCA) is a new bilateral aid mechanism, announced by the United States at the Monterrey conference and established in January 2004. It allocates new U.S. aid to poor countries based on their performance in three policy areas: governing justly, investing in people, and promoting economic freedom. To date, 17 countries are eligible to apply for MCA assistance. In addition, a threshold program encourages policy reform by offering 13 other coun- tries help in areas where they fall short of qualifying for the MCA. MCA-eligible countries identify their own priorities and develop their own MCA proposals, based on their assessments of the greatest barriers to their development and in consultation with civil society and the private sector. The Millennium Challenge Corporation evaluates MCA pro- posals based on their potential for reducing poverty through sustainable economic growth. The pro- posals are not restricted to any particular sector or area. MCA countries join with the Millennium Challenge Corporation in multiyear compacts to achieve shared development objectives. The com- pacts identify the responsibilities of each partner and contain clear objectives, benchmarks to mea- sure progress, procedures to ensure fiscal accountability for the use of MCA assistance, and plans for effective monitoring and objective evaluation of results. Programs are designed to enable progress to be sustained after funding under the compacts has ended. The initial target envisioned $5 billion in annual assistance under the MCA by fiscal 2006. The U.S. administration's fiscal 2006 budget request of $3 billion doubles the 2005 appropriation and envisions expansion of MCA funding to $5 billion in fiscal 2007. The Millennium Challenge Cor- poration approved the first MCA compact in March 2005, with Madagascar (providing nearly $110 million for a four-year project), and disbursements are expected to begin in spring 2005. Source: Millennium Challenge Corporation 2003, 2005. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 155 C H A P T E R 5 FIGURE 5.3 Debt relief and technical assistance dominate the increase in ODA Breakdown of nominal increase in net ODA by DAC donors in 2001­03 18 By type 18 By country 16 Other 16 Multilateral: bilateral: Unallocated by 14 14 $1.9 billion $1.2 billion Sub-Saharan country: 12 Emergency and 12 African LICs: $3.5 billion disaster relief $4 billion 10 and food aid: 10 $2.8 billion Jordan: 8 Technical 8 cooperation: $0.8 billion 6 Iraq: $4.8 billion 6 Afghanistan: $2.1 billion $1.1 billion 4 4 Debt relief: 2 Congo, DR: $5.9 billion 2 $5.1 billion 0 0 Other LICs: Other MICs: ­$0.2 billion ­2 ­$0.5 billion Source: OECD DAC database. Note: Total nominal increase in DAC members' net ODA in 2001­3 was $16.6 billion. The corresponding real increase was $6.6 billion in 2002 prices and exchange rates. Sub-Saharan African LICs does not include the Democratic Republic of Congo. Again, donors need to commit to expanding below the roughly 60 percent average of the aid efforts beyond 2006, to 2010 or beyond.6 1980s. Debt relief levels will remain high (and Most of the increase in development assis- rise) in the near term as more countries reach tance has been in the form of noncash assis- their completion points under the enhanced tance and debt relief.7 Debt relief and HIPC initiative, and because of the recent technical cooperation accounted for two- decision by donors to forgive up to 80 percent thirds of the $16.6 billion nominal increase in of Iraq's debt to the Paris Club. Possible addi- DAC members' net ODA between 2001 and tional debt relief to poor countries beyond the 2003, with $5.9 billion allocated to debt enhanced HIPC initiative would also affect relief and $4.8 billion to technical coopera- the size of this category. While debt relief is tion (figure 5.3).8 At about 17 percent, emer- crucial to relieving problems associated with gency disaster relief and food aid also high debt burdens and to expanding fiscal represented a significant portion of the space, donors will need to ensure that addi- increase. The increase in these categories cut tional relief does not crowd out needed into the shares of assistance available in cash increases in financing for development (for and more flexible forms--for program and further discussion, see the section below on project assistance--to meet countries' financ- debt relief). ing requirements for meeting the MDGs. For Global and regional security concerns have example, bilateral ODA for program and boosted aid flows as well. Aid to Iraq was project assistance increased by a modest $0.6 sharply higher at $2.3 billion in 2003, up billion during this period. This category from $0.1 billion in both 2001 and 2002. accounted for just a quarter of bilateral ODA Between 2001 and 2003 aid to Afghanistan in 2003, down from a third in 2001 and well nearly quadrupled, to $1.5 billion, and devel- 156 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 I N C R E A S I N G A I D A N D I T S E F F E C T I V E N E S S opment assistance to Jordan tripled. Pakistan has exhibited considerable variation--reflect- received large amounts of net aid in 2001 and ing less nonconcessional borrowing from the 2002 (about $2 billion a year), but loan repay- IMF, repayments on past crisis financing ments on previously rescheduled debt lowered packages, and prepayments of loans to the net flows in 2003. In addition, the Dayton World Bank. Peace Accord countries--Bosnia and Herze- Because of rising incomes in developing govina, Croatia, and Serbia and Montene- countries, higher aid volumes have translated gro--continue to receive large amounts of aid, into only a modest rise in the share of ODA averaging $2.2 billion a year in 2001­3. in recipients' GNI. Indeed, in 2003 this share Non-DAC countries contribute significant is only slightly above the low of 1997 and is assistance to developing countries, with such expected to remain in a narrow range flows reaching $3.4 billion in 2003, or 5 per- through 2006. The weight of aid in recipients' cent of DAC ODA--more than twice the level economies is largest in Sub-Saharan Africa, in 2001.9 Saudi Arabia continued to be the averaging 6.2 percent of GNI in 2003--at largest donor in this group; its ODA contri- least four times that in other regions, signal- butions jumped from less than $500 million in ing the importance of aid for Africa (figure 2001 to $2.4 billion in 2003. Other non-DAC 5.4). Globally, per capita ODA edged up in countries have also rapidly increased their recent years, averaging about $14 in 2003, ODA. For example, the Czech Republic more though this was below the level of the early than tripled its development assistance during 1990s. Again, there was wide regional varia- this period, providing $91 million in 2003. tion, with Sub-Saharan Africa receiving the Important contributions to development most ODA per capita.11 efforts in poor countries are also being made through South-South cooperation, particu- Improving Trend in Development larly through the sharing of experience and Assistance to Sub-Saharan Africa know-how. Comprehensive data on South- South development assistance are not avail- Mirroring the recovery in overall ODA, able, but countries such as Brazil, China, and development assistance to Sub-Saharan India have been particularly active in provid- Africa has begun to rise from its substantial ing technical assistance to low-income coun- slide of the 1990s. In real terms, aid to the tries.10 South-South assistance is expected to region is higher now than in the early 1990s. grow as these larger economies continue to The region is also receiving a larger share of record impressive economic and technologi- net ODA (disbursements): At about $24 bil- cal advances. Grants from nongovernmental lion, its share of total ODA was 33 percent in organizations (NGOs), using their own 2003, up from 27 percent in 2000. Most aid resources, also continue to rise. These grants to the region is in the form of grants--bilat- totaled $10.1 billion in 2003, up from $8.8 eral donors provide nearly all their assistance billion in 2002, and are expected to be as grants, and multilateral net ODA consists sharply higher in the aftermath of the recent of highly concessional loans (60 percent) and Asian tsunami. grants (40 percent). In 2001­3 the United Although multilateral ODA--comprising States and the International Development grants and net concessional lending--has Association (IDA) were the largest donors to grown in recent years, total multilateral flows Sub-Saharan Africa (with the U.S. share to developing countries have declined. Multi- sharply higher in 2003, at 20 percent), fol- lateral ODA grew by 7 percent in nominal lowed by France and the European Commis- terms between 2001 and 2003, with higher sion (figure 5.5). Several bilateral donors, grants offsetting a decline in net concessional such as Belgium, France, Ireland, Italy, and debt flows. Nonconcessional lending by mul- Portugal, allocate more than half of their tilaterals, mostly to middle-income countries, bilateral net ODA to Sub-Saharan Africa. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 157 C H A P T E R 5 FIGURE 5.4 Dependence on aid varies by region and is highest in Sub-Saharan Africa Size of ODA in recipients' economies (2003) ODA/GNI ODA per capita Percent US$ 7 35 6 30 5 25 4 20 3 15 2 10 1 5 0 0 Latin East South Middle Europe Sub- Sub- Europe Middle Latin South East America Asia Asia East & Saharan Saharan & East America Asia Asia & the & & Central Africa Africa Central & & the & Caribbean Pacific North Asia Asia North Caribbean Pacific Africa Africa Source: OECD DAC database. FIGURE 5.5 Sub-Saharan Africa's largest donors While the positive trend in devel- opment assistance to Sub-Saharan Africa is encouraging, the increase in Average share for 2001­3 aid provided in cash and more flexi- Other ble forms--program and project multilateral 9% United States assistance--has been rather modest. 15% Most of the $8.5 billion increase in net bilateral ODA to the region IDA between 2001 and 2003 was in the 13% form of debt relief ($5.6 billion) and France emergency and disaster relief and 11% food aid ($1.5 billion).12 The increase in program and project assistance (in cash) was only about $0.6 billion. European Commission The increase in total ODA--bilat- United Kingdom 11% eral and multilateral--to the region 6% was concentrated in a handful of coun- Germany tries. The Democratic Republic of 6% Congo received an additional $5.1 bil- lion (most of it for debt relief opera- Other bilateral tions), Cameroon $480 million, Sudan 28% $436 million, Tanzania $398 million, and Ethiopia $389 million.13 Other countries in the region received about Source: OECD DAC database. Note: The shares may not add to 100 because of rounding. $2.5 billion. Although the amount of aid allocated to social services has grown, that to infrastructure and rural and agricultural development has steadily declined. 158 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 I N C R E A S I N G A I D A N D I T S E F F E C T I V E N E S S Although aid to Sub-Saha- FIGURE 5.6 Official flows are the main source of external finance for Sub-Saharan Africa, ran Africa is rising, much twice as large as FDI and nearly four times as large as remittances Financial flows (long-term), 2003 more will be needed to sup- port its efforts to achieve the MDGs. Again, ODA averages Sub-Saharan Africa All developing countries excluding 6.2 percent of recipients' ($45 billion) Sub-Saharan Africa ($331 billion) GNI, and while this is high Official flows Official flows relative to other regions, it is 9% 50% well below the levels of the FDI early 1990s and the estimated 43% needs to meet the MDGs. Other private There is also large variation 16% in aid flows across Sub-Saha- ran countries. A handful of FDI countries, such as Mozam- 22% bique and Sierra Leone, have Other private very high aid to GNI ratios. 14% Remittances Remittances Indeed, in one-sixth of 42 13% 33% countries in the region, bilat- eral ODA is equal to more Sources: OECD DAC database; World Bank data and staff estimates. than 10 percent of GNI. Yet Note: Official flows include ODA and non-ODA. Although remittances are classified as current transfers in the balance of payments, they are an increasingly important source of foreign exchange for developing countries and are included in almost as many that share here as financial flows. Also included are NGO grants, which are current transfers. The shares may not add to 100 is less than 1 percent. In 1990 because of rounding. the corresponding distribu- tion was nearly 40 percent and 2 percent, economic stability, and rationalize taxes and respectively. tariffs, much remains to be done. FDI is ODA accounts for nearly 55 percent of strongly influenced by a country's investment foreign financial flows to Sub-Saharan Africa climate--and among developing countries, (figure 5.6), up from the levels of the late those in Africa have the most regulatory 1990s.14 Foreign direct investment (FDI) is obstacles to doing business.16 also a significant source of external finance African countries perform especially for the region. In 2003 FDI was equal to 2.5 poorly on the costs of starting a business, percent of GNI for Sub-Saharan countries, enforcing contracts, registering property, larger than the share for low-income coun- and labor regulation flexibility. The costs of tries (1.5 percent) and slightly higher than the a weak investment climate can be substan- average for all developing countries (2.3 per- tial. Data from investment climate surveys cent). FDI is concentrated in a few large, show that in terms of sales lost, such costs resource-rich economies, with more than half are two to three times larger in Kenya, Tan- going to Angola, Nigeria, and South Africa in zania, and Zambia than in Brazil and 2001­3. In 2003 remittance flows to the China. The composition of these costs region equaled just 1.5 percent of GNI.15 varies dramatically across countries: in Remittances are also concentrated in a few Kenya and Tanzania weak infrastructure countries, with Kenya, Nigeria, and Sudan services are particularly burdensome, while receiving almost 55 percent of these flows in in Zambia bribes are especially costly. Thus 2001­3. priority areas for reform also vary by coun- Most Sub-Saharan countries have limited try. Other country features, such as small prospects for attracting FDI. While many size and geographic location (especially countries have gone through tough reforms being landlocked), are further constraints to to liberalize their economies, promote macro- attracting FDI. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 159 C H A P T E R 5 Sub-Saharan countries need to accelerate and support other health interventions by reforms to enhance their investment climates. improving public health infrastructure. They also need to scale up investments in The IFFIm is intended to be a small IFF, basic infrastructure. Over time, such changes and if successful would serve as proof of con- will attract more FDI. But in the near to cept for some aspects of the larger IFF: the medium term, increases in ODA will remain capacity to garner donor support for such a critically important for the region. mechanism, resolution of issues on the fiscal treatment of contingent donor pledges, and acceptance of IFF-generated AAA bonds by Innovative Financing Mechanisms to rating agencies and capital markets. Augment Traditional Aid In the absence of sufficient traditional ODA, G L O B A L T A X E S innovative financing mechanisms may be A wide range of proposals has been made on required to increase aid flows. Several pro- ways to raise additional revenue through the posals are under discussion.17 introduction of global tax instruments. Global tax proposals should be judged by their rev- I N T E R N A T I O N A L F I N A N C E F A C I L I T Y enue adequacy and stability, efficiency, equity, The International Finance Facility (IFF) is a ease of collection, and minimum coalition proposal designed to frontload aid flows in size. Additionality must also be considered: the short term to help countries reach the allocating the proceeds of a tax to develop- MDGs. Donors would make off-budget ment spending may partially or completely pledges of future increases in aid commit- displace spending from traditional sources. In ments. The IFF would use the pledges as addition, detailed aspects of implementation backing to issue AAA-rated bonds. Bond pro- have received relatively little attention. ceeds would be channeled through existing Increasing international attention on how aid programs. Over time the IFF would draw to move forward on specific mechanisms may down the donor pledges to pay off its bonds. lead to more focused work on promising Future aid budgets would thus be used to sup- alternatives. One possibility recently put for- port aid disbursements as and when they are ward in the European Union would be an needed in the short term. international airline fuel tax, which would Technical aspects of the IFF proposal are address two externalities: the environmental being addressed through a pilot IFF for damage caused by air transportation and the Immunization (IFFIm). This pilot facility failure of international tax coordination in would raise frontloaded, reliable funding that airline fuel, unlike any other fuel, is gen- over a number of years to expand global erally untaxed. Such a tax could raise some immunization efforts to help achieve the child $9 billion a year, if levied globally at a rate of mortality MDG.18 The IFFIm would largely $0.20 a gallon. As another example, it has rely on the governance structures and coun- been estimated that a tax on arms sales could try programs of the Global Alliance for Vac- raise $2.5­5.0 billion a year.19 If technical cines and Immunization (GAVI) and the and political difficulties can be resolved, Vaccine Fund. global taxes could complement the IFF, gen- The frontloaded IFFIm funds would be erating additional aid funds in the medium to used for two main purposes: accelerating pro- long term as IFF flows, designed to increase duction of new and existing vaccines, to stim- development funds in the short term, dimin- ulate private investment and competition and ish while its bonds are being repaid.20 to reduce vaccine costs more rapidly than if there were no scaling up; and strengthening V O L U N T A R Y C O N T R I B U T I O N S capacity to deliver vaccines to save children's Private contributions to finance development lives immediately, reduce the risk of disease, are increasing. They are made in a range of 160 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 I N C R E A S I N G A I D A N D I T S E F F E C T I V E N E S S ways that could be expanded, encouraged, nal assistance needed to directly support the and made more effective without impinging MDGs in low-income countries at $73 billion on their voluntary and private nature. Some in 2006, rising to $135 billion by 2015.22 mechanisms, such as the establishment of Financing the MDGs and other needs would "affinity" credit cards that provide funding require nearly tripling net ODA. Because cost- for development through voluntary sur- ing the MDGs is difficult, there is much debate charges, could be undertaken by interested on the amounts needed to achieve them.23 Still, banks or companies. Others, such as the cre- there is broad agreement that current develop- ation of a special-purpose global lottery or ment assistance is insufficient and that sub- premium bond, would require regulatory stantially more aid is needed. action by participating countries, either uni- At current trends, most developing countries laterally or acting in concert. Given the rela- will fall far short of achieving the MDGs for tive lack of clear, consistent global data about health and education. The financing needs for these flows, the international community meeting these goals are large relative to avail- could benefit from a more systematic work able domestic resources, and significantly program to explore what governments can do higher aid will be needed to fill the financing to encourage private and voluntary flows for gap. Adequate progress by developing coun- development, and to foster their effective tries on the health goals, where projected short- channeling and use in support of developing falls are greatest, will require at least $25 billion countries' priorities. a year in additional aid. Additional aid require- ments for meeting the primary education goal B L E N D I N G A R R A N G E M E N T S in low-income countries are estimated to be at Blending arrangements--that is, combining least $3 billion a year (see chapter 3). flows with different financial terms and charac- Developing countries also need to address teristics (such as grants, loans, and guarantees) serious gaps in infrastructure.24 Annual spend- to increase concessionality or gain leverage-- ing on infrastructure--electricity, transport, are a possible way to augment resources for the telecommunications, water, and sanitation--is MDG agenda, fund global and regional public about 3.5 percent of GDP in these countries, goods, and address individual country circum- against estimated needs of about 5.5 percent to stances, such as creditworthiness constraints reach the MDGs. The shortfall in infrastruc- affecting gap countries.21 Blending mechanisms ture financing is worse in poorer countries. For could be structured in a variety of ways to pro- example, Sub-Saharan Africa needs to double vide different types of funding based on country annual infrastructure spending from 4.7 per- and program circumstances. cent to 9.2 percent of GDP (see chapter 2). Ethiopia shows just how large the infrastruc- The Need for--and Challenges ture gap is: In 2001 its road density was 0.029 of--Increasing Aid kilometers per square kilometer of land-- about a quarter of the average for low-income Current and near-term projections of develop- countries. Scaling up Ethiopia's road density ment assistance fall far short of what is needed by a factor of three, as part of a strategy to to meet the MDGs. Although recent estimates accelerate progress toward the MDGs, would of the additional resources needed to achieve cost some $7.2 billion over 2005­15. This the MDGs vary widely, they all point to a sig- amount is more than three times what invest- nificant financing gap (box 5.2). At the con- ment would be if current trends continued. servative end of these estimates, ODA must Clearly, many low-income countries do not increase by at least $50 billion a year, with the have sufficient domestic resources or access to increases phased in alignment with growth in global financial markets to finance such recipients' absorptive capacity. The UN Mil- investment.25 More aid will be critical to accel- lennium Project projects the additional exter- erating provision of infrastructure. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 161 C H A P T E R 5 BOX 5.2 Estimates of MDG financing needs vary widely, but all point to the need for a major increase The UN Millennium Project (2005) conducted detailed MDG-based needs assessments for five low- income countries--Bangladesh, Cambodia, Ghana, Tanzania, and Uganda. In Ghana, for example, per capita expenditure needs are projected at $80 in 2006, rising to $124 by 2015. The bulk of such spending will have to come from external financing: $52 in 2006 and $70 in 2015. (During this period domestic resource mobilization is expected to rise by about 4 percentage points of GDP.) The assessments for the other low-income countries suggest similar external financing needs: $40­$50 per capita in 2006, rising to $77­$98 in 2015. The study projects the MDG financing gap in low- income countries to be $73 billion in 2006, rising to $135 billion in 2015. The gap in middle-income countries is projected to be $10 billion a year. Meeting the MDGs and other needs in low- and mid- dle-income countries implies additional ODA over 2003 levels of $66 billion in 2006 and $126 bil- lion in 2015--a nearly threefold increase in net ODA by 2015. This implies that the share of ODA in donors' GNI will be 0.44 percent in 2006, rising to 0.46 percent in 2010, and reaching 0.54 per- cent by 2015. Several other studies have tried to place a figure on the global cost of meeting the MDGs. These were discussed in detail in the Global Monitoring Report 2004, so their results are only summa- rized here. The range of estimates varies widely, but most point to the need to increase ODA by at least $50 billion. The Commission for Africa (2005) estimates that achieving the MDGs in Sub-Saharan Africa will require $75 billion a year in additional financing. Two-thirds of the increase ($50 billion) would come from external sources. The Commission recommends proceeding in two stages. In the first stage an additional $25 billion a year would be required within three to five years (2006­2008/10)-- doubling aid to Sub-Saharan Africa over 2004 levels. Implementation of the second stage would be based on an assessment of the improvements in governance and aid quality achieved in the first stage. Estimates of additional ODA requirements vary widely Study Estimate of additional annual ODA required to meet the MDGs UNMP (2005) Increase over 2003 of $66 billion in 2006, $83 billion in 2010, and $126 billion in 2015 Development Committee (2003, 2004) Initial increment of at least $30 billion (for MDG investment needs), rising to more than $50 billion United Nations (2001) About $50 billion (to directly support the MDGs) Commission for Africa (2005) For Sub-Saharan Africa, $25 billion (doubling ODA) within 3­5 years, and $50 billion by 2015 Recent evidence suggests that aid can appear to have a positive impact on growth boost growth if it is invested well, say, in in the short term. Aid to social sectors also infrastructure.26 A cross-country study also contributes to growth, but its impact is finds that aid that directly supports invest- longer term. Importantly, the case for more ment has a positive influence on growth.27 aid to education and health, apart from its Thus budget support, balance of payments "narrow" contribution to economic growth, support, and investment in infrastructure derives from its impact on the nonincome and productive sectors like agriculture dimensions of poverty. 162 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 I N C R E A S I N G A I D A N D I T S E F F E C T I V E N E S S Absorptive Capacity Constraints An Improving Environment to Scaling Up Aid for Aid Absorption Scaling up of development assistance will be The policy and institutional environment in effective only if poor countries have adequate developing countries has steadily improved in capacity to absorb more aid. Capacity con- recent years, creating a better environment straints to effective absorption of resources for scaling up aid. In addition to pursuing can manifest themselves at a number of lev- sound macroeconomic policies and better els--from national policy and public budget public sector management, developing coun- management to local service delivery--and in tries have strengthened institutions, improved various ways--including macroeconomic governance, pursued wide-ranging structural management, institutional capacity, infra- reforms, and adopted policies of social inclu- structure, human capital, social, and cultural sion and equity. The overall improvement in factors. But not all constraints are equally policy frameworks and institutional perfor- binding; some can be eased in the near term, mance has contributed to faster growth in while others may take longer.28 Constraints these countries. The average quality of poli- related to the labor market (such as the sup- cies and institutions, as measured by the ply of skilled health and education service World Bank's Country Policy and Institu- providers) and the quality of governance (cor- tional Assessments (CPIAs), has risen over the ruption) might take more time to resolve, past five years. Although improvements in while issues such as weak public expenditure some areas (such as institutions and public management can be overcome more readily.29 sector management) have lagged those in oth- Moreover, changes can be mutually reinforc- ers, the overall upward trend is widespread. ing, with improvements in one area serving as In tandem, output growth has more than a catalyst in others. All these aspects imply doubled over the average rate of the 1990s, that sequencing is central to capacity build- with low-income regions such as South Asia ing: Interventions across the range of con- and Sub-Saharan Africa seeing much stronger straints should be prioritized, and public growth.30 investments aligned with those priorities. A 2003 Development Committee report The complex, dynamic nature of capacity assessed the capacity of 18 well-performing building points to the need for country-spe- low-income countries to effectively use more cific approaches to identifying, analyzing, aid to achieve the MDGs. It found that the five and addressing capacity constraints. Box 5.3 large Asian countries in the sample provides a preliminary assessment of Ethiopia's (Bangladesh, India, Indonesia, Pakistan, Viet- ability to achieve the MDGs and of labor, nam) could absorb an immediate doubling or macroeconomic, and infrastructure con- more of aid. Some Sub-Saharan countries straints to resource absorption. The modeling (such as Ethiopia and Madagascar) could, framework used helps capture country- and with substantial policy reforms, also absorb a sector-specific constraints (such as skilled doubling of aid. Overall, the Sub-Saharan labor shortages), cross-effects from investing countries in the sample were found to have the in related MDGs, and the role of sequencing capacity to use additional aid productively if investment. The simulation results show that they continued and strengthened reforms. Of it will be possible for Ethiopia to achieve the course, there was considerable variation in MDGs if aid (grants) roughly doubles (as a absorptive capacity across countries. share of GDP) by 2015. They also help illus- The UN Millennium Project recommends trate key absorptive capacity constraints, lim- identifying well-governed low-income coun- its to frontloading of disbursements, and the tries as fast-track countries that could receive importance of careful sequencing of increases large increases in assistance.31 Existing perfor- in aid and associated investments. mance-based criteria--such as being eligible to G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 163 BOX 5.3 Addressing absorptive capacity in Ethiopia Government policies and the flow of foreign aid required to reach the MDGs have strong econo- mywide effects that, through markets for labor, goods, services, and foreign exchange, feed back on the MDG targets. Measuring and projecting MDG costs and achievements must therefore be based on an economywide approach that complements in-depth sector studies. To examine these macro- micro linkages for Ethiopia--a very poor country for which the MDGs pose enormous challenges-- a model has been calibrated to country data to capture select macro and sector-specific constraints. Simulations of progress toward the MDGs are possible that reflect, in particular, labor market, infra- structure, and macroeconomic constraints. Projections of income poverty levels through 2015 under three scenarios are shown in the fig- ure. The first scenario is a continuation of present trends. Annual GDP growth follows the trend rate over the past decade (3.6 percent), external aid increases marginally (by 1.5 percent a year) above the current level ($16 per capita), and there is modest investment in physical infrastructure. Under this scenario Ethiopia will fall significantly short on all the MDGs, with poverty falling mod- estly--from its current 35 percent to 29 percent--and weak progress toward the other goals. The second scenario adds public investment in basic infrastructure (roads, other transport, energy, irrigation), which is considered critical to growth. Infrastructure investment is frontloaded, growing by 10 percent a year until 2009 and 5 percent a year thereafter, reflecting network effects. Without this investment, Ethiopia cannot reach the first MDG of halving income poverty. The net- work effects from improved infrastructure enable returns to private sector activities--worker pro- ductivity, agricultural yields, and so on--to rise over time. Such investment would require a 15 percent increase in foreign grants relative to the base case. Productivity gains would help boost annual GDP growth to nearly 5 percent after 2009, and poverty reduction would be accelerated, falling to 22 percent by 2015. Under the third scenario, investments in public services are set at the levels required to achieve the core human development MDG targets--universal primary education completion, two-thirds Projected income poverty in Ethiopia, 2003­15 (Headcount index) MDG 1: Share of population living on $1 (PPP) per day or less Percent 40 35 30 25 20 15 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Base Base-infrastructure Meeting MDGs Note: The projections use the Ethiopia Maquette for MDG Simulation (MAMS) model, parameterized using data from the Ethiopian poverty assessment (World Bank 2005a). 164 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 reduction in under-five mortality, three-quarters reduction in maternal mortality, and halving the population share without access to improved water and sanitation services. This scenario requires a gradual but substantial increase in foreign grants, rising to around $60 per capita, or about 40 percent of GDP, by 2015--roughly twice current aid as a share of GDP. These scenarios illustrate several key points. It is possible to achieve the MDGs--provided there is adequate external grant financing, and expansion of MDG-related services is accompa- nied by investment in basic infrastructure to raise growth. Additional aid is essential. Relying on domestic resources to finance such investment would reduce income growth, lower household consumption, and deepen poverty, even though some of the human development MDGs might be achieved. Investment in basic infrastructure is key to supporting economic expansion. Without better growth performance, income poverty goals will not be achieved. In the short run this requires improving physical infrastructure, whereas investing in human development has a longer- term impact on growth. This framework helps illustrate the important role of absorptive capacity and the lags inherent in expanding capacity. Consider investing to achieve the second MDG--universal primary educa- tion completion by 2015. Ethiopia currently has about 75,000 teachers and a student-teacher ratio of 75:1. To meet the goal with an unchanged student-teacher ratio, more than 52,000 additional teachers will need to be trained and deployed by 2015--while as many as 160,000 more teachers would be required for a much-needed reduction in the ratio to 40:1. Recruiting teachers will require increasing the supply of skilled labor--a gradual process with a lagged response--or raising real wages to hire skilled labor away from alternative uses. But raising wages to attract skilled labor raises the costs of public services, draws skilled labor from the private sector, and crowds out pri- vate growth. Constraints to absorptive capacity are also evident in the macroeconomic impact of higher aid flows. Aid permits a larger trade deficit and increases the demand for goods and services. This puts upward pressure on the exchange rate and reduces the competitiveness of both exports and import- competing goods. Over time this may shift the economy away from production for export, make it more dependent on aid, and reduce growth (often called the "Dutch disease"). In the third scenario above, which requires roughly a doubling of aid to GDP by 2015, the real exchange rate appreci- ates and leads to shrinkage of the export sector. But if public investment made possible by aid increases productivity and removes constraints to growth, this potential drag on output can be off- set. This underscores the importance of well-targeted investment and policy measures to offset these costs--particularly improvements in the business environment and trade reforms that improve mar- ket access and reduce behind-the-border barriers to export productivity. The importance of investment sequencing is another lesson from these simulations. Priority must be placed on basic infrastructure investment because of its key role in raising the underlying growth rate and achieving network productivity effects. At the same time, investments must proceed in human services that address binding constraints--such as education to ease skilled labor con- straints--and where production lags require earlier attention. Priority should also be given to invest- ments that generate positive externalities and lower costs. Investments in water and sanitation, for example, accelerate improved health outcomes. There are also implications for the pace of investing in the MDGs. Frontloading infrastructure investment helps accelerate growth through productivity gains. But frontloading expenditures on social and other MDG services runs into absorptive capacity constraints relatively quickly. Real wages rise, the exchange rate appreciates, and growth is compromised. Simulations suggest that for Ethiopia the cost-minimizing share of spending on MDG social services over the first five years is about one-fifth of total expenditures by 2015 (in present value terms) to meet goals related to these services. Note, however, that this calculation ignores the welfare gains of accelerated service deliv- ery due to frontloading. Finally, improved governance and institutional capacity are crucial to effective delivery of pub- lic (and private) services. Both strengthen absorptive capacity and can greatly reduce the costs of improving service delivery over time. Sources: Bourguignon and others 2004, 2005; Lofgren 2004. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 165 C H A P T E R 5 apply for assistance under the U.S. Millen- The studies have found that the PRS process nium Challenge Account, having reached has fostered improvements, though there is the completion point under the HIPC initia- much room for further progress.34 tive, or participating in the African Peer Uganda saw foreign aid increase by nearly Review Mechanism (APRM) of the New 5 percentage points of GDP between 1997/98 Partnership for Africa's Development and 2001/02. The increase came in the form (NEPAD)--could be used to assign fast- of budget support, with 60 percent in grants track status to countries. and the rest in concessional loans. Untied As the relevance of the poverty reduction budget support was provided through World strategy (PRS) approach continues to grow, Bank Poverty Reduction Support Credits the enabling environment for growth and (PRSCs)--a series of annual credits support- poverty reduction is expected to improve fur- ing a three-year rolling reform program--and ther. In low-income countries Poverty Reduc- grants from other donors.35 This approach tion Strategy Papers (PRSPs) provide the made the overall budget envelope more pre- strategic and operational framework for pro- dictable and helped boost service delivery, grams and policy reforms to promote growth especially to poor people.36 Between 1998/99 and reduce poverty. The papers are now also and 2002/03 the ratio of actual disburse- broadly viewed as the key operational vehicle ments to amounts initially programmed rose for achieving the MDGs. By the end of Feb- steadily, from less than 40 percent to more ruary 2005, 47 countries had prepared full than 85 percent. During this period devia- PRSPs, and 12 others had prepared interim tions in budget outturns and allocations nar- PRSPs.32 Of these, 33 were Sub-Saharan rowed, with the discrepancy index falling countries. Solid progress has been achieved in from nearly 10 percent to 5.5 percent.37 In many aspects of the PRS approach, but a key addition, the share of the budget allocated to challenge going forward is to deepen imple- the Poverty Action Fund more than doubled, mentation on the ground. (See chapter 1 for from 17 percent in 1997/98 to 37 percent in further discussion of the PRS process and 2002/03. related agenda.) In Tanzania foreign assistance more than Countries are paying more attention to doubled during 1999­2003, and donors now improving public expenditure management, finance about 90 percent of the country's which is key for effective aid use. By strength- development budget.38 Increases in donor ening such systems, public resources can be financing were associated with increases in aligned better with development priorities, priority sector spending.39 With PRS imple- and budget processes can be made more mentation, government spending on priority transparent. Many countries have made or sectors increased continuously, and by fiscal are planning significant changes in public 2002 such spending exceeded ODA (figure expenditure management, and country strate- 5.7). But donor funding still exceeds spending gies increasingly include measures to enhance on core priority areas, implying that there is it.33 Sustained government commitment and scope for sharpening donor focus on these strong, well-coordinated donor assistance areas. As donors align with national priori- can boost progress on strengthening public ties, there is also scope to better integrate expenditure management capacity. their support with the budget.40 Aid contin- ues to be highly variable, and though this P O V E R T Y R E D U C T I O N S T R A T E G I E S A N D variability has declined in recent years, it still B U D G E T S : P R O G R E S S I N D E L I V E R I N G exceeds that of domestic revenues. Within- A I D I N S U B - S A H A R A N A F R I C A year variability of aid flows is substantial as Several recent studies have reviewed budgets well. in highly aid-dependent countries to assess In Burkina Faso, with foreign assistance how PRSs have helped improve aid delivery. comprising 40 percent of the budget, donor 166 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 I N C R E A S I N G A I D A N D I T S E F F E C T I V E N E S S alignment with national priorities is crucial at the beginning of the fiscal year would con- to successful implementation of the PRS. Aid tribute to better public expenditure manage- is increasingly aligned with priority sectors, ment. Gaps between PRS projections and as evidenced by the narrowing gap between actual expenditures can be both large and ODA and spending on priority sectors and variable. Gaps in primary education expen- core priority areas (see figure 5.7).41 Never- diture are in part due to a shortfall in foreign theless, the gap between development assis- financing--that is, a gap between projected tance and spending on core priority areas and actual financing. When foreign financing remains high, at about 4 percentage points of has been late or postponed, this is reflected in GDP in 2002--implying that aid is being a gap between PRS projections and actual spent on noncore priority areas. Since the expenditures. When foreign financing has country's PRS was developed, donors have been delivered as projected, this gap is rela- been shifting the composition of aid toward tively small. budget support. As a result program loans and grants increased from 2.6 percent of C O U N T R Y S T U D I E S O N S C A L I N G U P GDP in 1998 to 4.0 percent in 2002, while Development efforts are being scaled up at project loans and grants fell from 8.5 percent the national, state, and community levels. of GDP to 6.6 percent. The in-year variabil- The Shanghai conference on scaling up ity of aid is large, however: During poverty reduction, held in May 2004, show- 1996­2000 about 60 percent of aid dis- cased a broad range of successful country bursements were in the last quarter of the interventions to reduce poverty and expand year. This bunching of assistance, which is access to health, education, water, and other usually not synchronized with the budget key services (box 5.4). These experiences cycle, makes it difficult for the country to reinforce some of the factors shown by other finance its budget effectively. Receiving funds evidence as common to successful scaling FIGURE 5.7 Higher development assistance is increasingly supporting and catalyzing more spending in priority areas Official development assistance and spending on priority sectors and core priority areas (as a percentage of GDP) Tanzania Burkina Faso Percent Percent 9 14 8 12 7 10 6 5 8 4 6 3 4 2 2 1 0 0 FY99 FY00 FY01 FY02 1998 1999 2000 2001 2002 Total ODA Priority sectors Core priority areas Source: Alonso and Utz 2004; Alonso 2004. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 167 C H A P T E R 5 BOX 5.4 Scaling up development efforts The May 2004 Shanghai conference on scaling up poverty reduction presented a number of coun- try cases of successful efforts to reduce poverty and scale up service delivery. In El Salvador, for example, education reforms have resulted in universal primary enrollment. Years of conflict had weakened the country's education system, and by the end of the 1980s more than a quarter of the population was illiterate, and a fifth of primary school-age children were not in the system. But in the early 1990s the country started reforming the system. The reforms transferred resources and decision making to stakeholders such as schools, communities, and parents. In addition, between 1992 and 2002 public spending on education rose from 1.9 percent of GDP to 3.3 percent. The reforms, which were supported by World Bank sector loans, targeted low-income and rural areas, and helped achieve a gross primary enrollment rate of 112 percent--and more than doubled the secondary enrollment rate, to 56 percent. El Salvador's successful education program has spurred similar innovations in Guatemala and Honduras. In Indonesia the community-based Kecamatan Development Program has been used to develop infrastructure and alleviate poverty in rural areas. It started small in 1997, operating in 25 villages, and by 2003 it had been scaled up to 28,000 villages. The program provides rural communities with block grants to build small-scale productive infrastructure. The communities receive the transfers at the beginning of the planning cycle, providing certainty of funding. Execution is decentralized, with planning and decision making directly involving local communities. In its first seven years the program reached 35 million people. Other social funds that have involved communities in the plan- ning and decision-making process--such as in Malawi, Yemen, and Zambia--have likewise had national scope and impact. Source: World Bank 2004d. up: institutional and policy change; innova- approach anchored in the PRS (or a joint tion, learning, and adaptation; political needs assessment, such as the UN­World leadership and sustained commitment; part- Bank Post-Conflict Needs Assessment, and nership with all stakeholders (which is key results-based framework, such as the Transi- for service delivery); and a supportive exter- tional Results Matrix, a multidonor and nal environment. national stakeholders' coordination and In sum, emerging country evidence, recent monitoring tool for difficult partnership research, a better understanding of how to countries) is required to assess financing address absorptive capacity constraints, needs, identify and address capacity con- prospects for continuing favorable trends in straints, and appropriately sequence incre- policies and institutions, and a stronger focus mental financing and investment. on governance all show that countries have increased, and continue to increase, their Making Aid More Effective capacity to absorb aid productively. Still, prospects vary by country. Many low-income The way aid is allocated and delivered is as countries are well positioned to absorb a scal- important as its volume in achieving the ing up of aid. But in some, especially difficult MDGs. Broad consensus has emerged that partnership countries, absorptive capacity development assistance is particularly effective can be a significant obstacle to scaling up, and in poor countries with sound policy and insti- innovative ways of channeling aid are tutional environments.42 But even as donors needed. In all cases a country-specific are allocating more aid to better performers, 168 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 I N C R E A S I N G A I D A N D I T S E F F E C T I V E N E S S increasing attention is being focused on the see substantial variation in the policy and special needs of difficult partnership countries poverty sensitivity of the different types of and on seeing how to make aid effective in aid. The results for disaggregated aid indi- these economies. cate that flexible ODA is more sensitive to In all countries, donors must provide assis- policy performance than technical coopera- tance in ways that are aligned with country- tion.44 On average, a 100 percent increase in based and -led development priorities as the quality of recipients' policies and insti- articulated in PRSs or equivalent national tutions is associated with a more than 250 development strategies. They should also dis- percent increase in flexible ODA. Technical burse aid in effective ways--reducing the bur- cooperation, by contrast, is not sensitive to den of processes, procedures, and requirements the quality of policies and institutions. This and making aid more predictable. In addition, category of aid is also the least selective with a stronger focus is needed on the results agenda. respect to poverty, reflecting the fact that This calls for moving from "accounting by technical cooperation is provided to a broad inputs" to practical ways of "accounting for range of countries--including special need outputs." Equally important to improving aid and conflict countries with extremely weak effectiveness is the need for more coherent institutional capacity, and middle-income donor policies. countries with institutional capacity gaps in narrowly defined areas. Overall, the results suggest that the scope for improving the Aid Selectivity allocation of aid by altering its composition Donors are becoming more focused on per- is potentially large. formance, with aid allocations increasingly Donor focus on performance is stronger in determined by both policy performance and low-income countries. Thus some donors that poverty. The policy selectivity index, which are not very selective in overall aid allocations measures the elasticity of aid with respect to nevertheless tend to favor better performers the quality of recipients' policies and institu- tions (based on the World Bank's CPIAs), shows a generally improving trend in TABLE 5.1 Selectivity in aid allocation: Donors' policy and poverty 1999­2003 (table 5.1).43 This trend has been focus is improving, but bilateral donors could do more fueled by the sharpening policy focus of mul- tilateral assistance: The relationship between Official development assistance net of emergency aid aid and policy performance is much stronger for multilateral than for bilateral aid. But Flow Policy Policy Poverty Poverty selectivity selectivity selectivity selectivity bilateral aid does exhibit a significantly posi- 1999 2003 1999 2003 tive relationship with the quality of recipients' Total aid 1.57* 1.77* ­0.34* ­0.55* policies and institutions--for more than 80 Bilateral aid 1.15* 1.04* ­0.27* ­0.47* percent of bilateral donors this relationship is Multilateral aid 2.09* 2.71* ­0.68* ­0.87* positive, and for more than half it is statisti- Five largest donors cally significant. Still, some of the largest bilat- United States 1.37 1.43 ­0.77* ­0.88* eral donors are not very selective. Donors' Japan 3.72* 1.74* ­0.23 0.01 poverty focus has strengthened as well, as France 0.65 1.27 ­0.17 ­0.32 reflected in the rise in the poverty elasticity Germany 1.99* 3.36* ­0.24* ­0.52* United Kingdom 2.82* 3.89* ­0.47* ­1.21* index (elasticity of aid with respect to recipi- ents' per capita income). Thus more aid is being allocated to poorer countries by both Source: Levin 2005. * Significant at the 10 percent level or higher. bilateral and multilateral donors. Note: Policy selectivity shows the policy selectivity index, which measures the elasticity of aid Since the various components of aid are with respect to the quality of recipients' policies and institutions. Poverty selectivity shows the poverty elasticity index, which measures the elasticity of aid with respect to recipients' per far from homogenous, it is not surprising to capita income. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 169 C H A P T E R 5 among poor countries. The best-performing Aid Effectiveness in Difficult third of recipients (as measured by the Bank's Partnership Countries CPIAs) receive an average of 40 percent of aid allocations--while the worst-performing third As bilateral donors move toward more policy receive 17 percent (figure 5.8). There is wide and poverty selectivity in aid allocation, there variation in donor effort directed at low-income is concern that difficult partnership countries (IDA-eligible) countries. During 1999­2003 may be underfunded.45 Empirical evidence countries that were consistently the top shows that these countries receive about 40 providers of assistance per donor country citi- percent less aid than predicted by their policy zen to low-income countries were Denmark and institutional ratings (figure 5.9).46 There is (with an annual average of $62 out of a total of wide variation, with the so-called "aid $115 per Danish citizen directed to the top third orphans" receiving much less aid and the "aid of policy performers in low-income countries), darlings" receiving much more than can be Luxembourg ($57 out of $120), Norway ($35 explained by policy and poverty criteria. While out of $85), Netherlands ($29 out of $68), and not all difficult partnership countries should Sweden ($23 out of $53). Comparable amounts receive more aid, the results suggest that an for some of the largest donors are $4 out of $11 increase in overall aid to the group would not for the United States and $11 out of $40 for compromise the performance basis of aid.47 France. The more generous donors in terms of Recent studies find that postconflict per capita aid effort are also generally more countries can absorb more aid than other selective. low-income countries with similar levels of FIGURE 5.8 In low-income countries donors allocate more aid to better performers; more generous donors also tend to be more selective Distribution of aid per bilateral donor country's capita by quality of policies and institutions in IDA-eligible countries Average for 1999­2003 in US$ per capita 140 Largest donors by aid per capita 120 120 115 100 85 80 68 60 53 40 40 36 26 23 20 11 0 Luxembourg Denmark Norway Netherlands Sweden United Japan France Germany United States Kingdom Largest donors by volume Bottom Middle Top Source: Based on Levin 2005. Note: IDA-eligible countries are split into three groups--bottom, middle, and top--using the 33.3 and 66.7 percentiles of quality of policies and institutions as measured by the World Bank's Country Policy and Institutional Assessments (CPIAs). 170 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 I N C R E A S I N G A I D A N D I T S E F F E C T I V E N E S S FIGURE 5.9 Difficult partnership countries receive less aid than predicted by their policy/institutional quality and poverty levels Actual versus predicted aid per capita flows to DPCs (1992­2002; population-weighted group averages) Dollars per capita 50 45 40 35 30 25 20 15 10 5 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Actual Predicted on the basis of GDP per capita and CPIA Source: Levin and Dollar 2005. poverty and institutions. Aid allocation pat- practice in these countries.51 terns in postconflict periods show an increase Because these countries have weak capacity in the first few years after a conflict ends, fol- and risky environments, delivering effective lowed by a dropoff. One study finds that rel- aid is a considerable challenge.52 Aid should be ative to conflict levels, per capita aid is focused on building capacity and providing generally $2 higher in the second year after key services through innovative mechanisms. conflict, then rises and peaks at around $9 per Some successful approaches are emerging, capita higher in the fourth year after con- including those that use local institutions to flict.48 Another finds that the increase is high- deliver services and those that work with non- est in the first two postconflict years, then falls state actors in ways designed for eventual off.49 But postconflict countries can effectively transfer to state delivery. (See chapter 3 for absorb higher levels of aid in later periods more on service delivery in countries under when their absorptive capacity has increased, stress.) The appropriate aid modality is likely so higher aid sustained over longer periods is to vary by country situation. But to be effec- more desirable for ensuring turnarounds in tive, aid needs to be better coordinated to min- these countries.50 Thus donors need to pro- imize the problem of aid darlings and orphans, vide assistance over a longer period--an as well as better sequenced and sustained. example is Sierra Leone's 10-year develop- ment plan--to rebuild weak capacity, restart Aid Fragmentation growth, and reduce poverty. The Senior Level Forum on Development Effectiveness in Frag- Donor fragmentation remains high in devel- ile States--organized jointly by DAC and oping countries. A donor fragmentation index, bilateral and multilateral donors and held in constructed from shares of individual bilateral London in January 2005--addressed the issue donors in annual bilateral aid flows, shows of how to improve effectiveness of aid in frag- that the degree of fragmentation in 2003 was ile states and the principles of good donor largely unchanged at 68; in 2002 the index was G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 171 C H A P T E R 5 FIGURE 5.10 Aid fragmentation is high, especially in Sub-Saharan Africa Donor fragmentation index, 1975­2003 90 80 70 60 50 1975 1980 1985 1990 1995 2000 All developing countries Sub-Saharan Africa Sources: OECD DAC database; World Bank staff estimates. Note: The indexes graphed are averages over groups of aid recipient countries. Donor fragmentation goes from 0-100; higher values imply more fragmentation. 67 (figure 5.10). High fragmentation can have favorite countries, they like to be present in negative implications for aid quality for several many countries in the region. On average, a reasons: high transaction costs for recipients recipientcountryinSub-SaharanAfricareceived because more time is taken meeting donor aid from 25 donors a year over the past two requirements; too many small projects, with decades.54 The number varies, ranging from 16 consequent limited opportunities to reap scale for Gabon to 37 for Ethiopia in 2003. economies; and smaller or narrower donor stakes in overall country outcomes.53 A large Untying Aid number of donors also compounds the chal- lenge of donor coordination. A number of Untying of aid significantly increases its effec- members of OECD's Development Assistance tiveness, yet large amounts of bilateral ODA Committee (DAC) are considering measures to continue to be tied. The DAC recommends limit the number of countries on which they untying all aid, excluding technical cooperation focus. Although the recent High Level Forum and food aid, to the least developed countries on Aid Effectiveness (held in Paris in March (LDCs).55 Almost all DAC countries have 2005) did not include fragmentation among the largely implemented these provisions, but four 12 indicators it adopted to monitor reforms of donors, including the largest (the United States), aid delivery and management, donors commit- do not report on the tying status of their bilat- ted to delegating authority to lead donors, eral ODA. Technical cooperation, which where appropriate, to reduce transaction costs. accounts for more than a third of bilateral ODA The problem is especially severe in Sub-Saha- and is largely spent on source-country expertise, ranAfrica,wherethedonorfragmentationindex is essentially a form of tied aid. Although sub- for 2003 is 81. The high degree of donor frag- stantially smaller, food aid (excluding humani- mentation is especially surprising given that aid tarian assistance) is mostly tied as well. tends to be concentrated in relatively few coun- Tying aid is costly for recipients. A recent tries:60percentofbilateralaidtotheregiongoes OECD study finds that untied food aid can to 10 countries. But although donors have their reach up to 50 percent more beneficiaries than 172 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 I N C R E A S I N G A I D A N D I T S E F F E C T I V E N E S S does tied aid.56 Other studies have also found countries--such countries receive only about that untying (project) aid yields sizable sav- half of promised aid. The data also show that ings.57 More progress on untying categories of aid does not counter large income shocks. aid that are currently tied and broadening cov- Among countries experiencing adverse macro- erage to other developing countries would economic shocks equivalent to 5 percent or improve the effectiveness of aid. DAC members more of GDP, only a fifth saw higher aid. are considering several options to expand the scope of recommendations on untying aid. At Progress on Harmonization, the recent Paris High Level Forum on Aid Alignment, and Results Effectiveness, DAC donors agreed to continue to make progress on untying aid and to moni- Aid is more effective when it is aligned with tor this progress through an indicator that mea- recipients' priorities, when it reduces transaction sures the share of bilateral aid that is untied.58 costs through harmonized processes and proce- dures and donor coordination, and when it is predictable. Related to such efforts is the need Reliability of Aid Flows foraclearerfocusonmanagingfordevelopment Given the large size of official flows relative to results. An overarching principle of the harmo- the incomes of many countries, variations in nization and alignment agenda is that donors these flows can cause problems. Volatile, unre- should support country-owned strategies for liable aid flows can undermine budget manage- growth and poverty reduction--in the form of ment in recipient countries and efforts to poverty reduction strategies or equivalent develop medium-term expenditure frameworks. national development plans--and base their In poor countries aid shortfalls are typically off- programming on the needs and priorities identi- set by cutbacks in spending, and sometimes by fied in these strategies. In addition, development tax increases.59 Improving the reliability of aid assistance should be provided in ways that build is important to increasing its effectiveness. It is onpartners'sustainablecapacitytodeveloppoli- also important for effective scaling up of assis- cies, implement them, and account for these tance: Countries that commit to sustained activities to their people and legislatures. reforms should be assured of timely, more pre- dictable, and longer-term aid commitments. The I M P L E M E N T I N G A L I G N M E N T predictability of aid will be monitored using the A N D H A R M O N I Z A T I O N indicators agreed under the Paris Declaration, The 2003 Rome High Level Forum provided an to minimize gaps between aid commitments impetus for advancing alignment and harmo- (under agreed schedules in annual or multiyear nization, and this global agenda was the focus frameworks) and actual disbursements. of the recent Paris High Level Forum--where Although donors are beginning to pay more ministers and senior officials from more than 90 attention to aid volatility and predictability, developed and developing countries and 25 cross-country data reveal no significant heads of multilateral and bilateral donor agen- improvement in these areas. Cross-country cies reaffirmed their commitment to the Rome data for 1995­8 and 2000­3 indicate that aid Declaration. Through the Paris Declaration, continues to be more volatile than fiscal rev- donors and partners agreed to mutual account- enue.60 Moreover, the volatility of aid relative ability in carrying out the partnership commit- to revenue appears to have edged up: The mea- ments made by both sides. The international sure of the volatility of aid relative to revenue development community has agreed to measure in 2000­3 is nearly twice the median value of progress on aid effectiveness using 12 indicators 1995­8. Aid to poor countries is also more (table 5.2). The indicators cover dimensions of variable than these countries' GDP.61 In addi- ownership, alignment, harmonization, manag- tion, aid commitments remain poor predictors ing for results, and mutual accountability. To of disbursements, particularly for the poorest track and encourage progress at the global level G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 173 C H A P T E R 5 TABLE 5.2 Indicators of progress (on ownership, harmonization, alignment, and results) To be measured nationally and monitored internationally OWNERSHIP TARGET FOR 2010 a 1 Partners have operational development strategies--number of partner countries with national development At least 75% of strategies (including PRSs) that have clear strategic priorities linked to medium-term expenditure frameworks partner countries and reflected in annual budgets ALIGNMENT 2 Reliable country systems--number of partner countries with procurement and public financial management Target to be set systems that adhere to broadly accepted good practices or have a reform program in place to achieve by September 2005 these 3 Aid flows aligned with national priorities--percent of aid flows to the government sector that is reported 85% of aid hours in partner countries' national budgets reported on budgets 4 Strengthen capacity by coordinated support--percent of donor capacity-development support provided Target to be set through coordinated programs consistent with partner countries' national development strategies by September 2005 5 Use of country systems--percent of donors and of aid flows that use partner country procurement and/or Target to be set public financial management systems in partner countries, which adhere to broadly accepted good by September 2005 practices or have a reform program in place 6 Strengthen capacity by avoiding parallel implementation structures--number of parallel project Target to be set implementation units per country by September 2005 7 Aid is more predictable--percent of aid disbursements released according to agreed schedules in At least 75% of annual ormultiyear frameworks such aid released on schedule 8 Aid is untied--percent of bilateral aid that is untied. Continued progress HARMONIZATION 9 Use of common arrangements or procedures--percent of aid provided as program-based approaches b At least 25% 10 Encourage shared analysis--percent of field missions and/or country analytic work, including diagnostic Target to be set reviews, conducted jointly by September 2005 MANAGING FOR RESULTS 11 Results-oriented frameworks--number of countries with transparent, monitorable performance assessment 75% of partner frameworks to assess progress against national development strategies and sector programs countries MUTUAL ACCOUNTABILITY 12 Mutual accountability--number of partner countries that undertake mutual assessments of progress in Target to be set implementing agreed commitments on aid effectiveness, including those in this (Paris) Declaration by September 2005 Source: OECD 2005e. a. Existing targets will be confirmed or amended by September 2005. b. See OECD 2005e, appendix A. and among countries and agencies, participants (WP-EFF) survey,62 Strategic Partnership for at the Paris forum also agreed to set targets for Africa (SPA) surveys, and the United Nations 2010 for 11 of the 12 indicators. Five prelimi- Economic Commission for Africa (UNECA)­ nary targets were agreed during the forum, and DAC Mutual Review of Development Effec- these and the others will be finalized and tiveness in the Context of the New Partnership adopted before the UN General Assembly sum- for Africa's Development (NEPAD) show that mit in September 2005. partner countries and donors are working Evidence from an OECD DAC Working together and taking actions to improve coor- Party on Aid Effectiveness and Donor Practices dination and aid effectiveness (box 5.5). The 174 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 BOX 5.5 Alignment and harmonization: country examples show a wide variety of approaches Cambodia. Establishing country ownership takes time, patience, perseverance, and resources. To address problems of poor aid management, Cambodia's government and donors have launched var- ious initiatives since a new coalition government was formed in the late 1990s. The multidonor, three- year Technical Cooperation Action Plan was approved in 2001 to help the government strengthen its capacity to formulate and implement sound macroeconomic policies and manage public finances. In the past few years Cambodia has started to connect to the global debate and is now a signatory to the Rome and Paris declarations on harmonization. A number of recent developments have sig- nificantly improved prospects for moving toward more productive use of resources. For example, the government has committed to merge three donor-funded strategies--the Second-Socio-Economic Development Plan 2001­5 (supported by the Asian Development Bank), Cambodia's Millennium Development Goals (supported by the United Nations Development Programme), and the National Poverty Reduction Strategy (supported by the World Bank and IMF)--into one poverty-focused national development plan for 2006­10. Donors have responded with common country strategy development processes, joint analytic work, joint support for public financial management reforms, sectorwide approaches (SWAps), and other types of collaboration. In November 2004, together with local donors, the government developed a National Action Plan for Harmonization and Alignment to guide implementation of its commitment to the Rome and Paris declarations on ownership, lead- ership, capacity building, harmonization, and alignment. Government-donor collaboration on pub- lic financial management reforms was further strengthened under a SWAp launched in late 2004. Ethiopia. In many countries where national systems are inadequate for donors to rely on, the donor community has bolstered collective action on capacity development efforts to help strengthen the systems. Recognizing that public sector capacity building efforts were largely supported by frag- mented donor projects and ad hoc financing, the government launched a consolidated five-year pro- gram to rapidly scale up capacity building and institutional transformation efforts in six crucial areas: a regional decentralization program that rapidly transferred delivery responsibilities--with substantial fiscal and administrative authority--to rural jurisdictions; municipal reforms designed to restructure and empower urban centers; reformulated civil service reforms increasingly focused on strengthening the public sector fiduciary framework and service delivery results on the ground; initiatives to enhance connectivity and develop e-government applications and school Internet pro- jects, efforts to reform the justice system (including the courts, lawmaking and law enforcement institutions, and the legislative process); and ongoing tax reforms that strengthen tax policy and administration at the federal and regional levels. In 2003 the scaling up process resulted in a SWAp: Seven donors combined their financial support under the program and aligned their procedures with the government's planning, budgeting, and disbursement procedures. Honduras. The Honduran PRS provides a framework for donors to align around country pri- orities. An executive office has been established to unblock project implementation bottlenecks and accelerate the achievement of results, and the government has begun negotiating with donors to restructure some operations for greater program coherence. Donors have cooperated by making institutional changes such as decentralized funding approvals, accepting lead donor roles in some areas, carrying out joint analytic work, and coordinating fiduciary requirements. Middle-income countries. Many middle-income countries have not elaborated formal harmo- nization and alignment efforts, but have simply pursued relevant aspects of the agenda. In Brazil, India, Mexico, and Morocco donor assistance often involves SWAps and increasingly relies on coun- try systems for financial management, disbursements, and procurement. Brazil's Bolsa Familia SWAp, for example, integrates several pro-poor federal programs into one comprehensive program covering health, education, and nutrition, with program implementation streamlined into a single administrative and management mechanism. Poland's Road Maintenance and Rehabilitation Pro- ject is fully aligned with the government's program and budget cycles, and implementation relies heavily on country systems for financial management, accounting, and environmental safeguards. Source: World Bank staff. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 175 C H A P T E R 5 BOX 5.6 Mozambique's performance assessment framework-- for donors All African multidonor budget support arrangements define a framework for periodically assessing country performance. In an innovative twist, Mozambique's government and donors have agreed to establish a performance assessment framework for the donor community as well. The objective is to monitor donor behavior on commitments, expose noncompliance and weaknesses to peer pres- sure, and strengthen donor accountability to government. Key features of this arrangement include: · Donors will identify the indicators to be assessed, which subsequently will be discussed with and vetted by the government. · Donor performance will be assessed by an independent team and subject to periodic discussion by the government and donor peers. · The donor performance assessment framework will be linked to an action plan and timeframe for its implementation. · Annual donor performance reports will be released publicly. · The framework will be continuously adapted based on collective and individual donor assess- ments. Source: Gerster and Harding 2004. SPA surveys and the UNECA-DAC report find ming to the needs and priorities identified in that while progress is being made in African PRSs. More than four-fifths of the donors countries, it has been uneven and concen- consulted indicated they rely on PRSs to pro- trated in countries that have worked longest gram their country assistance, and only a fifth and hardest to take ownership of the aid expressed reservations (figure 5.11).64 But the process (box 5.6). By the end of 2004 more WP-EFF and SPA surveys found only a small than 60 partner countries (worldwide) and 40 number of collaborative approaches to har- bilateral and multilateral agencies were monizing donor assistance around agreed engaged in harmonization and alignment country priorities, and little evidence that, activities. The challenge remains to ensure overall, donors have adapted their programs that the broad range of activities taking place, in support of national growth or poverty and the energy and creativity driving them, strategy priorities. Furthermore, in a number help increase aid effectiveness. of countries growth and poverty strategies are still broad, and while donors may be aligned Aid management and alignment. The WP- on broad categories--that is, priority sec- EFF has begun to quantify progress toward tors--this may not imply alignment on core the harmonization and alignment commit- priority areas. ments adopted in the Rome Declaration in 2003. After the Rome meeting a set of coun- Aid flexibility and predictability. The WP-EFF try-level indicators were developed, and the survey found that for countries that receive bud- WP-EFF surveyed harmonization and align- get support, 60 percent of donors provide mul- ment in 14 partner countries self-identified at tiyear commitments and timely commitments, the Rome forum as being interested in pursu- and 69 percent disburse budget support on ing harmonization efforts.63 The working schedule (see figure 5.11). Effective public party's survey found that donors are internal- expenditure management is an important pre- izing the principle of aligning their program- requisite for efficient use of budget support, and 176 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 I N C R E A S I N G A I D A N D I T S E F F E C T I V E N E S S FIGURE 5.11 Progress on alignment, harmonization, and predictability of aid needs to be accelerated Do donors rely on PRS to program Is budget support predictable? their country assistance? Percent of donors Percent of donors 90 80 70 70 68 60 66 50 64 40 79 62 69 30 60 20 58 60 60 10 21 56 0 54 Yes Yes but... Donors Donors Donors making making making multiannual timely timely Use of country systems by donors commitments commitments disbursements Are donors delegating cooperation? Procurement 33 Percent of donors Disbursement 31 60 Reporting 50 29 40 Monitoring & 28 Evaluation 30 57 Audit 27 20 Environmental 10 21 21 23 Impact Assessment 0 0 0 10 20 30 40 Yes Yes but... No but... No Percent of donors Source: OECD 2004b. countries are making progress on strengthening The UNECA-DAC report finds that despite these systems and public financial management an increase in budget and sector support (see above). Still, further progress on aid flexi- among good performers, there has been little bility is hampered by insufficient clarity about overall change in the aid landscape in Africa.65 country policy and investment priorities and the Projects are still the dominant mode of aid absence of a robust medium-term framework delivery, particularly for bilateral assistance, that links these priorities to country budget and and are often administered outside partner spending decisions and timetables. Also, there is oversight and control. In addition, capacity considerable variation in donor behavior across development efforts continue to fall outside countries. While 93 percent of donors make mainstream aid coordination and effectiveness multiyear commitments on budget support in efforts: They are still invariably piecemeal, Tanzania and 79 percent in Mozambique, only atomistic, and supply driven. But coordinated 40 percent do so in Bangladesh--and a mere 20 multidonor budget support efforts are emerg- percent in Zambia. ing in several countries, particularly where aid G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 177 C H A P T E R 5 relationships are characterized by mutual trust The SPA survey shows that sector support and accountability. operations are an important aid delivery mechanism for promoting and consolidating Limited use of country systems. Donors con- harmonization and alignment. The survey tinue to make limited use of country systems. concludes that strong elements of harmo- One of the main goals of the Rome agenda was nization in sector programs included joint to provide development assistance in ways that consultations with stakeholders, analytic build partners' sustainable capacity to develop work, partner reviews and government policies, implement them, and account for reporting, and monitoring and evaluation. these activities to their people and legislatures. Harmonization was weaker on procurement This means increased reliance on partners' sys- arrangements, disbursement mechanisms, tems and procedures to manage aid. Yet few of financial management, technical assistance, the donors active in the 14 countries surveyed and capacity building. by the DAC Working Party reported using partner systems (for financial reporting, dis- Delegated cooperation. Donors are also pur- bursement, procurement, audit, monitoring, suing delegated cooperation in some areas. and evaluation), and there are significant dis- The Rome Declaration encourages donors to parities between them in this area. Of course, intensify their efforts to work through dele- country systems must meet certain criteria for gated cooperation at the country level as a donors to rely on them. means of reducing transaction costs by making On average, the donors reported that only greater use of the comparative advantages of 29 percent of their projects are managed using individual donors. For instance, in a delegated partner systems and procedures. Results ranged cooperation agreement being prepared for from 23 percent of donors who said they rely Ethiopia, Sweden will delegate its role in the on country systems for environmental impact health program to Norway, while Norway will assessments to 33 percent who use country pro- delegate its role in the education program to curement systems. Additional technical work Sweden. The level and form of delegation vary has been done since Rome and Marrakech to considerably, and the DAC Working Party sur- develop criteria for assessing and strengthening vey found relatively few examples of delegated country systems and for harmonizing donor cooperation. Only 21 percent of donors across requirements around them. In several cases 14 countries reported that they were delegat- these criteria are guiding efforts among groups ing cooperation, and less than 8 percent of of donors to simplify and harmonize fiduciary, donor missions were carried out jointly.66 monitoring, and reporting arrangements. How recipients view donor efforts. The SPA Sectorwide approaches. Sectorwide approaches Budget Support survey asked African govern- (SWAps) are used to provide comprehen- ments to describe their satisfaction with donor sive, coordinated support for country-led behaviors in a number of areas. The results indi- sector programs. In 2003­4 borrowers from cate that donors made some progress between multilateral institutions showed increased 2002 and 2003 (table 5.3). There seems to be a interest in SWAps as a means for aligning higher degree of coordination (if not harmo- around sector priorities. A growing number nization). Moreover, satisfaction rose in coun- of SWAps use existing country frameworks to tries with more experience and higher budget channel and account for funds, becoming an support (Mozambique, Tanzania, Uganda) and integral part of the harmonization and align- fell in countries with less experience and lower ment agenda. In Brazil (health), India (educa- budget support (Benin, Niger, Rwanda). tion), Mexico (rural infrastructure), and Poland Partner countries also viewed donors posi- (roads), SWAps use country systems for pro- tively in areas such as providing timely infor- curement and financial management. mation on planned disbursements (with a 178 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 I N C R E A S I N G A I D A N D I T S E F F E C T I V E N E S S score of 3.8 out of 5.0), aligning disbursements TABLE 5.3 African governments are viewing donor behavior more with national budget cycles (3.6), disbursing at favorably (scale of 1 to 5; 5 is highest) the intended time (3.5), and using government reports with minimal demands for other infor- Area 2002­3 2003­4 mation (3.5). Conditionality coordinated 3.0 3.4 Joint missions or reviews 3.2 3.4 M A N A G I N G F O R D E V E L O P M E N T Reporting requirements minimized 3.2 3.1 R E S U L T S and coordinated The development community has moved Coordinated support on public 3.1 3.3 from conceptualizing to implementing the finance reforms Coordinated support to strengthen 2.7 3.1 global results agenda. Some early progress in statistical systems managing for development results is evident Conditionalities seen as useful 3.1 3.6 at the country and agency levels and across Number of conditions minimized 2.1 aid agencies. Partner countries are beginning to focus on results and are integrating results Source: SPA Budget Support Working Group 2004. in their development strategies. For example, strong strategies for education and health in Ethiopia have helped set a well-prioritized of the results agenda through guidance, train- and -costed PRS program. ing, and information technology systems. Budget processes and public expenditure Both bilateral and multilateral agencies have management efforts have the strongest results strengthened their development effectiveness orientations. In all countries there has been a work and corporate reporting. move to apply the principles of managing for At the global level, aid agencies are working results in line ministries, programs, or cross-cut- more systematically in identifying actions that ting themes. Stronger links are observed in produce results, scaling up support for that Brazil, the Philippines, South Africa, Thailand, work, and ensuring the availability of appro- Vietnam, and Uganda. A number of countries priate data. Work is under way on presenting have also developed strategies to improve their existing experiences in a Sourcebook on monitoring and evaluation systems. Recogniz- Emerging Good Practice in Managing for ing the importance of quality statistical systems Development Results. Aid agencies are seeking for monitoring and evaluation, a few coun- to harmonize results reporting requirements tries--Burkina Faso, Ukraine--have started around national monitoring and evaluation programs for statistical capacity development, systems that help countries manage for results. and strategic plans for statistical systems are Progress is expected in four African pilot coun- being finalized in other countries--Albania, tries in 2005. Aid agencies are also beginning China, India, Kenya, Nigeria, Yemen. work on jointly assessing monitoring and eval- Aid agencies are strengthening the focus uation settings in partner countries and align- on results in their country programs, financial ing capacity building support with national instruments, incentives, and reporting sys- strategies for monitoring and evaluation, which tems. Many agencies are deriving country will be pursued by supporting communities of programming from PRSs and linking country practice in managing for development results. support to a partner's medium-term expendi- ture framework. Emerging practices are being C H A L L E N G E S A H E A D shared and analyzed in the DAC Joint Ven- Progress on harmonization and alignment has ture on Managing for Development Results. been mixed, and that on managing for results All aid agencies have strengthened monitor- is just beginning. The pace of progress needs to ing and evaluations to better ascertain the be accelerated. It will not be easy, because quality and impact of their operations. They achieving harmonization, alignment, and man- are also working to enhance staff ownership aging for results requires intensive work among G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 179 C H A P T E R 5 participants--donors and partner countries-- guided by the development strategies and pri- to remove obstacles. Continued commitment at orities established by partner countries. the highest levels to the harmonization, align- In aid agencies, managing information and ment, and results agenda will be needed for its decision gaps between headquarters and field successful implementation. Participants at the staff is critical to facilitate progress on har- Paris High Level Forum acknowledged that monization. Agencies need to assess their enhancing the aid effectiveness is feasible and accountability regimes and mandates to see necessary across all aid modalities, and they how increased delegation of authority to the committed to concrete actions to address chal- field can promote more effective aid at the lenges that impede progress. country level. Creating incentives for harmo- In partner countries weaknesses remain in nizing and aligning­­at the political, institu- growth and poverty reduction strategies as well tional, and individual levels­­is another as in institutional capacities to manage these critical variable on which more thought and strategies for results. Progress in exercising action are needed. country ownership and leadership of the devel- opment process can be broadened, deepened, Debt Relief and facilitated by strengthening the national development strategy process--for example, by Most debt relief to low-income countries has integrating PRSs with budget processes and occurred under the aegis of the HIPC initiative, widening the participation of key stakeholders including the enhanced version of the initiative in developing the strategies. To ensure mutual introduced in 1999. But donor assistance for accountability, donors should provide compre- debt relief involves more than one-time reduc- hensive, timely, transparent information on aid tions in developing countries' debt levels--it flows, and governments should commit to pub- also requires ensuring that countries have the lic financial reporting that includes clear, mon- capacity and ability to ensure that debt remains itorable, outcome-based targets. at sustainable levels. In addition, recent pro- Among donor agencies, fragmented and posals have suggested that donors introduce uncoordinated assistance at the country level new approaches and programs to ease debt. needs to be minimized and programs aligned with country priorities, processes, and sys- Progress on the HIPC Initiative tems. Also, donors need to help strengthen countries' capacities to implement national For heavily indebted poor countries, debt relief development strategies. Donors should is crucial to create the fiscal space for much- streamline conditionality to focus on the pri- needed increases in spending to promote orities that governments set out in their growth and reduce poverty. Overall, substan- development strategies. To increase donor tial progress has been made in implementing complementarity, agencies should seek ways the enhanced HIPC initiative. By March 2005, of improving cross-country balance and 27 HIPCs--more than two-thirds of the 38 avoid major gaps and overlaps, applying countries that potentially qualify for assistance comparative advantage principles between under the initiative, and accounting for about and among bilateral and multilateral agen- two-thirds of total expected debt relief in net cies. The agreed aim is for donors to commit present value terms--had reached their deci- to use country systems, as soon as they jointly sion points and were receiving relief. Of these, assess them as being robust enough, in at least 15 had also reached their completion points-- four key areas: public financial management; when creditors provide the full amount of debt procurement; monitoring and evaluation; relief committed at the decision points on an and environmental and social safeguards. But irrevocable basis. in determining the most effective modalities Progress on reaching completion points of aid delivery, donors must ultimately be increased in 2004, and three more countries 180 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 I N C R E A S I N G A I D A N D I T S E F F E C T I V E N E S S are expected to reach their completion points their completion points. HIPCs in the interim by mid-2005. For many of the 12 countries in period have benefited from debt relief from the interim stage between decision and com- the Paris Club as well as from several multi- pletion points, maintaining macroeconomic lateral creditors. Ratios of debt service to stability remains a challenge. Although a exports and to fiscal revenues for the 27 number of countries are on track with respect countries that have reached their decision or to their macroeconomic programs, others completion points are estimated to have that have experienced difficulties in program fallen from an average of 16 percent and 24 implementation are pursuing the policy mea- percent in 1998­9 to 7 percent and 12 per- sures needed to bring their economic pro- cent in 2004, respectively (table 5.4). The grams back on track.67 Most of the countries near-term debt service ratios of these coun- in the interim stage have finalized their PRSs tries are below the average for non-HIPC and are making good progress in implement- low-income countries. ing them. Debt relief under the HIPC initiative has Of the 11 countries that have not reached helped countries increase poverty-reducing their decision points, 2 are making significant spending. In the 27 countries that have progress and are expected to reach their deci- reached the decision point, such spending sion points in 2005. For the others, significant rose from an average of 6.4 percent of GDP challenges remain: These countries have been in 1999 to 7.9 percent in 2004--about four affected by domestic conflicts and have pro- times the amount spent on debt service.68 In tracted arrears to various creditors, which has absolute terms, poverty-reducing spending is complicated the design and implementation estimated to have increased from nearly $6.0 of reform programs. billion in 1999 to $10.5 billion in 2004, and The sunset clause of the HIPC initiative is projected to increase to $14.5 billion in has been extended by two years to the end of 2007 (see table 5.4).69 2006, with its application ring-fenced to poor Although creditor participation has countries with unsustainable external debt improved, some non­Paris Club bilateral based on end-2004 data. All IDA-only and and commercial creditors have not commit- Poverty Reduction and Growth Facility ted to providing HIPC relief. Most of the (PRGF)-eligible countries that have not ben- costs attributable to bilateral creditors con- efited from HIPC debt relief and whose exter- tinue to be borne by members of the Paris nal indebtedness (based on end-2004 data) Club. Commercial creditors represent less exceeds the enhanced initiative's thresholds than 5 percent of the net present value cost after the assumed full application of tradi- of relief, in part because of measures by the tional debt relief are potentially eligible for Debt Reduction Facility for IDA-only coun- the initiative. World Bank and IMF staff are tries that have reduced the stock of commer- preparing a preliminary list of countries that cial debt in HIPCs. Moral suasion remains meet this criterion for consideration by the the principal measure for encouraging par- institutions' boards in August 2005. As now, ticipation and discouraging litigation by countries would receive debt relief based on remaining commercial creditors. With the level of debt at the time of reaching the respect to multilateral debt, 23 of the 31 decision point. multilateral creditors have indicated their HIPC relief is projected to substantially intent to participate in the initiative, repre- lower debt stocks and debt service ratios for senting more than 99 percent of the total most HIPCs that have reached their decision debt relief required. points. Net present values of debt stocks in A key premise of the HIPC initiative is that the 27 HIPCs that reached their decision debt relief should be additional to other points by mid-March 2005 are projected to forms of external financing assistance. An decline by about two-thirds once they reach important issue is whether countries receiving G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 181 C H A P T E R 5 TABLE 5.4 Debt service is falling and poverty-reducing spending rising among the 27 HIPCs that have reached their decision points (percent unless otherwise indicated) Actual Estimated Projected Indicator 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Debt service (US$ billions) 3.70 3.18 3.07 2.42 2.44 2.55 Debt service after enhanced HIPC relief (US$ billions) 2.63 2.49 2.55 2.78 Debt service/exports a 16.9 14.5 13.6 10.2 10.1 8.9 7.3 6.3 6.1 6.2 Debt service/ government revenue a 25.2 21.8 21.9 16.5 15.0 13.4 11.7 9.5 9.0 9.0 Debt service/GDP a 3.9 3.4 3.3 2.5 2.4 2.2 2.0 1.7 1.6 1.6 Poverty-reducing expenditure (US$ billions) 5.94 6.02 6.55 7.57 9.07 10.54 12.83 13.53 14.49 Poverty-reducing expenditure/government revenue a 40.9 42.9 44.8 46.6 47.6 46.8 49.1 47.5 46.7 Poverty-reducing expenditure/GDP a 6.4 6.4 6.8 7.4 7.8 7.9 8.6 8.4 8.4 Source: HIPC country documents and IMF staff estimates. Note: Debt service data for 1998 and 1999 reflect debt relief already provided to Bolivia, Guyana, Mozambique, and Uganda under the original HIPC initiative. Data on poverty-reducing expenditure are not available for all countries, particularly for 2003­05. In aggregate, the last available period was used for future years, thus understat- ing the likely level of poverty-reducing spending. a. Weighted average. HIPC debt relief are receiving additional due to HIPC debt relief and the high conces- resources, or whether debt relief crowds out sionality of new debt, the average change other aid flows. Merely observing the size of masked important differences between coun- flows does not provide conclusive evidence of tries. Medium-term projections generally additionality, as there is no way of knowing pointed to stable or declining trends in debt how much aid countries would have received and debt service ratios. The review indicated without the HIPC initiative. There are also that notwithstanding HIPCs' high vulnerabil- substantial difficulties in measurement ity to shocks, sound economic policies and because different donors account for debt close monitoring--using the proposed debt relief in different ways. Debt relief is some- sustainability framework for low-income times explicit, such as through grants for debt countries (see below)--would help prevent relief, and sometimes implicit, such as the reemergence of unsustainable debt. through debt service reductions. The August 2004 HIPC status report, Debt Sustainability based on updates of debt stock and debt ser- vice indicators in post­completion point Continued measures are needed by HIPCs and countries, found that the net present value of by creditors to ensure that debt sustainability debt ratios had climbed since the completion is maintained after completion points, just as points.70 Most of the increase was due to similar measures are needed for other low- interest and exchange rate changes, while income countries. The Boards of the IMF and high exports had significantly lowered debt World Bank have endorsed key elements of a ratios. Debt service ratios for these countries proposed debt sustainability framework for had also increased but remained close to 10 low-income countries aimed at supporting percent on average. While the low level was these countries' efforts to achieve the MDGs 182 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 I N C R E A S I N G A I D A N D I T S E F F E C T I V E N E S S without creating future debt problems and Proposals for Additional Debt Relief keeping countries that have received debt relief under the HIPC initiative on a sustain- Some G-7 members have proposed mecha- able track. In guiding future financing deci- nisms for additional debt relief (box 5.7). sions, the framework rests on three pillars: Further debt relief holds the promise of yield- ing additional development financing beyond · An assessment of debt sustainability what could be forthcoming in the form of guided by indicative country-specific debt additional gross flows, given the broad polit- burden thresholds related to the quality of ical support for debt relief. It could also their policies and institutions. reduce the remaining debt overhang and ease · A standardized, forward-looking analysis pressures to provide new aid to refinance of debt and debt-service dynamics under a existing debt service obligations (so-called baseline scenario and in the face of plausi- defensive lending), enabling a more effective ble shocks. policy dialogue between donors and debtor · An appropriate borrowing (and lending) countries. Debt relief also has the advantage strategy that contains the risk of debt dis- that, to the extent that it is committed irrev- tress. ocably up front, it can provide aid in a pre- Building on initial Board discussions of the dictable and easy to use form. proposed framework in early 2004, and fur- There is a danger, however, that further ther considerations in September 2004, Bank debt relief might instead result in a diver- and IMF staff are preparing a follow-up paper sion of resources that would have gone to that attempts to resolve outstanding issues on increased direct aid flows. Furthermore, rel- the indicative debt burden thresholds, the ative to the alternative of higher new aid interaction of the framework with the HIPC flows, debt relief has a number of potential initiative, and the modalities for Bank-IMF disadvantages. First, it allocates resources collaboration in deriving common assess- according to existing debt stocks rather ments of debt sustainability. It needs to be than need or policy performance, and so stressed, however, that debt sustainability is may prove inconsistent with the principle of not only a resource flow issue. It also depends allocating assistance to countries where it on increasing growth, diversifying exports, would be most effective. Second, debt relief expanding access to global markets, and mit- may reduce the scope for linking assistance igating the effects of exogenous shocks. to the maintenance of good policies, to the IDA financial support to poor countries extent that an irrevocable commitment to will now take systematic account of their vul- debt relief is made upfront. Third, it may nerability to debt. Debt sustainability will be create expectations of further relief in the the primary determinant of the grant and future, increasing the moral hazard associ- credit mix in IDA14, and the joint debt sus- ated with any subsequent lending and hin- tainability framework for low-income coun- dering the development of a credit culture. tries will form the analytical basis to link debt This could prompt creditors to reduce net sustainability and grant eligibility.71 Countries lending in the future. facing the toughest debt problems--most of Any new debt relief initiative would them in Sub-Saharan Africa--will get all their leave an unfinished agenda. Further debt support in the form of grants, while countries relief is inevitably only a small part of a less burdened by debt will receive IDA's highly broader agenda that involves stronger poli- concessional long-term loans, or in a few cases cies in developing countries, more and bet- a mix of grants and loans. The resulting share ter-targeted development assistance, and a of grants in IDA support over the next three supportive international environment for years is expected to be about 30 percent. growth. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 183 C H A P T E R 5 BOX 5.7 Proposals for additional debt relief--moving beyond HIPC Members of the G-7 have put forward a number of proposals for further debt relief beyond the enhanced HIPC initiative. Different motivations drive these proposals. Some proposals reflect a desire to provide additional resources to help low-income countries achieve the MDGs. Others see further debt reduction as a way of increasing the scope for new lending--under the proposed World Bank­IMF debt-sustainability framework--to low-income countries with relatively strong policies, to facilitate the development of a credit culture. Still others aim to eliminate the need for defensive lending and perpetual debt relief for HIPCs. Motivations apart, the proposals differ importantly along several lines, including the scope and modality of debt relief, the conditionality to be applied, and the source or sources of financing. Dif- ferences include: · Whether eligibility for relief should be restricted to HIPCs or be available to all low-income coun- tries. · Which institutions' debt should be relieved. · What percentage of eligible debt should be relieved. · Whether relief should take the form of reductions in debt stocks or debt service payments. · The strictness of conditionality. · How debt relief by international financial institutions will be financed--for example, with con- tributions from bilateral donors or by the institutions themselves. Some G-7 members have pro- posed that the IMF sell some of its gold reserves to cover its debt relief. Source: IMF 2005. Notes 5. European Commission (2004). In 2002 the European Commission adopted an interim target 1. DAC members' ODA consists of bilateral for ODA to average 0.39 percent of gross national ODA--provided directly to developing countries income (GNI) by 2006. that are on DAC's Part I list of aid recipients--and 6. Donors recently agreed to increase contri- contributions to multilateral agencies. Disburse- butions to the International Development Associ- ments of ODA by multilateral agencies may not ation's 14th replenishment (IDA14) by more than equal the contributions they received from donors. 25 percent. Over the next three fiscal years--from 2. OECD (2005a). Paris Club (comprising 1 July 2005 to 30 June 2008--grants are expected bilateral donors) members recently agreed to for- to account for about 30 percent of IDA support. give up to 80 percent of their debt claims on Iraq, 7. Noncash assistance typically involves tech- adding $12­$17 billion to ODA flows in 2005­6 nical cooperation, emergency and distress relief, (in addition to the amounts discussed in the text). and food aid. Debt relief involves a net transfer of For many donors these flows will be in addition to resources if debt is being serviced (that is, is not in their Monterrey commitments. arrears), but amounts to an accounting exercise if 3. Between 2001 and 2003 military expendi- it is not. tures rose by 18 percent in real terms (Stockholm 8. The increase in real ODA between 2001 International Peace Research Institute 2005); and 2003 was $6.6 billion at 2002 prices and such spending dwarfs aid flows. For example, in exchange rates. Debt relief increased by $3.8 bil- 2002 U.S. military spending was $1,217 per lion, technical cooperation by $2.6 billion, and capita and ODA was $46 per capita. At $358 per emergency and disaster relief and food aid by $1.9 capita, EU military spending was also much billion. larger than ODA per capita (Economists Allied 9. Data are for the 14 non-DAC donor coun- for Arms Reduction 2004). tries for which the OECD collects data on devel- 4. Oxfam International (2005). opment assistance. 184 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 I N C R E A S I N G A I D A N D I T S E F F E C T I V E N E S S 10. The Forum on Partnerships for More Effec- for normal borrowing from multilateral develop- tive Development Cooperation, held in February ment banks. 2005, brought together DAC members and a num- 22. UNMP (2005). ber of non-OECD countries involved in support- 23. World Bank (2004b). ing development in developing countries. The 24. Some analysts have argued that developing forum sought to improve coordination and coop- countries often lack a minimum amount of capi- eration among the entire donor community, par- tal--in terms of infrastructure, human capital, and ticularly through better information and public administration--to support modern produc- knowledge sharing. tion activity, so capital above a minimum threshold 11. Middle-income countries receive about a is needed to boost economic activity. According to third of aid. Although these countries are less that argument, the key to breaking out of such dependent on aid, it plays an important role in cat- "poverty traps" is a large infusion of investment in alyzing reforms, helping countries address issues of physical and human capital, which must be funded large pockets of poverty, and providing a buffer predominantly by external sources given limited against shocks. domestic capacity to save. See Sachs and others 12. The increase in real net bilateral ODA (2004) for a poverty trap perspective on Sub-Saha- between 2001 and 2003 was $6.5 billion, with ran Africa; see chapter 2 and Kraay and Raddatz $4.2 billion for debt relief and $1.6 billion for (2005) for empirical evidence on poverty traps. emergency and disaster relief and food aid. 25. UNMP (2005) estimates that in Ghana the 13. The corresponding real increase was $4.4 annual investment in roads required to meet the billion in the Democratic Republic of Congo, $225 MDGs is 2.4 percent of GDP, over three times million in Cameroon, $344 million in Sudan, $123 what the government can afford, and that in million in Tanzania, and $199 million in Ethiopia. Uganda it is 5.4 percent of GDP, more than twice 14. All official flows (ODA and non-ODA) what can be financed domestically. account for a slightly smaller share of resource 26. There is considerable debate in the recent flows--50 percent, as in figure 5.6--because non- economic literature on how aid affects growth. ODA official flows are slightly negative. Some cross-country macro studies find an unam- 15. Official data underestimate remittance biguously positive relationship between aid and flows, and unrecorded remittances may be larger growth. Another set of studies shows more condi- than recorded remittances. tional results, with the effect dependent on the 16. See World Bank (2004c) and chapter 2 for quality of policies and institutions or other coun- a detailed discussion of the private investment cli- try characteristics. A third set of studies finds no mate and its links to growth. effect, or even a negative effect, of aid on growth. 17. Development Committee (2005) analyzes 27. Clemens, Radelet, and Bhavani (2004). the various proposed innovative mechanisms 28. Development Committee (2004); Renzio under discussion. See also Development Commit- (2004). tee (2004) and Reisen (2004). 29. Levy (2004). 18. The IFFIm would be established as a U.K. 30. World Bank (2004a). charitable entity, essentially as a special-purpose 31. UNMP (2005). vehicle for the Vaccine Fund. Negotiations are 32. Of the 47 countries with full PRSPs, 22 under way to establish a core group of donors to have produced at least one annual progress report. fund the pilot facility. 33. See IMF and World Bank (2005) and chap- 19. Reisen (2004). ter 2 for results from the just concluded World 20. Taxes that correct inefficiencies ultimately Bank­IMF poverty-reducing public spending imply an increase in a country's real resources and tracking exercise for HIPCs. the possibility of increased development financing. 34. See Alonso, Judge, and Klugman (2004) for See Development Committee (2004) for a detailed a comparative analysis of PRSs and budget link- discussion of the additionality of various innova- ages in four countries. tive instruments. 35. PRSCs have also facilitated donor coordi- 21. Gap countries are countries that are ineligi- nation and increased aid for budget support. Bilat- ble for IDA financing (because their GNI per eral donors providing budget support include capita is above the IDA cutoff), other than on an Belgium, Ireland, the Netherlands, Sweden, the exceptional basis, and that are not creditworthy United Kingdom, and the United States. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 185 C H A P T E R 5 36. Miovic (2004). Input-level data show that country analyses that find aid to be effective in much larger amounts of resources have been chan- good institutional environments. The study finds neled to basic health, education, and water and the most robust results for the rule of law. In addi- sanitation. tion, geography matters: Projects in Sub-Saharan 37. While the overall performance was stable, countries have less successful outcomes (although there were within-year fluctuations in some areas tropical location does not significantly affect out- of the budget. comes). The study also finds that different institu- 38. Alonso and Utz (2004). tions have different effects on project success. For 39. Priority sectors are broad sectors--such as example, better democratic political institutions education, health, agriculture, and roads--that are result in better outcomes for policy-based loans, assigned priority in budget allocations. Core pri- whereas the success of project loans is facilitated ority areas are items within priority sectors, such by stronger property rights and rule of law. This is as primary health care and primary school educa- consistent with the growth literature, which finds tion. Per capita spending on priority sectors a favorable link between property rights and eco- increased 53 percent between fiscal 1999 and nomic growth. 2002, while spending on core priority areas rose 43. Based on Dollar and Levin (2004). 77 percent. The much larger increase for core pri- 44. Flexible ODA is defined here as total ODA ority areas was due to the donor-funded Primary less special-purpose grants--such as technical Education Development Program. cooperation, debt relief, emergency and disaster 40. Tanzania has about 650 donor projects relief, and food aid. being implemented by sector ministries and local 45. Difficult partnership countries (which governments. One of the four priorities of the Tan- include low-income countries under stress, or zanian assistance strategy agreed to in 2003 by the LICUS) are low-income countries with weak insti- government and development partners is to inte- tutions, defined as those with Country Policy and grate donor funds, including projects, with the gov- Institutional Assessment (CPIA) scores in the bot- ernment budget. To that end, the government has tom two quintiles. created a mechanism linking donor funds to gov- 46. Levin and Dollar (2005). ernment accounts, for donors to use in channeling 47. This model of aid allocation does not reflect funds to projects, nongovernmental organizations, the costs of conflict and the benefits of conflict pre- and the private sector. It has also provided relevant vention for growth and poverty reduction. See training to interested donor agencies. By August Chalmers (2004) and Chauvet and Collier (2004) 2004, however, only four of Tanzania's develop- for evidence on the potentially large effects of aid ment partners had indicated their readiness to use in difficult partnership countries. Aid reduces the this mechanism. See Peretz and Wangwe (2004). risk of conflict by raising economic growth. 41. Alonso (2004). Although priority sectors 48. Kang and Meernik (2004). are seeing higher spending, their share in the total 49. Collier and others (2003). budget is largely unchanged, even with HIPC 50. By contrast, aid has typically been inade- funds earmarked for priority sectors. Real spend- quate and mistimed, phasing out just when it ing--including real per capita spending--on pri- should be phasing in. ority sectors and core priority areas increased 51. See OECD (2005c) for a discussion of how between the start of the PRS, in 1999, and 2002. donors are moving forward on improving the Between 1998 and 2002 real per capita spending effectiveness of their aid to fragile states. on priority sectors and core priority areas doubled. 52. Difficult partnership countries, especially Allocations of increased spending between core countries just emerging from conflicts and post- priority areas have been quite uneven, however. conflict countries, often need to rebuild basic state, 42. As noted, there is considerable debate in civil society, and private sector institutions. recent literature on the impact of aid on growth. A 53. Knack and Rehman (2004). recent study by Dollar and Levin (2005) adds 54. Felix (2005). micro evidence to the macro results in the litera- 55. A 2001 DAC High Level Meeting adopted ture. The study finds a strong link between institu- recommendations to untie ODA to the least devel- tional quality and aid-financed project outcomes. oped countries. The results support the findings of other cross- 56. OECD (2004a). 186 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 I N C R E A S I N G A I D A N D I T S E F F E C T I V E N E S S 57. Aryeetey, Osei, and Quartey (2003) find the Africa participates in the Joint Venture on Pub- savings to be in the range of 11­25 percent; Jepma lic Financial Management, another group under (1991) estimates 15­30 percent. the WP-EFF. 58. See also table 5.2 and OECD (2005e). 64. This is similar, for example, to when donors 59. Gemmell and McGillivray (1998). disagree with specific aspects of partner country 60. See Bulir and Hamann (2003, 2005) and policies (such as resettlement policies). Bulir and Lane (2002). 65. The SPA Budget Support survey finds that 61. World Bank (2005c); Pallage and Robe for Africa as a whole, budget support increased (2001). from about $1.5 billion in 2002 to about $2.5 bil- 62. OECD (2004b, 2005d). The WP-EFF is a lion in 2003. group of bilateral and multilateral donors that 66. OECD (2004b). formed after the Rome forum to monitor and assist 67. IMF and World Bank (2004a). global progress on harmonization and alignment. 68. The definition of poverty-reducing spending 63. The countries were Bangladesh, Bolivia, varies by country, but commonly includes primary Cambodia, Ethiopia, Fiji, the Kyrgyz Republic, education, basic health, and rural development. Morocco, Mozambique, Nicaragua, Niger, Sene- 69. Some countries are implementing public gal, Tanzania, Vietnam, and Zambia. These expenditure management systems to ensure the countries, along with Mali, are associated with efficiency of poverty-reducing spending. See IMF the work of the Task Team on Harmonization and World Bank (2005). and Alignment, a subgroup of the WP-EFF. In 70. IMF and World Bank (2004a). addition to the preceding 15 countries, South 71. IDA (2004). G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 187 6 Strengthening and Sharpening Support from International Financial Institutions T his chapter analyzes the support pro- through a large variety of instruments and vided by international financial insti- sectors tailored to country circumstances tutions to help developing countries through decentralized processes; to a large achieve the Millennium Development Goals extent the key to understanding their contri- (MDGs) and related development objectives, bution lies in understanding how and how and sets out priorities for strengthening well those processes are working. The IMF's and sharpening that support. The focus is on product line is simpler, with programs the five largest multilateral development focused on substantive policy issues at a banks--the African Development Bank higher level of execution. (AfDB), Asian Development Bank (ADB), To provide historical context for the chap- European Bank for Reconstruction and ter, figure 6.1 shows development finance Development (EBRD), Inter-American Devel- flows over the past 25 years. During that time opment Bank (IDB), and World Bank--and there was a significant increase in private sec- the International Monetary Fund (IMF). The tor flows--albeit with considerable fluctua- discussion is structured around the four-pil- tions. Measured by gross disbursements, the lared organizational framework developed in contribution of the multilateral development the Global Monitoring Report 2004: country banks grew gradually but steadily through the focus, global and sectoral programs, partner- late 1990s (peaking in 1999) while shrinking ships, and results. relative to private finance--increasing the In applying the framework, the chapter banks' strategic and catalytic role in support- reflects the similarities across the interna- ing policy development and institution build- tional financial institutions and common ing. Net flows also peaked by the end of the directions of change, but also the differ- decade, turning negative in 2002 for the ADB ences--especially in the ways the multilat- and World Bank--reflecting transactions with eral development banks and the IMF middle-income borrowers. IMF support was contribute to progress on the MDGs. Oper- sometimes countercyclical relative to private ating in some ways like the aid agencies con- flows, and sometimes procyclical, with net sidered in chapter 5, the banks work flows negative in some years. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 189 C H A P T E R 6 FIGURE 6.1 Financial flows from the Big 5 multilateral development banks, IMF, and private sources Gross flows to developing countries Net flows to developing countries US$ billions US$ billions 350 300 300 250 250 200 200 150 150 100 100 50 50 0 0 ­50 1980 1985 1990 1995 2000 2003 1980 1985 1990 1995 2000 2003 MDBs IMF Private sources MDBs IMF Private sources Source: World Bank Debtor Reporting System. Multilateral Development Banks poverty reduction strategies (PRSs) or other national strategies--and the implementation In line with the model set out in earlier chap- quality of those programs. The analysis draws ters, the multilateral development banks con- on findings by the banks' independent evalu- tribute to the achievement of the MDGs ation departments and indicates plans for fur- through their support for country policies, ther evaluation studies that can inform future institutions, and investments and for global Global Monitoring Reports. and regional public goods. This section addresses how and how well the banks carry C O U N T R Y O W N E R S H I P out these tasks. The comparative profile in All the multilateral development banks rec- box 6.1 provides a perspective for interpret- ognize the importance of country ownership, ing the observations on the individual banks, with an emerging consensus that country especially with respect to their mix of low- demand, balanced with staff analysis, should and middle-income borrowers. form the basis for the policy dialogue. Low-income countries. The 61 low-income Country Programs countries that are members of multilateral In exploring how the multilateral develop- development banks are home to 2.2 billion ment banks are helping their developing mem- people. Their populations range from around ber countries achieve the MDGs, this section 150,000 people in São Tomé and Principe to examines how the banks approach country more than 1 billion in India. They are islands, ownership, strategies, financial support, and landlocked, peninsulas, and continents, with analytic and capacity-building support. It tremendous diversity across and within coun- reflects the view that the banks' contribution tries. Each faces unique development chal- to achieving the MDGs lies in the relevance of lenges, sharing a common statistic of annual their country programs--especially the links per capita income of $765 or less. They contain between their country strategies and national more than 70 percent of the world's people 190 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 BOX 6.1 Profile of the "Big 5" multilateral development banks Together the five biggest multilateral development banks--the African Development Bank (AfDB), Asian Develop- ment Bank (ADB), European Bank for Reconstruction and Development (EBRD), Inter-American Development Bank (IDB), and World Bank--commit and disburse about $35 billion a year. These banks share many character- istics. But they also have differences--in country coverage, mandate, voice and ownership, and location of work-- that influence how they respond to the challenge of helping countries achieve the MDGs and other development goals. Country coverage. Most developing countries are eligible to borrow from two of the Big 5 multilateral develop- ment banks: the World Bank and their regional bank. Exceptions include countries in the Pacific that are members of the ADB and not the World Bank (Cook Islands, Nauru, Tuvalu), countries that are members only of the World Bank (Antigua and Barbuda, Dominica, Grenada, Iran, Iraq, Jordan, Lebanon, St. Kitts and Nevis, St. Differences in Big 5 client bases Lucia, St. Vincent and Grenadines, Syria, Turkey, Yemen), and countries that are members of the ADB, EBRD, and World Bank (Azerbaijan, Kaza- Percent of client countries khstan, Kyrgyz Republic, Tajikistan, Turkmenistan, 100 7 4 Uzbekistan). 8 90 16 23 7 Differences in the income mix of the banks' 27 80 developing country members translate into very different client bases. The AfDB has the largest 70 25 shares of low-income members, while the EBRD 23 60 52 and IDB have the largest shares of middle-income members (see top figure). The ADB and the World 50 46 77 Bank are in the middle. Accordingly, average 40 income levels vary significantly for bank clients 36 46 (see second figure). 30 The relative importance of different funding 20 sources also varies for the different categories of 23 33 10 clients. For investment grade and other emerging 18 12 13 market economies, private financing provides up to 0 4 95 percent of inflows. For the others the private AfDB AsDB EBRD IDB WB share is much lower. These variations translate into Investment grade Core MIC differences across countries in the importance of the Core LIC LICUS multilateral development banks' financing role rela- tive to their policy and catalytic role. A third consideration is the size of borrowers, Average incomes of Big 5 client countries particularly between large states (more than 100 mil- lion people) and small states (less than 1.5 million Average GDP per capita, 1995 US$ people). There are nine large states, with one in the 4000 AfDB (Nigeria), five in the ADB (Bangladesh, China, India, Indonesia, Pakistan), one in the EBRD (Rus- 3500 sia), and two in the IDB (Brazil, Mexico). Small 3000 states cut across the spectrum of country classifica- tions, with Barbados being investment grade and the 2500 Solomon Islands a low-income country under stress, 2000 with most falling in between--whether middle 1500 income or low income--and more aid-dependent than larger states. Small states also cut across the 1000 multilateral development banks, accounting for 500 20­30 percent of country clients in the AfDB, IDB, and World Bank and more than 35 percent in the 0 AfDB AsDB EBRD IDB WB ADB, but less than 5 percent in the EBRD (see top figure, next page). G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 191 BOX 6.1 (continued) Mandate. The mandates of the AfDB, ADB, IDB, Small states in the Big 5 (percentage of client countries) and World Bank are similar: promoting growth and development and reducing poverty. The EBRD's Percent of client countries mandate is to promote transition and private sector 40 development. The mandates of the EBRD and 35 AfDB, ADB, and IDB also include an important regional dimension--to focus on regional and sub- 30 regional projects, programs, and trade. 25 Voice. The Big 5 differ in their borrowers' shares 20 of bank ownership, ranging from low in the EBRD to high in the AfDB (see middle figure, this page). 15 But the influence of nonborrowers is affected by the 10 role played by the banks' concessional windows, 5 which are heavily supported by nonborrowing donors. In the AfDB concessional lending accounts 0 for 44 percent of total lending; in the World Bank, AfDB AsDB EBRD IDB WB 40 percent; and in the ADB, 27 percent. The IDB has a concessional Fund for Special Operations that accounts for 7 percent of all lending. Also relevant is the process for selecting the banks' presidents-- Borrower shares in Big 5 ownership with the heads of the ADB, EBRD, and World Bank traditionally selected from a developed country and Percent of ownership the heads of the AfDB and IDB from a developing 60 country. Location of work. A final issue is the location 50 of the banks and their work. The headquarters of the EBRD, IDB, and World Bank are in G-7 coun- 40 tries, while the AfDB and ADB are in borrower countries. Equally important is the location of 30 work and staff. Two parameters are key: coverage of field offices and roles and responsibilities. Most 20 of the Big 5 have full or fairly full field presence in their developing member countries (see last figure, 10 this page). The exception is the AfDB, which had 0 closed its field offices because of problems but is AfDB AsDB EBRD IDB WB establishing new ones in 25 countries, following the example of the other Big 5 and lessons learned from recently established offices in Egypt, Big 5 decentralization Ethiopia, Gabon, Mozambique, Nigeria, Senegal, (percentage of member countries with bank office) Tanzania, Tunisia, and Uganda. All the Big 5 con- sider project administration a key task of their Percent of client countries country offices. But the ADB, EBRD, and World 100 Bank also see a critical role for their country offices 90 in strategy formulation and program design, with 80 most World Bank country directors located out- 70 side Washington, D.C. 60 50 40 30 20 10 0 AfDB AsDB EBRD IDB WB Source: Staff of the Big 5 multilateral development banks. S T R E N G T H E N I N G A N D S H A R P E N I N G S U P P O R T F R O M I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S living on less than $1 per day and 60 percent tion and the other MDGs. The more than of those living on less than $2 per day. They 400 million poor people living in these coun- are eligible for concessional financing from tries share bleak socioeconomic indicators, the multilateral development banks--from with per capita income levels half, and child the World Bank's International Development mortality rates double, those in other low- Association (IDA) and, in their respective income countries. Six LICUS are also small regions, from the African Development Fund, states--Comoros, The Gambia, Guinea-Bis- Asian Development Fund, and Inter-Ameri- sau, São Tomé and Principe, Solomon can Development Bank's Fund for Special Islands, and Timor Leste--making them Operations. Low-income members of the particularly vulnerable to economic shocks EBRD are supported by the Early Transition and volatility; they also face unique chal- Countries initiative, under which the EBRD lenges in sustaining support from donors. accepts higher risks in the projects it finances. Clearly, LICUS face the most difficult cir- Each of these facilities explicitly recog- cumstances for meeting the MDGs and nizes PRSs (or national strategies) as the other development goals. Hence the impor- vehicle for the banks to work with in low- tance of focused attention on their special income countries on their MDG priorities.1 needs, a central topic of the recent Senior- All the banks are committed to using the PRS Level Forum on Development Effectiveness process in the dialogue on, and as the start- in Fragile States hosted by the U.K. Depart- ing point of, their country strategies. Recent ment for International Development (DFID) reviews of the PRS approach carried out by and co-sponsored by the European Com- the independent evaluation departments of mission, OECD Development Assistance the World Bank (Operations Evaluation Committee (DAC), United Nations Devel- Department, or OED) and IMF (Independent opment Programme (UNDP), and World Evaluation Office, or IEO) highlight Bank.3 The forum led to support by the strengths and weaknesses of the PRS process, OECD DAC High Level Meeting in March as well as priorities for change.2 (See box 6.2 2005 for a new set of principles for interna- for the findings of the OED review; the IEO tional engagement in fragile states, and an review is discussed in box 6.11.) Building on agreement to pilot them in donor programs these reviews and their recommendations, in seven countries.4 steps are being taken to strike a better bal- Among the 25 LICUS in fiscal 2005, the ance between country ownership and exter- World Bank has been working closely with 15 nal involvement--including by international focus countries, while providing more general financial institutions--and to help countries support to the larger group.5 For the 8 focus broaden domestic participation, develop and countries where the Bank had previously dis- monitor their strategies, strengthen analysis engaged, there have recently been country of the sources of growth and poverty reduc- missions to all, along with analytic work to tion, link ambitious objectives with available regain basic knowledge. These reengagement resources and capacity constraints, and set activities have proved critical in positioning out operational paths for sustained imple- the Bank to move quickly when necessary, as mentation. has happened recently in Haiti, Liberia, and Sudan. Of the $25 million in the LICUS Low-income countries under stress. Among implementation trust fund approved by the low-income countries, low-income countries Bank's Board in March 2004 to support gov- under stress (LICUS) are the most fragile-- ernance and social service delivery in coun- often affected by conflict, and with the tries in arrears to the Bank, grants totaling weakest governance, policies, and institu- $20 million have been approved for the Cen- tions. This translates into severely limited tral African Republic, Comoros, Haiti, progress on and prospects for poverty reduc- Liberia, Somalia, and Sudan. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 193 C H A P T E R 6 BOX 6.2 Independent evaluation of the World Bank's role in poverty reduction strategies A recent review by the World Bank's independent Operations Evaluation Department (OED) found that the poverty reduction strategy (PRS) initiative is relevant to the development challenges in low- income countries and warrants continued World Bank support. But according to OED, the initia- tive has not yet fulfilled its full potential to enhance poverty reduction efforts in low-income countries because it has led countries to focus more on completing documents--which give them access to resources--than on improving domestic policies and practices. Other identified weaknesses include the absence of an effective mechanism for adapting the initiative to different country con- ditions, especially in the context of the weak public sector capacity found in most low-income coun- tries. Moreover, most PRSs pay too little attention to infrastructure, rural development, and other areas with substantial growth and poverty reduction potential. External partners have supported PRS formulation, and changes in donor processes are evident--but donors have not specifically defined whether and how they should change the content of their programs to reflect PRSs. The review also assessed the World Bank's role in the PRS initiative. Most problematic in OED's view, the Bank's process for presenting PRSs to its Board undermines country ownership. The Joint Staff Assessment mechanism was designed to provide the Bank and IMF Boards with an assessment of the soundness of a country's PRS as a basis for support; it was also designed to provide feedback on how a PRS could be improved over time. But OED found these assessments to be of mixed ana- lytic quality and coverage, with limited awareness of their findings and recommendations among stakeholders. On the positive side, OED found that the World Bank has effectively supported national stake- holders in PRS formulation, that Bank lending since the launch of the initiative has increased for countries with PRSs completed through 2003, and that economic and sector work has added value to country planning, with poverty assessments and public expenditure reviews useful for PRS for- mulation. OED also found that the Bank has promoted PRSs as a coordinating framework for donor activities--although apparently with limited success, in light of the evidence. Going forward, OED recommends that the World Bank make changes in: · PRS content, by helping countries address key analytic gaps about the poverty impact of poli- cies and programs. · PRS process, by emphasizing ways of improving country processes for planning, implementing, and monitoring public actions geared toward poverty reduction; placing less emphasis on com- pletion of documents; and developing a review procedure that is more supportive of ownership and more effectively linked to decisions about the World Bank's program. · Partnerships and alignment, by assisting countries in using the PRS as a partnership framework and encouraging government-led aid management and selectivity; and better integrating its assis- tance with the efforts of other partners. Source: OED 2004e. Of the LICUS, 14 are also members of ment, with implementation of the strategy the AfDB, 9 of the ADB, 3 of the EBRD (of to begin later this year. In the meantime the which 2 are also members of the ADB), and AfDB is continuing to implement its Post- 1 (Haiti) of the IDB. Responding to the Conflict Country Facility, approved by its African Development Fund's Deputies in Board in July 2004.6 the context of the recent replenishment The ADB is developing an approach for process, the AfDB is preparing a compre- working with fragile states in the context of hensive strategy for institutional engage- the Asian Development Fund's IX replenish- 194 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S T R E N G T H E N I N G A N D S H A R P E N I N G S U P P O R T F R O M I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S ment. The approach will emphasize highly other development partners. The access to focused interventions at points where assis- international capital markets of many mid- tance can be used effectively, with an dle-income countries reinforces the banks' increased emphasis on strategic partnerships. shared premise that their job is to add value Other issues under consideration include the that private markets cannot or will not-- importance of an initial assessment of crowding in private sector support, not absorptive capacity, use of stakeholder and crowding it out--a factor to be considered partner analysis to refine interventions, when reviewing trends in lending and net instruments that allow flexibility in situa- transfers. tions where existing institutions are essen- tially nonfunctional, and the potential role of COUNTRY STRATEGIES subregional cooperation. The country strategy process forms the basis for multilateral development banks' support Middle-income countries. Some 2.9 billion for country development, and in turn for the people live in middle-income countries, MDGs. In each case the process begins with which range in size from the very small, such the country's own priorities--as expressed in as Dominica (with less than 100,000 people), PRSs or similar national strategies in low- to the very large, such as China (with almost income countries (including plans for Early 1.3 billion people). Relative to low-income Transition Countries in the EBRD) and coun- countries, middle-income countries have try plans in middle-income countries. The greater public and private sector capacity, process takes into account participatory more resources, and better prospects, approaches and performance under earlier although there are large variations across strategies and reflects diagnostic analyses by middle-income countries. Though they have the country, the bank, and partners. Options less poverty than low-income countries, mid- for future support are set out, reflecting the dle-income countries still have too much: likelihood of success in contributing to sus- They are home to almost 30 percent of all tained growth, the MDGs, and other devel- people living on less than $1 a day and 40 opment goals. Throughout this process, the percent living on less than $2 a day. banks' financial, analytic, and capacity build- Few middle-income countries are bound ing support is customized to country needs, by the PRS process, as they are generally not aimed at ensuring the most effective package eligible for concessional funding.7 But they in light of the priorities articulated by the have long been in the development driver's country. seat and are articulate in expressing their All multilateral development banks have views. Most set out clear plans for growth evaluation departments that assess their strate- and poverty reduction in the context of their gies upon program completion, affording annual budget and planning documents, opportunities to test and validate results-- which in turn provide the starting point for including with respect to the banks' contribu- their dialogue with multilateral development tions to the MDGs--and lessons for the future banks (and donors). Multilateral develop- (table 6.1). A recent OED retrospective con- ment banks help middle-income countries cluded that roughly two-thirds of the 70 World through a combination of knowledge, lend- Bank country assistance programs it had ing, and financial services tailored to each reviewed over the past decade had satisfactory country's needs and circumstances. They outcomes, with tailoring to country contexts, strive to ensure that their country strategies strong knowledge bases, and realistic policy respond to the countries' diverse needs, as outlooks considered critical success factors.8 covered by their mandates. By supporting Conversely, the absence of these factors was an policy and institutional reforms, they aim to important ingredient in the third of the pro- catalyze private investment and support from grams judged unsatisfactory. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 195 C H A P T E R 6 TABLE 6.1 Country strategies of multilateral development banks World Bank EBRD Country AfDB Country ADB Country Country IDB Country Assistance Issue Strategy Paper Strategy Paper Strategy Strategy Strategy Basis for strategy's PRS for low-income PRS or national PRS or national PRS for low-income PRS for low-income country vision and countries; national strategy for low- strategy for Early countries; country countries; country objective development plans income countries; Transition Countries; documents for documents for for middle-income country documents country documents middle-income middle-income countries for middle-income for middle-income countries countries countries countries Frequency of bank Every 3 years Every 3­5 years Every 2 years With every new Every 4 years strategy government Progress report Annual Annual Annual Annual Every 2 years Results-based Being launched 1 pilot No No 7 pilots completed; strategy? in 2005 completed; assessment 2 under way under way Strategy completion To be launched Under No, but lessons No, but lessons 7 completed; report? with results-based consideration reflected in reflected in discussed strategies as part of new strategies new strategies with Board results-based strategies Independent 5 completed; 8 completed; 2 completed Conducted for Conducted every evaluationa 4 under way 3 under way every strategy; 8­10 years; 17 completed 70 completed Overall strategy Under way Under consideration Every 5 years No Every 3­4 years retrospective? Source: Staff of the Big 5 multilateral development banks. a. Country program evaluations carried out by the banks' independent evaluation departments are available at www.afdb.org; www.adb,org; www.ebrd.com; www.iadb.org; and www.worldbank.org. Looking to improve their effectiveness, the bank's country strategies and projects, the banks are increasingly focused on including better results frameworks in results, with the AfDB, ADB, and World country strategies and indicators for mea- Bank piloting results-based strategies. The suring progress.9 aim is to sharpen the relevance of the banks' country support programs by focusing on F I N A N C I A L S U P P O R T interventions with the greatest expected Multilateral development banks provide impacts and to improve their implementa- financial support through lending, grants, tion through enhanced monitoring and and debt relief under the Heavily Indebted evaluation using clearly identified indica- Poor Countries (HIPC) Initiative. tors and baselines. The EBRD's country strategies do not have results indicators as Lending. Lending by multilateral develop- such, but they do contain transition indica- ment banks serves two development pur- tors, which are also included in unit busi- poses: financial, and policy and institutional. ness plans. The IDB's Office of Evaluation Recent growth in concessional lending com- and Oversight (OVE) has consistently iden- mitments has been driven by IDA, with sup- tified the need for better "evaluability" of port for Sub-Saharan Africa growing 196 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S T R E N G T H E N I N G A N D S H A R P E N I N G S U P P O R T F R O M I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S FIGURE 6.2 Trends in lending and grant commitments by multilateral development banks Concessional Nonconcessional All regions--RDBs and IDA All regions--RDBs and IBRD US$ billions US$ billions 12 18 16 10 14 8 12 10 6 8 4 6 4 2 2 0 1999 2000 2001 2002 2003 2004 1999 2000 2001 2002 2003 2004 AfDF, AsDF, IDB IDA AfDB, AsDB, EBRD, IDB IBRD Africa--AfDF and IDA IDA grants US$ millions US$ millions 5,500 2,200 5,000 2,000 4,500 1,800 4,000 1,600 3,500 1,400 3,000 1,200 2,500 1,000 2,000 800 1,500 600 1,000 400 500 200 0 1999 2000 2001 2002 2003 2004 2002 2003 2004 AfDF IDA Source: Staff of the Big 5 multilateral development banks. Note: Data are for calendar years. sharply in 2000 and 2004, and for East and For many years there was a proliferation of South Asia in 2004 (figure 6.2). Commit- lending instruments among the multilateral ments for nonconcessional lending have development banks, responding to specific been more volatile. World Bank lending requests from shareholders and clients. More commitments have fluctuated narrowly, fol- recently, attention has focused on the two lowing a sharp correction from a spike in main kinds of instruments--project-based policy-based lending in 1998­9 that and policy-based lending--with the others reflected turbulent conditions in global recognized as variations on these two.10 All financial markets for many emerging market the banks offer project-based lending (or economies. For the regional development investment lending, as it is often called). The banks, trends in nonconcessional lending EBRD does not offer policy-based lending, have been driven by substantial annual vari- but it does have a substantial program in equi- ations in commitments by the IDB, largely ties, equity funds, and guarantees. associated with emergency lending, and Though there are many specific differences strong growth in EBRD commitments, in between project-based and policy-based lend- part, reflecting the appreciation of the euro, ing, they are fundamentally distinguished by in which many loans are denominated. the rules governing the use of the funds they G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 197 C H A P T E R 6 provide, with disbursements of project-based growth and an enhanced focus on measur- lending historically tied to complex require- able results. ments for procurement, financial manage- Grant funding to public agencies took a ment, and environmental assessment, and giant step under the IDA13 replenishment, policy-based lending disbursed in a more allowing for 18­21 percent of the resource untied manner, albeit associated with policy envelope to be used for grants. The African conditionality.11 Recent reforms have nar- and Asian Development Funds have taken rowed the differences between the two instru- similar approaches. Under the recently com- ments. Table 6.2 summarizes the status quo pleted IDA14 replenishment, concerns about in each of the banks, illustrating the trend debt sustainability led to the expansion of toward greater flexibility for both project- grants and mainstreaming of their use for eli- based and policy-based lending: gible countries, based on the World Bank­IMF debt sustainability framework · For project-based lending, reforms are (box 6.3; see also figure 6.2). Grants under moving the banks in the direction of sec- the African Development Fund X replenish- torwide approaches (SWAps) and related ment will follow the same approach, with the approaches, allowing greater reliance on fund using its own performance assessment country systems--where the systems meet ratings for eligible member countries. Simi- agreed standards--and in turn encourag- larly, the grants program under the Asian ing the banks to do more to help countries Development Fund IX replenishment aims to meet those standards. reduce the debt burden of development · For policy-based lending, reforms are finance in the region's poorest countries, help moving the banks toward streamlining poor countries accelerate their transition conditionality, relying more on country from postconflict situations to peace and sta- ownership and selectivity to align flows of bility, combat HIV/AIDS and other infectious financial resources with the policies and diseases, and undertake priority technical institutions needed to ensure their effective assistance. use--and in turn encouraging the banks to help countries design and implement the The HIPC Initiative and debt sustainability. needed reforms, often in advance of actual Along with the World Bank and IMF, the lending. regional multilateral development banks have participated in the HIPC Initiative. The esti- Grants. Multilateral development banks mated combined cost to AfDB and IDB have long provided grant facilities, whether broadly equals the cost to the IMF and is half funded out of net income or donor funds. the size of the cost to the World Bank. The Traditionally, these have taken the form of ADB is agreeable, in principle, to providing small grants to countries, public agencies, HIPC relief; however, none of its members and private entities to carry out specific has requested it. tasks. Such grant funding continues at all Cooperation on debt relief and sustain- the banks--including on a large scale ability has taken on a new dimension, with through the IDB's Multilateral Investment the African and Asian Development Funds Fund (MIF), which together with its part- and IDA starting to allocate grants and ners has directed more than $2 billion in credits based on debt sustainability consid- technical assistance and investment projects erations, and with announcements by the for private sector development. Replenish- G-7 and others of their interest in further ment negotiations for MIF II are expected debt relief. Plans are under way for the to be finalized in April 2005, with a clear regional development banks to collaborate focus on poverty reduction and economic on debt sustainability analysis--using the 198 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 TABLE 6.2 Lending instruments of multilateral development banks AfDB ADB EBRD IDB World Bank Project-based lending Available? Yes Yes Yes Yes Yes Share of commitments 77 81 81a 71 78 (IDA) in fiscal 2004 (percent) 61 (IBRD) Recent reforms Sectorwide SWAps; scope SWAps; SWAps; approaches for use liberalization liberalization (SWAps) identified of expenditure of expenditure eligibility eligibility Forward agenda Simplification Developing similar Eliminating Increasing use of proposals on minimum country systems in liberalizing disbursement procurement; expenditure periods and piloting use of eligibility "matrix" for foreign country systems exchange financing;b for environmental increasing use of and social country systems safeguards; reviewing conditionality Policy-based lending Available? Yes Yes No Yes Yes Share of 23 19 29 22 (IDA) commitments 39 (IBRD) in fiscal 2004 (percent) Statutory limit on 25 20 Under New Shares amount or share Lending Framework monitored (percent unless (NLF):b ordinary regularlyc otherwise indicated) capital, $9.8 billion in 2005­08; Fund for Special Operations (FSO), $100 million a year Recent reforms Development Scope for use None From adjustment budget support of program-based lending to loan policy approaches identified development policy lending Single-tranche Yes Yes Yes for Yes operations ordinary capital, permitted? under NLF;b No for FSO Stance on Streamlined: Country ownership None explicit Minimize legally conditionality fewer and simpler essential binding conditions Forward agenda Further streamlining Review of program- NLF eliminates Review of of conditionality based approaches limits on conditionality under way disbursement periodsb under way Source: Staff of the Big 5 multilateral development banks. a. Remainder is equities, equity funds, and guarantees. b. Pending approval by Board of Governors. c. With regard to IDA, the IDA14 Deputies noted that Development Policy Operations (DPOs) should remain below 30 percent of total IDA commitments during the IDA-14 period. Management will monitor annually the overall share of DPOs in IDA countries. If it is projected that it could exceed 30 percent for any year, management will report that projection to the Executive Directors for review and guidance. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 199 C H A P T E R 6 BOX 6.3 Grant financing in the African and Asian Development Funds and IDA Recent empirical research has emphasized the need to fully consider the specific factors that affect debt sustainability in low-income countries. It calls for country-specific external debt thresholds that take into account the importance of policies and exogenous shocks. This recommendation emerges from the research finding that the risk of debt distress in low-income countries is inversely correlated with the quality of policies and institutions in these countries, and positively correlated with the sever- ity of shocks that may affect them. This research has also formed the basis for a new joint World Bank­IMF debt sustainability framework for low-income countries. Additional analysis of the risks associated with exogenous shocks and how country responses might be strengthened is under way-- with due consideration being given to the role to be played by the IMF and other partners. African Development Fund. During the recently concluded discussions for the African Devel- opment Fund X replenishment, donors recommended that terms of financing be based on analyses of country prospects for debt sustainability, and it was agreed that eligibility for the fund's grants will be based on the World Bank­IMF debt sustainability framework. This means that eligibility will be guided by the same policy-dependent external debt thresholds as used for IDA14, although the African Development Fund will continue using its own country policy and institutional assess- ments to evaluate the performance of its member countries. Meanwhile, the share of grants has been more than doubled under this replenishment, to nearly 45 percent. Under the African Development Fund IX replenishment, as under IDA13, the grant share was limited to 18­21 percent of total resources and covered multiple objectives. Asian Development Fund. Negotiations for the Asian Development Fund IX replenishment were concluded before the IDA14 and African Development Fund X negotiations were finalized. The Asian Development Fund's IX grants program is similar to the IDA13 and African Development Fund IX programs, incorporating a 21 percent limit on the overall grant share and broad coverage, including grants for debt-vulnerable poorest countries, postconflict countries, HIV/AIDS opera- tions, and priority technical assistance. Donors recommended that the Asian Development Fund IX grants program be assessed during the fund's midterm review and that the fund coordinate closely with the World Bank and IMF on debt sustainability issues. IDA. Participants in the IDA14 replenishment discussions recommended that debt sustainabil- ity be the primary determinant of the program's grant and credit mix. They agreed that IDA should adopt the Bank­IMF debt sustainability framework for low-income countries as the analytic basis to link debt sustainability and grant eligibility in IDA14. Therefore, unlike in IDA13, grants in IDA14 will no longer be allocated according to multiple, special-purpose eligibility criteria. In IDA13 the overall grant share was expected to fall between 18 and 21 percent of the total resource envelope, covering postconflict countries, countries with per capita gross national income below $360 a year, debt-vulnerable poorest countries, and HIV/AIDS and natural disaster relief projects. Under the new grant allocation system the share of grants in total IDA financing will emerge from a country by country analysis of the risk of debt distress. The resulting overall grant share is expected to be around 30 percent. Sources: Kraay and Nehru 2004; IMF and World Bank 2004a; African Development Fund 2004; Asian Development Fund 2004; World Bank 2005f. new debt sustainability framework (see box mended by OED, which had found that the 6.3)--to provide a common platform for World Bank and its partners did not always judgments on the mix of financial assistance calibrate the size and financing of their provided to low-income countries. This also assistance to recipients' debt carrying moves in the direction previously recom- capacity.12 200 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S T R E N G T H E N I N G A N D S H A R P E N I N G S U P P O R T F R O M I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S Cross-country determinants of financial sup- FIGURE 6.3 Policy and poverty selectivity of aid from multilateral port. While within-country lending and development banks, 2003 other resource allocation decisions are determined through country strategy and 9 programming processes, cross-country allo- 8 7 cations are determined differently. To allo- 6 cate their scarce concessional funds in 5 low-income countries, the four banks with 4 3 concessional windows--the AfDB, ADB, 2 IDB, and World Bank--follow broadly sim- 1 0 ilar performance-based allocation processes. ­1 Country policy and institutional assess- ­2 ­3 ments are carried out by staff as part of an ­4 allocation formula that also takes into ­5 ­6 account population, degree of poverty, and AfDF AsDF IDB Fund for IDA Bilateral aid track record for effective use of multilateral Special Operations development bank funds. As discussed else- Policy selectivity Poverty selectivity where in this report, the criteria used by the banks are converging, as are the scores for Sources: Dollar and Levin 2004; World Bank staff estimates. countries rated by two banks. Recent research has examined the selec- tivity of the concessional assistance provided by the multilateral development banks and service delivery to the most vulnerable other agencies. The findings suggest that groups, in some cases relying on trust fund selectivity in aid allocation by the banks, as support. measured by the policy and poverty elastici- For middle-income countries the level of ties of their aid, is generally high--both the banks' support is determined by institu- absolutely and relative to bilateral donors-- tional financial constraints, country credit- and has held up well in recent years, with a worthiness considerations, and country modest trend toward further improvement demand factors. In recent years--especially (figure 6.3; see chapter 5, table 5.1, for more in the context of the negative net transfer details on the calculation of these elastici- positions of the ADB, IDB, and World ties). The Asian Development Fund's alloca- Bank--country demand has received much tions are the most targeted to the poor attention from the banks, reflecting "cost of countries within its region, followed by doing business" concerns cited by develop- IDA's. On policy selectivity, the African ing country members as a factor discourag- Development Fund is the most selective for ing them from borrowing from the banks for countries with good policies and institutions infrastructure and related investments,13 within its region, followed by the Asian along with other constraints such as limited Development Fund and IDA--which the fiscal space. The banks are implementing research suggests are also well aligned with broadly similar reforms to respond to these policy performance. Meanwhile, the perfor- concerns, which are also being applied to mance-based allocations of the banks' con- low-income borrowers. Being developed cessional financial resources preclude under different names--the New Partner- substantial financial allocations to low- ship Framework in the AfDB, New Lending income countries under stress (LICUS), Framework in the IDB, and Middle-Income where the banks continue to engage through Country Action Plan in the World Bank-- focused capacity building to help restore these initiatives have involved a healthy essential state functions and through social rethinking of many bank processes, leading G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 201 C H A P T E R 6 them toward more risk-adjusted approaches that such work can be an effective vehicle for that are also likely to enhance the efficiency engaging governments in policy dialogue and of operations even as they contribute to informing civil society. Though the review country capacity building through the afore- was focused on World Bank programs, its mentioned increased attention to country broad conclusions about the importance of systems. analytic work are echoed in the evaluation reports of the other multilateral development banks. A N A L Y T I C A N D C A P A C I T Y B U I L D I N G S U P P O R T · The AfDB's analytic work is being strength- The multilateral development banks also ened, building on the recommendations of contribute to country development through an independent external evaluation, which their analytic and capacity building sup- emphasized the work's central importance port--both in terms of their inputs into the to the Bank's policy dialogue, country selection, design, and implementation of strategies, and lending operations.15 To that lending operations and in terms of the more end, the Bank has introduced the Country fundamental challenge of helping countries Governance Profile as a new diagnostic tool manage their development efforts, regardless to systematically identify governance- of the financing source. While the banks' related structural and institutional weak- analytic work is important for all developing nesses and inform participatory dialogue. In member countries, it is relatively more 2004 such profiles were prepared for Benin, important for the countries at the opposite Cameroon, Chad, Malawi, Senegal, and ends of the performance spectrum, given the Swaziland. The AfDB is also developing relatively smaller financial role played by the Private Sector Country Profiles, setting out banks in those countries: for middle-income its private sector strategies for member countries, targeted analytic support adds countries and building on investment cli- value that can catalyze private financing; for mate assessments and other diagnostic LICUS, more basic capacity building support work. is key. Future Global Monitoring Reports · Analytic work is the basis for all ADB pol- could usefully quantify the banks' contribu- icy discussions, strategy formulation, and tions in the various areas of analytic and preparation of lending and nonlending capacity building support. But this will programs. Macroeconomic and poverty require further work, including agreeing analyses and assessments on gender, gov- among the banks on appropriate metrics and ernance, private sector development, the monitoring tools. environment, and other areas provide the necessary background to formulate the Analytic work. Economic, technical, and sec- Bank's country strategies, while detailed tor work underpins the multilateral develop- roadmaps steer operations in individual ment banks' policy dialogue with member sectors. The ADB has carried out invest- countries--on policies, strategies, lending, ment climate surveys in selected Asian and capacity building support. In its 10-year countries, in partnership with the World retrospective on 70 World Bank country pro- Bank. grams, the Bank's Operations Evaluation · The EBRD's analytic work is mostly con- Department (OED) found that economic and ducted as part of project due diligence (for sector work was critical for good outcomes, example, market studies and least cost and that successful country programs were analyses). To support its policy dialogue associated with timely analytic work.14 It also on the investment climate, the EBRD concluded that the absence of analytic work (together with the World Bank) has under- leads to unsatisfactory project outcomes, and taken periodic Business Environment and 202 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S T R E N G T H E N I N G A N D S H A R P E N I N G S U P P O R T F R O M I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S Enterprise Performance Surveys (BEEPS). ture, and other discretionary topics is gain- The next round of BEEPS is planned for ing ground relative to fiduciary diagnostic 2005, covering all 26 EBRD borrowers-- studies as gaps in the latter have increas- and, as noted below, the survey is to be ingly been filled. But the status of country extended to all developing countries under fiduciary systems, assessments, and knowl- a joint initiative of the multilateral devel- edge gaps will continue to require careful opment banks. A parallel EBRD-only attention--especially given the capacity exercise will focus on Early Transition building role played by the multilateral Countries. The EBRD's knowledge trans- development banks in helping countries fer activities focus on market economy implement the financial accountability sys- skills for the private and public sectors and tems needed to absorb higher aid levels. on results-based demonstration projects. · The IDB's country strategies benefit from Capacity building. Capacity building consti- analytic work carried out in partnership tutes the quintessential challenge of develop- with governments and other development ment assistance, and support for it is partners. Sector policy notes and, increas- embedded in almost all multilateral develop- ingly, debt sustainability assessments (in ment bank activities. As discussed later in this both HIPCs and other countries) are chapter, support to build capacity in statistics becoming an integral part of the country and managing for results is central to the strategy preparation process, albeit within results agenda of the multilateral develop- a highly constrained administrative ment banks. Of equal and complementary resource envelope--as reflected in the find- relevance to this report--given the recom- ings of the country program evaluations of mendations of earlier chapters--is support the Bank's Office of Evaluation and Over- for enhancing countries' absorptive capacity sight (OVE), which has identified underin- in managing and accounting for aid (and vestment in economic and sector work as other resource) flows, in view of the need for a factor hindering the policy dialogue at increased volumes if the MDGs are to be met, the sectoral and country levels.16 improving capacity for private sector­led · The World Bank has adopted a partner- growth, and trade capacity building--partic- ship approach to economic and sector ularly for trade facilitation, financial services, work. Carrying out its analysis with bor- and transport infrastructure. rowers helps promote capacity building while grounding the analysis in country · Aid management. Increasing aid absorptive conditions. Sharing the work with bilat- capacity requires credible country systems eral and multilateral partners helps con- for accounting for and managing the tain costs by reducing duplication and money--including, importantly, fighting promoting harmonization. Much of the corruption. This involves arm's-length Bank's diagnostic work on country fidu- financial audits, competitive procurement, ciary systems is carried out with partners, and accountable public expenditure man- a trend also observed in the preparation of agement. All the multilateral development Poverty and Social Impact Assessments banks are working in these areas, with and Investment Climate Assessments. lessons learned shared through the Work- Growth in the Bank's economic and sector ing Group on Governance, Anti-Corrup- work has begun to level off from the rapid tion, and Capacity Building. Meanwhile, as rates recorded several years ago when the part of the shift from enclave projects to Bank was overhauling its economic and SWAps, budget support operations, and sector work program. Sector work on broader lending support vehicles, the banks human and social development and social (and others, such as the U.K. Department protection, the rural sector and agricul- for International Development, European G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 203 C H A P T E R 6 Commission, and IMF) have been helping · Trade facilitation. The banks are active in to strengthen country systems for manag- facilitating trade, but more needs to be ing public funds from all sources, using done, especially to coordinate better-- diagnostic instruments such as Country avoiding duplication and gaps in country Financial Accountability and Procurement coverage and promoting synergies. The Assessments, Public Expenditure Reviews, ADB has been supporting customs harmo- and HIPC Public Expenditure Manage- nization and streamlining and anti­money ment Assessment and Action Plans. All laundering and other measures, focusing on these efforts focus on the supply side of aid the Greater Mekong Subregion and Central management and have generally received Asia. The EBRD--using donor funds in satisfactory marks in evaluation reviews. conjunction with its Regional Trade Facili- In a recent review of anticorruption activ- tation Programme--has been providing ities, the World Bank's OED also stressed training and advisory services to help banks the importance of underpinning such in countries such as Armenia, Azerbaijan, efforts with demand-side initiatives-- Georgia, and the Russian Federation geared to fostering public support among improve their international trade finance a wide spectrum of stakeholders.17 services.19 The IDB provides direct loans · Investment climate. The multilateral and guarantees to local financial institutions development banks' approach to private to support their trade finance activities, sector development has evolved over time, including through its recently established from support for credit institutions to a Regional Trade Finance Facilitation Pro- greater focus on macroeconomic policies, gram, while its Multilateral Investment and now to a greater focus on the quality Fund supports the modernization of cus- of a country's investment climate. Institu- toms facilities and border crossings tions--including the "rules of the game"-- throughout Latin America and the and associated capacity building efforts Caribbean. Focusing on diagnostic work, in are seen as key, and all the banks have 2004 the World Bank carried out Trade and major programs of support and analysis, Transport Facilitation Audits in Benin, including extensive investment climate Chad, Guinea, Malawi, Mozambique, surveys.18 As noted, the banks also Rwanda, Tanzania, and Zambia--as part recently announced their intention to of an intensive program of support for Sub- extend the BEEPS currently used by the Saharan Africa--as well as in Bangladesh, EBRD and World Bank in Europe to all the Dominican Republic, and Tajikistan. It developing countries, opening a new win- also approved 16 new projects with trade dow into the conditions faced by the pri- facilitation components, with commitment vate sector in different country levels more than doubling over the previous circumstances. Such country-specific infor- year. Noting the marked shift in World mation is especially valuable given multi- Bank support from adjustment to trade lateral development bank evaluation facilitation during the 1990s, its OED has findings on investment climate assess- launched an evaluation of Bank assistance ments, highlighting the need for greater on trade; the findings should be available knowledge of country-specific constraints for next year's Global Monitoring Report. and opportunities. Going forward, the multilateral development banks need to Sectoral, Regional, Global, ensure that this information--and that and Research Programs emerging from the investment climate assessments and Doing Business surveys-- The multilateral development banks' country is fully reflected in the design and supervi- focus is supported by four complementary sion of their country programs. activities, considered in turn below. First are 204 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S T R E N G T H E N I N G A N D S H A R P E N I N G S U P P O R T F R O M I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S the banks' sectoral and thematic strategies · The AfDB's sectoral policies and strategies and programs. Second are their regional pro- cover agriculture and rural development, grams--for addressing regional issues and the social sectors (especially education and regional public goods. Third are their global health), fighting HIV/AIDS, integrated programs--for addressing global issues and water resources management, water and global public goods. Fourth is their research, sanitation, infrastructure, private sector itself an international public good. development, gender and the environment, governance, finance, and regional eco- S E C T O R A L A N D T H E M A T I C S T R A T E G I E S , nomic cooperation and integration. P R O G R A M S , A N D O U T C O M E S · The ADB's sectoral and thematic policies As the banks have become increasingly coun- and strategies set out the Bank's institu- try focused, they have relied on sectoral and tional priorities, directions, and guidance thematic strategies to guide country strategy to staff, including for safeguards and gen- formulation, program and project design, der, which were updated last year. At that and implementation, building on the lessons time the Bank also reviewed its overarch- of operational experience and research. These ing poverty reduction strategy--assessing strategies set out the banks' sectoral and the- progress, evaluating the conceptual frame- matic modalities for helping developing work, and addressing implementation member countries achieve their objectives. Of challenges--and enhanced its country course, to fully understand the banks' differ- focus through alignment with national ent sectoral and thematic orientations, the PRSs, introducing capacity development evidentiary picture needs to go beyond state- as a new thematic priority and integrating ments of strategies and intentions. It must timebound indicators in all operations. also include analysis of actual interventions, · The EBRD's sector strategies cover its assessing how underlying sectoral and the- main activity areas--agribusiness, energy, matic strategies have been reflected in coun- financial sector, microfinance and small try strategies and programs--as well as in the and medium-size enterprises, municipal banks' sectoral and thematic "results," once infrastructure, property and tourism, their interventions have worked their way transport, and telecommunications--set- through country systems. ting out the approaches that must be fol- Neither of these other dimensions is easy to lowed in its operations. address across the multilateral development · The IDB's "2+4+1" program focuses on banks with current data. What is sketched seven sector strategies developed in 2002­3 below is the very beginning of an analysis that in the priority areas of the Bank's institu- could in due course be linked more directly to tional strategy.20 The seven strategies cover the results measurement initiatives being sustainable economic growth, poverty developed by the banks in other contexts. reduction and promotion of social equity, Taking it further in future Global Monitoring modernization of the state, competitive- Reports will require more in-depth work, ness, social development, regional integra- including investment by the banks in harmo- tion, and the environment. In addition, nizing their sectoral and thematic classifica- there is an implementation plan for the tions for lending and analytic work. strategies, including a series of output indi- cators, designed to help focus Bank actions Strategies. In line with the themes of this and enhance their development impact. report, all the banks' strategies stress the · Among the World Bank's many sector importance of private sector­led growth, strategies, the most relevant for this report infrastructure, governance, and--with the are those that focus on private sector­led exception of the EBRD--delivery of social growth in manufacturing, agriculture, and services. Specifics include: services, for which the Bank Group-- G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 205 C H A P T E R 6 drawing on the synergies across the Bank, Lending shares and trends. Sectoral lending International Finance Corporation (IFC), shares across the multilateral development and Multilateral Investment Guarantee banks are summarized in figure 6.4. Measured Agency (MIGA)--can provide full-service by disbursements over the 1999­2004 period, support; infrastructure, through the Bank infrastructure is the largest sector for the mul- Group Infrastructure Action Plan, which tilateral development banks as a group. It is seeks to revitalize this critical sector by also the largest sector for the ADB and IDB internalizing recent innovations involving individually, and for the World Bank overall pragmatic approaches, output-based aid, and in East Asia, South Asia, and Europe and public-private partnerships, and so on; Central Asia. For African and Latin American governance, where the focus is on institu- and Caribbean borrowers from the World tional development through sustained Bank, social sector lending is the largest. While reform, effective public financial manage- new commitments for infrastructure have been ment, transparent processes, and anticor- increasing, disbursements have been declin- ruption efforts; and the delivery of social ing--reflecting the lagged effect of develop- services, especially for primary education ments in the 1990s, when infrastructure and health care. commitments fell because of concerns about FIGURE 6.4 Big 5 multilateral development banks: sectoral distribution of lending, 1999­2004 All RDBs All regions, WB All MDBs 17% 20% 24% 22% 21% 21% 33% 30% 24% 27% 30% 31% Private/productive sector Infrastructure Social services Reform and state modernization All MDBs: Commitments All MDBs: Disbursements US$ millions US$ millions 16,000 14,000 14,000 12,000 12,000 10,000 10,000 8,000 8,000 6,000 6,000 4,000 4,000 2,000 2,000 0 0 1999 2000 2001 2002 2003 2004 1999 2000 2001 2002 2003 2004 Social services Private/Productive sector Infrastructure Reform & state modernization Source: Staff of the Big 5 multilateral development banks. Note: Data are for calendar years. Sectoral classification of MDB operations is not fully comparable across the institutions, indicating the need for better har- monization of the classification systems to provide a firmer basis for comparison and analysis. 206 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S T R E N G T H E N I N G A N D S H A R P E N I N G S U P P O R T F R O M I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S environmental risks, fiscal space, and crowding · The need for clearer evaluability at the out of the private sector, which was expected to design stage, with the intended results and play a larger role than materialized. With infra- measurement platform (including indica- structure commitments on a recovery path, dis- tors and baselines) clearly set out along bursements will also recover, albeit with a lag. with the instruments and modalities of Regional differences in bank support war- implementation. rant further analysis--especially between Asia · The importance of analyzing the political (where ADB and World Bank sectoral shares are economy of reform--and the incentives of similar) and Latin America and the Caribbean key players in sector reform--to allow the (where IDB and World Bank sectoral shares are strategies to take those factors into different). Further analysis is also warranted of account and be more likely to lead to sus- the different approaches taken by the banks to tained implementation at the country level. lending support for state reform and modern- · The importance of providing country ization, which constitutes a much larger share typologies for guiding localization, so that of disbursements by the World Bank than by the the strategies can be more easily cus- regional development banks. Such analyses tomized to country conditions. could be undertaken for the next Global Moni- toring Report, including trends in banks' ana- R E G I O N A L P U B L I C G O O D S lytic work across sectors and countries. A N D P R O G R A M S The multilateral development banks support Results and evaluations. The methodological a number of regional and subregional pro- challenges of going beyond lending tallies to grams and initiatives in collaboration with assess the multilateral development banks' sec- other partners, as highlighted below. Espe- toral contributions and results are not insignif- cially important for the regional banks, given icant, involving complex methodological issues their regional mandates, these programs are a on causation and attribution. Adopting a prag- mix of regional public goods programs, matic approach, the banks are beginning to including for regional infrastructure projects, measure their sectoral outputs more systemati- and multicountry programs. cally--for example in the context of the IDA14 Results Measurement System (discussed later in · Regional cooperation and integration are this chapter). But it is still early in this process, key areas for the AfDB, including trans- and much work needs to be done to see how to boundary water rights and river basin move credibly from measuring bank-supported development. Support has been provided sectoral outputs to outcomes. for capacity building for regional economic Whatever solution ultimately emerges, it is communities, development of regional likely to rely heavily on the findings of the infrastructure, creation of an enabling banks' independent evaluation departments, regional environment for the private sector, which have carried out a number of relevant promotion of sustainable development at reviews. These generally paint a mixed pic- the regional level, and the fight against ture, in which the banks are found to have HIV/AIDS. The AfDB supports the NEPAD made contributions in infrastructure, private Secretariat, the African Union, the Global sector development, governance, and the Environment Facility (especially on the social sectors, but where performance could development of the Environmental Action have been better--especially at it has affected Plan for Africa), and the Africa Regional country, program, and project outcomes, Coordination Unit for the UN Convention institutional development, and sustainability. to Combat Desertification. While individual findings vary, three themes · In Asia the Greater Mekong Subregion run through many of the banks' sectoral and Program has long been a prominent area thematic evaluations: of ADB support, promoting cross-country G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 207 C H A P T E R 6 cooperation in a number of sectors Policy Dialogue provides a forum for through investments in infrastructure, policymakers to discuss issues of com- policy initiatives, and institutional mech- mon concern in its seven network areas anisms.21 Other regional programs cover (education, natural disasters, environ- the Pacific Islands, Central Asian ment, central banks and finance min- regional economic cooperation, South istries, poverty and social protection, Asian subregional economic coopera- public policy management, and trans- tion, the Indonesia, Malaysia, and Thai- parency), with 15 regional and subre- land growth triangle, and the Brunei, gional meetings in 2004. Its Regional Indonesia, Malaysia, Philippines growth Technical Cooperation Program has area. The Asian Development Bank also focused on promoting modernization of implements technical assistance projects the state, supporting the private sector and loans supporting regional coopera- through competitiveness strengthening, tion. Areas of support range from infra- and addressing social issues of develop- structure (transport, energy, trade ment. Finally, responding to the growing facilitation) to health (combating infec- demand for regional public goods over tious diseases), environment, urban the past decade to support country development, financial and capital mar- reform efforts, the IDB's Initiative for the ket development, and capacity building Promotion of Regional Public Goods is in public sector management, including now operational. Since its approval in managing for development results. Par- March 2004, it has received 35 propos- ticularly noteworthy is the collaboration als for an amount close to $64 million. between the ADB and IDB on regional The initiative will provide up to $10 mil- public goods--including their joint spon- lion annually to help finance selected sorship of the recent Tokyo Forum on the projects. Operational Dimensions of Supplying · The World Bank supports a large number Regional Public Goods through Regional of regional programs and initiatives, in Development Assistance--and ADB cooperation with the other multilateral leadership on tsunami-related work, development banks and relevant partners. including the recent high-level confer- Examples of direct relevance to the priori- ence it organized22 and its pledged sup- ties set out in earlier chapters include the port for an interim tsunami warning Trade and Transport Facilitation in South- system. east Europe Program, which promotes · The EBRD administers a number of more efficient and less costly trade flows regional programs supporting private sec- and provides customs standards compati- tor development, including for trade facil- ble with the European Union; the Latin itation and small and medium-size American regional initiative on infrastruc- enterprise development. These programs ture, in cooperation with the IDB; and the include a series of country-specific subpro- strategic framework for IDA assistance to jects, which are monitored and processed Africa in cooperation with the AfDB and as country-level operations. In addition, a other partners (box 6.4). growing number of projects cover more than one country (for example, regional equity funds, projects in which sponsors G L O B A L P U B L I C G O O D S from one country invest in another, and A N D P R O G R A M S energy trade). Like their regional programs, multilateral · The IDB's approach to regional issues development banks' global programs are a has long focused on facilitating cross-fer- mix of global public goods programs and tilization on policy issues. Its Regional multicountry programs. As implementing 208 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S T R E N G T H E N I N G A N D S H A R P E N I N G S U P P O R T F R O M I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S BOX 6.4 IDA's strategy in Sub-Saharan Africa Strategic context and vision The International Development Association (IDA) is the World Bank's main source of development assistance for the world's 81 poorest countries, including 39 in Sub-Saharan Africa. This year's inter- national focus on Africa offers unique opportunities--and challenges--for IDA to support African development. In February 2005 donor countries reached a milestone agreement to replenish IDA over the next three years with the largest expansion in two decades--at least 25 percent, to $33 billion-- with about half of IDA resources going to Africa. This increase represents a major step in international efforts to promote stronger, broadly based economic growth in order to fight poverty and achieve the MDGs. Among other things, the funds will be used to improve access by poor communities to clean water, better communications, and power; support private sector development and a better investment climate to promote faster growth; provide grants to alleviate severe debt problems in Sub-Saharan Africa and elsewhere; promote transparent assessments of country performance on economic policies, gover- nance, and poverty reduction efforts; better coordinate donor support for these efforts; and fund an innovative monitoring system of development results. In addition to IDA, Africa's performance can be enhanced by positive outcomes in other forums, especially the Doha Round of international trade nego- tiations and meetings on the quality and quantity of donor funding, as discussed in earlier chapters. Against this background, IDA's outlook for Africa is one of hopeful realism. Hopeful because: · The New Partnership for Africa's Development (NEPAD) and the African Union are leading more actively in the areas of postconflict recovery, economic management, public accountability, and gov- ernance, and promoting regional integration within countries: Ghana, Nigeria, Senegal, South Africa, and others are shaping their economic agendas and taking ownership of their development. · Macroeconomic management is improving, as are country policies and institutions. · Growth is widening, with 15 countries having maintained growth rates of more than 5 percent for several years. · Subregional integration efforts are growing. · HIV/AIDS prevention is beginning to show promise. · The Extractive Industries Transparency Initiative is taking root. But realism is needed as well, because: · 7 percent growth is needed to achieve the poverty reduction MDG. · Conflict remains a threat to stability, investment, and growth. · HIV/AIDS and malaria are exacting enormous costs in terms of lives, public services, produc- tivity, and growth. · Aid remains insufficient in terms of both quantity and quality (with weak harmonization and alignment). Strategic directions The new emphasis in the IDA strategy is to accelerate and deepen shared growth to achieve sus- tained poverty reduction and make faster progress toward the other MDGs, and to increase invest- ment in the assets (human, physical, financial) of poor people to enable them to participate in and benefit from growth. An action plan is being developed to scale up World Bank activities in the con- text of Commission for Africa, IDA14, and other international efforts. Elements will include: · Trade and regional integration--focusing on a trade policy agenda that promotes an export push in agriculture (particularly for commodities with strong processing linkages). · Agriculture and rural development--developing a multisectoral approach explicitly linked to IDA's private sector development and infrastructure programs. · Private sector and infrastructure--concentrating on reducing the transaction costs of doing busi- ness in Africa. The region will have a combined strategy with the International Finance Corpo- G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 209 C H A P T E R 6 ration (IFC) and the Multilateral Investment Guarantee Agency (MIGA) to help fill the gaps in infrastructure. Regional projects, concessions, and privatization operations will increase. · Alignment and partnership--aligning World Bank support consistently with government-led programs and processes as well as with other donors. · Governance, capacity building, and conflict--addressing key dimensions: on governance, clearer benchmarks will be set for measuring performance in difficult environments, drawing on the work of the UN Economic Commission for Africa; on capacity building, a task force is devel- oping innovations in these areas; and on conflict, Bankwide experiences and lessons point to the value of explicit attention to conflict prevention and, in postconflict cases, the need to be engaged early and deeply. · Investing in people--focusing on three strategic areas: strengthening frameworks and delivery systems to accelerate progress toward the MDGs; helping to develop integrated macro-micro systems for social protection and risk mitigation; and emphasizing selected areas of strategic leadership and advocacy, including for infectious diseases (especially HIV/AIDS and malaria) and the education MDGs. Source: World Bank staff. agencies geared to supporting country devel- address key global challenges. But it gener- opment, all the banks are involved in helping ally found the programs to be underman- their clients meet their commitments under aged. The phase 2 report finds a lack of international agreements governing the pro- results orientation, focus on advocacy with- vision of global public goods--from peace out the necessary resources for technical and security to disease control and support assistance or investments, unclear poverty for the global commons to financial stability impacts, and weak knowledge manage- and anti-money laundering, open trade, and ment.24 OED's recommendations stress the knowledge sharing. They are implementing need for a global strategy, based on a con- agencies for the Global Environment Facility sultative process involving key partners, and participate in the Global Fund to Fight and better day-to-day management of the AIDS, Tuberculosis, and Malaria, the Global existing global portfolio, designed to Alliance for Vaccination and Immunization, enhance returns to Bank country operations and so on. and help set international standards for As the single global institution among quality. In line with these recommenda- the banks, the World Bank's support for tions, the Bank has established a small, cen- global programs has grown rapidly in tral Global Programs and Partnerships recent years, with 70 different programs Secretariat to better manage and monitor funded by the Bank's core budget, the these activities and is currently fleshing out Development Grant Facility, and donor- its strategy. supported trust funds. World Bank support for global programs has been the subject of R E S E A R C H an extensive evaluation by its OED. The Research by multilateral development banks Global Monitoring Report 2004 reported has helped to articulate the global and on the findings of the OED phase 1 report.23 regional development agenda, with notable As noted there, OED concluded that the contributions on aid, private sector­led Bank had played a useful role in these pro- growth, and trade, as reflected in earlier chap- grams by providing a platform for learning, ters of this report. It has also provided a basis advocacy, and collaborative action to for the application of emerging lessons at the 210 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S T R E N G T H E N I N G A N D S H A R P E N I N G S U P P O R T F R O M I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S country level, albeit somewhat less success- ing and knowledge. In 2004 the ADB fully according to the banks' evaluation adopted a knowledge management frame- reviews, which have generally pointed to the work to enhance knowledge sharing among need for greater specificity based on country its clients and to become a better learning conditions. OED, for example, has argued organization. As noted, the Bank is cur- that the World Bank's research on the invest- rently carrying out a detailed review of its ment climate provides insufficient guidance research function, including analysis of to client governments and staff.25 cost, user demand, and quality, with a view Meanwhile, consistent with the partner- to enhancing quality and impact. ship theme of this chapter, another area · Flagship EBRD research publications are identified for improvement involves cross- the Transition Report (autumn) and fertilization across the multilateral develop- Transition Report Update (spring), which ment banks. At present, the banks' include indicators on progress in transi- researchers meet in a variety of contexts, but tion at the country level, as well as topi- more systematic approaches would also be cal analyses. Areas of particular research fruitful, especially given the banks' different interest include transition economics, vantage points--with the regional banks social transition, the business environ- often intermediating between the global ment, energy, infrastructure, and the development agenda and regional considera- financial sector. The Office of the Chief tions. The AfDB and ADB are currently Economist, which oversees EBRD reviewing the roles and contributions of their research, provides the transition impact research capacities; it would be useful to ratings for projects, which are a key input broaden these initiatives to the other banks, for assessing operational performance. and more generally to increase interactions · Mainstays of IDB research are a focus on across the banks in this area. macroeconomics, the private sector, and growth; trade and integration; and sector · The AfDB has launched efforts to strategies and policies. The bank has also upgrade its research capacity--in tandem been active in supporting regional with the strengthening of its economic research networks promoting academic and sector work discussed above. These research and policy dialogue and in efforts are focusing on poverty analysis, strengthening the research capacity of growth, and debt sustainability; macro- regional institutes. economics and forecasting; public policy · Research is central to the World Bank's and public sector management; agricul- "knowledge bank" mission, with its agenda ture and food security; financial sector evolving in response to operational and pol- development; science, technology, and icy needs. Its main focus is strategic, and industrial development; human capital directed at informing the overall agenda for and social development; and interna- development policy and assistance, through tional trade and regional integration. flagship vehicles such as this year's World · The ADB undertakes research, including Development Report on the investment cli- innovative, experimental, or theoretical mate and analysis and data critical to inter- work to acquire new knowledge, normally national trade negotiations--as in Cancun, directed toward a specific purpose such as Mexico, last year--and the ongoing inter- developing a new policy or evaluating a national dialogue on growth, poverty reduc- program. The bank's intellectual work tion, trade, and aid effectiveness, especially includes advocacy, capacity building, and with respect to the mutual contributions of research, with each of these roles contribut- developing and developed countries, as dis- ing in different ways to development think- cussed in earlier chapters. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 211 C H A P T E R 6 Partnerships and Harmonization group, and along with bilateral donors and the United Nations Development Programme Virtually everything discussed in this report (UNDP) have formed the Joint Venture on involves partnerships--at the regional and Managing for Development Results, under global levels, at the country level, and at the the Working Party on Aid Effectiveness and institutional level--all touching the issue of Donor Practices. The aims are to harmonize harmonization in one way or another. Also donor requirements for country results relevant are the issues of transparency and reporting around national systems and better disclosure, which bear on the inclusiveness coordinate donor support for helping coun- or exclusiveness of the partnerships under tries strengthen their capacity to manage for consideration. results. The main outcome of the global part- nership to date is the convergence of the mul- G L O B A L P A R T N E R S H I P S tilateral development banks around agreed The multilateral development banks actively core principles and results agendas that share participated in the recent Paris High Level common elements and approaches--as dis- Forum on Harmonization, Alignment, and cussed below and as reflected in the recently Results, with the heads of the banks endors- issued (draft) Results Sourcebook.27 Building ing the Paris Declaration on Aid Effective- on these efforts and the pre-forum regional ness--setting out specific commitments for workshops, in Paris the banks committed to further alignment, harmonization, and support regional communities of practice in results.26 All engaged in the Working Party on managing for development results, including Aid Effectiveness and Donor Practices, a through a focused learning process in selected broad partnership of bilateral and multilateral developing countries. donors and agencies and representatives of more than 16 developing countries, supported C O U N T R Y - L E V E L P A R T N E R S H I P S by the OECD's Development Assistance The true test of global partnerships is opera- Committee (DAC). The working party was tional work at the local level: Without follow- put in place after the 2003 Rome High Level through there, the various global meetings Forum on Harmonization to facilitate, sup- remain talk shops with little impact. At this port, and monitor progress on harmonization, level, the multilateral development banks alignment, and managing for development have entered into a variety of arrangements results. The ADB is represented on the work- with their developing member countries and ing party's steering committee, and multilat- other partners--ranging from preparation of eral development bank staff chair or co-chair joint analytic work and strategies to joint four of the five subgroups, and contribute sub- operations and common environmental stantively to the work of all. The World Bank impact assessment procedures. These chaired the steering committee for the Paris processes have been facilitated by the com- forum and has seconded a full-time staff mem- mon direction in which the banks have been ber to the DAC Secretariat to assist the work- moving on their strategies and lending, as ing party. In preparing for the forum, all the summarized earlier in tables 6.1 and 6.2. multilateral development banks were involved Nevertheless, individual personalities and in regional workshops organized to ensure the behavior continue to affect the speed and inclusion of country and regional perspectives depth of progress on institutional commit- on the challenge of harmonization and man- ments to partnership. Hence while there are aging for results. many examples of good practice, there Central to these efforts is the banks' work remain instances of bad practice, which are in fostering a Global Partnership on Manag- long remembered by those affected. Despite ing for Development Results. To that end, the sense among many that World Bank cul- they have established an active working ture has changed, its staff continues to be 212 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S T R E N G T H E N I N G A N D S H A R P E N I N G S U P P O R T F R O M I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S considered arrogant by some, including staff contradiction and duplication. In LICUS, of other multilateral development banks, and such as Afghanistan, Guinea-Bissau, Haiti, as reflected more broadly in the World Bank Liberia, Sudan, and Timor Leste, multilateral Global Poll.28 development bank teams are collaborating closely with other donors to provide support Country strategies and portfolio reviews. As on strategy development (including, in some examples of good practice, multilateral cases, transitional results matrixes and development banks are increasingly coordi- pooled funding mechanisms). Meanwhile, nating their country strategies and portfolio the AfDB, ADB, and World Bank have reviews with each other and with other part- undertaken joint portfolio reviews in a num- ners. Coordinated strategies are planned, ber of countries, including Kenya, the Kyrgyz under preparation, or were recently com- Republic, Mozambique, Rwanda, the Philip- pleted for Bangladesh, Cambodia (box 6.5), pines, Uganda, and Vietnam. Honduras, Nigeria, Tanzania, and Uganda; these exercises involve working with the Operational support. The innovations in authorities to ease administrative burdens multilateral development banks' lending and with other partners to coordinate instruments discussed earlier in this chapter schedules, share diagnostics, and ensure have opened the door to much greater part- consistency and balance while avoiding nership at the country level, especially the BOX 6.5 Cambodia's country strategies--coordinating efforts among multiple donors The Cambodian country strategies for the ADB, U.K. Department for International Development (DFID), and World Bank were prepared together, all drawing on the country's poverty reduction strategy. By working together, the partners aimed to increase coordination and coherence in the pol- icy dialogue and reduce government transaction costs in dealing with them. Meanwhile, the gov- ernment has signaled a greater commitment to country ownership and leadership of the development and donor coordination process, giving greater attention to project implementation and to enhancement of the level of resource transfers from development partners. In support of the above, the ADB, DFID, and World Bank have agreed on a "lead agency" approach to implementing their partnership. Under this approach the lead agency in a sector (or sectors) provides primary support for the government's strategy development and implementation, while providing backup support in other sectors. For example, the ADB has taken the lead in agri- culture and water resources, education, finance, and transportation, while supporting the dialogue in sectors where the DFID or World Bank has the lead role. The three donors have also developed a set of principles guiding their relationships with each other and with the government, other international development partners, the private sector, and civil society. Other partnership initiatives include restructuring government-donor technical work- ing groups at the sector and thematic levels, greater reliance on SWAps, and better harmonization of donor procedures in project implementation. The ADB, DFID, and World Bank have cooperated with the government (and with other donors) on the preparation of the Cambodia National Action Plan on Harmonization and Alignment, which adopts a LICUS approach by placing the burden on donors for initial efforts to reduce transaction costs and improve information and reporting, rather than waiting for government capacity to improve before improving donor behavior. Source: ADB and World Bank staff. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 213 C H A P T E R 6 introduction of SWAps by the AfDB, ADB, promote collaboration on analytic work, the IDB, and World Bank.29 (See box 6.6 for an World Bank hosts the Country Analytic Work example of a SWAp in support of HIV/AIDS Web site (www.countryanalyticwork.net), prevention and treatment.) The World Bank's which offers major reports from more than Poverty Reduction Strategy Credits (PRSCs) 25 multilateral and bilateral donor agencies; are also proving useful for coordinating more than 1,400 reports were added to the donor support for low-income countries' site in 2004.30 It will be important to build on poverty reduction strategies, with half of the this initiative by using the database for joint PRSCs currently under implementation programming of analytic and capacity build- involving coordination of support and condi- ing work, based on identification of gaps and tionality with other donors. needs in key areas. Joint analytic work. Carrying out joint ana- PA R T N E R S H I P S A M O N G I N T E R N AT I O N A L lytic and diagnostic work is a win-win F I N A N C I A L I N S T I T U T I O N S approach to reducing costs for donors and As noted at the start of this chapter, the busi- countries alike. The multilateral development ness models of international financial institu- banks have increasingly conducted analytic tions differ between the multilateral work with other partners, especially for the development banks on the one hand and the core diagnostic and fiduciary reviews that IMF on the other. These differences translate underpin lending. To facilitate sharing and into differently shaped partnerships across the BOX 6.6 Malawi's sectorwide--and multisectoral--approach to HIV/AIDS Partly because of work on its poverty reduction strategy (PRS), donor coordination in Malawi is improving. Major donors and sectoral donor working groups in economic management, poverty reduction, water, and agriculture meet regularly. In addition, donors have been collaborating on sectorwide approaches (SWAps) for development assistance--as evidenced by the Multisectoral HIV/AIDS Project, which supports Malawi's efforts to reduce HIV transmission, improve the qual- ity of life of those infected and affected by HIV/AIDS, and mitigate the disease's impact, all central PRS objectives. Key project components include a focus on advocacy aimed at changing behavior and prevent- ing HIV transmission, especially among target populations, such as by promoting safer sex and incorporating life skills education and HIV/AIDS information into education curriculums. The pro- ject also focuses on impact mitigation, targeting those infected and affected by the epidemic. Other components are designed to support the work of the National AIDS Commission in preventing and treating the epidemic, monitoring and evaluating developments, coordinating support for policy- related issues, and managing procurement, financial accountability, and institutional development. The project is structured as a SWAp and is supported or under consideration for support by a number of donors, including the African Development Fund, IDA, Canadian International Devel- opment Agency, U.K. Department for International Development, Global Fund to Fight AIDS, Tuberculosis, and Malaria, Norwegian Agency for International Development, United Nations Development Programme, and U.S. Agency for International Development. It involves coordinated joint implementation reviews, pooled funding arrangements, a single framework for financial reporting, monitoring, and evaluation (including one set of quarterly financial tables and progress reports for all eight donors), and harmonized procurement. Source: AfDB and World Bank staff. 214 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S T R E N G T H E N I N G A N D S H A R P E N I N G S U P P O R T F R O M I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S institutions. Among the banks, given their next year's Global Monitoring Report, many parallel concerns and challenges, there is including the division of labor in country, a premium on cross-fertilization and network- regional, and global programs, building on ing in the pursuit of good practices that can be the banks' respective mandates and areas of adapted to different regional and country cir- comparative advantage. cumstances. Between the banks (especially the World Bank) and the IMF, given their more World Bank­IMF collaboration. In line with complementary roles and contributions, the the earlier discussion and as highlighted focus is more on joint products and an appro- below in the section on IMF partnerships, priate division of labor in producing them. three issues continue to be of central impor- tance to the World Bank's partnership with Multilateral development bank networks. the IMF (and of continuing interest to the Consistent with the above, the multilateral other banks as well): debt sustainability, the development banks are increasingly function- PRS process, and streamlining of structural ing as a federation of networks, operating at conditionality. In addition, two other almost as many different levels as the banks themes warrant highlighting in line with the themselves operate. The recent announce- themes of this report: collaboration between ment that the banks will extend the the Bank's OED and the IMF's Independent EBRD­World Bank Business Environment Evaluation Office (IEO), and issues sur- and Enterprise Performance Surveys (BEEPS) rounding public investment in infrastruc- to other regions is but the latest development ture. On the partnership between OED and in an ever expanding series of such efforts. IEO, the collaborative review of the PRS Another recent example is the January 2005 process referred to earlier set an important meeting hosted by the ADB to discuss com- precedent and example for future reviews, mon challenges in managing the perfor- including by other institutions.31 On infra- mance-based allocation systems of the banks' structure investment, the Bank and the IMF concessional windows--an exercise that is are working on steps to safeguard produc- likely to segue into an ongoing working tive public investment and improve public group, especially as the banks move toward investment planning and oversight, while disclosure of country policy and institutional maintaining a focus on fiscal and macroeco- assessments in early 2006. nomic sustainability. Following up on work Meanwhile, working groups on financial by the IMF's Fiscal Affairs Department-- management, procurement, the environment, carried out in close cooperation with the and capacity building have continued to Bank and the other multilateral develop- progress, with new groups such as the Work- ment banks, particularly the IDB--eight ing Group on Managing for Development case studies have been prepared, the prelim- Results energizing bank partnerships across a inary findings of which point to little impact broad front. These groups have been produc- on growth of the public investment com- tive forums for sharing experiences, chal- pression under investigation.32 (See also lenges, and best practices across the below, where this topic is discussed in the institutions. Going forward, they should be context of the IMF's role and work.) encouraged to think more boldly and strate- gically, moving beyond the harmonization P A R T N E R S H I P S W I T H C I V I L S O C I E T Y agenda to seeing how they might function as All the above partnerships are among full-fledged networks across the banks. They "insiders"--those with institutional affilia- also should be encouraged to advise on future tions that give them access to information. directions for strategic selectivity, which But for many critics of international finan- could constitute a major theme of the analy- cial institutions, the more relevant issue is sis of the multilateral development banks in openness to "outsiders"--those without G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 215 C H A P T E R 6 official affiliations and credentials, for based systems. The key elements of the whom access to information and trans- country pillar are support for public sector parency of the institutions' activities are key. management and statistical capacity build- Over the past 15 years the multilateral ing. This support has two objectives. First, it development banks have adopted formal aims at increasing the efficiency of country policies for partnering with civil society and resource allocation and use--whether at the for providing more open access to informa- national, state, provincial, or local level, or tion and documents, with a number of fur- in a given sector (or both). Second, and more ther changes recently approved (by the narrowly, it aims at improving implementa- World Bank) or pending or under consider- tion of bank-financed operations, through ation (by the AfDB and ADB). (See table 6.3 greater reliance on country systems for man- for the current disclosure status of key aging for results. classes of documents as authorized by the Helping countries manage for results is at banks' Boards of Directors.) Nevertheless, the heart of the banks' public sector man- there remain concerns that the banks have agement agenda. More specifically, such not met a standard of transparency and efforts call for greater attention to certain accountability commensurate with their aspects, such as building evaluation capacity power and influence in a number of areas, and developing other vehicles to increase but especially on project implementation accountability in government agencies and and Board deliberations. departments (box 6.7). This process is occurring in all the banks, whether in the Managing for and Measuring Results context of training staff from project exe- cuting agencies (as in the AfDB and IDB), This section addresses two points. First, what using technical assistance grants to build are multilateral development banks doing to evaluation capacity in borrowing countries manage better for results? Second, what are (ADB), building evaluation capacity in pro- they (and others) doing to measure results? ject agencies on a project-by-project basis (EBRD), or strengthening country budget M A N A G I N G F O R R E S U L T S and evaluation systems in the context of pol- The conceptual framework for multilateral icy-based lending (World Bank). The World development banks defines results as sus- Bank, with its partners in the Public Expen- tained improvements in development out- diture and Financial Accountability (PEFA) comes at the country level. It posits that program,33 has developed standardized per- outcomes can be improved through critical formance indicators for use in monitoring actions along the results chain that leads from country progress in public financial man- inputs to outputs and in turn to outcomes. agement, and is widely consulting with For the banks this translates into a focus on development partners (through the OECD's country capacity and "demand" for results, Development Assistance Committee) and and on bank strategies and quality. All the client countries. The indicators are part of a banks have approached the results agenda in strengthened approach to public finance a similar manner, providing similar kinds of reform that emphasizes country leadership support to client countries (table 6.4). The in developing the reform strategy, donor exception is the EBRD, which does not have coordination behind the government strat- a program supporting statistical capacity egy, and performance indicators for moni- building. toring progress over time. Supporting and complementing these Country pillar. All the banks stress that the efforts is a major agenda to help countries most important element of the results build their statistical capacity. Without good agenda is the support provided for country- statistics, governments cannot deliver efficient 216 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 TABLE 6.3 Transparency among multilateral development banks Type of information/stage of development AfDB ADB EBRD IDB World Bank Country strategy documents Early draft Yes Not routinely; proposed Yes No Yes in new policy Final draft Under No No No No (pre-Board) consideration Final (after Board) Yes Yes Yes Yes Yes Analytic and project work Economic and sector Yes Not routinely; proposed Partially Yes Yes work in new policy Country policy and Under Yes Yes (Transition No Yes institutional assessments consideration Scores in (2005 scores) Transition Report) Appraisal reports Yes For public sector projects, Partially Yes Yes (excl. privileged yes; for private sector (such as information) projects, no. Environmental Yes for both proposed Impact in new policy Assessments) Project supervision No No; updated Project No No No reports Performance Reports disclosed in proposed new policy Project completion Yes For public sector projects, No Yes Yes reports (excl. privileged yes; for private sector information) projects, no. Yes for both proposed in new policy Policy papers Final draft Under No No No No (pre-Board) consideration Evaluation documents Bankwide Yes Yes Yes Yes Yes Country strategies Yes Yes No (country Yes Yes strategy evaluations still in pilot stage) Sector reviews Yes Yes Yes Yes Yes Project audits Yes Yes Partially Yes Yes (through summary documents) Board procedures Agendas Yes No; proposed in new policy No Yes Yes Minutes No; but summaries No; proposed in new policy No Yes Yes of Board discussions, yes Source: Staff of the Big 5 multilateral development banks. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 217 C H A P T E R 6 TABLE 6.4 Managing for development results in multilateral development banks Type of support AfDB ADB EBRD IDB World Bank Country pillar Public sector management Statistical capacity building No Institutional pillar Strategies Projects Source: Staff of the Big 5 multilateral development banks. BOX 6.7 Multilateral development banks' support to build Colombia's culture of evaluation In 2000, with support from the IDB and World Bank, Colombia implemented three emergency social programs to help poor people cope with the economic crisis--Familias en Accion, Empleo en Accion, and Jovenes en Accion, collectively known as the RAS (Red de Apoyo Social). Familias is a cash transfer program conditional on school and health center attendance by children; Empleo is an employment program for low-skilled adults. And Jovenes is a job training and subsidy program for young people from poor neighborhoods. Of the combined $400 million in loans for the pro- grams, $5 million was programmed to be spent on external evaluations. Highly credible because of their high quality, the evaluations found that the programs are effec- tive tools for crisis management at the household level. For example, the evaluation of Familias en Accion showed that food consumption was 14­24 percent higher among recipients, with no effect on household tobacco and alcohol consumption; school attendance rates were 4­8 percentage points higher among program participants age 12­17; and program participants age 0­6 were taller (by an average of 0.75 centimeter) and heavier (by 0.25­0.50 kilograms) than nonparticipants-- partly due to less illness among these children, particularly in rural areas. The evaluations also played an important strategic role. Critics of the Familias program had argued that it was costly and that its grant money would be poorly spent by beneficiary families, making it a candidate for budget cuts. When the evaluation results were presented to the president, the government's strategy reversed: the program was not only maintained, but pilots and evalua- tions were conducted to explore the possibility of expansion. The RAS evaluations also helped institutionalize a culture of evaluation and results-based man- agement in Colombia's social sectors. While the government had established an evaluation depart- ment, the National System for Evaluation of Results and Public Management (SINERGIA, based on its Spanish name), in the early 1990s, the RAS evaluations gave it a concrete objective. The IDB and World Bank worked with SINERGIA to develop its capacity to be a good "consumer" of external evaluations and to undertake evaluation studies of its own. In recent years technical assistance, grants, policy-based loans, and investment operations have supported SINERGIA's evaluations of social pro- grams, preparation of legislation requiring periodic impact evaluations of social programs, creation of a multiministerial group on impact evaluation, regular production and dissemination of reports monitoring government progress in implementing policies, and a high-profile international conference on the importance of impact evaluations to government policy. Source: Inter-American Bank and World Bank staff. 218 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S T R E N G T H E N I N G A N D S H A R P E N I N G S U P P O R T F R O M I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S administration, good management, and evi- including lessons from past strategies--with dence-based policymaking. Nor can citizens the EBRD focusing on transition impact as effectively monitor government perfor- its key measure of results and the IDB mance and make informed decisions about increasing the evaluability of its country their lives. Thus an effective and efficient strategies by improving the indicators in its national statistical system, providing the matrixes for monitoring the outcomes of its data needed to support better policies and interventions. The critical feature is to use monitor progress, is a crucial component of the process to move to a more strategic good governance and accountability. Sup- approach to country programming, focused port for capacity building in this area com- on where the banks can have the biggest plements multilateral development bank impact and overcoming supply-driven ten- support for public sector management in dencies that may linger among sectoral staff. other areas, such as budget management and Based on its ongoing review of results-based auditing, and is being provided by all the country assistance strategies (CASs), the banks except the EBRD, as noted earlier. World Bank plans to introduce ratings into Programs include technical assistance grants its CAS completion report process, thereby for statistical capacity development such as taking a step toward more systematic self- those provided by the ADB. In addition, a assessment of achievements of intended CAS number of joint initiatives, many working outcomes. closely with the PARIS21 initiative, are Emerging best practice relies on self- under way.34 These include the IDB, United assessments by teams, arm's-length assess- Nations Economic Commission for Latin ments by quality assurance groups, and America (ECLAC), and World Bank Pro- independent assessments upon completion. gram for the Improvement of Surveys and Table 6.5 shows where multilateral develop- the Measurement of Living Conditions ment banks are in implementing this best (MECOVI), which provides technical and practice system. The AfDB has committed, in financial assistance to improve household the context of African Development Fund X, surveys of social conditions; the AfDB's to the full complement of reviews, to rein- work with the International Comparison force the positive trends emerging there.35 Programme in helping countries collect eco- For the ADB important developments in nomic statistics; and the World Bank's Stat- 2004 included the new independence of its cap program, which provides support for Operations Evaluation Department and the long-term development of national sta- important steps taken on results-based coun- tistical systems and may involve a series of try strategy papers and the broader results grants or loans as appropriate. agenda. The IDB has also made progress in recent years--piloting quality-at-entry reviews Institutional pillar. Efforts to bolster multi- for both project-based and policy-based lend- lateral development banks' performance and ing, proposing in its new Medium-Term results focus on country strategies and lend- Action Plan for Improving Development ing operations--including support for mea- Effectiveness the launch of a quality-of- sures to help countries develop their own supervision exercise as well, and revamping capacity to manage for results, as described its project completion reporting, including above--with independent and self-evalua- validation of ratings by its independent evalu- tions playing a key role. ation department (OVE).36 The World Bank As noted earlier, the AfDB, ADB, and has continued to deepen the pioneering work World Bank are piloting results-based of its Quality Assurance Group (QAG) and approaches (see table 6.1). The EBRD and management commitment to act on QAG IDB are incorporating many features of the (and OED) recommendations. In all cases the results-based approach in their strategies-- key will be effective follow-through. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 219 C H A P T E R 6 TABLE 6.5 Project monitoring, evaluation, and reporting in multilateral development banks Stage AfDB ADB EBRD IDB World Bank Upstream: arm's To be launched in Under discussion Ratings assigned by Piloted for Quality Assurance length review of 2005 under African Chief Economist's investment and Group reviews since quality at entry Development Office and Risk policy-based lending 1998 Fund X Agreement Management Vice Presidency Midstream: To be launched in Case by case Project Evaluation Presidency not yet agreed arm's length 2005 under African reviews by Department Recommended Quality Assurance review of quality Development Operations reviews, as well as under Medium-Term Group reviews since of supervision Fund X agreement Evaluation (since 2003) transi- Action Plan; timing Department tion impact moni- toring system managed by Chief Economist's Office and Risk Management Vice 1999 department 50% 50% normal 40% (0% before 2004) Completion: 50% in-depth; 100% starting in 100% share of project 2004 since 1980 completion reports validated by evaluation Source: Staff of the Big 5 multilateral development banks. M E A S U R I N G R E S U L T S performance assessment framework that can Several approaches to measuring the results also be used to underpin future Global Mon- of multilateral development banks have itoring Reports. emerged in recent years. The first is the prac- tice being developed in the context of replen- Concessional windows. Efforts to measure ishing the banks' concessional windows. On the results of concessional lending began with a parallel track, albeit more focused on bank the adoption of the IDA13 Results Measure- performance than results, some bank share- ment System, which had its genesis in donor holders are developing comparative frame- discussions in 2001. At that time the multi- works for assessing the performance of the lateral development banks' work on results banks and other multilateral agencies, gener- was just beginning to heat up, with the first ally with a view to fine-tuning the distribution roundtable on results held in 2002. Much of their financial support to multilateral enti- debate, technical analysis, and dialogue with ties. Third, civil society organizations are donors and IDA-eligible countries went into monitoring the performance of multilateral the construction of the initial approach, development banks in an increasingly sys- which has since been refined for IDA14 and tematic manner. Finally, reflecting lessons is being analyzed in the context of the African from these and other efforts, the banks' Development Fund and Asian Development results teams are developing a comparative Fund systems. 220 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S T R E N G T H E N I N G A N D S H A R P E N I N G S U P P O R T F R O M I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S Box 6.8 shows the results of the IDA13 accuracy and other elements of their assess- measurement system, which were validated ments. To date, none of these efforts include by an independent external audit. The sys- vehicles for borrowers or shareholders of tem focused on several country outcome borrowing countries to rate or compare the indicators (chosen because of data availabil- performance of multilateral development ity and relevance) and on the delivery of banks. agreed inputs of analytic work by the World The Danish International Development Bank. Agency (DANIDA) relies on ratings struc- As the World Bank's results agenda took tured around a set format to assess the per- shape during 2002­4, the IDA Results Mea- formance of each multilateral organization it surement System was aligned with it, focus- supports--including the AfDB, ADB, and ing on a broader set of country indicators World Bank--as well as its contribution to (more closely aligned with the MDGs but each organization.38 The reporting forms also reflecting broader objectives including part of the agency's results measurement sys- growth, governance, and infrastructure), tem, set up to assess the effectiveness of Dan- results-based country strategies, and the ish multilateral assistance. The results are quality and outcomes of lending operations. reflected in DANIDA's annual high-level con- The indicators for the new system for sultations with each organization. IDA14, agreed in December 2004, are shown The U.K. Department for International in box 6.9. Development (DFID) rates multilateral In line with instructions from its Deputies, development banks on three dimensions-- the African Development Fund's Results internal performance, country-level results, Measurement System is similar in methodol- and partnerships (figure 6.5). Ratings are ogy to that of a prototype of the IDA14 sys- based on DFID assessments of corporate tem.37 Scheduled for revision in 2005, governance, corporate strategy, resource assessment of the African Development management, operational management, Fund's performance will occur at the project, quality assurance, staff quality, monitoring institutional (country strategy), and country levels through the use of operations quality indexes, evaluation findings, and changes in country-level indicators, based mostly on FIGURE 6.5 DFID Scorecard for multilateral development banks internationally available statistics. The ADB is developing a Monitoring and Results Reporting System that is also relevant 100 to the Asian Development Fund. The Bank is 90 reviewing the IDA14 approach, especially 80 against the backdrop of its mandate as a 70 regional development bank, and plans to 60 50 introduce a systematic approach to results 40 measurement in 2005. 30 20 Donor and shareholder initiatives. In parallel 10 with these efforts, bilateral donors and share- 0 holders have initiated a number of programs AfDB AsDB EBRD IDB WB to measure the performance of multilateral Internal performance Country-level results agencies. Several efforts are just getting under Partnerships Average way, while others are quite advanced-- including provisions allowing assessed agen- cies to review and comment on the factual Source: Scott 2005. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 221 C H A P T E R 6 BOX 6.8 IDA13's Results Measurement System--comparing targets and results ORIGINAL PROCEDURE, TREND PROCEDURE, Education outcomes 2002 2002 Increase primary completion Target 69 69 rate from baseline (percent) Result 70 73 Increase number of countries Target 38 38 with positive growth in primary Result 45 43 completion rate (number of countries) Note: The original procedure imputed primary completion rate values for years where no data were available for a specific year on the premise that the most recent observation from a previous period is the best approximation of the missing year. The trend procedure imputed values for a missing year on the premise that the trend of an indicator remains the same unless a new observation indicates otherwise. TARGET Health outcomes Coverage rate 2001 result 2002 result Increase in population-weighted coverage 60 61 65 rate of measles immunization (percent) Number of countries with 80 percent coverage 29 27 29 Private sector development TARGET, outcomes 2001­3 RESULT, 2001­3 Reduce time required for business 7 12 startup (percent) Reduce formal cost of business 7 19 startup (percent) COMPLETED between fiscal 2001 TARGET FOR SPRING Analytic inputs and spring 2004 2004 Country Financial 51 40 Accountability Assessment Africa 21 20 Country Procurement 42 38 Assessment Review Africa 19 19 Public Expenditure Reviews 42 40 Africa 20 20 Investment Climate Assessment 16 14 Source: World Bank data and Booz Allen 2004. Note: Data are as of 1 April 2004. 222 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S T R E N G T H E N I N G A N D S H A R P E N I N G S U P P O R T F R O M I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S BOX 6.9 Indicators introduced under IDA14's Results Measurement System Outcome indicators Indicators of IDA performance, fiscal 2005­7 · Share of population below $1 a day poverty Project level line · Share of projects with satisfactory outcome · Under-five child mortality rate ratings · HIV prevalence rate of pregnant women · Share of projects with satisfactory quality at age 15­24 entry ratings · Share of births attended by skilled health · Share of first IDA Project Supervision personnel Reports with satisfactory baseline data on · Ratio of girls to boys in primary and sec- expected outcomes for projects initiated ondary education after July 2003 · Primary school completion rate · Share of IDA Implementation Completion · Share of population with sustainable access Reports with satisfactory data on project to an improved water source outcomes · Fixed and mobile telephone lines (per 1,000 people) Country level · Formal cost of business startup (percentage · Number of results-based country assistance of per capita gross national income) strategies prepared during IDA14 · Time required for business startup (days) Outputs · Public financial management (number of · Health benchmarks met) · Education · GDP per capita (annual growth rate) · Water supply · Share of rural population with access to an · Transportation all-season road · Share of households with electricity Source: IDA 2004a. and evaluation, and reporting of results. Rat- Norway, Sweden, Switzerland, and the United ings of internal performance reflect DFID Kingdom--the Multilateral Organizations Per- judgments of the banks' project performance, formance Assessment Network was launched in evaluation systems, implementation of strate- 2002, with an initial focus on the Big 5 multi- gic directions, and transparency. The EBRD lateral development banks (with the exception received the top score in this category. Rat- of the EBRD), plus the Pan-American Health ings for country-level results reflect, among Organization (PAHO), World Health Organi- other things, DFID assessments of the banks' zation (WHO), and United Nations Children's poverty reduction strategy (PRS) and MDG Fund (UNICEF). The network's methodology orientation.39 Here the AfDB and World relied on questionnaires of agency staff and Bank had the top scores. On partnerships, knowledgeable stakeholders. The findings of which reflect DFID assessments of perfor- the initial pilot, which focused on the health sec- mance on harmonization and related issues, tor, gave the highest ratings to PAHO, the next the World Bank was rated highest. The World to the WHO, UNICEF, and World Bank, and Bank also had the highest overall score the next to the regional development banks. But among the multilateral development banks. in providing these scores, the network stressed In a parallel effort organized by an informal the limitations of its methodology--especially network of like-minded donors--Austria, the fact that many raters lacked familiarity Canada, Denmark, Germany, the Netherlands, with the regional development banks.40 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 223 C H A P T E R 6 The U.S. Government Accountability development banks. They reflect the rising Office (GAO) periodically reviews how well demand for systematic, comparative assess- international financial institutions perform ments. They also provide useful lessons for on various topics. In recent years it has assessing performance. The banks' Working assessed the sustainability of the HIPC Group on Managing for Results has been dis- Initiative and the control frameworks of cussing options for a joint self-assessment the five biggest multilateral development framework, and now needs to take tangible banks.41 The HIPC review concluded that steps, taking into account data from indepen- the financial shortfalls facing the AfDB, dent and self-evaluations, feedback from share- IDA, and IDB will likely be far higher than holders, borrowers, beneficiaries, researchers, projected because country export earnings and critics, and lessons from approaches devel- will likely be less than those projected by the oped by others. Such a framework could World Bank and IMF, which have assumed underpin future Global Monitoring Reports, export growth rates higher than historical building on the analysis set out in this chap- averages.42 On the control frameworks, the ter--especially with respect to the compara- GAO found that all the banks had consis- tive tables 6.1­6.5, but also bringing in tently received clean audits and had clear quantitative information on lending (quantity internal and external control frameworks. and quality, including progress in using coun- Nevertheless, in view of what it character- try systems), grants, and analytic work (such ized as the difficult and challenging environ- as poverty and social impact assessments, ment in which the banks operate, the GAO investment climate assessments, fiduciary concluded that the banks and their members assessments, and support for statistical capac- could benefit from additional examinations ity building)--providing metrics, baselines, and reporting by external auditors (as part and indicators for tracking progress over of the banks' annual financial statement time. It would take the analysis of the contri- audits) in the areas of internal control over butions of the multilateral development lending operations and compliance with key banks a further step beyond processes, policies. toward a greater focus on results. Civil society monitoring. A number of civil International society organizations and Web sites monitor Monetary Fund programs conducted by multilateral develop- ment banks. These organizations and Web This section describes IMF activities in sup- sites provide important feedback--typically port of the MDGs within the framework of quite critical--on bank activities. One such the four-pillar approach set out in the Global organization, the Bank Information Center, Monitoring Report 2004 and used above to provides important monitoring and other analyze the multilateral development banks-- watchdog services, especially on the banks' country programs, global programs, partner- compliance with their operational policies. ships, and results. As with the banks, the The center recently launched the Trans- IMF's contribution to the development goals parency Resource, an in-depth database cat- is largely indirect. The following discussion aloguing and comparing the banks' focuses on areas of the IMF's competence and disclosure policies--and concluding that all comparative advantage. the banks need to improve to the highest dis- closure standards.43 Country Programs Self-assessments. The initiatives described IMF policy advice and financial support helps above are important for assessing the perfor- countries achieve and maintain macroeco- mance and contributions of the multilateral nomic stability and growth--prerequisites for 224 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S T R E N G T H E N I N G A N D S H A R P E N I N G S U P P O R T F R O M I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S poverty reduction--and recover from crises The suitability of the goals of IMF-sup- and exogenous shocks. The IMF also pro- ported programs in low-income countries in vides technical assistance, either to resolve the context of the MDGs is perhaps best specific problems of policy implementation or assessed in relation to the situation of each to address larger capacity constraints. In country. Low-income countries can be distin- many developing countries this includes guished as mature stabilizers, early stabiliz- trade-related technical assistance, primarily ers, or fragile states, with corresponding in customs administration and tariff policy, differences in how IMF-supported programs aimed at securing effective liberalization of should be designed.44 trade while safeguarding public revenues, or Mature stabilizers typically have had sev- in the context of the Integrated Framework eral years of relative macroeconomic stabil- for Trade-Related Technical Assistance, ity; face less binding fiscal and external which helps countries prepare to benefit from financing constraints; and have more firmly trade liberalization and is expected to help established and internalized PRS processes mainstream trade issues identified in poverty and better-defined and -prioritized PRSs. reduction strategies (PRSs). Thus PRGF-supported programs in such At the end of 2004 there were 49 IMF countries should be expected to: arrangements in place, 33 of which were under the Poverty Reduction and Growth · Focus on consolidating past gains, and Facility (PRGF). One country, Sri Lanka, is accelerating and sustaining growth. supported by blended resources from two · Set macroeconomic targets that allow IMF arrangements, a PRGF and an Extended greater scope for implementing pro-poor Fund Facility (EFF). A further 17 arrange- policies and improving the investment ments were under consideration (of which 4 climate. would be with members that already have · Provide for less IMF financing to close bal- arrangements in place). Thus a total of 61 ance of payments gaps, as financing con- members--one-third of the IMF's member- straints recede. ship--had arrangements in place or under · Have streamlined conditionality more consideration. Thirteen of these arrange- closely aligned with PRS priorities, given ments had been approved in 2004, with total the greater degree of country ownership. commitments of SDR 1.8 billion (roughly $2.7 billion at period average exchange Early stabilizers, by contrast, usually can- rates), compared with 21 new arrangements not yet sustain macroeconomic stability, in 2003. Seven of these were new PRGF often due to slippages in policy implementa- arrangements, for total new commitments of tion. They still need to consolidate public SDR 534 million ($791 million). finances, implement key structural reforms, and bring domestic and external debt under L O W - I N C O M E C O U N T R I E S control, and they face major balance of pay- IMF support for low-income countries' ments gaps. They are also often at early stages efforts to achieve the MDGs is provided of the PRS process, possibly with less well- within the framework of the country-driven articulated strategies. In such cases PRGF- PRS approach. The support is predicated on supported programs focus on achieving full country ownership of the priorities and macroeconomic stabilization, implementing programs set out in PRSs, reflecting the recog- essential structural reforms, building basic nition that successful implementation of poli- administrative capacity, and, often, recover- cies cannot be sustainably imposed from ing from external shocks. The extent of the outside. Much of the IMF's work in low- required adjustment effort and continuing income countries involves countries in Sub- imbalances limit the scope for direct poverty- Saharan Africa (box 6.10). reducing expenditures, and IMF financing G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 225 BOX 6.10 IMF activities in Sub-Saharan Africa At the end of 2004 the IMF had financial programs in place in 18 Sub-Saharan African countries, with a total commitment of SDR 1.9 billion, of which roughly SDR 850 million remained to be drawn. This represented a small decline over 2003, when 21 programs were in place. All of these are Poverty Reduction and Growth Facility (PRGF) arrangements. In terms of the Heavily Indebted Poor Countries (HIPC) Initiative, 10 of 14 countries at the completion point and 12 of 13 at the decision point are in Sub-Saharan Africa. For the first group, nominal debt relief delivered has totaled $20.3 billion, and for the second group, $23.4 billion (with both figures measured in terms of the net present value in the year of the decision point). More than 80 percent of HIPC debt relief provided by the IMF has been to these countries. Policy advice The IMF's policy advice to Sub-Saharan countries encompasses all its areas of competence and man- date--fiscal and monetary policy, exchange rate issues, trade, financial sector issues (including bank regulation and supervision), and macroeconomic and financial statistics--frequently supported by technical assistance. Given the number of PRGF arrangements in place, much of this policy advice aims to facilitate the policy and structural reforms needed to achieve and maintain macroeconomic stability and reduce imbalances. Sub-Saharan Africa has seen an overall improvement in fiscal and external balances since the early 1990s, accompanied by a more prudent financing mix. Inflation has reached historical lows since 2000, current account deficits have stabilized at moderate levels, and fiscal deficits have shown further improvement--allowing countries to reduce their recourse domestic financing. There has been an upward trend in spending on health and education, and IMF fiscal policy advice to countries implementing PRSs has aimed at accommodating increases in poverty-reduc- ing expenditures while maintaining a sustainable overall fiscal stance. Particular emphasis has been placed on strengthening domestic resource mobilization to augment the resources available to fund development and poverty reduction, and on analyzing fiscal and debt sustainability over the medium term. Together with the World Bank, IMF staff have placed increasing emphasis on country policy dia- logues on financial sector development and trade as sources of additional growth. Areas of partic- ular importance include enhancing the access of small and medium-size enterprises to financial services, deepening financial intermediation, and strengthening bank supervision and regulation. In trade the focus has been on improving the effectiveness of the many regional trade arrangements and preparing countries to participate more actively in multilateral trade liberalization. The IMF has also stepped up its efforts to assess the impact of exogenous shocks on Sub-Saharan countries and to help them deal with them, particularly the impact of declining world cotton prices, and to prepare for the removal of textile quotas. Technical assistance Sub-Saharan Africa receives about one-quarter of all IMF technical assistance, consistently more than any other region. Areas of focus include bank supervision and monetary operations, public expenditure policy and budget management, customs and tax administration and policy, public debt management, and macroeconomic and financial statistics. One-third of the assistance supports countries' poverty reduction efforts and regional issues such as trade and monetary policy. But a large portion is dedicated to postconflict and isolation cases. Almost two-thirds of the assistance supports capacity building and policy reforms in IMF core areas. The IMF has opened two regional technical assistance centers, one in Tanzania covering 6 East African countries (in October 2002) and the other in Mali covering 10 West African countries (in May 2003). An increasingly impor- tant share of technical assistance and capacity building support to East and West African countries is delivered through regular short-term visits, seminars, and training provided by experts at the regional centers. A recent independent evaluation of the centers found that they had increased the efficiency of technical assistance, were responsive to country needs and requests, and were better able to provide customized assistance due to their proximity. If the centers' operations prove suc- cessful, three additional centers will be opened to cover all of Sub-Saharan Africa. Source: IMF staff. S T R E N G T H E N I N G A N D S H A R P E N I N G S U P P O R T F R O M I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S will typically play a greater role in closing revenues, thus aiming at broadly external financing gaps. Finally, conditional- unchanged fiscal deficits of around 4.5 ity is unlikely to be clearly linked to the PRS, percent of GDP. Fiscal outturns have been which often is not well defined. less expansionary than envisaged, with Fragile states, often having recently capital spending increasing more modestly emerged from conflict situations, generally than programmed--but with a significant lack the political and economic institutions to increase in poverty-reducing spending. implement full-fledged macroeconomic pro- · Programs are largely centered around grams or elaborate comprehensive PRSs. avoiding nonconcessional financing from They also often face pressing needs for both domestic and foreign sources. Thus, humanitarian and balance of payments to a large extent, the level of the budget financing. IMF assistance will thus typically deficit seems to be determined by the level focus on providing technical assistance to of external concessional financing, as help rebuild critical institutions of macroeco- increased domestic financing is usually not nomic management, with limited financial targeted. support provided through the emergency and · The growth of reserve and broad money postconflict assistance program. has tended to exceed program targets, In broad terms, IMF program design accommodating unforeseen declines in changes as countries become mature stabiliz- velocity. It is unclear whether limits on ers. But even in these cases the link between the domestic financing of the budget in PRGF- goals of IMF-supported programs and national supported programs have allowed higher strategies is often not clearly specified-- credit growth to the private sector. a particular shortcoming when a PRGF- supported program is intended to support I N D E P E N D E N T V I E W S O F T H E I M F ' S implementation of a PRS. Macroeconomic R O L E I N L O W - I N C O M E C O U N T R I E S outcomes in low-income countries have A 2004 evaluation of PRSs and the PRGF by improved markedly in recent years, reflecting the IMF's Independent Evaluation Office improvements in policy implementation, (IEO) found limited progress in embedding higher official financial support, and a rela- the PRGF into national strategies for growth tively conducive international environment. and poverty reduction, despite evidence of a At the fore of this improvement is a small greater pro-poor and pro-growth orientation group of countries where (relatively) high in PRGF-supported programs. These short- growth rates have been sustained for some comings are explained by the IEO as reflect- time and macroeconomic imbalances have ing a lack of clarity about what the IMF receded furthest. should be delivering in some areas, and insuf- As part of an ongoing review, IMF staff ficient recognition of the qualitative changes examined aspects of program design in 15 implied by the PRS approach for the IMF's mature stabilizers with PRGF-supported pro- "way of doing business." The IMF's role in grams.45 The analysis found that: the PRS process, and by implication the PRGF, are thus seen as falling short of the · In general, annual growth is projected to ambitious expectations set out in the original be some 5.5 percent, and outcomes have policy documents (box 6.11).46 been marginally higher. Programs initially Other critics echo these points--in partic- target a 4­6 percent range of inflation, but ular, IMF-supported programs are seen as inflation targets have tended to be revised constraining budgets to the envelope of avail- upward over the course of programs. able external financing, rather than consider- · On the fiscal front, programs have gener- ing the policies needed to achieve the MDGs ally targeted modest increases in capital and then identifying and helping to mobilize spending and (offsetting) increases in tax the necessary resources. Critics have also G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 227 BOX 6.11 Recent evaluations by the IMF's Independent Evaluation Office In recent years the IMF's Independent Evaluation Office (IEO) has conducted several major reviews. This box summarizes the key recommendations of evaluations conducted in 2004. A more com- plete picture of the IEO's activities can be found in its 2004 annual report. Poverty reduction strategies and the Poverty Reduction and Growth Facility The IEO found IMF participation in the formulation of PRSs to be broader than in previous years, though not necessarily drawing more on country institutions. Ownership results were mixed, with the least change in macroeconomic policy areas. PRSs had a greater focus on poverty and a some- what stronger results orientation, but largely fell short in providing strategic roadmaps for policy formulation, addressing difficult tradeoffs, setting out clear priorities, and addressing capacity con- straints, particularly in budget and expenditure management. The IEO found some progress with respect to the key features of PRGF-supported programs set out in the original policy documents, particularly in mature stabilizers--with a marked increase in poverty-reducing expenditures, greater fiscal flexibility, some streamlining of program conditional- ity, and a greater willingness to consider alternative country-driven policies. But progress was found to be relatively limited in other areas, with little broad discussion of policy alternatives and of the need to strengthen country-specific growth analysis underpinning programs, and an absence of clear links in program documents between growth, poverty, and macroeconomic policies. Recommendations included: increasing the flexibility of PRS implementation to better fit specific country needs; shifting emphasis from the production of documents to the development of sound domestic policy formulation and implementation processes; clarifying and redefining the purpose of the IMF­World Bank Joint Staff Assessment mechanism; clarifying the implications of the PRS approach for the IMF's operations and strengthening its implementation of that role; strengthening prioritization and accountability on what the IMF is supposed to deliver within the PRS framework; and strength- ening the framework for establishing the external resource envelope as part of the PRS approach. The IMF's role in Argentina, 1991­2001 The IEO found weaknesses in the IMF's pre-crisis surveillance of Argentina's economic policies. There was little in-depth discussion of exchange rate policy until early 1999, and fiscal policy dis- cussions paid inadequate attention to provincial finances and overestimated the sustainable level of public debt. There was also little progress in fiscal structural reforms and a lack of strong structural conditionality in IMF programs. The critical shortcoming of the crisis management period (2000­1) was a failure to have in place an exit strategy, including a contingency plan, given the known risks. Lessons drawn included that the IMF should have a contingency strategy from the outset of a cri- sis, with "stop-loss rules" to determine when a change in approach is needed and a clearly defined role when confronting a solvency problem. In addition, assessments of debt and exchange rate sustain- ability should be intensified and expanded to cover vulnerabilities that could surface over the medium term. Moreover, the IMF should not enter into a program relationship with a country if there is no immediate balance of payments need or if there are serious political obstacles to needed adjustments and reforms. Finally, the IMF Board should exercise effective oversight of management decisions, based on full access to necessary information and open exchange with management on all topics. IMF technical assistance The IEO evaluation of IMF technical assistance emphasized the need for a medium-term framework to define technical assistance priorities, better filters for translating those priorities into resource allocations, greater involvement by country authorities in defining priorities and deeper commit- ment to implementing technical assistance recommendations, and greater efforts to measure the impact of such assistance. The evaluation also advocated drawing a clearer distinction between tech- nical assistance provided in support of policy advice or program implementation and that aimed at longer-term capacity building, and shifting the emphasis from delivering technical assistance through missions and short-term assignments back to greater use of long-term resident experts. Source: IEO 2004. 228 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S T R E N G T H E N I N G A N D S H A R P E N I N G S U P P O R T F R O M I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S seized on the perceived lack of willingness to encompasses a broad range of activities-- open up the debate on macroeconomic policy including regular production of notes on issues. The perceived lack of consistency regional outlooks and other issues, mainte- between PRSs and PRGFs makes it difficult to nance of dialogues with various regional discern the links between the two and has cast forums, and research on regional issues--that doubts on the extent to which the PRS feed into bilateral and multilateral surveil- approach has generated a greater poverty lance. Better integration of these activities focus in IMF-supported programs.47 and better assessment of potential global and Some of these problems may reflect short- regional spillovers have been explicitly recog- comings of the PRSs, which seldom contain a nized as priority areas of work over the next detailed discussion of the macroeconomic two years. framework and necessary structural reforms, In addition to its regular Article IV consul- sources of growth, or the role of the private tations with individual member countries and sector in generating that growth.48 It is also regional organizations, in 2004 the IMF com- unclear in many cases how the priorities of pleted the Biennial Review of IMF Surveil- the PRS are reflected in budget allocation lance. The review found IMF surveillance to decisions. be generally well focused, but suggested some But the IEO report also points to persisting improvements, including better integration of ambiguities about the IMF's contribution to bilateral, regional, and multilateral surveil- advancing the PRS process and achieving the lance; fuller treatment in Article IV consulta- MDGs, as well as overly ambitious expecta- tions with the largest IMF members of the tions of the PRS process itself. Many of these global impact of their economic conditions questions can be answered through a clear def- and policies; clearer and more candid treat- inition of the IMF's role in the PRS approach, ment of exchange rate issues; wider coverage and in low-income countries more generally. of financial sector issues; and refinements of Such efforts have already begun. Recent staff the vulnerability and sustainability assess- papers have set out key elements of a concep- ments. The review also noted the scope for tual framework for the IMF's role in low- Article IV reports to draw more on analysis of income countries articulated around a set of relevant issues conducted by third parties, guiding principles, and work is under way to including other donors. Looking ahead, spe- define specific aspects of this role (box 6.12). cific monitorable objectives have been pro- posed for assessing the effectiveness of surveillance in the next review. It has also been Global Programs decided to extend formal procedures for IMF As noted in the Global Monitoring Report surveillance of the euro area to the other three 2004, the IMF plays a key role in promoting currency unions; a policy paper on surveil- and helping to maintain a stable, open global lance in currency unions is planned for 2005. economic and financial environment, and in In the context of joint work with the World preventing and resolving crises. It meets this Bank on standards and codes, by the end of responsibility through its program work; 2004 the IMF had completed Reviews on the bilateral, regional, and multilateral surveil- Observance of Standards and Codes (ROSCs) lance; ongoing assessments of members' eco- in 119 countries and Financial Sector Assess- nomic and financial vulnerabilities; and work ment Programs (FSAPs) in 18 countries. In on standards and codes. addition, 82 countries had participated in the Of note in the area of surveillance in 2004 IMF's General Data Dissemination Standards, was the further extension of the IMF's and 58 countries had subscribed to the Special regional work, reflecting the increasing Data Dissemination Standards. importance of regional organizations in eco- In the area of crisis prevention and reso- nomic and monetary policy. This work lution, the IMF continued its monthly vul- G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 229 C H A P T E R 6 BOX 6.12 Key elements of the IMF's role in low-income countries A conceptual framework for the IMF's role in low-income countries was presented to its Board in August 2004. Although a final decision has not been made on this framework, its key elements include: · Strengthening PRGF program design through better analysis of growth and greater use of alter- native scenarios and stress tests in dealing with exogenous shocks, systematic integration of fiscal and debt sustainability analyses, analysis of the macroeconomic impact of higher aid flows, and support for country authorities in defining the linkages between realistic baseline macroeconomic frameworks and more ambitious frameworks for scaling up efforts to reach the MDGs. · Improving coordination of IMF support for PRS implementation with efforts by other partners, including by providing timely assessments of the macroeconomic situation. · Demonstrating the linkages between PRGF arrangements and PRSs, through clear descriptions of the alignment of PRGF objectives and conditionality with PRS priorities in PRGF documentation. In September 2004, partly in response to evaluations of the PRS process by the IMF's Indepen- dent Evaluation Office and the World Bank's Operations Evaluation Department, the IMF and Bank Boards made several changes in the PRS architecture. These amendments--particularly the elimi- nation of the requirement of Board endorsement of the PRS as the basis for IMF­Bank concessional lending--aim at strengthening country ownership of the PRS process and its underpinning in domestic processes, and reducing the perception of the need for "Washington signoff" on PRSs. In 2005 the IMF's Board will consider policy papers that pertain to several aspects of IMF activ- ities in low-income countries: · Signaling and donor coordination in low-income countries. · The role of IMF staff in the PRS process. · The triennial in-depth review of the PRS process, jointly with the World Bank. · Options and instruments for helping countries deal with exogenous shocks (for example, in Janu- ary 2005 the Board approved subsidization of the IMF's emergency assistance for natural disasters). IMF staff are also elaborating issues related to fiscal policy and public investment, based on an analytic framework recently tested through eight pilot country case studies. Many of the pilot coun- tries were found to have sizable infrastructure needs. But they also face important tradeoffs and complementarities between infrastructure and other investment spending needs (including for human capital) and current spending items (such as in health and education). On its own, infra- structure spending may have limited effect in enhancing growth, and the various tradeoffs will have to be addressed on a case-by-case basis. In general, countries with a high public debt burden have limited scope for increasing public investment. Moreover, additional room for infrastructure spending cannot result from changes in fiscal accounting. Thus desired increases in public infrastructure investment would need to be achieved first and foremost through increases in public savings. The pilot country studies also con- firm that, in general, there is significant scope for improving the quality of government infrastruc- ture spending through better project evaluation, prioritization, and management. In many countries this will need to go hand in hand with improving the coverage of fiscal accounts. The IMF and World Bank are working together on ways to safeguard productive public investment and improve its planning and oversight within a stable fiscal and macroeconomic framework. The full findings from the pilot country case studies are expected to be available in April 2005. Finally, as part of its ongoing research on low-income countries, in February 2005 the IMF co- hosted with the World Bank an international conference on macroeconomic issues in low-income countries. Source: IMF 2004b, c. 230 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S T R E N G T H E N I N G A N D S H A R P E N I N G S U P P O R T F R O M I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S nerability assessments as part of an early potentially major source of development warning system that allows emerging prob- finance (the spring issue of the IMF's World lems to be identified and addressed before Economic Outlook will contain a section on they develop into crises. The IMF has also remittances) and its participation in various actively supported the introduction of col- initiatives related to efficient management of lective action clauses and codes of conduct in natural resources, including the Extractive sovereign bond issues. Another area of recent Industries Transparency Initiative. The IMF is work concerns the development and refine- also intensifying its analysis of the impact of ment of financial soundness indicators and HIV/AIDS on country economic performance policies on contingency financing arrange- and addressing the operational issues con- ments. In addition, increased publication of fronting HIV/AIDS donors in working with policy papers and country reports has facili- IMF staff. tated better risk assessment by the private In other areas, the IMF continues to play sector and helped mobilize support for pol- a major role in implementing the HIPC Ini- icy actions. tiative and other debt relief proposals. It The IMF has also been increasingly active also recently participated in two of the task in promoting the coherence of developed forces that contributed to the final report of country policies, as called for in the Monter- the Millennium Project, and continues to rey Consensus. In addition to calls for donors collaborate closely with the UN system in to increase their official development assis- implementing the PRS approach at the tance (ODA) consistent with their commit- country level and in following up on the ments at Monterrey, the primary focus of this commitments made at the Monterrey con- effort has been on trade-related issues. ference. Accordingly, the IMF has stepped up its surveillance of trade-related issues. Since the Partnerships start of the Doha Round there has been a sig- nificant focus--in Article IV consultations, As noted in the Global Monitoring Report management's public communications, and 2004, in supporting the PRS approach and in other forums--on trade policies in large all its activities related to the MDGs, the developed countries, especially with regard to IMF's principal partner is the World Bank. It policy spillovers, trade-related macroeco- has also deepened its partnerships with other nomic vulnerabilities, and regional trade ini- agencies and institutions, including the UN tiatives.49 In addition, IMF staff have system, and intensified the dialogue with par- undertaken a significant amount of trade- liaments, trade unions, and nongovernmental related research.50 and civil society organizations. The trade focus in IMF-supported pro- Three areas of cooperation with the World grams has shifted from trade policy measures Bank received increased attention in 2004. to trade administration. In 2004 the IMF fur- First, the framework for debt sustainability ther increased its focus on trade vulnerabili- analysis, initially developed for middle- ties in its program work with the introduction income countries, has been jointly adapted of the Trade Integration Mechanism, through and extended to low-income countries to which it will support members in designing strengthen their debt management. This is appropriate adjustment policies to trade- particularly important in the context of related shocks and provide financial assis- pledges of substantial increases in aid flows, tance to help address any related balance of as well as concerns over rising debt levels in payments problems.51 post-HIPC completion point countries. Sec- In 2005 the IMF will complete a review of ond, the IMF and the Bank continue their its trade policy advice. It is also stepping up close collaboration in further streamlining its work on remittances, which represent a their structural conditionality.52 Third, IMF G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 231 C H A P T E R 6 and World Bank country teams collaborate IEO review of the IMF's technical assistance closely to identify needs for analysis of the and a forthcoming independent midterm poverty and social impacts of planned assessment of its African technical assistance reforms in PRSs. While the Bank naturally centers underscore the rising importance of has the lead in many areas, the IMF has cre- this collaboration.56 But both reviews also ated a special Poverty and Social Impact noted the absence of an effective medium- Analysis (PSIA) Unit to conduct some of this term framework for prioritizing and coordi- analysis in the IMF's areas of competence, nating the technical assistance provided by identify relevant PSIA work done elsewhere, different partners, and argued that a coun- and support country teams in integrating the try's PRS should provide such a framework. results of PSIA into Poverty Reduction Strat- About one-third of IMF technical assistance egy Papers (PRSPs) and IMF program is funded by other donors. designs. The IMF and the Bank also continue Finally, the IMF will strengthen its collab- their close collaboration on policies govern- oration with the UN system, particularly the ing the enhanced HIPC initiative (on topping United Nations Development Programme up and sunset clause arrangements); and the (UNDP), in helping countries adapt the IMF worked closely with the Bank in prepar- MDGs to their specific circumstances, and ing the 2004 report to the Development reflect them in their PRSs. Increasing empha- Committee on aid effectiveness and financing sis will be placed on enhancing countries' modalities.53 systems for monitoring and evaluating per- The importance of IMF collaboration with formance, consistent with the managing for other donors in its country work has risen development results agenda set out at Mar- with the emphasis in the Monterrey Consen- rakech in 2004. sus on building effective partnerships for achieving the MDGs. Donor coordination in Quality and Results supporting PRS implementation and in align- ing their programs with country priorities is a The IMF has several means of ensuring quality critical element of the PRS approach, and control. First, there are regular reviews of IMF enhances aid effectiveness by simplifying and policies and facilities, as well as progress harmonizing donor procedures. The IMF has reports on, and periodic updates and revisions been an active participant in work in the of, the operational guidance notes provided to OECD's Development Assistance Committee staff for their implementation. This process (DAC), the Strategic Partnership with Africa ensures that policies and facilities are appro- (SPA), and other forums to advance the donor priately adapted to the requirements of IMF harmonization and alignment agenda, leading members and the changing economic environ- up to the Second High Level Forum on Aid ment, and that their implementation by staff Effectiveness, held in Paris in March 2005.54 takes into account changing circumstances and For the IMF a key aspect of this collaboration emerging best practices. In 2004 reviews and is its role in providing signals to donors. progress reports of policies and facilities were The IMF's partnership with the WTO is of conducted in virtually all areas of IMF activi- growing importance in the context of their ties, including surveillance, lending facilities, mutual interests in advancing the Doha program design, crisis prevention and resolu- Round and further developing the multilat- tion, collaboration with the World Bank, the eral trading system. Management and staff of HIPC Initiative, the PRS approach, and stan- both institutions enjoy excellent working dards, codes, and transparency. In early 2005, relationships and collaborate closely on a the Executive Board discussed the review of wide range of issues.55 the implementation of the 2002 conditionality Another major area of IMF collaboration guidelines. Other major assessments planned with donors is technical assistance. A recent for 2005 include the review of PRGF program 232 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S T R E N G T H E N I N G A N D S H A R P E N I N G S U P P O R T F R O M I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S design and of access policy; and the triennial original policy documents. First and most in-depth review of the PRS approach. Policy important is the linkage between the macro- work is also informed by the IMF's ongoing economic framework of an IMF-supported research activities, by in-depth analytic stud- program, the country's budget, and the ies of specific country experiences in working poverty reduction effort. A key issue here papers and occasional papers, and by the would be how the program contributes to selected issues papers that accompany Article overcoming constraints to growth. An assess- IV consultation reports. ment of the quality and scope of the policy Targeted reviews by the IMF's Independent dialogue can give a sense of the extent of Evaluation Office (IEO) are another major country ownership. This includes the nature element of efforts to enhance the quality and and extent of IMF staff participation in the effectiveness of IMF activities. In 2004 the PRS process and the method used to set pro- IEO conducted major evaluations of PRSs and gram targets and objectives--and how they the PRGF, IMF involvement in Argentina, and are adjusted to accommodate higher aid IMF technical assistance (see box 6.11). inflows or to reflect the PSIA of critical Ongoing projects include evaluations of the reforms. The links between program condi- IMF's approach to capital account liberaliza- tionality and PRS priorities, and the timing of tion; the financial sector assessment program; PRGF missions and reviews, would give a and IMF assistance to Jordan. The IEO's work sense of the alignment of the content and program for 2005 may include assessments of process of the PRGF with the PRS. experiences with structural conditionality, Performance could be assessed by moni- bilateral surveillance in large developed coun- toring the extent to which IMF program doc- tries, policy advice on exchange rates in the uments frame the PRGF-supported program context of surveillance, data dissemination in terms of the country's objectives and plans standards, and IMF experience in a low- for reaching the MDGs, and address these income economy. specific aspects. Combined with regular inter- It is difficult to measure the impact of the nal reviews, progress reports, and updates of IMF's activities because the intended "out- guidance notes, evaluations by the IEO, and comes"--improved economic stability and follow-up to the conclusions of these and performance among its members, increased other external reviews, it should be possible stability of the international economic and to measure progress over time in adapting financial system, and more favorable condi- IMF policies and operations to help countries tions for global growth and prosperity-- meet the challenges of the MDGs. depend on more than just IMF inputs. In most cases results are affected by a variety of Conclusion factors, including policy implementation and exogenous influences. Moreover, the causal- Earlier chapters of this report have analyzed ity between a specific policy action and a progress on, and prospects for, meeting the given result is often difficult to establish or to MDGs, identifying priority actions for devel- measure in the short term. Comparing the oping and developed countries alike. Against targets and outcomes of IMF-supported pro- that background, this chapter has considered grams is thus complex and difficult, and may how international financial institutions are not generate conclusive results to guide contributing to the international effort to future action. achieve the MDGs and related development In measuring the effectiveness of the IMF's outcomes and how they can strengthen and contributions to the MDGs, it would be use- sharpen their support. This section summa- ful to rely on parameters measuring the rizes the chapter's conclusions for the inter- extent to which its PRGF is linked to a coun- national financial institutions and ends with try's PRS and has the features set out in the some implications going beyond them. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 233 C H A P T E R 6 Low-Income Countries countries have been vocal in calling for reduc- tions in the costs of doing business with the For low-income countries the priorities for banks, especially when those costs arise in the international financial institutions are to sup- context of replenishment exercises for conces- port the deepening of the PRS framework and sional funds that they cannot access. Healthy to align their assistance with that framework. competition among the banks has led to the For low-income countries under stress transmission of innovations across them, such (LICUS), support for building institutional as liberalization of expenditure eligibility cate- capacity is especially important. The good gories for investment lending and reliance on news is that recent replenishment agreements country systems. Going forward, the banks' for the African Development Fund, Asian increasing collaboration, including their par- Development Fund, and IDA have endorsed ticipation in joint workshops with bilateral a common approach to reliance on PRSs and agencies on concerns of middle-income coun- national strategies, including for operational- tries, should provide a vehicle for more regular ization of the MDGs, grants, debt sustain- cross-fertilization on these issues and help has- ability, disclosure of country policy and ten the speed and transmission of innovation. institutional assessments, results-based coun- try strategies, results measurement systems, and special programs for LICUS. As these Knowledge and Capacity Building replenishments cover some 95 percent of To ensure that the opportunities emerging from multilateral development banks' programs in the recommendations for dismantling trade low-income countries, they provide a solid barriers and increasing the scale and effective- base for accelerating implementation of these ness of aid set out in earlier chapters can be initiatives and harmonizing them across the taken advantage of, international financial banks. Reflecting independent assessments by institutions need to upgrade their support for their evaluation departments, the World Bank and monitoring of country capacity building and IMF need to support stronger country for trade, private sector­led growth, and pub- leadership of the PRS process, while deepen- lic financial management and accountability. ing their dialogue with clients on the policy Research by these institutions has helped artic- agenda. Clearer country ownership of PRSs, ulate the global development agenda, making with the Bank and IMF providing their views notable contributions on trade, aid, and the through Joint Staff Advisory Notes, will also enabling climate for private sector­led growth, help clarify the accountabilities of Bank and as reflected in earlier chapters. International IMF staff relative to country authorities. financial institutions have also contributed much on building trade capacity--particularly Middle-Income Countries through support for trade facilitation, financial For middle-income countries the priority for services, and transport infrastructure--and on international financial institutions is to con- enhancing countries' fiduciary and fiscal sys- tinue to adapt approaches and instruments to tems for the absorption of aid. But they need to respond to these countries' evolving and vary- do more--including systematically tracking ing needs, including by streamlining condition- key capacity gaps and investing more in coun- ality and simplifying processing requirements try-level knowledge as a basis for informing the for investment lending (also important for composition and design of their own and low-income countries). For middle-income partners' programs. In this context, the recent countries there has been a trend toward har- announcement that the multilateral develop- monization across the multilateral develop- ment banks will extend Business Environ- ment banks, albeit at a slower pace than for ment and Enterprise Performance Surveys low-income countries--reflecting the differen- (BEEPS) to all developing countries is espe- tiated needs of middle-income countries. These cially welcome. 234 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S T R E N G T H E N I N G A N D S H A R P E N I N G S U P P O R T F R O M I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S Partnerships the Medium-Term Action Plan for Develop- ment Effectiveness; the new independence of The multilateral development banks are the ADB's evaluation department; the recent partnering more effectively with their launch of the (draft) Results Sourcebook clients, with each other, and with other prepared jointly by these institutions and donors. This progress is partly due to the bilateral donors; and the PRS evaluations developments cited above with respect to carried out jointly by OED and IEO--in replenishments of the banks' concessional addition to continuing progress on statisti- windows and greater reliance on country cal capacity building, results-based public systems for processing the banks' funding. sector management, the quality agenda, and In terms of civil society, disclosure remains a the Global Partnership on Managing for divisive issue; despite improvements, many Development Results. Meanwhile, the IMF critics feel that international financial insti- is considering how to conceptualize and tutions do not meet a standard of account- operationalize the results agenda within its ability commensurate with their power and institutional framework, drawing on recom- influence in key areas. But recent and pend- mendations from its IEO. Going forward, ing changes in AfDB, ADB, and World Bank the international financial institutions must disclosure policies signal further progress. continue to focus on results and account- Meanwhile, World Bank­IMF relations ability, by supporting country efforts to have continued to mature, based on com- manage for development results (strength- parative advantage and a mandate-driven ening public sector management and devel- division of labor highlighted by ongoing col- opment statistics) and advancing internal laboration on PRSs, debt sustainability efforts to enhance the results orientation of analysis and its application to concessional their country strategies and programs and and grant financing, and further streamlin- quality assurance processes. Immediate pri- ing of structural conditionality. Going for- orities include adoption of a common frame- ward, in line with the Paris Declaration on work for self-evaluation of multilateral Aid Effectiveness, multilateral development development bank performance and results banks need to continue to strengthen part- measurement, with adaptations that allow nerships and harmonization by enhancing for consideration of IMF operations as the flexibility of their assistance (through much as possible, and follow-through on the continued simplification and use of sector- Paris High Level Forum commitment to sup- wide approaches, or SWAps) and promoting port regional communities of practice in the development and use of country sys- managing for development results, including tems--for procurement, financial manage- through a focused learning process in ment, and environmental assessment. selected developing countries. Results Beyond International Financial In 2004 several milestones were reached in Institutions building results-based systems in the multi- lateral development banks. These included The following priorities relate contributions completion of the first cycle of the IDA13 by international financial institutions to the Results Measurement System; adoption of broader international institutional context. the IDA14 and African Development Fund X Results Measurement Systems; comple- H A R M O N I Z A T I O N , A L I G N M E N T , tion of results-based country strategy pilots A N D R E S U L T S by the ADB and World Bank and their com- The Paris High Level Forum on Harmoniza- mitment (along with the AfDB) to conduct tion, Alignment, and Results brought together further pilots in 2005; the IDB's adoption of developing countries, bilateral donors, global G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 235 C H A P T E R 6 funds, UN agencies, civil society, and interna- tion for trade, the World Health Organiza- tional financial institutions to assess progress tion for disease control, and the UN Security and chart the way forward, including through Council for peace and security--calling for monitoring of agreed indicators of progress. more systematic attention to them and citing Key components of the agreement involve the IMF's work with its Article IV consulta- aligning international support around tions, Reviews on the Observance of Stan- national development strategies and using dards and Codes (ROSCs), and World strengthened country systems--for public Economic Outlook and other reports as a financial management, accounting, auditing, good-practice example.57 It has also called for procurement, results frameworks, and moni- a periodic apex monitoring report on global toring--to provide assurances that aid will be public goods, along the lines of the Global used for agreed purposes. This agreement Monitoring Report. If such a report is places a premium on credible analysis of the launched, close coordination with the Global adequacy of country systems for amounts and Monitoring Report process will be needed to modalities of donor support. It also places a ensure coherence and avoid duplication. premium on integrating the economic and sec- tor work prepared by international financial V O I C E A N D P A R T I C I P A T I O N institutions and others, especially in terms of Early on, when profiling the multilateral assessments of underlying country financial development banks, this chapter highlighted accountability systems and priorities needed the differences in developing country owner- to improve them, within the country-led ship shares across them. But the analysis sug- framework for capacity development. gests that key drivers of bank differences are also their varying client bases and mandates, M O N I T O R I N G A N D E V A L U A T I O N with the banks moving in similar directions Credible monitoring and evaluation are at the in the way they deal with similar clients. The core of an effective multilateral system. Inter- IMF is also moving in similar directions on national financial institutions have made transparency and conditionality, though its progress on this front, and it will be impor- unique mandate continues to set it apart tant to bring the PRS approach to bear on the from the multilateral development banks evaluation end of the country programming despite the ownership structure it largely cycle, bringing together the multilateral shares with the World Bank. International development banks' country assistance eval- financial institutions have acted progres- uations, the OECD Development Assistance sively on transparency, and the reform Committee's joint donor peer reviews, and process is still under way. But the voice issue the United Nations Development Pro- (voting shares and quotas, distribution of gramme's country program evaluations in a Board seats) continues to affect the perceived way that focuses on agency contributions to legitimacy and effectiveness of the World the achievement of country outcomes. But the Bank and IMF, and constrains their effec- lessons of a well-functioning monitoring and tiveness as partners in the international evaluation system go beyond work on coun- development system. The 2002 Monterrey tries, and are also relevant for managing Consensus encouraged the Bank and IMF to global public goods. Ongoing work by the enhance the participation of developing and Secretariat of the International Task Force on transition economies in their decisionmak- Global Public Goods has focused on the mon- ing, and "thereby to strengthen the interna- itoring and evaluation efforts of the lead tional dialogue and the work of those international institutions for global public institutions as they address the development goods--such as the IMF for international needs and concerns of those countries."58 financial stability, the World Trade Organiza- This issue is in urgent need of resolution. 236 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 S T R E N G T H E N I N G A N D S H A R P E N I N G S U P P O R T F R O M I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S Notes 21. See ADB (2004h). 22. See http://www.adb.org/Documents/Events/ 1. See African Development Fund replenish- 2005/Rehabilitation-Reconstruction/default.asp. ment documents on www.afdb.org and Asian 23. See OED (2002). Development Fund replenishment documents on 24. See OED (2004f). www.adb.org. 25. See OED, OEG, and OEU (2004). 2. See OED (2004e) and IEO (2004b). 26. http://www1.worldbank.org/harmonization/ 3. See OECD DAC (2005a). Paris/FINALPARISDECLARATION.pdf. 4. See OECD DAC (2005b). 27. See www.mfdr.org/sourcebook.html. 5. See worldbank.org/INTLICUS/Resources/ 28. See World Bank (2003). taskforceonlicus.pdf. 29. Since 2002, when new fiduciary processes 6. The seven countries benefiting from the were introduced to allow the World Bank to partic- facility are Burundi, Central African Republic, ipate in pooled financing arrangements, its lending Republic of Congo, Côte d'Ivoire, Liberia, Soma- using SWAps has risen. In fiscal 2004, 13 projects lia, and Sudan. Two other postconflict countries used such approaches, up from 4 in fiscal 2003. that are not yet beneficiaries are Comoros and 30. Statistics include delivered, ongoing, and Togo. The facility is designed to help clear the planned documents. arrears of eligible countries so that they can qual- 31. See IEO (2004b) and OED (2004e). ify for debt relief at decision points under the 32. See IMF (2004g). enhanced HIPC Initiative and otherwise reengage 33. The Public Expenditure and Financial with the African Bank Group and other interna- Accountability (PEFA) program, supported by tional financial institutions. the U.K. Department for International Develop- 7. Nine middle-income countries are eligible ment, European Commission, IMF, and World for concessional IDA resources under the small Bank, among others, was developed to coordinate island economy exception: Cape Verde, Dominica, and integrate participating agency support for Grenada, Maldives, Samoa, St. Lucia, St. Vincent capacity building in areas related to financial and Grenadines, Tonga, and Vanuatu. accountability. 8. See OED (2004g). 34. The Partnership in Statistics for Develop- 9. See, for example, IDB (2004f). See also IDB ment in the 21st Century (PARIS21)--created in (2002b, 2003a). 1999 by the United Nations, OECD, World 10. Strictly speaking, this covers only the major- Bank, IMF, and European Union--helps coun- ity of instruments. Guarantees and deferred draw- tries develop well-managed and appropriately down operations, among others, are sui generis. resourced statistical systems as the foundation 11. See ADB (2001). for effective development policies. With its 12. See OED (2003c). worldwide membership, PARIS21 promotes evi- 13. Costs of doing business associated with dence-based policymaking and monitoring in all long processing and approval times, high front- countries, especially poor countries. See end costs, and delays to satisfy social and environ- www.paris21.org. mental requirements have been identified as a 35. See AfDB (2004a). factor affecting borrowing from the IDB. See IDB 36. See IDB (2004b, c). (2004g). 37. See African Development Fund (2003). 14. See OED (2004g). 38. See Danida (2005). 15. See AfDB (2004a). 39. These categories were not applied to the 16. See, for example, IDB (2004d, e). EBRD, given its transition mandate. 17. See OED (2004a). 40. See MOPAN (2003, 2005). 18. See http://rru.worldbank.org/Investment 41. See GAO (2001, 2004a, b). Climate. 42. The U.S. Treasury, IMF, and World Bank all 19. The EBRD's Project Evaluation Depart- provided critical comments on the methodology ment reviewed this program in 2003 and con- used, but the GAO did not take them into account. firmed its positive transition impact, while 43. See http://www.ifitransparencyresource.org/ recommending improvements. See EBRD (2003). en/Index.aspx. 20. See IDB (2004h). 44. See IMF (2003b). G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 237 C H A P T E R 6 45. The countries are Albania, Azerbaijan, recent PRGF arrangements, and the IMF and Bangladesh, Benin, Ethiopia, Guyana, Honduras, World Bank are both currently assessing whether Kyrgyz Republic, Madagascar, Mongolia, Mozam- conditionality has in fact decreased, consistent bique, Rwanda, Senegal, Tanzania, and Uganda. with rising country ownership of programs (par- 46. See IMF (2000). ticularly under the PRS approach) and continuing 47. For example, see Bird (2004), Trócaire improvements in policy formulation and imple- (2004), and Eurodad (2004). mentation in developing countries. See IMF and 48. See, for example, Fox (2004). World Bank (2004b). 49. Trade policies formed an important part 53. See Development Committee (2004). of the recently published Sub-Saharan Africa 54. Because IMF-supported programs are often Regional Economic Outlook; see IMF (2004h). aligned with members' budget cycles, at least ini- 50. Regional integration was the most promi- tially, the alignment of the PRGF with PRSs would nent topic in trade-related research. Other recent be greatly facilitated by the internal alignment of studies include an analysis of the impact of the PRS cycle with the budget cycle. The principle exchange rate volatility on trade (http://www.imf. of aligning the PRGF with the PRS cycle was dis- org/external/np/res/exrate/2004/eng/051904.htm) cussed by the Executive Board in April 2003; see and a study of the impact of preference erosion IMF (2003a). on middle-income countries (http://www.imf.org/ 55. For example, the August 2004 framework external/pubs/ft/wp/2004/wp04169.pdf). agreements call for consultation with the IMF and 51. See IMF (2004a). In July Bangladesh other agencies to direct resources toward develop- became the first country to obtain funding under ing economies where cotton is vitally important. this mechanism. 56. See IMF (2005). 52. 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Washington, D.C. 256 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 5 T he year 2005 marks an important juncture for development as the international community takes stock of implementation of the Millennium Declaration-- signed by 189 countries in 2000--and discusses how progress toward the Millennium Development Goals (MDGs) can be accelerated. The MDGs set clear targets for reducing poverty and other human deprivations and for promoting sustainable development. What progress has been made toward these goals, and what should be done to accelerate it? What are the responsibilities of developing countries, developed countries, and international financial institutions? And how are these actors delivering on the commitments to development they made under the Monterrey Consensus of 2002? Global Monitoring Report 2005 addresses these questions. Prepared jointly by the staff of the World Bank and the International Monetary Fund (IMF), in close collaboration with partner agencies, this report is the second in an annual series assessing progress on the MDGs and related development outcomes. This year's report has a special focus on Sub-Saharan Africa--the region that is farthest from the development goals and faces the toughest challenges in accelerating progress. The report finds that without rapid action to accelerate progress, the MDGs will be seriously jeopardized--especially in Sub-Saharan Africa, which is falling short on all the goals. It calls on the international community to seize the opportunities presented by the increased global attention to development in 2005 to build momentum for the MDGs. The report presents in-depth analysis of the agenda and priorities for action. It discusses improvements in policies and governance that developing countries need to make to achieve stronger economic growth and scale up human development and related key services. It examines actions that developed countries need to take to provide more and better development aid and to reform their trade policies to improve market access for developing country exports. And it evaluates how international financial institutions can strengthen and sharpen their support for this agenda. Global Monitoring Report 2005 is essential reading for development practitioners and those interested in international affairs, especially in the context of major international discussions in 2005 on the MDGs and development in Sub-Saharan Africa. THE WORLD BANK ISBN 0-8213-6077-9