Multilateral Development Banks: Measurable Results, Debt Sustainability and Accountability

Overview

The Multilateral Development Banks (MDBs) serve critical United States’ interests in promoting global economic growth and stability, especially in countries and regions where poverty is most acute. From the outset, the Bush Administration has pursued an aggressive reform agenda in an effort to maximize the institutions’ effectiveness and achieve better results on the ground. As a result, considerable progress has been achieved in measuring results, increasing grants, focusing on private-sector development, fighting corruption and improving transparency and accountability. Ongoing work is required to extend and make permanent these advances, and the intensity of U.S. leadership for change continues unabated.

While the World Bank predicts 3.2% growth in developing countries in 2005, overall economic progress in the world’s poorest countries remains unsatisfactory. Over the last two decades,some broad indicators of global poverty have shown improvement and the MDBs have contributed to these results. According to the latest available data, the proportion of people living in extreme poverty (under $1 per day) fell from approximately 30% in 1990 to 21% in 2001. Between 1990 and 2002, male adult literacy increased from 64% to 72%; female literacy increased from 42% to 53% during this same period, due primarily to a sharp increase in girls entering school. The under-five infant mortality rate in low and middle income countries dropped from 103 per thousand live births in 1990 to 88 per thousand live births in 2002.

However, despite these improvements, billions of people still live in poverty.

Among countries and regions economic growth and rising living standards are uneven. Since 1990, countries in East Asia and the Pacific, led by China, have nearly halved extreme poverty.

Parts of Latin America and the Caribbean are making some progress. Central Asia and Sub-Saharan Africa, however, have shown little improvement in living standards. In Sub-Saharan Africa, half the population lives in extreme poverty, one-third go hungry, and one-sixth die before the age of five – about the same as a decade ago. Yet amid this picture of stagnation, some countries are reforming and making impressive gains. Sierra Leone, Mozambique, and Uganda grew more than 3% a year on a per capita basis in 2001 and 2002. Over the past decade, Madagascar and Mauritania achieved some of the world’s sharpest reductions in childhood malnutrition. Countries that adopt and implement the right mix of pro-growth policies can achieve real progress and use development assistance wisely and effectively.

In addition to their role in promoting economic growth, the MDBs also provide support for key U.S. foreign policy priorities, such as disaster assistance following the South Asia tsunami, reconstruction in Iraq and Afghanistan, advancing economic reform in frontline countries in the war on terrorism, combating money laundering and terrorist financing, supporting post-conflict countries in their efforts to keep the peace and revitalize their economies, promoting free trade, and fighting HIV/AIDS.

President Bush has said, “Because of American leadership and resolve, the world is changing for the better.” The Bush Administration has developed a new economic development agenda with the aim of using foreign aid more effectively and has put this agenda in practice with the creation of the Millennium Challenge Account (MCA). MCA funds will assist countries that govern justly, invest in people, and encourage economic freedom. President Bush has called for explicit measurable results throughout his administration, and it is a theme being stressed in the MCA assistance programs.

U.S. leadership in the MDBs is strong and is continuing to achieve results that make the institutions better and more accountable. To help achieve its MDB reform goals, the Bush Administration linked its financial commitments to implementation of reforms that hold the institutions accountable for spending resources effectively through results-based management frameworks. The implementation of results-based systems by the MDBs will also help the international community meet the international development goals of the UN Millennium Declaration including by 2015 to reduce by half the number of people, from 1990, whose income is less than a dollar a day.

The U.S. has urged the MDBs to focus their efforts on projects that produce measurable results and raise living standards through higher productivity. This means placing a greater emphasis on private sector development – particularly small and medium sized enterprises – as well as on health and education, to help individuals realize their full potential. It also means aggressively promoting pro-growth policies that enable countries to use assistance effectively. Because of U.S. leadership, the MDBs’ concessional windows – which are devoted to the poorest countries – have established performance-based allocation systems (PBAS). Such systems provide more resources to countries with sound growth-oriented policies and fewer resources to countries without them, with an extra emphasis on governance to promote transparency and fight corruption.

The Administration’s FY2006 budget request for the MDBs includes $1,329 million to fund annual U.S. commitments. The request also includes $6.6 million towards clearing U.S. arrears to the MDBs, which now total $687 million. It is critical that the U.S. meet its international commitments, thus helping to ensure U.S. leadership and credibility on policy direction, program priorities, and institutional reform.

The FY2006 request includes the first annual commitment to three new replenishments: the fourteenth replenishment of the International Development Association (IDA-14); the tenth replenishment of the African Development Fund (AfDF-10); and the ninth replenishment of the Asian Development Fund (AsDF-8). The negotiations for these three replenishments were very successful in achieving key U.S. reform objectives. Each of these replenishments includes profound advances in improving debt sustainability through increased grants. IDA and the AfDF will increase the share of new funding distributed to the poorest countries through grants, rather than loans, to about 45% from approximately 25% and 20%, respectively. The AsDF established a grant window for the first time and approximately 30% of assistance to the poorest countries will be in the form of grants. Success was also achieved in the areas of debt sustainability, measurable results, transparency, and support for the private sector.

The U.S. is the largest cumulative donor to the MDBs, thus giving the U.S. sizable influence in the institutions. Our participation in the MDBs leverages greater resources and thus can generate greater impact than is available through bilateral programs. In FY2004, the U.S. provided $1.4 billion in new funding, while the MDBs made loan and grant commitments of approximately $49 billion. U.S. commitment to the MDBs reflects not only this resource-leveraging power, but also the enormity of the challenge and the U.S. economic and security stakes in developing and emerging countries around the world.

The remainder of this essay is divided into four sections:
(I) Furthering Measurable Results;
(II)Improving Debt Sustainability;
(III) Increasing Accountability;
(IV) Advancing U.S. Foreign.

Policy Interests. More detailed information on each MDB can be found in separate tabs of this document.

I. Furthering Measurable Results

President Bush’s agenda for the MDBs continues to focus on raising productivity growth by channeling more funds to countries that follow pro-growth policies based on economic freedom.

The MDBs can play an important role in helping countries to grow and reduce poverty, but rigorous tracking of results is necessary to demonstrate whether MDB activities are making a difference. The U.S. has led a high-priority campaign for the establishment of results-based systems that set quantifiable performance targets and measure results at the project, sector, country and institutional level of operations.

Mainstreaming Results Management: The MDBs are changing their operating style to focus on measurable results, and they are continuing to strengthen their systems of measurement and accountability. All of the MDBs have begun to mainstream mechanisms to measure and report the results of their projects. The new reforms emphasize quantifiable results with specific timelines in all operations, especially in the design of country assistance strategies and individual projects (including during project implementation).

The new reforms emphasize development outcomes in addition to process indicators. It is not enough to say that a medical clinic has been built to provide vaccinations for children. What matters is whether the vaccines get into the arms and mouths of the children who need them and their health improves. Addressing these multiple aspects means: establishing a pervasive results culture in MDBs by incorporating a measurable results agenda into all operations; strongly encouraging and building capacity in developing countries to collect the data necessary to measure results; and emphasizing the need to establish outcome indicators and monitoring systems early in the design of country assistance strategies and individual projects.

• A portion of the U.S. commitment to the previous IDA replenishment (IDA-13) was structured as an incentive payment for reaching specified targets in the area of health, education, and private sector development. In FY2005, the incentive contribution was $200 million. IDA met all of the targets. At the request of Congress, the U.S. required that an outside, independent evaluation verify that IDA did indeed meet the targets. The assessment concluded that IDA met the targets for the $200 million incentive contribution.
• The recent replenishment of IDA (IDA-14) significantly improves the performance measurement system. This results-oriented approach will increase the effectiveness of IDA’s development projects and programs. Specifically the new system will include: 14 country outcome indicators; output indicators; country-level institutional indicators; and project level indicators. Furthermore, the IDA-14 report stipulates that World Bank Management will work to ensure that 100% of IDA investment projects and development policy loans include indicators connected to a timeline with baseline data and periodic assessments of projects and programs against defined expectations.
• At U.S. urging, the AsDB made results measurement a centerpiece of the AsDF-9 replenishment negotiations, concluded in May 2004. The Bank has established a dedicated Results Management Unit to oversee integration of results measurements in all project and grant documents and in country strategies. To this end, the Bank has made significant strides in improving the quantity and quality of hard, time bound data in its loan and country documents. Further, AsDB management has initiated a new human resources strategy that rewards staff for achievement of development outcomes, rather than the quantity of loans approved.
• As part of the AfDF-10 replenishment, every project and strategy coming to the Board of Directors will have a fully operational results-based management system by mid-2006. Already, measurable outcome indicators are found in most AfDB projects and are quantified and based on baseline data.
• For each of its countries of operation, the EBRD monitors progress in transitioning toward a market economy. Specifically, the EBRD produces an annual Transition Report that examines policy changes and economic developments in each country and a semi-annual publication entitled Law in Transition, which examines the quality of laws and institutions (such as insolvency laws, corporate governance, and contract enforcement) that build market-based economies, create a sound investment climate, and promote economic growth.

Supporting Countries with Good Policy Performance: Assistance is effective when it is provided to countries that are committed to and successful in implementing sound pro-growth economic policies. A sound policy environment also attracts investment because it increases private sector confidence. On the other hand, providing assistance to countries that are not committed to good policies can actually be counterproductive. Under MDB performance-based allocation systems, countries that demonstrate commitment to good policies receive greater resources than those that do not.

• Today, the best policy performers in IDA will receive almost seven times more resources per capita than the poorest performers. For every $1 per capita lent to the median IDA performer in WBFY93-95, about $1.20 went to the best performers and $0.85 to the poorest performers. By WBFY99-01, the spread had widened, with $1.77 per capita going to the best performers and $0.57 to the poorest performers. IDA’s strategy for FY05-07 envisions an even wider spread, with $1.64 per capita going to the best performers and $0.24 to the poorest performers.
• As the culmination of consistent U.S. pressure over the last several years, the IDA-14 report commits the World Bank to full disclosure of the numerical ratings for all components of the Country Policy and Institutional Assessments (CPIAs), beginning with the FY05 exercise. Transparency of the CPIAs will ensure that shareholders, borrowers, and other stakeholders will have full access to the information that determines how IDA allocates limited resources to poor countries. The AfDF-10 report also commits to makeing the country performance allocation’s (CPA’s) individual country performance ratings and components fully transparent.
• The AsDB has taken important steps to improve its performance-based allocation system by significantly increasing the weight given to governance and performance in country ratings. The methodology for determining country allocations is now far more transparent and easy to understand than the old formula. Additionally, Management has agreed to provide full disclosure of all country performance ratings starting in 2005.
• The International Fund for Agriculture Development (IFAD) has implemented a PBAS for all countries, as a result of U.S. leadership in the IFAD-6 replenishment. In January 2005, IFAD became the first institution to provide full public disclosure of all country scores, including the individual component scores for each criterion within the PBAS.
The first loans using the PBAS will be presented to the Executive Board for approval in April 2005.

II. Improving Debt Sustainability and Increasing Grants

For the last twenty-five years, the international community has attempted to address the unsustainable debt burdens of poor countries through a series of stop-gap measures. During this period, a number of countries have needed and received repeated debt reduction and reschedulings from the “Paris Club” of major bilateral creditors. Numerous poor countries,including Cote d’ Ivoire, Democratic Republic of Congo, Madagascar, Mauritania, Mozambique, Niger, Senegal, Sierra Leone, Togo, Uganda, and Zambia, have each received 8 or more Paris Club reschedulings.

All of these responses were understandable in light of the countries’ debt problems; however, they have not comprehensively addressed the longer term systemic determinants of debt distress, such as perverse incentives for excessive lending and excessive borrowing. The result has been that as debt is cleared through forgiveness and re-schedulings, the IFIs have stepped in and provided new loans often exceeding the amount of debt relief. For example, between 1989 and 2002, countries eligible for the Heavily Indebted Poor Countries (HIPC) initiative accumulated nearly $93 billion in new debt while debt relief totaled approximately $40 billion.

Increasing Grants: The Bush Administration strongly believes that grant financing is a critical component of any long-term debt sustainability solution. In 2001, President Bush called on the MDBs to provide 50 percent of their assistance to the poorest countries in the form of grants.

We have made considerable progress in the last few years toward reaching this goal. As a result of strong U.S. leadership in the previous round of replenishments (IDA-13 and AfDF-9, completed in 2002), the International Development Association (IDA) and African Development Fund (AfDF) now provide roughly 25 percent of their total assistance to the poorest countries on grant terms.

Throughout 2004, the U.S. pressed very successfully for significant increases in grant assistance in the replenishment negotiations at IDA, the AfDF, and the AsDF:

• Due to strong U.S. leadership during IDA-14 negotiations, IDA adopted a new debt sustainability framework to serve as the analytical base for determining grant eligibility.
As a result, IDA will allocate grant financing when countries are at risk of experiencing debt distress. Under the framework, 47 countries (out of 62 eligible) are projected to receive grant financing, of which 42 will receive 100% of their IDA assistance in the form of grants. Given IDA’s role as the largest multilateral provider of development assistance, this achievement will have a significant impact in facilitating long-term debt sustainability in the poorest countries.
• At the AfDF negotiations, the U.S. pressed donors to adopt a debt sustainability framework that is compatible the IDA framework, thereby ensuring a coordinated approach to determining the most appropriate financing terms for poor countries. Under this framework, 29 countries (out of 38 eligible) are projected to receive grant financing, of which, 26 (more than two-thirds) of the poorest countries will receive 100% of their AfDF assistance as grants.
• The IDA-14 and AfDF-10 Agreements nearly fulfill President Bush’s initiative calling for 50 percent of IDA’s assistance to the poorest countries to be provided as grants.
Overall, IDA and the AfDF will increase the share of new funding distributed to the poorest countries through grants, rather than loans, to about 45% from approximately 25% and 20%, respectively. Before 2002, nearly 100% of IDA and AfDF assistance was provided as loans.
• The recent replenishment of the AsDF established a grant window for the first time where 30% of assistance to the poorest countries will be in the form of grants. Grants will be provided for technical assistance, HIV/AIDS projects, and debt-vulnerable or post-conflict countries. Furthermore, recognizing the importance of harmonizing debt sustainability analyses across the IFIs, donors agreed that the AsDB would consult closely with IDA on its debt sustainability framework.

Experience under IDA-13 and AfDF-9 has demonstrated the utility of grants for priority development needs in the poorest countries. Some of the illustrative examples include:

• The Democratic Republic of the Congo received a $102 million grant from IDA to mitigate the negative impact of the HIV/AIDS epidemic on the stabilization, recovery, and development of the country. It will help strengthen the capacity of both the people living with HIV/AIDS and community-based organizations, as well as provide financing for activities in the area of prevention, care and treatment. Furthermore, the grant will empower local communities to identify priorities and implement micro-projects, which aim to change behaviors, improve the impact of prevention measures, and develop local responses to blunt the impact of the epidemic.
• Bangladesh received a $40 million grant from IDA to increase access to water in low-income rural communities through the promotion of piped water supply. In small villages of less than 200 households where arsenic levels are unsafe, and where the provision of piped water is not viable, the project will provide traditional arsenic mitigation options. It will also support the development of adequate regulations, monitoring, capacity building and training.
• Madagascar received a $9 million grant from the AfDF to strengthen national capacity to implement strong governance programs. The project has three components:
(i) support for the enhancement of transparency and accountability in public finance management;
(ii) support for the modernization and enhancement of the legal and judicial environment;
(iii) project management improvement.
The grant will build national skills, in order to improve the quality of the output of public services and allocation of budgetary resources. It will help elaborate budget-programs in five pilot ministries (Justice, Education, Health, Agriculture and Industry) and implement a computerized system for managing public accounts.
• Kyrgyzstan received a $7 million grant from IDA to clean up radioactive Soviet-era mining residue and decrease vulnerability to landslides. Specifically, this grant project
comprises key mitigation measures designed to:
(i) isolate and protect abandoned uranium mine tailings and waste dumps from disturbance by natural processes such as landslides, floods, and from leaching and dispersal processes associated with ground- and surface-water drainage;
(ii) create an effectively administered disaster management and response system;
(iii) develop and implement systems to detect and warn against active landslide movements.

III. Enhancing Accountability: Transparency, Governance and Corruption