GLOBAL MONITORING REPORT 2004 Policies andActions forAchieving the Millennium Development Goals and Related Outcomes GLOBAL MONITORING REPORT 2004 Policies andActions forAchieving the Millennium Development Goals and Related Outcomes © 2004 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 All rights reserved. 1 2 3 4 07 06 05 04 This volume is a product of the staff of the World Bank and the International Monetary Fund. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank, the Board of Executive Directors of the International Monetary Fund, or the governments they represent. The World Bank and the International Monetary Fund do not guarantee the accuracy of the data included in this work. 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ISBN 0-8213-5859-6 Contents Foreword ix Acknowledgments xi Abbreviations and Acronyms xiii Executive Summary xvii Millennium Development Goals (MDGs) xxii Overview: From Vision to Action 1 P A R T I Framework 19 1 Monitoring Framework 21 2 MDG Prospects: Reasons for Optimism, Grave Concerns 33 P A R T II Developing-Country Policies 49 3 Overall Picture 51 4 Improving Enabling Climate for Growth: Economic and Financial Policies 57 5 Upgrading Public Sector Governance 81 6 Strengthening Infrastructure 93 7 Accelerating Human Development 107 8 Promoting Environmental Sustainability 125 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 4 iii C O N T E N T S P A R T III Developed-Country Policies 131 9 Fostering Growth and Stability: Macro-financial Policies 133 10 Dismantling Barriers to Trade 143 11 Providing More and Better Aid 163 12 Fulfilling Responsibilities for Global Public Goods 181 P A R T IV Role of International Financial Institutions 189 13 Monitoring the IFIs' Contribution 191 References 217 Boxes Millennium Development Goals xxii 1.1 An action plan for improving development statistics 24 1.2 Strengthening the links between PRSPs and the MDGs 30 2.1 East Asia and Pacific: Despite solid performance on MDGs, challenges remain 38 5.1 Improving fiscal transparency through ROSCs 84 5.2 The African Peer Review Mechanism: self-assessing governance 89 5.3 Governance in Africa--progress on a difficult agenda 90 6.1 Water supply and sanitation in the MDGs 104 7.1 Rwanda: HIV/AIDS and health expenditures 112 7.2 The case of the missing money: monitoring public expenditure 115 7.3 The Bangladesh Female Secondary School Assistance Program 117 8.1 Multisectoral interventions to achieve the MDGs: lessons from child mortality in rural India 128 8.2 The United Nations Task Force on Environmental Sustainability 128 9.1 Differences between remittances and capital flows 139 10.1 The EU's Common Agricultural Policy reform 149 10.2 Lessons from Integrated Framework diagnostic trade integration studies 158 11.1 Estimating the cost of the MDGs 167 11.2 Measuring aid selectivity 171 11.3 Vietnam's comprehensive government-led harmonization program 176 12.1 International Task Force on Global Public Goods 182 iv 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 4 C O N T E N T S 12.2 Progress toward environmental sustainability through performance review and peer pressure 183 12.3 International environmental agreements: toward global cooperation, with some notable exceptions 184 13.1 Framework for assessing IFI contributions 192 13.2 Results-based CAS 200 13.3 Proposed IDA14 results-measurement system 206 13.4 Sectorwide approach to primary education development 209 Figures 1.1 Framework linking policies and actions with development outcomes 25 1.2 Monitoring: dimensions of developing-country policies 27 1.3 Monitoring: dimensions of developed-country policies 28 1.4 Monitoring: dimensions of development agency support 30 2.1 Growth prospects improve, but not enough 35 2.2 Most regions will reach the goal of halving poverty by 2015, but Sub-Saharan Africa is seriously off track 37 2.3 Mortality at a given level of national income has been declining 40 2.4 A few regions are close to the target on primary education: others are off track 41 2.5 Prospects for reaching the child mortality goal are dim 43 2.6 Reform combined with stronger partner support can substantially boost prospects for achieving the MDGs 46 3.1 Developing countries' policies have improved; governance and institutions lag 52 3.2 Other ratings corroborate that developing-country policies have improved but that governance and institutions lag 54 3.3 The transition countries are making broad progress in removing obstacles to business 55 3.4 The developing-country policy diamond shows progress, but much more is needed 55 4.1 Faster growing countries typically have better macroeconomic policies 59 4.2 Better-off countries tend to restrict trade less 65 4.3 Overall policy on trade in services remains more restrictive in developing countries 66 4.4 Heavy regulation is associated with lower productivity 67 4.5 Heavier regulation contributes to the informal economy and corruption 68 4.6 More regulation does not necessarily produce better social outcomes 68 4.7 Protecting property rights is associated with more credit 69 4.8 Poor countries regulate the most 70 4.9 Low-income countries lag far behind best practice in promoting business 71 4.10 Low-income countries lag the most in property rights and rule of law 72 4.11 Countries are improving their private business environment 73 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 4 v C O N T E N T S 4.12 The financial sector is deepening in the developing world, but at a varying pace 75 4.13 Deposit growth has not been equally reflected in growth in private sector credit 76 4.14 Financial system strength is typically positively correlated with compliance with Basel Core Principles 77 4.15 Capital markets are shallow in low-income countries 78 5.1 The quality of governance is weak but improving in developing countries 87 5.2 Civil liberties are gradually improving in developing countries 88 5.3 Participatory processes are also improving in developing countries 88 6.1 Gaps in infrastructure call for significantly increased spending, which must be managed well for effectiveness 101 7.1 Investment in human capital is up, but more is needed 109 7.2 Developing countries are allocating more public spending to human development 110 7.3 Public spending covers more of the cost of health care in high-income countries than in low-income countries 111 7.4 Public spending on human development often benefits the rich more than the poor 114 7.5 Teachers' salaries absorb most recurrent education spending 116 8.1 Environmental policy ratings are low but improving 126 9.1 A robust global economy requires orderly resolution of the large external and fiscal imbalances 135 9.2 Low-income countries receive little foreign direct investment 137 9.3 Private capital flows to developing countries are recovering, led by debt flows 137 10.1 Potential income gains from trade reforms are large and can help reduce poverty 145 10.2 Escalating tariff rates discourage development 147 10.3 Protection in agriculture is high--a multiple of that in manufacturing 153 10.4 Is overall trade policy pro development? Mixed picture 154 10.5 Potential gains from liberalization of services, especially migration, are large 157 11.1 Aid is rising but is well short of what is needed 164 11.2 The increase in ODA in 2002 was concentrated in special-purpose grants 165 11.3 The proportion of aid provided in cash and more flexible forms should be rising, not falling 169 11.4 Institutions and policies matter for aid effectiveness 169 11.5 More selective donors provide more aid per capita to countries with stronger policies and institutions 170 11.6 Aid fragmentation is high 172 11.7 Aid flows are typically more volatile than fiscal revenues in aid-dependent countries 173 12.1 MDGs and Kyoto Protocol call for reduction of greenhouse emissions, but results tell a different story 185 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 4 C O N T E N T S Tables 2.1 Growth rates and decline in poverty by region, through 2015 36 2.2 Projected per capita growth and improvement in poverty in Sub-Saharan Africa, 2000­2015 39 2.3 Primary education completion rates, progress needed by region 41 2.4 Distance from the goal of gender parity in primary and secondary education, by region, circa 2000 42 4.1 Macroeconomic indicators for low-income countries, by region, 1983­2008 58 4.2 Quality of macroeconomic policies for low-income countries, by country characteristics 60 4.3 Macroeconomic indicators for middle-income countries, 1983­2008 61 4.4 Impact of financial crises on poverty, East Asia, 1997­98 62 4.5 Decline in tariffs in developing countries, late 1980s to 2003 63 4.6 Decline in core nontariff barriers in developing countries, 1989­94 to 2000 63 4.7 Major users of antidumping, developing countries, 1995­2002 64 4.8 Overall trade restrictiveness of developing-country groups, 2001 64 4.9 Investment climate, selected low- and middle-income countries, 2002 72 4.10 Summary of lessons learned from corporate governance assessments 74 4.11 Evolution of selected financial soundness indicators, 1998­2002 76 5.1 Improvement in public financial management in developing countries, 1999­2003 82 5.2 Public financial management benchmarks used in HIPC assessments 83 5.3 Central government tax revenue, 1990­2001 85 5.4 Quality of public sector governance, 1999­2003 86 5.5 Worldwide governance indicators, 1998­2002 87 6.1 Distribution of studies according to their findings on impact of infrastructure investment on productivity or growth 94 6.2 Access of population to infrastructure services 96 6.3 Technical quality of infrastructure services 97 6.4 Quality of infrastructure services as perceived by commercial users 98 6.5 Electricity reform in selected countries, 2003 99 6.6 Expected annual needs for new investment and maintenance in infrastructure, 2005­10 100 6.7 Private commitments for infrastructure, 1990­2002 102 7.1 Private health expenditure 111 7.2 Public spending on social protection for selected countries by region 113 7.3 Frequency of attended births by wealth and region, various years 119 8.1 Selected outcome indicators of environmental sustainability by region and country income category 127 9.1 Macroeconomic indicators for advanced economies, 1993­2008 134 9.2 Global economic environment and developing countries 136 9.3 Remittances to developing countries, by region, 2001­03 138 10.1 MFN tariffs, developed countries, 1990 and 2002 146 10.2 Simple average NTB coverage ratios, 2001 147 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 4 vii C O N T E N T S 10.3 Agricultural support, 1986­88 and 2000­02 148 10.4 Trade shares of products affected by agricultural subsidies 150 10.5 Antidumping investigations by selected OECD members, 1995­2002 151 10.6 Average tariff imposed in final U.S. antidumping duty determinations 152 10.7 Overall trade restrictiveness and import shares, high-income OECD and Quad, 2001 152 11.1 Actual ODA and post-Monterrey commitments (DAC donors), 2002 and 2006 165 11.2 Framework of indicators on progress on harmonization and alignment (provisional) 175 11.3 Debt service and poverty-reducing expenditure by the 27 HIPCs that have reached the decision point 177 12.1 Aid for the environment, 1990­2000 186 12.2 Performance of developed countries on global environmental sustainability 186 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 4 Foreword T his Global Monitoring Report is the will spur further interaction on policies and first in a planned series of annual actions to meet the agreed development goals. reports assessing the implementation The findings of the report provide a of policies and actions for achieving the Mil- sobering assessment of progress toward the lennium Development Goals (MDGs) and MDGs, and of progress in meeting the com- related outcomes. These reports will under- mitments made at Monterrey. As the report pin regular monitoring by the Development makes clear, on current trends, most MDGs Committee, the joint Ministerial body of our will not be met by most countries. This is two institutions, of progress on the policy not to downplay the impressive progress agenda; and they will aid the Development made in some countries, particularly large Committee in setting priorities for action ones such as China and India. But there are and defining the accountabilities of the key many that are falling behind, especially in actors--developing and developed countries Sub-Saharan Africa. And we can do better and multilateral institutions. The Global even in countries where progress has been Monitoring Report is being published in order good. There is an urgent need to scale up to disseminate its findings and messages more actions, building on the foundations laid by widely. We expect to publish these reports past successes and lessons learned from past each year and to maintain the momentum mistakes. The report identifies where the toward achieving the MDGs by 2015. need for action is most critical. This report has been prepared jointly by the The report provides a range of evidence on staff of the World Bank and the International the improvement of policies and institutions Monetary Fund, in close collaboration with in developing countries. We have seen evi- partner agencies--other multilateral develop- dence of this improvement directly, through ment banks, the United Nations, World Trade our own visits and interactions with people in Organization, Organisation for Economic Co- countries in all parts of the developing world. operation and Development and its Develop- In Africa, for instance, the New Partnership ment Assistance Committee, and the European for Africa's Development has asserted a new Commission. It is particularly encouraging that accountability, and there are now many we now have such a broad partnership sup- countries that have taken credible steps to porting this effort. We hope that this first report strengthen their policies and governance with 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 4 ix F O R E W O R D a clear sense that there is now an unprece- ter with country-owned priorities, to make dented opportunity for accelerating progress it more predictable and flexible, to focus it on development results. More needs to be on results, and to harmonize aid practices done to deepen and sustain reforms, but we and procedures. believe that we have the basis for scaling up The report also highlights the need for in many countries. continued attention to how international As the report shows, in contrast to the agencies, including our own, can strengthen improving performance in many developing their support at the country, regional, and countries, the developed countries are falling global levels. There is clear recognition of the behind on two critical fronts that are vital to importance of strong results orientation in accelerating progress and scaling up results-- what we do individually and collectively. trade and aid. We cannot overemphasize the Refining and strengthening institutional roles importance and urgency of reinvigorating in low-income countries, including deepen- the Doha Round, including agreement on ing the process of preparation and imple- improved market access for agriculture and mentation of Poverty Reduction Strategy labor-intensive manufactures that are so Papers, is a priority area for attention. At the critical to the prospects of the poorest coun- same time, we need to continue to adapt tries. The other area for priority attention is approaches and instruments to the evolving the quantity and quality of aid. There is a needs of middle-income countries. clear need to increase the volume of devel- In sum, this first Global Monitoring Report opment assistance in support of countries is, in our view, an important and credible step implementing sound macroeconomic, struc- in putting in place a framework for results and tural, and institutional policies to accelerate accountability that will enhance the inter- progress toward the MDGs. In parallel, we national development community's review of need political commitment on the agenda to progress on and priorities for achieving global improve the quality of aid--to align aid bet- development goals. James D. Wolfensohn Rodrigo de Rato President Managing Director World Bank International Monetary Fund 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 4 Acknowledgments T his report has been prepared jointly by Mary Hollifield, Philip Keefer, Steve Knack, the staff of the World Bank and the Victoria Levin, Maureen Lewis, Pilar Maistera, International Monetary Fund. In Tamar Manuelyan Atinc, Roberto Martin- preparing the report, staff have collaborated Hurtado, Caralee McLiesh, Aaditya Mattoo, closely with partner institutions--other Marcelo Olarreaga, John Panzer, Axel Peuker, multilateral development banks, the United Dilip Ratha, Vanessa Saldanha, Joanne Salop, Nations, World Trade Organization, Organ- Sudhir Shetty, Susan Stout, Eric Swanson, isation for Economic Co-operation and Caroline Van Den Berg, Dominique Van Der Development and its Development Assistance Mensbrugghe, and Linda Van Gelder. Committee, and the European Commission. Inputs from IMF staff were coordinated by The cooperation and support of staff of these James Boughton. Other Fund contributors institutions are gratefully acknowledged. included Charles Blitzer, Benedict Clements, Zia Qureshi was the lead author and man- Thomas Dorsey, Peter Fallon, Judith Gold, ager of the report. The work was carried out Sanjeev Gupta, Peter Heller, Timothy Lane, under the general guidance of Shengman Hans Peter Lankes, James Morsink, David Zhang, Managing Director, World Bank. The Robinson, Carlo Sdralevich, Mark Swin- Bank team of contributors included Shaida burne, Patrizia Tumbarello, and Kal Wajid. Badiee, Gilles Bauche, Gordon Betcherman, Guidance received from the Executive Milan Brahmbhatt, Cecila Briceno-Garmen- Directors of the Bank and the Fund during dia, Barbara Bruns, Punam Chuhan, Mansoor discussions of the draft report is gratefully Dailami, Anis Dani, Shantayanan Devarajan, acknowledged. The report has also benefited Simeon Djankov, David Dollar, Mark Dorf- from many useful comments and suggestions man, William Dorotinsky, Poul Engberg-Ped- received from Bank and Fund management ersen, Antonio Estache, Manuel Felix, Deon and staff in the course of the preparation and Filmer, Lucia Fort, Engilbert Gudmundsson, review of the report. The World Bank's Office Christopher Hall, Jonathan Halpern, Kirk of the Publisher coordinated book design, Hamilton, James Hanson, Bernard Hoekman, editing, and print production. 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 4 xi Abbreviations and Acronyms AFD Agence Française CGIAR Consultative Group on de Développement International Agricultural AfDB African Development Bank Research AGOA African Growth CIPE Country Institutional and Opportunity Act Policy Evaluation AMS Aggregate measure of support CPA Country Performance APRM African Peer Review Assessment Mechanism CPIA Country Policy and ARDE Annual Review of Development Institutional Assessment Effectiveness DAC Development Assistance AROE Annual Report on Operations Committee (OECD) Evaluation DATA Data Accountability and AsDB Asian Development Bank Technical Assistance Project ATC Agreement on Textiles DB Doing Business Project and Clothing DEC Development Economics Group AVEs Ad valorem equivalents (World Bank) Bank World Bank DHS Demographic and Health BCP Basel Core Principle Survey BEEPS Business Environment and EAP East Asia and Pacific Enterprise Performance Surveys EBA Everything-but-Arms Initiative BPO Business process outsourcing EBRD European Bank for CAC Collective action clauses Reconstruction and CAE Country Assistance Evaluation Development CAP Common Agricultural Policy ECA Europe and Central Asia region CAS Country Assistance Strategy Educo Education with the Participation CBO Community-based organization of Communities Program CDF Comprehensive Development EFA-FTI Education for All­Fast-Track Framework Initiative CEDAW Convention on Elimination EIB European Investment Bank of All Forms of Discrimination EPR Environmental performance against Women review 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 4 xiii A B B R E V I A T I O N S A N D A C R O N Y M S ESAF Enhanced Structural IFC International Finance Adjustment Facility (IMF) Corporation ESW Economic and sector work IFF International Finance Facility EU European Union IFI International financial FDI Foreign direct investment institution FSAP Financial Sector Assessment IFS International Financial Program (IMF and World Statistics Bank) IGR Institutional and Governance FSLC Financial Sector Liaison Reviews Committee ILO International Labour FSSAP Female Secondary School Organisation Assistance Program IMF International Monetary Fund (Bangladesh) INFVP Infrastructure Vice Presidency Fund International Monetary Fund (World Bank) GAC Governance and Anti- IPP Independent power producers Corruption Survey I-PRSP Interim Poverty Reduction GATS General Agreement on Trade Strategy Paper in Services ITC International Trade Center GDF Global Development Finance ITU International Telecommunication GDP Gross domestic product Union GEF Global Environment Facility JIC Joint Implementation GEP Global Economic Prospects Committee GFATM Global Fund to Fight AIDS, JSA Joint Staff Assessment Tuberculosis, and Malaria KfW Kreditanstalt fur Wiederaufbau GFS Government Finance Statistics LAC Latin America and Caribbean GNI Gross national income region GPGs Global public goods LDCs Least developed countries GSP Generalized System LICUS Low-income countries of Preferences under stress HIPC Heavily indebted poor country MDB Multilateral development bank HIPC AAP HIPC Assessment and MDGs Millennium Development Goals Action Plan MFA Multifiber Arrangement HS Harmonized System MFN Most favored nation IAP Infrastructure Action Plan MICs Middle-income countries IBRD International Bank for MIGA Multilateral Investment Reconstruction and Guarantee Agency Development MNA Middle East and North Africa ICA Investment climate assessment region ICB/NCB International Competitive MoU Memorandum of Understanding Bidding/National Competitive MTEF Medium-Term Expenditure Bidding Framework ICRG International Country NAFTA North American Free Risk Guide Trade Agreement IDA International Development NCA New Capital Accord or Basel II Association NEPAD New Partnership for Africa's IDB Inter-American Development Development Bank NGO Nongovernmental organization IEO Independent Evaluation Office NPV Net present value 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 4 A B B R E V I A T I O N S A N D A C R O N Y M S NTB Nontariff barrier TSE Total support estimate O&M Operation and maintenance TUPE Transfer of Undertakings and ODA Official development assistance Protection of Employees OECD Organisation for Economic Co- U.N. United Nations operation and Development UNAIDS Joint United Nations OED Operations Evaluation Programme on HIV/AIDS Department (World Bank) UNCTAD United Nations Conference OTRI Overall trade restrictiveness for Trade and Development index UNDAF United Nations Development PARIS21 Partnership in Statistics Assistance Framework for Development in the UNDP United Nations Development 21st Century Programme PEFA Public Expenditure and UNECA United Nations Economic Financial Accountability Commission for Africa PFM Public financial management UNEP United Nations Environment PPP Purchasing power parity Programme PREM Poverty Reduction and UNESCO United Nations Educational, Economic Management Group Scientific, and Cultural (World Bank) Organization PRGF Poverty Reduction and Growth UNGASS United Nations General Facility Assembly Special Session PRSP Poverty Reduction Strategy on HIV/AIDS Paper UNICEF United Nations Children's Fund PSE Producer support estimate UNSD United Nations Statistics QAG Quality Assurance Group Division (World Bank) URAA Uruguay Round Agreement ROSC Reports on Observance of on Agriculture (World Trade Standards and Codes Organization) RPGs Regional public goods USAID United States Agency for RTA Regional trade agreement International Development SDT Special and differential VAT Value-added tax treatment WBI World Bank Institute SME Small and medium enterprises WBI GI WBI Governance Indicators SPA Strategic Partnership WDR World Development Report with Africa WDI World Development Indicators SSA Sub-Saharan Africa region WEO World Economic Outlook SWAp Sectorwide approach WHO World Health Organization TA Technical assistance WITS World Integrated Trade Solution TB Tuberculosis WP-EFF Working Party on Aid TI Transition indicators Effectiveness and Donor TRIPS Trade-related aspects of Practices intellectual property rights WSS Water supply and sanitation TRQ Tariff rate quota WTO World Trade Organization 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 4 xv Executive Summary MDG Prospects--Need to Scale reform efforts by developing countries Up Action, Significantly and with stronger support from developed Swiftly countries and international agencies. On current trends, most Millennium Devel- Priorities for Developing opment Goals (MDGs) will not be met by Countries most countries. The income poverty goal is likely to be achieved at the global level, but Policies in developing countries have improved, Africa will fall well short. For the human enhancing their capacity to make effective use development goals, the risks are much more of resources, domestic and external, for devel- pervasive across the regions. Likely shortfalls opment. Performance varies widely, however, are especially serious with respect to the and reform needs to be accelerated and deep- health and related environmental goals-- ened in many countries, especially in Sub- child and maternal mortality, access to safe Saharan Africa. The analysis suggests four drinking water and basic sanitation. Few, if areas for particular attention: any, regions will achieve the mortality goals. The implication is clear. Achievement of the Improving the enabling climate for private MDGs requires rising above current trends sector activity, by solidifying progress on and substantially accelerating progress toward macroeconomic stability, further reducing the goals. There is an urgent need for all par- barriers to trade, and shifting emphasis ties to scale up action. The agenda has three from regulating business operations to essential elements: strengthening market institutions. In macro- economic policy, the main area for improve- Accelerating reforms to achieve stronger ment is fiscal management. Strengthening economic growth--Africa will need to property rights and the rule of law are the double its growth rate. key areas for attention with respect to Empowering and investing in poor peo- the institutional environment. An improved ple--scaling up and improving the delivery enabling economic climate is essential both of human development and related key for mobilizing domestic investment and services. attracting more foreign investment. Speeding up the implementation of the Strengthening capacity in the public sector Monterrey partnership, matching stronger and improving the quality of governance 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 4 xvii E X E C U T I V E S U M M A R Y --the biggest challenge for many coun- Implementation needs to be expedited on tries. The most serious shortcomings are in two key donor-supported programs--the transparency, accountability, and control Education for All-Fast Track Initiative of corruption. Performance is better in (EFA-FTI) and the Global Fund to Fight general in public financial management-- AIDS, Tuberculosis, and Malaria (GFATM). expenditure and revenue management-- As of January 2004, only $6 million had but needs to improve further. On average, been disbursed under the EFA-FTI against low-income countries can increase tax rev- initial commitments of $170 million (total enue by at least 1 to 2 percent of GDP by external financing needs for primary edu- eliminating tax exemptions and improving cation in low-income countries are esti- tax administration. The bulk of the financ- mated to rise to at least $3.7 billion by ing needed to achieve the MDGs, however, 2005­06, compared with actual assistance will have to come from improving the of about $1 billion in 2002). As of the efficiency of existing spending, economic same date, only $230 million had been dis- growth, and external resources. In Africa, bursed under GFATM against $3.4 billion which has the weakest governance indica- in pledges and $1.5 billion in commit- tors, the New Partnership for Africa's ments. Swifter action is needed on the part Development (NEPAD) initiative provides of both donors in providing funds and a very promising foundation for reform to recipients in addressing implementation build on. constraints. Scaling up investment in infrastructure and ensuring its effectiveness, according prior- Cutting across the policy agenda is the ity to infrastructure services closely linked need to empower women, by removing bar- to the human development goals--water riers to their fuller participation in the devel- and sanitation, transport. Compared with opment process, and the need to ensure the levels of the 1990s, infrastructure environmental sustainability. These cross- spending (investment plus operation and cutting concerns should be fully integrated maintenance) will need to rise by 3.5 to 5 into policymaking. percent of GDP in low-income countries Within the foregoing agenda, specific pri- and by 2.5 to 4 percent of GDP in lower- orities and sequencing of actions of course middle-income countries, with the pace of vary across countries and must be determined the increase depending upon institutional at the country level in the context of coherent, capacity and macroeconomic conditions in country-owned development strategies, as the country concerned. reflected in the Poverty Reduction Strategy Enhancing the effectiveness of service Papers (PRSPs) in the case of low-income delivery in human development, by better countries and respective national strategy targeting education, health, and social frameworks in the case of middle-income assistance services toward poor people, countries. addressing governance-related impedi- ments to service quality and effectiveness, Priorities for Developed increasing community participation, and Countries scaling up on the basis of successful pro- grams (for example, the Female Secondary Overall, developed country actions to date School Assistance Program in Bangladesh, have fallen well short of the Monterrey vision. the Education with the Participation of Progress seriously lags commitments in most Communities (Educo) program in El Sal- areas. This must change, and change quickly, vador, and the Education, Health, and to help accelerate progress toward the devel- Nutrition (Progresa) program in Mexico). opment goals. The vision of Monterrey needs 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 4 E X E C U T I V E S U M M A R Y to be translated rapidly into concrete actions. ization. For developing countries (especially Priorities for developed countries relate to the low-income ones) to take full advantage trade and aid policies. But also important are of improved market access, they will need the broad conduct of macroeconomic and support in dealing with the "behind-the- financial policies conducive to robust growth border" agenda. Some countries will also in the world economy and increased attention need assistance with adjustment costs asso- to key global public goods, including environ- ciated with trade liberalization. mental sustainability. Providing more and better aid. Aid flows need to rise well above current levels. Sustaining stable and strong growth in the Although donors have made post-Mon- global economy. A key issue is the orderly terrey additional commitments of about resolution of fiscal and external imbal- $18.5 billion a year by 2006, estimates ances, especially the large U.S. external show that an initial increment of at least current account deficit. An abrupt adjust- $30 billion annually can be effectively uti- ment in the large economies could retard lized by developing countries. As countries growth and leave global economic condi- improve their policies and governance, the tions vulnerable to shocks. Further work amount of additional aid that can be used by developed countries--working with effectively will rise into the range of $50 emerging market countries and interna- billion plus a year, which estimates sug- tional financial institutions--is needed to gest will be needed to support adequate improve the international financial archi- progress toward the MDGs. ODA rose by tecture to enhance prospects for stronger $6 billion in nominal amount ($4 billion in and more stable capital flows to develop- real terms) in 2002, but the increase was ing countries and to reduce the likelihood almost wholly accounted for by special- and severity of financial crises. Rapid purpose allocations--technical coopera- progress is being made in the use of collec- tion, debt relief, emergency and disaster tive action clauses, but substantial work relief. More aid will need to be provided in remains to improve practices in sovereign forms that can flexibly meet the incremen- debt restructuring. tal costs of achieving the MDGs, including Ensuring a successful, pro-development, providing a higher proportion directly to and timely outcome to the Doha Round. countries in the form of cash, supporting High-income countries, given their weight good policy performance with predictable in the system, must lead by example. They and longer-term aid commitments, and should aim for reform targets that are suffi- allowing for the financing of recurrent ciently ambitious. These could include: costs where country circumstances war- complete elimination of tariffs on manufac- rant. There is also substantial scope for tured products; complete elimination of increasing the effectiveness of aid by agricultural export subsidies and complete improving the allocation of aid across decoupling of domestic agricultural subsi- countries, aligning aid with national dies from production, and reduction of development strategies and priorities (as agricultural tariffs to, say, no more than 10 expressed through PRSPs in the case of percent; and commitments to ensure free low-income countries), and harmonizing cross-border trade in services delivered over donor policies and practices around the telecommunications links, complemented recipient country's own systems. To ensure by actions to liberalize the temporary move- debt sustainability in heavily indebted ment of workers. Developing countries also poor countries that are pursuing good must seize the opportunity provided by the policies, a larger proportion of additional Round to further their own trade liberal- aid should be provided in the form 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 4 xix E X E C U T I V E S U M M A R Y grants. Timely and adequate assistance in monizing operational programs and prac- the event of adverse exogenous shocks is tices around national strategies and sys- especially important for these countries. tems, while also continuing to adapt Improving policy coherence for develop- approaches and instruments to the evolv- ment. Increased aid and other actions need ing needs of middle-income countries. to be part of a coherent overall approach Furthering progress on the results agenda, to supporting development. In many cases, including implementation of the action plan there are contradictions in policies, with endorsed by the sponsoring agencies at the support provided in one area undercut by Marrakech Roundtable on Managing for actions in another. Putting in place Development Results held in February 2004. processes that enable an integrated assess- Improving selectivity and coordination of ment of the coherence of policies that agency programs in line with comparative affect development--trade, aid, foreign advantage and mandate to achieve greater investment and other capital flows, migra- systemic coherence and effectiveness. tion, knowledge and technology transfer, environment--would help avoid such out- Priorities for Strengthening comes. Recent actions by Sweden to insti- the Monitoring Exercise tute an "integrated global development policy," and by Denmark and other coun- To carry this agenda forward, the World Bank tries to prepare regular assessments of and the International Monetary Fund plan to their contribution to the goal of establish- focus future Global Monitoring Reports on ing a global partnership for development, specific challenges--at the country, agency, and go in the right direction. global levels--for meeting these priorities. This will require further work, especially in the fol- Priorities for International lowing areas: Financial Institutions Strengthening the underlying development Review of how the international financial statistics, including timely implementation institutions are playing their role in contribut- of the action plan agreed among interna- ing to the achievement of the MDGs and tional statistical agencies at the Marrakech related outcomes shows that they have made Roundtable. progress in enhancing their development effec- Conducting research on the determinants of tiveness. This is reflected in progress in coun- the MDGs, on critical issues such as effec- try focus and ownership, results orientation of tiveness of aid, and on development of more operations, transparency and accountability, robust metrics for key policy areas such as and partnership. But there is much more to do. governance and for the impact on develop- There are three key areas for action to deepen ing countries of rich country policies. and build on the progress made: Deepening collaboration with partner agen- cies in this work, building on respective Refining and strengthening institutional agency comparative advantage and ensuring roles in low-income countries, including that the approach to monitoring and evalu- by deepening the PRSP process and har- ation is coherent across agencies. 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 4 Millennium Development Goals 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 4 Overview From Vision to Action T he turn of the century was marked by their part. Implementation needs to happen some significant and promising events within countries and at the global level. All for world development. The Millen- parties must deliver on their part of the com- nium Declaration--signed by 189 countries in pact. This was the central message of the September 2000--led to the adoption of the 2003 International Monetary Fund (IMF) Millennium Development Goals (MDGs). and World Bank (Bank) Annual Meetings These goals set clear targets for eradicating held in Dubai. But is implementation actually poverty and other sources of human depriva- happening? What progress has been made? tion and for promoting sustainable develop- What constraints are blocking implementa- ment (see goals and targets, p. xxii). This was tion? How are all parties doing in delivering followed in 2001­02 by major international on their commitments? What are the priori- meetings in Doha, Monterrey, and Johannes- ties in the agenda? This report attempts to burg that contributed to the emergence of a answer those questions. shared understanding of the broad develop- The themes of implementation and ment strategy and policies needed to attain the accountability constitute the fundamental MDGs. The meeting in Monterrey in March motivation behind the global monitoring 2002 ushered in a new compact between initiative, launched at the request of the developing and developed countries. The Development Committee, the joint Ministe- Monterrey Consensus stressed mutual respon- rial body of the World Bank and the IMF. sibilities in the quest for the MDGs. It called The annual global monitoring reports, of on the developing countries to improve their which this report is the first, will provide an policies and governance. And it called on the assessment of progress on policies and developed countries to step up their support, actions for achieving the MDGs and related especially by providing more and better aid development outcomes. These reports will and more open access to their markets. underpin the Development Committee's reg- With broad agreement on the goals and ular monitoring of progress on the policy strategies to achieve them, the task now is agenda and reinforcement of the priorities implementation. It is time to translate vision for action and the accountabilities of the key into action; to strive for a better balance in actors--developing and developed countries the development effort so that all parties play as well as multilateral agencies. 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 4 1 O V E R V I E W Prospects for Meeting the MDGs: education are most serious in the same three Reasons for Optimism, regions. While the target for gender equality Grave Concerns in primary and secondary education is to be achieved preferably by 2005, about a third Income poverty goal: a mixed picture. At the of developing countries appear unlikely to global level, the world will likely meet the achieve it even by 2015. Prospects for gender first goal of halving income poverty between parity at all levels of education, including 1990 and 2015, thanks to stronger economic higher education, are even less comforting. growth spurred by improvements in policies-- But the prospects are gravest in health. On especially in China and India, the world's two current trends, the goals of reducing child and most populous countries. With current trends, maternal mortality will not be attained in most regions will achieve or come close to most regions. Only a small proportion of achieving the goal. East Asia has already met countries (15­20 percent) currently appear to it. However, Sub-Saharan Africa is seriously be on track. The goal of halting and reversing off track; just eight countries, representing the spread of HIV/AIDS (human immuno- about 15 percent of the regional population, deficiency virus/acquired immunodeficiency will likely achieve the goal. Within other syndrome) and other major diseases (malaria, regions that will likely meet the goal at the tuberculosis) appears daunting. Their incidence aggregate level, a number of countries will not. continues to rise, further aggravating condi- Low-income countries under stress (LICUS), tions affecting child and maternal mortality about half of which are in Africa, are especially and entailing broad and serious economic and at risk of falling far short. The trends are social consequences. The risks of failure to broadly similar with respect to the target of halt the spread of HIV/AIDS are especially halving the proportion of people who suffer high in Sub-Saharan Africa, but are substantial from hunger, also part of Goal 1. The target in many countries in other regions as well. will likely be met at the global level, but Sub- The health goals are rendered more diffi- Saharan Africa and a number of countries in cult by the large gaps in access to safe drink- other regions will likely fall short. ing water and basic sanitation. The gaps are largest in Sub-Saharan Africa for water and Human development and environmental in South Asia for sanitation. The goal of halv- goals: more serious concerns. The risks asso- ing, by 2015, the proportion of population ciated with the human development goals are without access to safe water and sanitation more pervasive across the regions. While eco- means providing an additional 1.5 billion nomic growth has a significant effect on edu- people with water and 2 billion with sanita- cation and health outcomes, just as it does on tion. With current rates of progress at about income poverty, the magnitude of the effect is half what is needed, most regions will fall typically smaller. Prospects for progress on well short. At those rates, only about one- the human development goals also depend fifth of countries will achieve the target importantly on the scale and effectiveness of increase in access. Among low-income coun- development interventions directed specifi- tries, only about one-tenth will make it. cally toward them. The determinants of these goals are multiple and cut across sectors. Variation across countries. Global and The prospects are brighter in education regional trends hide considerable variation than in health. With current trends, several across countries. East Asia, with its rich regions will achieve or approach the goal of diversity, provides a good example. At one providing universal primary education. Again, end, the region has middle-income countries, shortfalls are likely in Sub-Saharan Africa, such as China and Thailand, that have and possibly in South Asia and the Middle already met or will soon meet several of the East and North Africa as well. Gender gaps in MDGs; some of those countries are develop- 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 4 O V E R V I E W ing "MDG-plus" agendas. At the other end, scourge. These achievements demonstrate low-income countries such as Cambodia and that rapid progress is possible, given good Papua New Guinea are seriously off track, as policies and the support of partners. are many poor countries in Sub-Saharan Africa. There is also diversity within coun- Scaling Up on the Basis tries, especially large ones. Although China of the Monterrey Consensus has already met the income-poverty MDG at the national level, progress has been much The implications of the foregoing assessment slower in some inland provinces that con- are clear. The achievement of the development tinue to have large concentrations of poverty. goals will require rising above current trends In general, middle-income countries are and accelerating the pace of development, and much better positioned to achieve the MDGs doing so swiftly. In line with the principles and than low-income countries. Many of them partnership established at Monterrey, all par- have already met the goals or are well on their ties must scale up their action. The agenda has way. Notwithstanding their progress on three essential elements: income poverty, those countries remain home to 280 million people living on less than $1 a Accelerating and deepening reforms to day and 870 million people living on less than achieve stronger economic growth $2 a day. A number of them lag in relation to Empowering and investing in poor peo- some of the non-income MDGs. For exam- ple--stepping up action to improve the ple, China, despite its spectacular perfor- delivery of services affecting human devel- mance in reducing income poverty, is not on opment track to meet the child mortality goal, based Speeding up the implementation of the on current trends. Monterrey partnership, matching stronger developing country efforts to spur growth Daunting challenges, but grounds for hope. and improve service delivery to poor peo- The MDGs present a difficult challenge, but ple with stronger support from developed past development successes give cause for countries and international agencies. hope. Globally, adult illiteracy fell by half over the past 30 years, while life expectancy Acting on multiple fronts. The multidimen- at birth rose by 20 years over the past 40 sionality of the MDGs, the linkages among years. Some countries have advanced partic- them, and their multisectoral determinants ularly far, particularly fast. Vietnam, for imply that the policy agenda for achieving the example, a low-income country, reduced goals is similarly broad. Indeed, the agenda poverty from 51 to 14 percent from 1990 to spans the gamut of development. There is no 2002. Even in Sub-Saharan Africa, there one-to-one link between the MDG relating to have been encouraging stories of success. a sector and policies relating to that sector. Botswana doubled the proportion of children The outcome in a given sector depends in primary school in 15 years, nearly achiev- importantly on factors outside that sector. ing universal primary education. Benin For child survival, for example, mother's edu- increased its primary enrollment rate and cation and access to safe water and sanitation Mali its primary completion rate by more may be more important than access to health than 20 percentage points in the 1990s. Mau- facilities. Likewise, schools and health facili- ritania increased the ratio of girls to boys at ties may exist, but girls may be prevented school from 67 to 93 percent between 1990 from attending if they spend much of their and 1996. Uganda reduced HIV/AIDS infec- time fetching water from distant sources or if tion rates for eight consecutive years in the adequate and safe means of transport are 1990s. Zambia may soon become the second lacking. The agenda cuts across sectors, and African country to slow the spread of this across policies, investments, and institutions. 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 4 3 O V E R V I E W The scaling-up effort, therefore, will require need expanded access to markets in devel- concerted action on multiple fronts. oped countries to increase exports and spur growth. And they need more aid to finance Promoting stronger economic growth. At the development programs that improve the center of the strategy to achieve the MDGs delivery of human development and infra- and related development outcomes must be structure services. This mutualism was clearly the promotion of stronger economic growth. recognized and affirmed at Monterrey, but Growth directly reduces income poverty and progress to date has been relatively slow. The expands resources for use toward the non- spirit of Monterrey needs to be translated income goals. So, first and foremost, eco- rapidly into action. nomic growth in developing countries will need to be stronger than recently attained or Priorities for Developing currently projected. Sub-Saharan Africa will Countries need to double its average GDP (gross domes- tic product) growth rate, to around 6 percent. Policies improving, but much further to go. This target is ambitious, of course, but some Indicators for the past five years show improve- countries in the region achieved it in the ment in policies in all regions, although to vary- 1990s: Cape Verde, Mauritius, Mozambique, ing degrees. On average, policy indicators and Uganda. What is needed is to accelerate remain the lowest in Sub-Saharan Africa, but policy and governance reforms to improve even there show an encouraging improvement the enabling climate for growth: macroeco- on most dimensions, suggesting that recent nomic stability and openness, the regulatory reforms are beginning to take hold. The and institutional environment for private sec- improvement in policies is creating conditions tor activity, physical and financial infrastruc- that enhance countries' capacity to make effec- ture, and public sector governance. tive use of resources for development, domestic and external. While some improvement has Scaling up service delivery. Reaching the goals occurred across all policy areas, progress is will also require policies and actions to especially notable in macroeconomic manage- enhance the capabilities of poor people--men ment and trade policy. Average inflation and and women--to participate in and benefit tariff rates have been cut in half in the past from growth. For their participation to be decade. The improved policy environment has effective, the poor need to be empowered contributed to a pick-up in economic growth. through improved delivery of education and Indeed, average per capita GDP growth in low- health services, as well as related infrastructure income developing countries in the past five services, such as water and sanitation and rural years was higher than during any other five- roads. Stepped-up investments in those ser- year period in the past two decades. Better poli- vices must be accompanied by reforms in sec- cies pay off. tor policy and institutional frameworks that Despite this improvement, however, growth improve the effectiveness of delivery, including in many countries--most of them in Sub- greater involvement of communities, especially Saharan Africa--remains below the level poor people, in making decisions. needed to achieve the MDGs. During 1998­ 2002, nearly 60 percent of low-income coun- Enhancing the global development partner- tries (with a combined population of 950 mil- ship. The developing countries are in the dri- lion) experienced per capita growth of less ver's seat in setting the agenda for achieving than 2 percent, while 32 percent (with a com- the development goals, but they will need bined population of 555 million) experienced help from development partners. Implemen- negative per capita growth. Factors such as tation will require increased cooperation at adverse political and external circumstances the global level. The developing countries have played a role, including the limited avail- 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 4 O V E R V I E W ability of aid resources and impediments to macroeconomic management as well, perfor- access to export markets in developed coun- mance is strongly correlated with the quality tries, but the growth response to improve- of institutions responsible for policy imple- ments in the macroeconomic and trade policy mentation. And in most developing countries, environment has been dampened by slower improved management of the environment progress on structural and institutional reforms requires building up fledgling environmental that are essential to improving the enabling cli- institutions. Responding to these challenges, mate for private sector activity. Stronger governments in more and more developing growth in the future will depend crucially on countries have launched governance and more vigorous and consistent efforts to speed institutional reforms. An important example up reforms in these areas. is the New Partnership for Africa's Develop- In the delivery of services--human develop- ment (NEPAD), an initiative owned and led ment, infrastructure--the picture is broadly by African countries that places improvement similar. Some areas show encouraging progress; in governance at the center of the reform others require stronger action. Resource allo- agenda. cation has improved somewhat, as evidenced by the increased investment in human capital. Country focus and ownership: central to suc- Public education and health spending increased cess. The primary determinant of the prospects over the 1990s from 6.9 to 7.4 percent of GDP for achieving the MDGs is developing coun- in those low-income countries for which data tries' own policies. Overall, progress has been are available. Successful innovations in service encouraging, but reforms need to be acceler- delivery to the poor are encouraging. These ated and deepened. The review conducted for include the Education with the Participation of this report points to five areas needing particu- Communities (EDUCO) program in El Sal- lar attention, as discussed below. Within these vador; the Progresa program of conditional broad areas, policy priorities for individual cash transfers to the poor linked to school and countries must be determined at the country clinic attendance in Mexico; and the Female level, in the context of coherent country devel- Secondary School Assistance Program in opment strategies. Country ownership and Bangladesh, which employs targeted financial leadership of the development strategy are cru- incentives and community engagement to cial to effective implementation and achieve- increase girls' enrollment in schools. Key ideas ment of results. from these innovations are now being applied For low-income countries, the Poverty in other countries, including most recently Reduction Strategy Papers (PRSPs) are the pri- Nepal. In many countries, however, the quality mary avenue of expression of a country-owned and effectiveness of service delivery show major and -led development strategy. In middle- deficiencies. These gaps point to the need to income countries, the policy integration and accelerate improvements in the underlying pol- prioritization role is performed within respec- icy and institutional framework to raise the tive national strategy frameworks. By the end yield of increased spending on services. of March 2004, 37 countries had prepared and were implementing full PRSPs; 16 more had The core of the reform agenda: institutional prepared Interim PRSPs (I-PRSPs). Countries reform. Cutting across the policy agenda is are increasingly reflecting the MDGs in their the need to improve governance. Public sec- PRSPs. The PRSP process itself is being deep- tor governance, while improving, remains the ened along various dimensions, including par- weakest area of the reform agenda in most ticipatory process, growth strategies, public countries. Institutional dimensions of reform expenditure management, and poverty and are also paramount in the improvement of the social impact analysis. Continued strengthen- private sector business climate and the per- ing of the PRSP process, and deepening of the formance of the service delivery sectors. In links with the MDGs, will ground the agenda 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 4 5 O V E R V I E W for achieving the development goals in coun- improvement in several countries. Gover- try-owned strategies. Countries can spell out nance of financial and corporate sectors also their commitments to policy and institutional needs to be strengthened to prevent the reforms in these strategies, which in turn build-up of balance-sheet vulnerabilities. enables donors to commit support in a coher- ent and consistent way. Improving Private Sector Enabling Environment Solidifying Macroeconomic Stability Extending progress toward outward-oriented Fiscal management: the main area for strategies. Despite significant liberalization, improvement. Macroeconomic management there is substantial scope for further reduc- has improved in all regions. Yet progress has tions in trade barriers, especially in regions been uneven and remains fragile in many where they remain high. In South Asia, for countries, especially in Sub-Saharan Africa. example, despite sharp declines since the late Fiscal management is the area of most concern. 1980s, the average tariff remains around 20 Performance is much better on monetary and percent. Taking into account nontariff barri- exchange rate management. Fiscal policy, as it ers (excluding technical product regulations), relates to the sustainability of public debt and South Asia's average tariff equivalent was an containment of fiscally derived macroeco- estimated 32 percent in 2001, the highest nomic imbalances, remains unsatisfactory in among developing regions. Developing coun- about a third of low-income countries. The tries should take advantage of the Doha deficiencies in structural aspects of fiscal policy Round to make further strides toward trade are even more serious, with nearly half of low- openness. Countries that derive a sizable part income countries assessed as having an unsat- of government revenue from trade taxes may isfactory composition of public expenditures. need assistance in adjusting to a regime of For these countries, therefore, a strengthening lower trade tariffs. In addition to reducing of macroeconomic policies, especially fiscal trade barriers, countries should move vigor- management, remains necessary. Even in coun- ously on the "behind-the-border" agenda, to tries with better performance, maintaining enable the private sector to exploit the and building on macroeconomic stability--an opportunities created by lower trade barri- essential foundation for sustained growth-- ers. The agenda includes the efficient supply will be a continuing challenge. of services closely related to trade--customs, In middle-income countries, macroeco- transport, and telecommunications, financial nomic policy indicators are better, on aver- services--and improvement of the broader age, than in low-income countries. Because enabling environment for entrepreneurship middle-income countries typically are more and private investment. Evidence suggests integrated into international capital mar- that full liberalization and regulatory reform kets, maintaining sound macroeconomic in services trade could add significantly to policies is especially important for reducing economic growth. vulnerability to crises--which can wash away hard-won gains in reducing poverty. In Reducing regulation, strengthening institu- the past two decades, average output loss in tions--especially property rights, rule of law. developing countries from currency crises is While improving, the regulatory and institu- estimated at about 7.5 percent of pre-crisis tional environment for private sector activity GDP. Although vulnerability indicators have still needs significant reform in many coun- improved in the past few years, the reduc- tries. Regulation typically is much heavier tion of public debt, especially external debt, and more complex in low-income countries, relative to GDP remains a key area for notwithstanding their more limited imple- 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 4 O V E R V I E W mentation capacities, raising the cost of start- in the low-income countries under stress. ing and operating a business and creating Governance ratings are higher in middle- opportunities for corruption. Starting a busi- income countries, but those ratings still are ness in high-income countries typically takes lower than their ratings in other policy areas. 30 days and costs less than 10 percent of per These findings highlight governance and insti- capita income; in low-income countries, it tution-building reforms as an area for partic- takes 74 days and costs two times per capita ular attention, as poor governance and weak income. While regulation is heavy, the essen- institutions can seriously undermine the effec- tial institutions underpinning markets are tiveness of policies and programs throughout weak. The most serious shortcomings are in an economy. Initiatives such as the NEPAD, property rights and rules-based governance, therefore, are especially valuable and timely. an area assessed as less than satisfactory in almost four-fifths of low-income countries. Controlling corruption. The most serious Such an environment deters investors, both shortcomings are in transparency, accountabil- domestic and foreign. Weak creditor rights ity, and control of corruption. Reform is com- and contract enforcement also inhibit the plex in these areas, which are less amenable to growth and deepening of the financial system. "technocratic" solutions. Progress will depend Countries need to shift emphasis from reg- on a careful nurturing of reform ownership and ulating business operations to building insti- of needed changes in bureaucratic culture. tutions that facilitate business by supporting Political will is key, as are political processes efficient and fair functioning of markets. A that allow broad participation, build in checks key area of reform is the strengthening of on executive authority, and enable citizens to property rights and of institutions that estab- hold administrations accountable. lish and enforce the rule of law, including legal and judicial reform and the reduction of Building on progress in public financial man- bureaucratic harassment. Continued strength- agement. Performance is better in public ening of the institutions of corporate gover- financial management, on average. A greater nance, especially in middle-income countries, focus on public expenditure and budget man- is also important. agement in the preparation of the PRSPs and in the initiative to help heavily indebted poor countries (HIPCs) has contributed to progress Upgrading Public Sector Governance in these areas, which must be sustained and Accelerating governance reform. The need to deepened. The importance of improved man- accelerate reform is greatest in public sector agement of public resources is underscored by governance. The quality of public sector gov- the need to create fiscal space for increased ernance has improved, especially in Europe spending on key infrastructure and human and Central Asia and South Asia. But the development services (see below) within sus- reform agenda calls for more vigorous action tainable overall fiscal positions. In many in many countries. In three-fourths of low- countries, the scope for reallocating spending income countries, overall public sector gov- toward development remains substantial. On ernance is assessed to be less than satisfactory, the revenue side, analysis shows that on aver- making it the weakest area of performance. age low-income countries can increase their The weaknesses are most pervasive precisely tax-to-GDP ratio by 1 to 2 percentage points in those countries where stronger institu- by eliminating tax exemptions and improving tional capacities are needed to manage devel- tax administration. Doing so would help opment interventions that will spur progress mobilize resources, although the bulk of the toward the MDGs--low-income countries in financing needed to achieve the MDGs will Sub-Saharan Africa. They are especially acute have to come from improving the efficiency 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 4 7 O V E R V I E W of existing spending, economic growth, and vate financing. At the same time, the decade- external resources. long decline in public spending on infrastruc- Decentralized governance can improve the ture needs to be reversed. That will require delivery of services at the local level. Decen- stronger mobilization of domestic resources, tralization is especially important for large including improved cost-recovery and reallo- middle-income countries like Brazil and cation of spending, and increased external China that need to tackle major concentra- assistance. Especially in the low-income coun- tions of poverty at the subnational level. To tries, external assistance must provide a larger be effective, decentralization must be under- share of total infrastructure spending than the pinned by sound intergovernmental fiscal sys- roughly 10 percent it provided in the 1990s. tems and local institutional capacities. Infrastructure requirements relating to water and sanitation warrant special attention in public spending and foreign assistance pro- Strengthening Infrastructure grams, given their close links to the health and Substantial scaling up of investment needed. gender goals, and the fact that this sector tra- Infrastructure plays a dual role in the effort to ditionally attracts less private financing than achieve the MDGs. It is an important part of other infrastructure sectors such as power and the enabling environment for economic telecommunications. growth, and it also delivers services that are key to meeting the human development and Increased investment: not the sole answer. gender equality goals. Gaps in the availability To ensure its effectiveness and sustainabil- and quality of key infrastructure are large, ity, investment must be underpinned by especially in low-income countries and in improvements in the policy and governance rural areas within countries. Narrowing framework, especially the capacity of key those gaps will require sizable increases in institutions. With more and more responsi- investment and associated spending on oper- bilities in infrastructure falling on local gov- ation and maintenance. Average spending on ernments, strengthening administrative and infrastructure (investment plus operation and financial capacities at the local level, includ- maintenance) in low-income and lower- ing developing and facilitating the use of middle-income countries may have to almost appropriate subsovereign financing instru- double from the levels of the 1990s (when ments, is increasingly important. such spending fell by 2 to 4 percent of GDP). This implies increases in infrastructure spend- ing (covering power, transport, telecommuni- Accelerating Human Development cations, and water and sanitation) on the order of 3.5 to 5 percent of GDP in low- More resources complemented by more effec- income countries and 2.5 to 4 percent of GDP tive use. Encouraging progress has been made in lower-middle-income countries relative to in human development. More investment is the low levels of the 1990s. The pace of the being made in education and health and more increase will depend upon the institutional attention is being paid to the effectiveness of capacity and macroeconomic conditions in service delivery. But progress needs to be the country concerned. accelerated and broadened if the human Financing this spending will be a major development goals are to be achieved. The challenge. Private investment in infrastructure deficiencies in service delivery are most seri- has increased, but not as much as expected. ous in Sub-Saharan Africa and South Asia, Efforts must continue to improve the regula- although even in these regions, individual tory and institutional environment for such countries are making progress, such as Ghana investment. Innovative instruments for risk on child mortality, and Ethiopia and Rwanda mitigation could also help leverage more pri- on primary completion. 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 4 O V E R V I E W In most low-income countries, the targets in interventions to educate girls is fundamen- education and health require the commitment tally embedded in the sociocultural context, of more resources to these services. However, community involvement can help ensure that in a number of these countries, there is sub- interventions are responsive to needs. Effec- stantial scope for increasing the impact of tive improvement of female access to educa- existing spending by correcting poor targeting tion--and to other key services--requires of subsidies, lax resource management, low that the design of services reflects gender con- efficiency and quality of service, and informa- cerns. Indeed, the goal of empowerment of tion failures. Examples abound. In Guinea, the women calls for gender concerns to be fully share of public spending on education and integrated into policymaking more broadly. health accruing to the richest quintile was found to be seven times that accruing to the Donor support: EFA-FTI and GFATM. The poorest. In Uganda, 87 percent of nonwage scaling up of human development in low- resources intended for schools was diverted to income countries will require that more other uses before the problem was discovered donor support come in forms that promote and corrective action taken. Teacher salaries broad sector reform, encompassing the pol- absorbed more than 90 percent of the recur- icy and institutional dimensions of the sector rent education budget in Kenya. Teacher and moving away from past practices absenteeism is 39 percent in Bihar, India. focused more on earmarked expenditures or Among doctors in primary health facilities in vertical programs that delivered a narrow Bangladesh, absenteeism is 73 percent. Despite package of interventions. The Education for free immunization, 60 percent of children are All­Fast Track Initiative (EFA-FTI) is helping not immunized in India, because mothers are to support a shift in that direction. Disburse- unaware of the benefit. Many of these prob- ments under the program, slow to take off lems can be traced to weaknesses in gover- because of agency programming and budget- nance and institutional capacities. ing cycles, need to be expedited. As of Janu- ary 2004, only $6 million of the first $170 Main elements of the agenda. Concerted million committed to the initial group of action is needed on several fronts: scaling up countries had been disbursed. World Bank investment in human capital in low-income projections suggest that as the FTI scales up countries while maximizing the impact of to all low-income countries, at least $3.7 bil- existing public spending by improving the lion per year will be needed in external targeting of public services in education, financing for primary education by 2005­06, health, and social assistance; paying attention compared with about $1 billion in 2002. to intersectoral linkages when developing and Implementation has also been slow under the implementing programs (it is hard to reduce Global Fund for AIDS, Tuberculosis and child mortality when only 10 percent of the Malaria (GFATM). As of January 2004, out poor households have access to an improved of $3.4 billion in pledges, $1.5 billion had water source, as in Ethiopia); addressing been committed but only $230 million had governance-related impediments to service been disbursed. Expediting progress in this quality and effectiveness; and piloting and eval- priority area requires better donor coordi- uating empowerment options to strengthen the nation and the alleviation of institutional involvement of stakeholders, especially poor capacity constraints in recipient countries. people, in the design and delivery of services (and scaling up on the basis of successful pro- Priorities for Developed Countries grams, such as Educo and Progresa). Community involvement is particularly Actions well short of the Monterrey vision. important to the goal of reducing gender dis- As agreed in Monterrey, if the MDGs are parities in education. Since the success of to be achieved, stronger reform actions by 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 4 9 O V E R V I E W developing countries must meet with stronger central challenge is to implement needed support from developed countries in an en- structural reforms, especially in labor mar- hanced global development partnership. Pri- kets and social security systems, to return orities for developed countries relate to trade economic growth to a sustainable 2 to 3 per- and aid policies. Also important is the broad cent range over the medium term. In Japan, conduct of macroeconomic and financial poli- economic policy needs to continue to focus cies in a way that is conducive to strong global on countering deflationary tendencies, stabi- economic growth and stable private capital lizing public sector debt, and addressing the flows. Attention to key global public goods is accumulation of imbalances in the financial also needed. How well are developed coun- and corporate sectors. A common, longer- tries doing in living up to their commitments? term structural challenge is to address the The assessment carried out for this report fiscal impact of the demographic changes shows that actions seriously lag commitments building up in these countries. in most areas. Accelerating progress toward The ongoing global economic recovery, the MDGs requires much stronger actions of buttressed by low interest rates in the support from the developed world than wit- advanced economies, is reflected also in some nessed so far. As for developing countries, the recovery in private capital flows to develop- agenda can be grouped under five heads. ing countries in 2003. The outlook for sus- taining these flows in the longer term would improve if the large fiscal and external imbal- Fostering a Robust Global ances in the advanced economies were Economic Recovery reduced, freeing up financing for developing Through their impact on trade and capital countries, and the recipient countries contin- flows, global economic conditions exercise a ued to improve their policy and institutional major influence on prospects for growth and environment to make sound and sustainable poverty reduction in developing countries. use of external financing. Prospects for pri- Growth in the developing countries cannot vate capital flows would also benefit from thrive in the absence of strong and sustain- improvements in the international financial able growth in the advanced economies. architecture to make those flows more stable Although the prospects for recovery in world and reduce the likelihood and severity of economic growth appear to be reasonably financial crises, including more extensive use bright over the near term, sustaining a strong of collective action clauses and improved global economy will require the major coun- practices in sovereign debt restructuring. tries to address some outstanding issues and imbalances. Moving Forcefully on the Doha Development Agenda Orderly resolution of imbalances. Disorderly adjustment in the largest economies could Trade barriers: a major impediment to devel- retard growth or leave global economic con- opment. Improving market access for devel- ditions vulnerable to shocks. Most notably, oping country exports would provide a major the United States is running a large external boost to economic growth and accelerate current account deficit. Such large external progress toward reducing poverty and meet- imbalances, financed increasingly with debt ing other MDGs. At present, trade barriers in instruments, are difficult to sustain for a long developed countries effectively discriminate period. As economic growth in the United against developing countries in many cases. States gathers steam, a gradual tightening of They are highest on products of major export fiscal and monetary policies could help bring interest to developing countries. Protection in about an orderly adjustment. In Europe, the agriculture is a multiple of that in manufac- 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 4 O V E R V I E W turing. Taking into account both tariff and much as 70 percent--would arise from liber- non-tariff barriers--including domestic sub- alization in agriculture. sidies but excluding technical product regula- tions--average protection in agriculture in Liberalization of services trade, including high-income OECD (Organisation for Eco- migration: source of substantial additional nomic Co-operation and Development) coun- gains. Gains from liberalization of trade in tries in 2001 was 25.6 percent, compared to services, especially the temporary move- 3.6 percent in manufacturing. Both border ment of workers, could be a multiple of barriers (tariffs) and domestic subsidies con- those from liberalization of merchandise tribute significantly to the high protection in trade, according to some estimates. Services agriculture, but the former have a much overall are the fastest growing component larger impact. Protection is particularly high of developing country exports. Services pro- on key individual products. OECD countries' vided over telecommunications links and protection rates for sugar are frequently through migrant workers show particular above 200 percent, and their support to sugar dynamism. Workers' remittances, estimated producers of $6.4 billion a year roughly at $93 billion in 2003, are now the second- equals developing country exports. In the largest source of private external funding European Union, producer support for beef is for developing countries, behind foreign as high as 84 percent of the value of domestic direct investment. Against this background, production. U.S. subsidies to cotton growers the recent build-up of protectionist pressure totaled $3.6 billion in 2001­02, twice as against services imports in some developed much as all U.S. foreign aid to Africa, and countries is a cause for concern. This build- cost West African cotton growers an esti- up is exemplified by new legal norms in the mated $250 million by depressing prices. European Union (EU) and pending legisla- Within manufacturing, while average pro- tion in the United States that could limit tection is low, tariff peaks and escalation dis- outsourcing of government contracts, for criminate against developing country exports example. and efforts to move up the value chain. In clothing, for example, tariff peaks average 16 Timely and pro-development outcome of the to 17 percent in Canada, Japan, and the United Doha Round: a critical need. Putting the States. More than 60 percent of imports sub- Doha Round back on track must be accorded ject to tariff peaks originate in developing the highest priority. Developed countries, countries. The incidence of contingent protec- because of their weight in the system, need to tion--antidumping actions--also is higher lead by example. Bilateral or regional agree- against developing countries, on average. ments are a poor alternative to a forward movement on the multilateral front. Agree- Trade policy reform: source of large gains. ment on some focal points or targets for trade Gains from a significant removal of these policy reform would provide a needed impe- trade barriers would be substantial, both for tus. Such focal points could include complete developing and developed countries. Stronger elimination by high-income countries of tar- growth resulting from a pro-development iffs on manufactured products by a target outcome of the Doha Round could increase date; complete elimination of agricultural real income in developing countries by $350 export subsidies and complete decoupling of billion by 2015 (roughly equivalent to the all domestic agricultural subsidies from pro- entire GDP of Sub-Saharan Africa), and lift duction, and reduction of agricultural tariffs an additional 140 million people out of to, say, no more than 10 percent, by a target poverty by that year (a decline of 8 percent). date; and commitments to ensure free cross- The bulk of these potential income gains--as border trade in services delivered 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 4 11 O V E R V I E W telecommunications networks, complemented the development ambitions of the international by actions to liberalize the temporary move- community and the resources provided. An ment of service providers. At the same time, increase in aid is critical for low-income coun- reform should aim to achieve greater trans- tries, to support their reforms and enhance parency and predictability in trade policy, by their prospects for achieving the development limiting the use of less transparent instruments goals. Aid also plays an important role in mid- such as specific tariffs, simplifying regulatory dle-income countries by reinforcing domestic requirements, and imposing greater discipline efforts to tackle concentrations of poverty and on the use of contingent protection. countering negative shocks. Against this back- Any incorporation of rules relating to ground, it is encouraging to see aid volumes domestic regulations such as competition and begin to reverse the decline of the past decade. investment policies (the so-called Singapore ODA rose in 2002 and, according to prelimi- issues) into World Trade Organization nary estimates, again in 2003. Indications of (WTO) trade agreements needs to ensure that increased assistance from the donor commu- the rules support development and take into nity in follow-up to Monterrey, if realized, account the different implementation capaci- would raise ODA by about $18.5 billion by ties of developing countries. A flexible 2006 from the 2002 level of $58 billion. This approach is warranted. An example of such would increase total net ODA to 0.29 percent flexibility is the agreement reached in 2003 to of donors' gross national income (GNI), up clarify the Trade-Related Intellectual Prop- from the 2002 level of 0.23 percent. This is erty Rights (TRIPS) Agreement to expand indeed welcome, but well short of what is poor countries' access to essential drugs at needed as part of the global compact to achieve low cost. Relatedly, support to developing the MDGs. countries should be stepped up to build their Country-level analysis conducted recently institutional capacities to deal with the trade- by the World Bank indicates that, as a con- related agenda and take advantage of better servative estimate, an initial increment of at market access opportunities. The Integrated least $30 billion could be used effectively. Framework for Trade-Related Technical Early commitment of this additional sum Assistance is a useful initiative in that con- would help create a virtuous circle by encour- text. "Aid for trade," and complementary aging developing countries to undertake and measures to facilitate technology transfers to sustain deeper reforms, which would make developing countries, can have high impact, aid still more productive. As countries and will be needed to enable poor countries improve their policies and governance and to realize the potential gains from global upgrade their capacities, the amount of addi- trade reforms discussed above. Some of these tional aid that can be used effectively would countries will also need assistance in adjust- rise into the range of $50 billion plus a year ing to a reduction in trade preferences fol- that estimates suggest is likely to be necessary lowing further nondiscriminatory trade to support adequate progress toward the liberalization, and to the potential effects of a MDGs. Ongoing work to examine the merits significant increase in world food prices-- of various options, such as an international should that materialize. financing facility, to mobilize the substantial additional resources that are needed and can Providing More and Better Aid be effectively used to achieve development results is therefore important and timely. Need for a substantial increase in ODA. Offi- It is useful to view these numbers in con- cial development assistance (ODA) needs to text. An additional $50 billion would raise rise well beyond current commitments. At cur- ODA relative to donors' projected GNI in the rent levels of ODA, there is a large gap between latter half of the 2000s to roughly the same 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 4 O V E R V I E W level as at the turn of the 1990s (levels in ear- bilateral donors, the Nordic countries, the lier decades were still higher). Since then, con- Netherlands, and the United Kingdom are the ditions for effective use of aid in developing most selective (with Denmark the highest). countries on average have improved, thanks The index shows that some of the largest to better policies. Donors' income levels have donors in absolute size, such as France and also risen. Ironically, as aid has become more the United States, have not been particularly productive and donors' capacity to give has selective along either the policy or poverty grown, aid amounts have declined sharply. dimension. Japan is selective on policy but This does not mean that all donors have not on poverty, reducing the overall selectiv- reduced their assistance. The aid effort varies ity of its aid. Thus while the typical donor has widely across members of the OECD Devel- improved its aid quality in terms of targeting opment Assistance Committee (DAC), rang- more funds to poor countries with better poli- ing from a high of 0.96 percent of GNI in the cies and governance, this cannot be said for case of Denmark to a low of 0.13 percent in the typical aid dollar, as the largest donors in the case of the United States in 2002 (how- absolute amount are less selective. Looking ever, the United States has more recently ahead, actions now being taken by some of increased its aid commitments, which would these donors, such as the establishment of the raise its net ODA in 2006 by about 50 per- Millennium Challenge Account (MCA) in the cent over the 2002 level). United States, are expected to contribute to While aid volumes are rising again, there is further improvements in aid allocation. The some concern that much of the increase may MCA aims to improve aid effectiveness by be dominated by strategic considerations-- tying increased assistance to performance. the war on terrorism, conflict and recon- Efforts to target aid better need to take struction in Afghanistan and Iraq. Large account of the special needs of conflict-affected amounts have recently been committed for and other low-income countries under stress. these purposes, but it is unclear whether all of The challenge is to balance issues of weak poli- these commitments represent an increase in cies and institutions with the need to maintain total aid or are in part a reallocation of aid critical engagement. Appropriately timed and from other countries. In the period ahead, it directed aid, sensitive to local efforts to rebuild will be important to ensure that development and the institutional capacity constraints, can aid is not crowded out by aid influenced by play a very useful role in these situations. Well- such strategic objectives. timed aid can also be quite productive follow- ing adverse exogenous shocks, helping to limit Improving the allocation of aid. Most donors the diversion of development resources into today are more selective than they were about short-term relief efforts. a decade ago; they are allocating more aid to countries with better policies and more Increasing the effectiveness of aid through poverty. However, there is considerable vari- improved alignment and harmonization. ation among donors. On average, multilat- Related to better allocation of aid across coun- eral institutions are more than three times as tries, the effectiveness of aid depends crucially selective as bilateral donors, based on a newly on its alignment with national development developed index that measures both policy priorities within country programs and on har- and poverty selectivity in aid allocation. Mul- monization and coordination of donor policies tilateral assistance is much more sharply tar- and procedures around the recipient country's geted to good policies and to poverty, with own systems. In low-income countries, the the International Development Association PRSP provides the framework for strategic (IDA) being the most selective. About two- alignment with country-owned and -led prior- thirds of total ODA is bilateral aid. Among ities and for achieving better coherence 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 4 13 O V E R V I E W coordination in donor support activities. The designed sectoral programs. Many activities country-led alignment and harmonization in education and health that are crucial to efforts in Tanzania and Vietnam, centered on progress toward the MDGs involve in major the PRSP, provide good examples. Aid align- part an expansion of recurrent spending. To ment and harmonization efforts were given an ensure debt sustainability in heavily indebted impetus by the High-Level Forum on Harmo- countries that are pursuing good policies, nization held in Rome in February 2003. consideration should be given to providing a Important follow-up work is now being carried larger share of additional aid in the form of out by the donor community jointly under the grants. auspices of the DAC Working Party on Aid Effectiveness and Donor Practices (WP-EFF), Debt relief and debt sustainability. Much including elaboration of a set of indicators of progress has been made under the HIPC Ini- progress. Results from this work will be impor- tiative in reducing heavily indebted poor tant to widening the application of good prac- countries' debt and debt service burden and tices and better monitoring progress. creating fiscal space for much-needed increases in poverty-reducing spending. Providing aid in forms that are responsive to While most acute in the case of the HIPCs, country circumstances and needs. As coun- the issue of achieving and maintaining debt tries build a track record of policy perfor- sustainability is of broader concern to low- mance, their efforts should be supported with income countries. Work is under way at the timely, predictable, and longer-term aid com- IMF and World Bank on a debt sustainability mitments. Such commitments would enable framework that is intended to provide guid- them to embark upon sustained reforms and ance on issues relating to financing strategies investments necessary to meet the MDGs, for low-income countries, including the range with assurance that needed support would be of indicators for assessing debt sustainability, forthcoming. Aid should be provided in the role of policies in determining appropri- forms that can flexibly meet countries' needs ate debt thresholds, the importance of includ- for incremental financing. Currently, only ing domestic debt in such assessments, and about a third of bilateral ODA is available for the appropriate mix of grants and new cred- program and project expenditures in recipi- its. These issues are becoming increasingly ent countries. The rest is allocated to special important in the light of the need for large purposes such as technical cooperation, debt increases in external financing to meet the relief, emergency and disaster relief, food aid, MDGs and implications for country debt sus- and costs of aid administration. These spe- tainability. Debt sustainability is not only a cial-purpose grants accounted for almost all resource flow issue, however; it also depends of the $6 billion nominal increase in ODA in crucially on increasing growth, expanding 2002. (In real terms, the increase was about and diversifying exports, improving access to $4 billion.) global markets, and mitigating the effects of Going forward, a much higher proportion exogenous shocks. of additional aid will need to be provided directly to countries in the form of cash so Stepping Up Action on Key Global that it can be deployed in accordance with Public Goods country priorities to finance the costs of meet- ing the MDGs. Where country circumstances As globalization has advanced, and aware- warrant, and budget frameworks are sound, ness has grown of the international spillovers more aid could be provided in forms that of local actions and conditions, there has allow for the financing of recurrent costs, been a welcome increase in attention to areas either through budget or sectorwide support, for global collective action. Reference has or through targeted assistance to well- been made in the foregoing to several such 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 4 O V E R V I E W areas--control of infectious diseases, promo- contradictions in policies, with support to tion of education and dissemination of development provided in one area defeated knowledge, opening up of the international by actions in others. There are both collec- trade regime, promotion of a more stable tive and individual country examples: $58 international financial system. In all of these billion in ODA by the OECD countries is areas, there is progress to report, but, as undermined by five times as much protection noted, there is also need to step up action. to domestic agricultural producers; advocacy of and support for private sector develop- Stronger resolve needed to address environ- ment and export diversification in develop- mental concerns. One key area for global col- ing countries are blunted by systematic lective action, and directly related to the escalation of tariffs on higher-value imports MDGs, is environmental sustainability. Devel- from those countries; Norway's stellar per- oped countries bear much of the responsibility formance as an aid donor coexists with the for the preservation of the global environmen- most restrictive agricultural trade policy tal commons, as they are the largest contribu- regime among the OECD countries; a similar tors to the degradation of the commons and contradiction between aid and trade policies possess the financial and technical resources applies to the European Union; the African needed for prevention and mitigation. Devel- Growth and Opportunity Act of the United oping countries must also play their part by States was undercut by its 2002 Farm Bill improving their environmental management, and its higher protection against imports including by increasing regional cooperation from low-income and least-developed coun- among themselves that donors could support. tries than from the rest of the world. While there has been good progress on pro- tecting the ozone layer, thanks to implementa- Institutionalizing policy coherence. The tion of the Montreal Protocol, much less realization that development policy extends progress has been made in most other areas-- well beyond aid and specific trade prefer- greenhouse gas emissions, biodiversity, fish- ences is leading to welcome indications that eries. Aid to developing countries to support the developed countries are willing to look improved environmental practices, both bilat- broadly at the policy areas that affect devel- erally and through multilateral vehicles, has opment--trade, aid, foreign investment and declined after a short-lived increase following other capital flows, migration, knowledge the 1992 Rio Convention. Not all advanced and technology transfer, environment--and countries have shown weak resolve in address- to put in place institutional arrangements ing the environmental challenges; there are that would help ensure coherence. A note- good global citizens such as Sweden and worthy development in this context is the Switzerland. Looking ahead, priorities include passing into law of an "integrated global stronger and more concerted action on green- development policy" in Sweden in January house gas emissions and increasing aid to 2004 that calls for the country's aid, trade, developing countries in support of environ- agriculture, environment, migration, secu- mental sustainability, including through the rity, and other policies to be aligned with Global Environment Facility (GEF). the objective of reducing poverty and pro- moting sustainable development. Another notable development has been the issuance Improving Policy Coherence by Denmark of the first in a planned series for Development of reports on how it is contributing to the Cutting across the policy areas is the need to goal of establishing a global partnership for improve the overall coherence of policies in development (the aim of MDG 8). Prepara- high-income countries in terms of their tion of similar reports is being considered development impact. All too often, there are by some other OECD members, including 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 4 15 O V E R V I E W Belgium, Canada, Finland, Germany, the client focus and country ownership, trans- Netherlands, Norway, and Sweden. parency, results, and accountabilities. Natu- Two related ongoing initiatives at the OECD rally, the degree of progress varies across are a "Horizontal Project" on policy coherence institutions and areas. Highlights include the for development that looks at the impact on strong start of the IMF's Independent Evalua- developing countries of a broad range of devel- tion Office--whose creation means that all the oped-country policies, and increased attention IFIs now have independent evaluation offices in DAC peer reviews to issues of policy coher- reporting directly to their executive boards-- ence. Work on these issues is also being under- and its reviews of prolonged use of Fund taken by private think tanks and civil society, resources, the Fund's role in capital-account among them the Center for Global Develop- crises, and fiscal adjustment in Fund-supported ment and the World Economic Forum. These programs; the World Bank's commitment to encouraging efforts would prove very valuable the results agenda and its focus on actions and if they were instrumental in bringing about implementation in countries, with partners and more systematic attention to issues of develop- within the Bank; and the regional development ment impact and coherence in policymaking in banks' respective commitments to enhanced rich countries. operational quality, development effectiveness, and results, as demonstrated recently in Mar- Priorities for International rakech. But there is clearly no room for com- Financial Institutions placency. The recent progress needs to continue and be deepened. How are the international financial institu- tions (IFIs) contributing to the achievement of IMF. For the Fund, the priority is to con- the MDGs and related outcomes? This report tinue to refine its role in assisting low- assesses the IFI contribution along four income countries, in several ways: by dimensions: country programs, global pro- adapting its instruments of financial and grams, partnership, and results. Applying the technical support to enable its low-income framework across the IFIs suggests that there members to catalyze other donor assistance, has been progress in recent years, especially deal with postconflict situations, respond to since Monterrey. But the evidence is incon- exogenous shocks, absorb the cost of clusive on the critical questions of compara- adjustment to multilateral trade liberaliza- tive performance and whether the whole of tion, and establish institutions that will the IFI contribution is larger (or smaller) than enable them to gain access to private financ- the sum of the individual IFI contributions. ing. The Fund's work agenda also aims at Going forward, greater availability and com- strengthening the design of Fund-supported parability of evaluation data will facilitate economic programs in low-income coun- monitoring, and in turn improve the quality tries, while enhancing alignment with the of reporting to the taxpaying public in all PRSP. A third element of the Fund's ongo- countries. The joint work program on results ing work, together with the World Bank, is endorsed by the multilateral development to develop an effective and flexible frame- banks (MDBs) in February 2004 at the Mar- work for assessing debt sustainability in rakech Roundtable on Managing for Devel- low-income countries. opment Results should provide a key vehicle World Bank. The Bank's country support for progress. Future assessments of the IFI priorities are to continue to work with role will also benefit from greater use of countries and partner agencies to deepen external evaluations. the PRSP process as a basis for the design of its assistance strategies in low-income Individual IFIs. Within each of the institutions, countries; to adapt approaches and instru- the evidence points to enhanced attention to ments to the evolving needs of middle- 16 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 4 O V E R V I E W income countries; and to complete the Progress is needed also in the ongoing major agenda the Bank has set out on work related to IFI governance. Strengthen- results, harmonization, and simplification. ing the voice and participation of developing Supporting and complementing the deep- countries in the IFIs is part of the Monterrey ening of country-led approaches in the compact. Bank's assistance strategies is the strength- ening of its analytic, knowledge, and advo- Priorities for Strengthening cacy work. A priority for Bank-supported the Monitoring Exercise global and sectoral programs is the imple- mentation of an effective framework for Fully developing the potential of the global appraisal, statistics, monitoring, and eval- monitoring exercise will require a strong uation that is every bit as strong as the focus on specific challenges at the country, framework for country programs. agency, and global levels for meeting the pri- Regional Development Banks. The other orities set out above. This will in turn require MDBs also have large agendas before continuing work to strengthen the statistical them--in their country programs and in and analytic foundations of the exercise and their support for regional public goods. All to deepen collaboration with partner agen- need to complete their ongoing reforms cies. Three areas for further work are partic- associated with the results agenda, as they ularly important: set out at the Marrakech Roundtable. In addition, like the World Bank, they need to Data. Timely statistics on the desired apply greater efforts to strengthen the development outcomes and good metrics overall governance and accountability for the key policy drivers are critical for framework for their regional and sectoral effective monitoring. At present, there are programs. major gaps in data, especially with respect to human development and infrastructure Systemic coherence. Looking across the IFIs, services and outcomes in developing coun- the evidence also points to progress collec- tries. The World Bank and its partner tively--both institutionally and in day-to- agencies in the U.N. system, working day work at the country level. Bank-Fund together and in consultation with client collaboration and coordination among the countries, have developed a time-bound MDBs are smoother and more productive and costed action plan to strengthen a than five years ago. In tandem with the broad range of data in developing coun- increase in partnership and coordination, tries and build their statistical capacities. there also is a healthy movement toward Presented and agreed at the Marrakech greater specialization in line with institu- Roundtable, the plan will need timely and tional comparative advantage. This reverses coordinated donor support for its objec- the trend of the early 1990s when overlaps in tives to be realized. IFIs' and other agencies' capacities increased, Research. More research is needed to as the consensus on the comprehensiveness strengthen the analytic underpinnings of of the development paradigm was beginning the monitoring framework, especially the to grow. But the "gains from trade" between links between policies and outcomes. and among IFIs have not all been harvested While there is a broad consensus on the yet. Opportunities include increased selectiv- main policy and institutional determi- ity of agency programs in line with compar- nants of growth, poverty reduction, and ative advantage, harmonization of agency the other MDGs, less is known about the practices around national poverty reduction precise transmission mechanisms and the strategies and systems, and joint evaluations relative weights of the various determi- of their support. nants and interrelationships among 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 4 17 O V E R V I E W Collaborative research is under way at the itoring report will be deepened further, World Bank, the IMF, and the U.N. Mil- building on respective agency mandates and lennium Project to better model and quan- comparative advantage and ensuring that tify some of these relationships, especially the approach to monitoring is coherent through in-depth work at the country across agencies. This could include broad- level. More research is also needed on crit- ening the framework for reflecting the ical issues such as aid effectiveness and on contribution of the multilateral agencies, development of more robust metrics for currently focused on the IFIs, to encompass key policy areas such as governance and other agencies as well, even as efforts are for the impact on developing countries of made to strengthen the evaluation of the rich country policies. IFI contribution, including through better Partnership. In these and other areas, col- harmonizing the self- and independent- laboration developed with partner agen- evaluation criteria used by the IFIs. Col- cies--the United Nations, other MDBs, the laboration will also be expanded with civil WTO, OECD, the European Commisson-- society, which has become increasingly in the preparation of this first global mon- involved in monitoring activities. 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 4 I Framework 1 Monitoring Framework T he purpose of the Global Monitoring policies of developed countries, suggesting Report is to assess progress on the actions they need to take to fulfill their com- policies and actions needed to achieve mitments in support of the development goals. the Millennium Development Goals and Part IV looks at the role of multilateral agen- related outcomes. Covering developing and cies, asking how they are supporting coun- developed countries as well as multilateral tries' progress toward the development goals, agencies, the assessment aims to facilitate the both individually and collectively. Development Committee's monitoring of the accountabilities of the entities jointly respon- Background on Global sible for reaching the development goals.1 It Monitoring also aims to inform the international com- munity more broadly on progress on the Discussions at major international meetings development policy agenda and the priorities at the beginning of the new millennium pro- for action. duced a broad consensus on key development The report is organized as follows. Part I goals and on the strategies and partnerships sets out the context and analytic framework needed to achieve them. The 2000 U.N. Mil- for monitoring progress on the policy agenda lennium Summit led to the adoption of the for achieving the MDGs. It also assesses Millennium Declaration and the Millennium prospects for attaining the goals based on Development Goals, 8 clear goals and 18 tar- current trends. That assessment informs the gets (p. xxii) by which the international com- subsequent presentation of the need to scale munity could measure progress on key up policies and actions. Part II moves on to dimensions of development.2 Since their evaluate policies in developing countries. The adoption, the MDGs have rallied public sup- focus is on low-income countries, where the port for development. Reinforcing the agree- challenge to achieve the development goals is ment on the development goals, meetings in greatest, but the discussion also covers issues Doha, Monterrey, and Johannesburg in 2001 important to middle-income countries-- and 2002 contributed to the emergence of a among them reducing economic volatility and shared understanding of the broad develop- promoting sustainable growth, and address- ment strategy and policies needed to attain ing concentrations of poverty and deprivation the goals, as well as of the roles of the differ- at the subnational level. Part III assesses the ent development partners.3 The meeting 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 4 21 P A R T I : F R A M E W O R K Monterrey ushered in a new compact between Monitoring Report complements the United developing and developed countries--the Nations' monitoring of the MDG targets and Monterrey Consensus--that stressed their indicators. The latter includes an annual report mutual responsibilities and accountabilities in by the Secretary General to the General Assem- the development effort. bly on the implementation of the Millennium With broad agreement on the goals and Declaration and an annual report with a bien- strategies, attention soon focused on imple- nial comprehensive review by the Secretary mentation, to convert the ideas and shared General to the General Assembly on the imple- approaches into concrete actions and to mon- mentation of the agreements reached at the itor progress on the delivery of commitments International Conference on Financing for under the compact. It was against this back- Development in Monterrey.7 Complementing ground that the Development Committee, at these reports, the U.N. Millennium Project is a its meeting in September 2002, expressed its three-year research project--to which the intent to regularly monitor progress on the Bank and the Fund are also contributing-- policies and actions needed to achieve the designed to identify approaches for achieving MDGs and related development outcomes. the MDGs. The Millennium Campaign is To reinforce the accountabilities of the key aimed at mobilizing public support for the actors--developing countries, developed MDGs and fostering country ownership. countries, and multilateral agencies--the In preparing this report, Bank and Fund Committee asked the World Bank and the staff have worked closely with the United International Monetary Fund to prepare pro- Nations and other partner agencies, including posals for monitoring MDG-related policies, the other multilateral development banks while recognizing the role of the United (MDBs), the World Trade Organization Nations in monitoring the MDGs.4 (WTO), the Organisation for Economic Co- In response to the request, the staffs of operation and Development (OECD), and the the Bank and Fund proposed a monitoring European Commission (EC). The collabora- framework that the Development Commit- tion has spanned the initial design of the tee discussed at its April 2003 meeting.5 A monitoring framework and the subsequent progress report on implementation of the assembling of the supporting data and analy- monitoring framework, including issues sis. All of the partner agencies participated in related to the measurement and assessment an Inter-Agency Workshop on Global Moni- of relevant policies and actions and collab- toring organized by the Bank and the Fund in oration with partner agencies, was pre- Washington in June 2003.8 Going forward, sented to the Development Committee at its collaboration will be deepened further, build- September 2003 meeting.6 The framework ing on respective agency strengths and ensur- envisages an annual Global Monitoring ing that the approach to monitoring is Report--to be prepared jointly by Bank and coherent across agencies. Collaboration also Fund staff in advance of the Committee's will be expanded with civil society organiza- spring meeting--supplemented by interim tions that have become increasingly involved reports on selected issues. in monitoring activities.9 This first annual report is part of a broad To establish a baseline for future assess- architecture of monitoring and reporting that ments, this report covers policies and actions has emerged since the Millennium Declaration for achieving the MDGs and related out- and the Monterrey Consensus. Individual comes in a comprehensive manner. Future international agencies lead the monitoring reports may be more selective and thematic, work in the areas of their respective mandates focusing on identified priorities and major and expertise, while supporting and comple- changes from the baseline established here. menting the work of partner agencies. With its Timely statistics on desired outcomes and focus on policies and actions, the Global good metrics for key policies are critical for 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 4 M O N I T O R I N G F R A M E W O R K effective monitoring. But there are important Framework Linking Policies gaps in both areas, especially in countries most to Development Goals at risk of not meeting the MDGs. Filling in those gaps calls for systematic investment in The MDGs reflect the multidimensional more robust and timely data and more precise nature of development. They span income indicators of the relevant policies and their and important non-income dimensions of impact. Research to strengthen the analytical development, which are interlinked. Higher underpinnings of the monitoring framework is incomes and less poverty mean better human also needed--especially into the links between development outcomes. Better health and policies and outcomes. In particular, while education contribute to increased productiv- there is broad consensus on the main policy ity and higher incomes.12 There are important and institutional determinants of growth, linkages among the human development poverty reduction, and the other MDGs, as goals. Perhaps the strongest determinant of described in the next section, less is known child mortality, for example, is the mother's about the precise transmission mechanisms, education.13 Health and nutritional status interrelationships among the determinants, affect the probability that a child will enroll and their relative weights and elasticities with and succeed in school.14 And the human respect to the development goals. development outcomes are affected greatly by The Bank and the Fund are working with conditions in other sectors. Child mortality is their partners on initiatives to address these closely linked to access to safe water and gaps.10 Progress has been made in developing basic sanitation.15 Roads and other transport a time-bound and costed action plan for facilitate access to education and health facil- international support for strengthening a ities, electrification of those facilities broad range of data in developing countries improves the quality and effectiveness of the and building their statistical capacities (box services they provide, and refrigeration net- 1.1). Progress and needed follow-up work in works help preserve vaccines.16 measuring specific policies and their impact The multidimensionality of the MDGs, and supporting research are noted in the interlinkages among them, and their multi- respective sections of the report. The ongo- sectoral determinants imply that the policy ing work will strengthen the statistical and agenda for the achievement of these goals is analytic foundation for monitoring. How- similarly broad. Indeed, it spans the gamut of ever, results will take time to materialize. The development. The central element of the global monitoring exercise, therefore, should agenda is promotion of stronger economic be seen as a phased process, the full potential growth. Growth directly reduces income of which will appear only in the medium poverty and expands resources available for term. With more timely and reliable underly- progress toward the other MDGs. No coun- ing data, better metrics for key policies, and try has made rapid progress toward these more clarity on the links between policies development goals without robust growth. In and outcomes, the findings and recommen- most low-income countries, reaching the dations reported to the Development Com- goals will require improvements in policies mittee will become increasingly specific and and governance to achieve stronger economic quantified. growth than recently attained or currently Complementing the annual monitoring projected. It will also require policies specifi- reports to the Development Committee, an cally targeted to enhancing the capabilities of open information platform accessible through poor people to participate in growth, espe- the Development Gateway will present the cially through improved access to education, data underlying the reports for monitoring by health, and related key services. While eco- the broader international community on an nomic growth has a significant effect on edu- ongoing basis.11 cation and health outcomes, the magnitude 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 4 23 P A R T I : F R A M E W O R K BOX 1.1 An action plan for improving development statistics The focus on measurable development goals, as embodied in the MDGs, and clear accountability for policy, as reflected in the Monterrey Consensus, implies the need for more and better statistics to inform policy and monitor progress. But the new demands placed on national statistical systems exceed the capacity of many countries. External support has helped, but often progress has not been sustained. Today many national statistical systems underperform, in part because they receive inad- equate domestic funding and uncertain, sometimes conflicting, donor support. Recognizing the need for action, the statistics community is responding, at both the national and international levels. Learning from experience, the new initiatives emphasize responsiveness to country needs and priorities and country-level capacity building. Most encouraging are national efforts embedded in broader national development strategies, such as the PRSP. Notable initiatives at the international level include the PARIS21 (Partnership in Statistics for Development in the 21st Century) consortium that brings together users and producers of data, the U.N. MDG Indicators Expert Group to pool agencies' data and expertise, improved international data standards, and trust funds and lending facilities to support investment needs in national statistical capacity building. Building on these initiatives, and reflecting collaborative work across agencies, a global action plan was discussed and agreed at the second Roundtable on Managing for Development Results held in Marrakech on February 4­5, 2004. The plan recommends six short- and medium-term sets of actions aimed at achieving tangible and sustainable improvements in national and international statistical capacity. The first set of actions addresses national needs: Action 1. Mainstream strategic planning of statistical systems and prepare national statistical development strategies for all low-income countries by 2006 Action 2. Begin preparations for the 2010 census round Action 3. Increase financing for country-level statistical capacity building. The second set addresses international responsibilities: Action 4. Set up an international Household Survey Network Action 5. Undertake urgent improvements needed for MDG monitoring by 2005 Action 6. Increase the accountability of the international statistical system. Cost estimates have been prepared for the implementation of the action plan in 2004­06. The annual incremental cost of improvements to national statistical systems is estimated at $115 mil- lion to $120 million. These costs are extrapolated from a limited number of countries based on recent experience or expert opinions. For many of the poor countries, external financing will be nec- essary. Additional spending by development agencies for improvements in the international system is estimated at $24 million to $28 million a year. There is need for a clear and strong commitment on the part of the international community to a shared work program over the next three to five years for improving development data and build- ing statistical capacity in developing countries. The tasks specified in the action plan are not exhaus- tive, nor are they intended to preclude other initiatives. But they do require commitment on the part of the international community to work together, to share resources, and to keep the needs and pri- orities of developing countries at the forefront. In keeping with the spirit of the Monterrey com- pact, countries that set realistic goals for improvements in their statistical systems and make a reasonable commitment of their own resources should receive commensurate assistance from the international community. Source: A full description of the action plan is available at: http://www.managingfordevelopmentresults.org/Agenda-Seminar2.html. 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 4 M O N I T O R I N G F R A M E W O R K the effect is typically smaller than on income groups. Are the parties to the consensus deliv- poverty. Prospects for progress on the human ering on their commitments? It is the purpose development goals also depend on the scale of this report to provide an answer. Anchored and effectiveness of development interven- in the Monterrey Consensus, the global mon- tions targeted directly toward these goals.17 itoring framework translates the agenda for And policies and programs need to take into achieving the MDGs and related development account implications for environmental sus- outcomes into a set of policies and actions, or tainability. Although the developing countries accountabilities, of developing and developed themselves are in the driver's seat, imple- countries, and a corresponding set of respon- menting this agenda will require increased sibilities of international agencies, that will be cooperation at the global level, in which monitored on a regular basis. stronger reform efforts by developing coun- The analytic framework underpinning the tries are matched with enhanced support global monitoring exercise is outlined in fig- from developed countries and international ure 1.1. It depicts the results chain leading to institutions. the MDGs, running from the inputs of poli- The consensus forged at Monterrey in cies and actions of developing and developed March 2002 was based on a recognition that countries and international agencies to the a strong global development partnership was intermediate outcomes of economic growth needed to achieve the MDGs. It called on and delivery of human development and developing countries to improve their policies related key services to poor people and on to and governance and on developed countries to the final outcomes--the MDGs themselves. step up their support, noting that the goals The main elements of the framework, and the called for scaling up actions to accelerate policies and actions to be monitored, are dis- development on the part of both of these cussed below. FIGURE 1.1 Framework linking policies and actions with development outcomes Policies and actions Key intermediate outcomes Agenda anchored in the in developing countries Monterrey Consensus Developing countries · Create a good enabling climate for economic activity M · Empower and invest in poor people Stronger and sustainable economic growth D Developed countries · Enhance support to developing country reform efforts and global public goods G Improved delivery of services s to poor people Development agencies · Better align support to delivery of development results 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 4 25 P A R T I : F R A M E W O R K Developing Countries innovation. Development success has gen- erally been associated with an outward ori- Research and experience have led to a broad entation with respect to trade policies, with consensus on an effective strategy for develop- trade acting as a crucial engine of growth.18 ment, one that is country owned and country Good governance and institutions are essen- led, promotes economic growth, and ensures tial to competitive and efficient functioning that poor people participate in it and benefit of markets, providing a level playing field from it--and that produces maximum progress and predictability and enforceability of con- toward the MDGs. The strategy has two inter- tracts. This is especially important for linked and mutually reinforcing pillars. The smaller firms, which are less able than large first is an enabling climate for economic activ- firms to finance the costs of dealing with ity that encourages private firms and farms to excessive and arbitrary regulations. invest, create jobs, and increase productivity. Stronger and deeper financial markets chan- The second is empowerment of and investment nel savings to productive uses and broaden in poor people. Improvements in the economic access to finance. A sound financial sector climate spur growth but also expand opportu- complements good macroeconomic man- nities for the poor. Empowerment of poor men agement in maintaining economic stability and women through improved access to edu- and strengthening an economy's resilience to cation and health fosters social inclusion but shocks. also promotes growth as these groups increase Investment and productivity also depend their participation in economic activity. on the availability of key physical infra- structure--transport, power, telecommuni- Enabling climate for economic activity. The cations. In addition to facilitating growth, first pillar focuses on the process of the infrastructure services contribute directly growth. Entrepreneurship, investment, and to the development goals, as when access innovation by the private sector drive eco- to safe water and sanitation reduces child nomic growth. But they will not occur with- mortality. out the right environment. A good economic climate spurs domestic economic activity and Empowerment of and investment in poor attracts investment from abroad. Such a cli- people. The second pillar of the development mate is based on several policy elements: strategy is concerned with increasing the capabilities of poor people, by widening their Sound macroeconomic policies--sustain- access to key services and fostering social able fiscal, monetary, and exchange-rate inclusion: policies and prudent debt management-- promote sustainable economic growth with Better access of the poor to education and low inflation and instill confidence among health care, and better quality of these ser- investors. By fostering a stable economic vices, expand opportunities for them to environment, sound policies encourage sav- improve their own well-being. This calls ing and investment. Good macroeconomic for allocating adequate public resources policies also play an important role in avert- to spending on human capital develop- ing the high costs of financial crises in terms ment and, equally important, improving of lost output and increased poverty. public sector management and gover- Emerging markets in particular need to nance, including building the capacity of maintain policies that sustain investor con- related institutions, to ensure the effective fidence and avoid the risk of capital flight. delivery of these services. Good gover- Openness to trade expands opportunities nance is key to the effectiveness of public for growth and diversification and spurs services more generally. 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 4 M O N I T O R I N G F R A M E W O R K Also important is the poor's access to nomic and financial policies; public sector social protection--well-targeted safety governance; human development; and policies nets that protect poor and vulnerable peo- for environmental sustainability. These are ple from unforeseen shocks and disloca- represented by the four facets of the develop- tions occasioned by necessary reforms. ing-country "policy diamond" in figure 1.2. The effectiveness of any strategy to empower and invest in the poor will Developed Countries depend to an important degree on mecha- nisms that foster their participation in In calling for a global partnership for devel- decisions that affect them. Enabling the opment (MDG 8), the international commu- poor to have an increased voice needs to be nity recognized that attaining the agreed an integral element of the strategy. development outcomes would require, in Cutting across this agenda is the empow- addition to redoubled reform by developing erment of women by removing barriers to countries, enhanced support from the devel- their fuller participation in the develop- oped world. Developed countries help by ment process. Promoting gender equality maintaining macroeconomic and financial is not only an important social goal itself, policies that promote stability and growth in but is also essential for the achievement of the world economy. But the Monterrey Con- the development goals more broadly.19 sensus also envisages increased support in two key areas that affect outcomes in the Environmental sustainability. Both the en- developing world more directly--trade and abling economic climate and empowerment aid. In addition, developed-country policies of the poor have environmental dimensions. greatly affect outcomes in areas of global col- The principles of sustainable development lective action, such as the preservation of the must be fully integrated in economic poli- global environmental commons. The global cies. Environmental concerns are addressed monitoring framework focuses on these key through an agenda similar to that outlined above, spanning policies that generate the right incentives for private agents (using and FIGURE 1.2 Monitoring: dimensions of developing-country policies creating markets, through instruments such as taxes, user charges, concessions, and trad- able permits), regulations (particularly for Economic and financial policies · Macro · Private sector regulatory and toxic substances or where market-based · Trade institutional environment instruments are impractical), capable insti- · Financial sector tutions, and engagement of the public. The · Infrastructure important linkages between environmental Public sector and other development outcomes, such as governance poverty alleviation and human develop- Human · Public expenditure development ment, should inform policymaking. Proper and revenue · Education and management management of natural resources protects health · Public rural incomes, just as access to water and · Social protection administration sanitation reduces child mortality. · Voice/inclusion · Transparency, It is clear from the foregoing that attain- · Gender accountability, ment of the MDGs will depend on progress in control of corruption developing countries across a broad range of policies and institutions. The framework for Environmental management · Policies and institutions monitoring developing-country policies clas- sifies the policy agenda into four clusters: eco- 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 4 27 P A R T I : F R A M E W O R K FIGURE 1.3 Monitoring: dimensions of developed-country policies Trade policies. Better access to developed- country markets is crucial to the develop- ment of poor countries. Many developing Macrofinancial policies countries that have opened their trade · Policies supportive of economic growth and stable capital flows regimes are prevented from reaping the bene- fits because of barriers maintained by devel- oped countries, especially in agriculture, Trade policies textiles, and clothing--labor-intensive sectors · Agriculture and manufactures where developing countries typically have a Aid · Services (including comparative advantage. Reducing trade pro- · Quantity and temporary movement tection can yield large benefits for developing quality of aid of workers) · Debt relief and developed countries alike.21 Liberalizing · Trade-related trade in services, including through the so- assistance called Mode 4 trade (temporary migration of workers), also promises large potential gains. The Doha Development Agenda provides Global public goods an opportunity for major progress on market · Environment access for developing-country exports, as · Others well as for further liberalization by develop- ing countries themselves. Liberalization must be supported by increased trade-related financial and technical assistance to help developing countries with the "behind-the- aspects of developed-country policies, as border" investments they need to make to depicted by the developed-country "policy take advantage of wider market access and to diamond" in figure 1.3. enhance their institutional capacity to make and implement effective trade policy. Macroeconomic policies. Macroeconomic policies and outlook in developed countries Aid. The parties to the Monterrey Consensus exert a major influence on developing coun- agreed that more and better aid would be tries' growth prospects. Growth in developed necessary to meet the MDGs. Various esti- countries stimulates activity in developing mates prepared in the past year indicate that countries through trade and creates the the additional aid requirements are sizable. potential for raising aid flows. Macroeco- A major factor determining whether aid is nomic policies and outcomes also affect effective is of course the recipient country's developing countries through their impact on own policies; hence the focus on developing- private capital flows, which include not only country actions, including sound macroeco- foreign direct investment and portfolio debt nomic management, structural reform, and and equity flows but, increasingly, workers' improved institutions and governance. Such remittances. Fluctuations in real GDP in policies not only enhance the effectiveness of developing countries tend to be synchronized aid, but also help alleviate the macroeco- and positively associated with GDP fluctua- nomic instability that can result from a large tions in large developed countries. Macro- influx of aid. Recent and ongoing reforms in economic policies in advanced countries that many developing countries have improved support a stable and growing world economy, the setting for effective use of aid.22 A recent therefore, make an important contribution to study of better-performing developing coun- progress toward desired development out- tries showed that, as a conservative estimate, comes in developing countries.20 additional assistance of $30 billion or more 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 4 M O N I T O R I N G F R A M E W O R K can be productively absorbed.23 The effec- mental degradation) and preservation of bio- tiveness of aid also depends importantly on diversity--also call for stepped-up efforts at the policies of donors. As underscored at the the global level. Developed countries have a High Level Forum on Harmonization held in special contribution to make to protecting the Rome in February 2003, and in the follow- global environment, as they dominate energy up work of the Development Assistance use, consume the most natural resources, and Committee Working Party on Aid Effective- produce the most pollutants. Of course, ness and Donor Practices, there is large scope developing countries also need to play their for increasing the impact of aid through a part, including through increased regional stronger focus on selectivity in aid allocation, cooperation among themselves that aid tighter alignment of aid with national donors should support. International financial poverty reduction strategies and priorities, stability, another important global public provision of aid in forms that are responsive good, can be enhanced by strengthening the to recipients' needs, and closer harmoniza- international financial architecture to improve tion of donor policies and practices.24 What crisis prevention and resolution and avoid the is needed now is consistent implementation spread of contagion between countries. of that consensus and concerted monitoring. Heavily indebted poor countries need debt International Financial Institutions relief to create the fiscal space to allocate more resources to social spending and other The international financial institutions (IFIs) programs to reduce poverty and accelerate have an important role to play in helping growth. That need underscores the impor- countries achieve the MDGs and related tance of continued progress on the Heavily development outcomes. How are they play- Indebted Poor Country (HIPC) Initiative. If ing their part? The monitoring framework for heavily indebted countries are to avoid slip- assessing their contribution is focused on four ping back into unsustainable debt positions, key dimensions: country programs--strategic they will have to continue to strengthen their alignment with country-owned and country- policies to promote increased efficiency in led strategies for poverty reduction and other resource use and stronger economic growth, MDGs, and design of programs and instru- and new external assistance will have to be ments that support those priorities; global provided on appropriately concessional terms. programs--support for global public goods Stronger export growth is especially impor- such as international financial stability, tant to such countries, underscoring the need health, environmental sustainability, an open for better market access and improved trade- trade system, and spread of knowledge; part- related infrastructure. nership--effectiveness in working together, through harmonization of policies and prac- Global public goods. Developed countries tices, strategic selectivity in country support also need to step up action in support of key programs, and coordination; and results-- global public goods and areas for global col- orientation to quality and results in opera- lective action. In some areas, notably the pre- tions and transparency in evaluation and vention and treatment of infectious and reporting. These four monitoring dimensions communicable diseases, especially HIV/AIDS, are represented in the IFI "policy diamond" investment in global public goods will provide in figure 1.4. The assessment also looks essential support for national programs. across individual agencies and addresses Major issues relating to the global environ- issues of systemic performance and coher- mental commons--mitigation of global ence--whether the overall effectiveness of the warming (tropical countries are particularly multilateral agencies is larger or smaller than vulnerable to climate change and environ- the sum of individual agency contributions. 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 4 29 P A R T I : F R A M E W O R K FIGURE 1.4 Monitoring: dimensions of development agency support Country Focus and Ownership The elements of the global compact and the Country programs implied policy agenda for achieving the · Strategic alignment­with country-owned MDGs must come together at the country priorities for poverty reduction and other MDGs level within coherent country development · Relevance and selectivity in program design strategies that respond to local conditions Global programs and priorities and are nationally owned. Pol- Partnership · Support to country icy priorities vary across countries and time, · Harmonization of capacity building and policies also vary in terms of the relative policies and for RPGs/GPGs weights they carry with respect to the differ- practices · Anchor role in ent development goals. It is in the process of · Coordination of international support programs system for key articulating and integrating a country devel- RPGs/GPGs opment strategy that priorities are identified and coherence achieved. Country ownership Results and leadership of the development strategy · Focus on quality and results are crucial to effective implementation. · Systems for monitoring, For low-income countries, the Poverty reporting, and evaluation Reduction Strategy Papers (PRSPs) are the pri- mary avenue of expression of such a country- Box 1.2 Strengthening the links between PRSPs and the MDGs The MDGs are global, but their implementation must occur at the country level, through country- owned and -led development strategies. In low-income countries, the Poverty Reduction Strategy Paper is the vehicle through which country policies and programs and resource requirements are linked to the MDGs. Although there is no required set of indicators or goals that must be included in PRSPs, the tar- gets specified are expected to be framed against the backdrop of the Millennium Development Goals. They also need to take account of initial conditions and national priorities so that they set out credible policies and programs for making progress toward the goals. As they prepare PRSPs, therefore, countries need to balance their long-term aspirations linked to the MDGs with the need to formulate concrete measures that can be feasibly implemented in the context of their annual plan- ning cycles. Thus, for example, Vietnam's PRSP (called the Growth and Poverty Reduction Strat- egy) articulates the government's commitment to the MDGs but specifies goals and targets (the Vietnam Development Goals) that reflect extensive work to adapt progress toward the MDGs to local conditions. Overall, most PRSPs do reflect fairly good coverage of the MDG topics, and that coverage has improved over time. All PRSPs completed by July 2003 included targets related to poverty head- count, school enrollment, and maternal health. Over 90 percent of the strategies covered child mor- tality and water access. On the other hand, coverage of the MDG indicators for women's voice, income distribution, biodiversity, and housing was only around 20 percent. Moreover, while the indicators chosen in PRSPs are often consistent with the MDGs, they frequently differ from the spe- cific indicators chosen to track the MDG targets. Data limitations and methodological issues associated with the time spans covered by PRSPs (three to five years) and the MDGs (up to 2015) make it difficult to compare the respective targets. However, a recent review by World Bank staff suggests that in some areas (malnutrition, access to water) targets set out in full PRSPs tend to be at least as ambitious as the MDG targets. On the other hand, for child and maternal mortality targets, PRSPs often set less ambitious targets than the MDG targets. At the same time, PRSP targets are generally quite ambitious compared to historical trends. 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 4 M O N I T O R I N G F R A M E W O R K owned and -led development strategy. In in which countries spell out their commit- middle-income countries, the policy integra- ments to policy and institutional reforms and tion and prioritization role is performed which donors can commit to support in a within respective national strategy frame- coherent and consistent way (box 1.2). works. By the end of March 2004, 37 coun- tries had prepared and were implementing Notes full PRSPs; 16 more had prepared Interim PRSPs. Increasingly the MDGs are being in- 1. The Development Committee is the Joint corporated in national PRSPs, and the PRSP Ministerial Committee of the Boards of Gover- process itself is being deepened along various nors of the World Bank and the International dimensions--participatory processes, growth Monetary Fund on the Transfer of Real strategies, public expenditure management, Resources to Developing Countries. 2. United Nations 2000, 2001. poverty and social impact analysis. Contin- 3. WTO 2001; United Nations 2002a, 2002b. ued strengthening of the PRSP process, and 4. Development Committee 2002. deepening of the links with the MDGs, will be 5. Development Committee 2003a, 2003b, key to the grounding of the policy agenda for 2003c. the achievement of the development goals at 6. Development Committee 2003f, 2003g. the country level, in country-owned strategies 7. United Nations 2003. For poverty, malnutrition, immunization, child mortality, and access to water, most countries for which data are available have set PRSP targets at levels that entail a substantial acceleration of improvement relative to current rates of progress. Looking ahead, it is important that low-income countries (with support from their development partners) continue to strengthen the links between their PRSPs and the MDG targets. One way of doing this, suggested in the 2003 PRSP Progress Report, is for countries to develop alternative sce- narios that illustrate how improved policies and governance and more and better aid would help them in accelerating progress toward the MDGs. Linking the PRSP approach more closely to the MDGs will require work on several fronts, and countries will need support from external partners in the process. First, PRSPs will need to reflect medium-term goals that are linked to the MDG targets for 2015. These goals should be sufficiently ambitious, relevant to country circumstances, and based on national consultations undertaken as part of the PRSP process. Second, the goals should be related to a medium-term program of policy, institutional, and financing requirements that will include, in addition to the normal growth agenda, necessary infrastructure investments, service-delivery improvements, capacity upgrades, and mar- ket-access enhancements. Third, the medium-term program will need to be linked to a medium- term budget, including a public expenditure program and financing requirements. Fiscal constraints will need to be considered, together with options for increasing aid volumes and changes in aid modalities. Fourth, donors will need to be willing to make upfront commitments to close the medium-term financing gap in ways that are consistent with a realistic assessment of the country's spending priorities and debt sustainability. As long as the country's implementation of its PRSP remained on track, its program would be supported by higher and more predictable aid flows pro- vided in ways appropriate to meeting the MDGs. An enhanced approach along these lines could initially be applied in a group of focus countries based on their relative readiness. The experience in implementing the approach would provide lessons, which could then be used to extend the approach to other countries. Sources: Development Committee 2003d; Harrison, Swanson, and Klugman 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 4 31 P A R T I : F R A M E W O R K 8. For the proceedings of this workshop, see water improves by 10 percent, by 3 percent if years the World Bank's global monitoring Web site at of schooling among women rise by 10 percent, by http://www.worldbank.org/. 0.8 to 1.5 percent if government health spending 9. See the papers submitted to the March 2003 rises by 10 percent, by 1 to 1.5 percent if the den- and September 2003 Development Committee sity of paved roads rises by 10 percent, and by 2 to meetings (Development Committee 2003a, 2003b, 3 percent if per capita income growth rises by 10 2003f) for a fuller account of the related monitor- percent (Wagstaff 2003). ing activities of the partner agencies and collabo- 17. The growth elasticity of income poverty is ration with them, as well as the relevant activities typically between 1 and 2, whereas that of child of the civil society. mortality and primary enrollment is around 0.5 10. Details of this work were set out in the (Filmer and Pritchett 1999; Pritchett and Summers global monitoring implementation report pro- 1996; Schultz 1987). These elasticities of course vided to the September 2003 Development Com- are not fixed; they can be higher with better poli- mittee meeting (Development Committee 2003f). cies and governance. 11. Development Gateway Web site: 18. For a recent review of evidence on the role www.developmentgateway.org. of trade in growth and poverty reduction, see Berg 12. Ends in themselves, better education and and Krueger (2003). health also are means to stronger economic 19. Studies find that gender equality con- growth because they raise workers' productivity. tributes to better education and health outcomes One study estimated that a 10 percent improve- (see, for example, Behrman and others 1999). ment in life expectancy at birth can raise the per Research on Sub-Saharan Africa shows that capita income growth rate by 0.4 percentage point greater gender equality in farm inputs could (WHO 2001). Barro (2001) estimated that an increase farm output by up to 20 percent (Udry additional year of schooling can raise the growth 1996). More recent cross-country research has rate by about 0.5 percentage point. found that gender inequalities in education impede 13. A large part of this effect might not be gen- economic growth (Klasen 2002). eral education but specific health knowledge, but 20. It is estimated that a 1 percent increase in this is usually acquired using literacy and numer- output growth in G-7 countries has on average acy skills learned in school, as a study in Morocco been associated with a 0.4 percent increase in found (Glewwe 1999). developing country growth (IMF 2001). 14. A study in the Philippines found that a 21. Results from modeling of a pro-development one­standard deviation increase in early-age child outcome of the Doha Round show that stronger health increased subsequent test scores by about growth associated with the removal of significant one-third of a standard deviation (Glewwe and impediments to merchandise trade and slashing of King 2001). An evaluation of school-based mass tariff peaks could mean as many as 140 million treatment for deworming in rural Kenya found fewer people living in dire poverty in 2015--a that student absenteeism fell by one-fourth decline of 8 percent. Agricultural subsidies also have (Miguel and Kremer 2001). a huge cost for the developed countries. It is esti- 15. An eight-country study found that going mated that these subsidies cost the average work- from no improved water to "optimal" water ing family in the European Union, Japan, and the access was associated with a 6-percentage-point United States more than $1,000 a year (World reduction in the prevalence of diarrhea in children Bank 2003). under three years of age (Asrey 1996). Lack of 22. For evidence on increased productivity of access to water supply and sanitation kills an esti- aid in developing countries, see Goldin, Rogers, mated 2.1 million to 3.5 million children a year and Stern (2002). (WHO 2002). 23. Development Committee 2003e. See chap- 16. The interlinked nature of the MDGs and ter 11 for more discussion of additional aid their multisectoral determinants are illustrated by requirements. a recent study of child mortality, which found that, 24. See Rome Declaration on Harmonization, holding other factors constant, child mortality February 25, 2003, at http://www1.worldbank.org/ declines by 3 to 4 percent if access to drinking harmonization/romehlf. 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 4 2 MDG Prospects Reasons for Optimism, Grave Concerns P ast the halfway mark to the 2015 target Education for All Fast Track Initiative is date, prospects for achieving the Mil- likely to accelerate progress toward universal lennium Development Goals raise both primary school completion, but shortfalls are optimism and grave concerns. Based on cur- still likely in Sub-Saharan Africa. While there rent trends and growth forecasts, the goal has been global progress toward gender par- of halving extreme poverty and hunger will ity in education, particularly at the primary be achieved--although Sub-Saharan Africa level, the 2005 goal of parity in primary and remains highly vulnerable. A few countries, secondary education may not be met in about notably China, already have reached the goal; a third of developing countries even by 2015. some others, including India, are on track to Accelerating economic growth is central to meet it. But progress has stalled in some achieving the MDGs. The link between eco- countries, and others are at severe risk of nomic growth and income poverty is particu- falling short of the goal. In Sub-Saharan larly strong, but growth is also an important Africa, on current trends, only eight countries determinant of human development out- are projected to halve extreme poverty by comes. For faster growth, developing coun- 2015. tries will need to implement substantial policy Progress on non-income poverty goals has and institutional reforms. Particularly impor- been considerably slower.1 The least progress tant will be actions to improve the regulatory has been made in child and maternal mortal- and institutional framework for private sec- ity and in providing access to safe water and tor activity, strengthen infrastructure, and sanitation. In hardly any region are those enhance the quality of governance. goals likely to be met by the target date of Making progress on the human develop- 2015. Only 16 percent of countries, home to ment goals will also require efforts directed at 22 percent of the developing world's popula- improving the delivery of key services-- tion, are on track to meet the under-five mor- health, education, and water and sanita- tality target. tion--especially to poor people. Investment Prospects for reaching the goal of univer- in human development will need to be scaled sal primary education are better, but the goal up, together with reforms in public sector remains a challenge. The East Asia and Pacific governance and capacity building to improve region has nearly met the goal; Europe and service delivery. Central Asia and Latin America and the The effectiveness of interventions will also Caribbean are on target to achieve it. The depend on taking into account cross-effects 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 4 33 P A R T I : F R A M E W O R K among goals. Health and nutritional status, services rises. Thus income, health, and edu- for example, directly affect a child's proba- cation reinforce one another. More income bility of school enrollment, and access to safe leads to better human development out- water and sanitation is critical for child sur- comes, while better health and education can vival. The existence of such cross-effects lead to increased productivity and higher means that improvements in one goal depend incomes.4 also on progress on other goals. Interlinkages are also evident across sectors. Sectoral inter- Growth Outlook linkages imply that isolated interventions may do little to achieve goals if bottlenecks The outlook for growth over the next decade remain in other sectors. Progress on the goal is promising--although with continuing wide of universal primary education, for example, disparities across regions.5 Should the current may depend importantly on better trans- favorable trend in growth continue, most portation, as well as increased spending on regions will see an acceleration in per capita schools. Accordingly, national reform pro- income growth--some substantial (figure grams must be built on multisectoral analysis 2.1). East Asia is likely to continue its strong and anchored in coherent country develop- growth in the medium term, with an eventual ment strategies. moderation in growth as some countries in As envisioned in the Monterrey Consen- the region begin to approach the level of sus, national efforts will need to receive income of OECD countries. The robust turn- stronger support from external partners. Pri- around in Europe and Central Asia should ority areas of support are more open access to continue--although at a more moderate pace export markets and more and better aid. than that of the last five years--with the The human development goals present a accession of several countries of the region to daunting challenge, but they are not unreach- the European Union and also as the transition able. Past successes, such as halving adult from planned economies advances. illiteracy in the last 30 years and extending There is some evidence that countries in life expectancy by 20 years over the last 40 Sub-Saharan Africa have turned the corner. years, suggest that much can be achieved.2 Between 1997 and 2002, 24 of 46 countries in Sub-Saharan Africa--representing 53 per- Growth and Prospects cent of the region's population--experienced for Achieving the MDGs positive per capita income growth.6 Reforms undertaken over the last few years, and a shift Economic growth is central to achieving the toward more manufacturing exports, should MDGs, particularly the goal of reducing benefit African economies--although contin- income poverty. Economic growth reduces ued conflict and the HIV/AIDS epidemic will poverty because average incomes of the poor weigh on their prospects. To achieve the typically tend to rise proportionately with the MDGs, growth in the region will have to average income of the population.3 This accelerate much further (see below). result is robust over time and across countries The other regions also will benefit from and regions. past and ongoing reforms--a more stable Higher national income contributes to macroeconomic environment and greater human development goals as well. At the openness--to boost their long-term growth macro level, growth generates increased pub- rates, with South Asia leading the pack. Latin lic resources to improve the quantity and America is the only developing region to have quality of education, health, water supply, faltered in the late 1990s and early 2000s-- sanitation, and other services. At the house- mostly weighed down by the lengthy crisis in hold level, as growth reduces income poverty, Argentina, with related contagion to the rest demand for schooling, health care, and other of the region. A hopeful sign is that popula- 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 4 M D G P R O S P E C T S : R E A S O N S F O R O P T I M I S M , G R A V E C O N C E R N S FIGURE 2.1 Growth prospects improve, but not enough Real per capita growth by region, 1990­2015 8 1990­2000 2001­03 2004­15 6 year 4 per 2 Percent 0 ­2 East Asia South Europe & Latin Middle Sub- Middle- Low- & Pacific Asia Central Asia America East & Saharan income income & North Africa Africa countries countries Caribbean Source: World Bank staff estimates. tion growth is slowing in the developing The contribution of productivity to growth world: average growth is expected to be will become more important in the future. about 1.1 percent over the next decade First, millions of low-productivity agricultural (2005­15), below the 1.4 percent rate of the workers--particularly in Asia and Africa-- 1990s. constitute a labor reserve for industrial and ter- tiary activities. Second, productivity in most Drivers of growth. Underlying the growth developing countries lags far behind that in scenario are structural shifts--first from industrial countries--a significant opportunity subsistence agriculture to low-skilled man- for convergence as global trade and investment ufacturing and later, as investment acceler- linkages convey the knowledge and technolo- ates and skills are upgraded, to intermediate gies needed for greater productivity. and finished goods of increasing technical The scenario presented above is useful pri- sophistication.7 A dramatic decrease in bar- marily as a reference point. Hypothetical riers to trade and cross-border investment deviations from it provide insights into the in recent decades has made these structural potential range of outcomes--particularly transformations possible.8 Greater open- those driven by changes in specific policies. ness has been accompanied by improve- For example, full global merchandise trade ments in investment climate. Inflation has reform has the potential to boost the average dropped dramatically across the world as growth rate in developing countries by up to policymakers have come to understand the half of a percentage point--depending on negative impacts of high inflation. Govern- how trade reforms deal with the factors that ment balances have improved, contributing affect productivity.9 But the converse is also to both macroeconomic stability and more true. Numerous factors could lead to slower effective use of public resources in support growth than that assumed in the reference of development. Workers have become bet- scenario--either on a cyclical or sustained ter educated and healthier; infrastructure basis, and with a global, regional, or more has grown; and institutions have improved. localized impact. Examples include a rise 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 4 35 P A R T I : F R A M E W O R K protection, failure to address long-term struc- The Sub-Saharan Africa region is the least tural imbalances, regional conflicts, and likely to achieve the income poverty MDG, financial crises. having made little or no progress on reducing the incidence of poverty over the 1990s. The incidence of poverty is much lower in Latin Implications for the Poverty MDG America and the Caribbean, but progress in The scenario outlined above would meet the further reducing poverty has been slow. MDG of halving global poverty by 2015.10 Faster improvement will be needed if the The poverty headcount index would fall from region is to reach its target. In Europe and its 1990 level of 27.9 to 12.5 percent. The Central Asia, poverty rates rose in the 1990s number of poor people (on a $1-a-day basis) from low average levels as the region experi- would fall below 735 million, from about enced a sharp drop in income in the early part 1.22 billion in 1990 (table 2.1).11 China and of the decade. These rates are now declining, India, which had the largest number of poor and by 2015 will be about a third of current in 1990 but have achieved high per capita levels. In these regions, either growth will growth rates, would account for most of the need to accelerate or the poverty elasticity of global success. China already has achieved growth will need to rise to boost prospects for the poverty goal; India is well on its way. meeting the MDG target. The challenge is But even if the global poverty goal is met, much greater for Sub-Saharan Africa. There, many individual countries, particularly in in order to reach the income poverty goal, Sub-Saharan Africa, will fail to achieve the GDP growth will have to double relative to target (figure 2.2). Even in regions with the base scenario, or the poverty elasticity of strong overall performance, some countries growth will have to rise by a large factor. are seriously off track. It is also likely that Sub-Saharan Africa faces low per capita some countries that meet the income poverty growth and a relatively low poverty elasticity. target at the national level may leave some Of the 43 countries in the regional sample, areas or groups behind. Special effort will 28, representing two-thirds of the region's need to be made to address the situation fac- population in 2000, had per capita growth ing vulnerable groups (box 2.1). rates of 2 percent or less (table 2.2). On cur- TABLE 2.1 Growth rates and decline in poverty by region, through 2015 Annual average growth rates (2004­15) Population living under $1 per day Scenario Headcount (percent) Number of persons (millions) Region Per capita GDP GDP 1990 2001 2015 1990 2001 2015 East Asia and Pacific 6.0 6.3 29.6 15.6 2.3 472 284 44 China 6.4 7.0 33.0 16.6 3.0 377 212 41 Europe and Central Asia 3.9 3.8 0.5 3.7 1.3 2 18 6 Latin America and Caribbean 2.3 3.7 11.3 9.5 7.6 49 50 46 Middle East and North Africa 2.3 4.1 2.3 2.4 1.2 6 7 4 South Asia 4.0 5.3 41.3 31.1 16.4 462 428 268 Sub-Saharan Africa 1.8 3.8 44.6 46.5 42.3 227 314 366 Total 3.7 4.7 27.9 21.3 12.5 1,219 1,101 734 Excluding China 3.0 4.1 26.1 22.8 15.4 841 888 692 Source: World Bank staff estimates. 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 4 M D G P R O S P E C T S : R E A S O N S F O R O P T I M I S M , G R A V E C O N C E R N S FIGURE 2.2 Most regions will reach the goal of halving poverty by 2015, but Sub-Saharan Africa is seriously off track Actual and projected decline in number of people living on less than $1 a day by region, 1990­2015 East Asia & Pacific Europe & Central Asia Latin America & Caribbean 50 tion 40 29.6 popula 30 total 20 of 15.6 14.8 11.3 9.5 7.6 centreP 10 2.3 3.7 0.5 1.3 0.3 5.6 0 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 50 44.6 41.3 tion 46.5 40 42.3 31.1 popula 30 20.6 total 20 of 22.3 16.4 centreP10 2.3 2.4 1.2 1.2 0 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Goal Poverty rate at $1 a day 1990 2001 2015 Actual and forecast Path to goal Source: World Bank staff estimates. rent trends, only four countries--with some 0.2.13 Pro-growth policies would help the 16 percent of the region's population--are region, but pro-growth policies that favor the likely to see per capita growth of more than 3 poor would have a much greater impact on percent. Mirroring the growth figures, only the incidence of poverty. two countries in the region are expected to see Why some countries and regions have suc- an improvement in the headcount index of 50 ceeded in reducing poverty while others have percent or more between 2000 and 2015,12 lagged was the subject of a major conference with six more countries achieving an improve- on scaling up poverty reduction held in May ment between 30 and 50 percent. Together, 2004 in Shanghai. The review of a number of these eight countries represent somewhat less country experiences, based on case studies, than 15 percent of the 2000 population. provided new insights into what works and The two countries with the best poverty what doesn't and what countries can learn performance have relatively modest per from the experience of others. The main pur- capita growth rates (between 2 and 3 per- pose of the conference, cohosted by the Gov- cent), but have a relatively high poverty elas- ernment of China and the World Bank, was ticity. Both also have the more equal income to encourage South-South learning about distribution, with Gini coefficients under scaling up poverty reduction. Many of 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 4 37 P A R T I : F R A M E W O R K BOX 2.1 East Asia and Pacific: Despite solid performance on MDGs, challenges remain East Asia has done remarkably well in meeting several MDGs. Seven of the nine countries for which adequate information is available either have already achieved the poverty reduction goal or are on track to achieve it. East Asia is also broadly on track to meet the goal on universal primary educa- tion, with enrollments already comparable to many high-income countries. But progress has been uneven: across goals, across countries, and across socioeconomic groups and geographical areas within countries. The region's performance on health, particularly child immuniza- tion and maternal mortality, does not match its progress on income poverty and education. The region is not on track to cut the child mortality rate by two-thirds. In China, under-five mortality is estimated to have fallen from 49 per 1,000 live births in 1990 to 39 in 2001; however, if there is no acceleration in this pace of improvement, China will not meet the child mortality target of 16 for 2015. On the other hand, middle-income Southeast Asian economies such as Malaysia and the Philippines saw significant decreases in child mortality over the last decade and appear on track to meet MDG targets for 2015. The region's low-income countries are lagging behind in several dimensions (see accompanying table). And the persistence of disparities within countries with respect to most MDGs remains a con- tinuing challenge, even where goals have been or are about to be attained in the aggregate. The region needs a differentiated approach that combines accelerated efforts to reach the MDGs where they are in danger of being missed with a will to exceed particular targets in countries that are on track. The so-called MDG-plus agenda could focus on faster reduction of national poverty, specify targets with respect to a particular geographic region or segment of the population, or spec- ify different indicators to capture the remaining challenges relating to a goal. In preparing its Poverty Reduction Strategy Paper, the Government of Vietnam adapted the MDGs to the particular context of Vietnam. In many respects, the adaptations represent an ambitious agenda, including reducing poverty faster than envisaged in the MDGs, eliminating the gender gap not only in primary but also in secondary education and improving the quality of education not just access to it, and eliminat- ing the gap with ethnic minorities. Thailand, too, is developing an MDG-plus agenda for incorpo- ration into its Ninth Five-Year Plan. This agenda calls for reaching the poverty goal in the northeast of Thailand, the poorest region in the country. Prospects for reaching the MDGs in East Asia Primary Gender Child Child Births Immmunization Access to Poverty school equality in malnutrition mortality attended for measles safe water Country completion school Cambodia * * * * China Fiji * * * * * * * * * * Indonesia Lao PDR Malaysia * * * * * * Mongolia * * * * Papua New Guinea * * * * Philippines Thailand * * Vietnam * * Seriously off Insufficient Off track On track Achieved track data * * Note: Prospects in the above table are assessments based on the current levels of these indicators and recent progress toward the targets. Outcomes in the future could change markedly from past trends. Source: UNESCAP/UNDP 2003; World Bank 2003a and 2003b. 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 4 M D G P R O S P E C T S : R E A S O N S F O R O P T I M I S M , G R A V E C O N C E R N S TABLE 2.2 Projected per capita growth and improvement in poverty in Sub-Saharan Africa, 2000­2015 Projected growth of consumption 2000 2000 per capita, 2000­2015 Number of countries Population (millions) Population share (percent) <1 12 233 37.2 1­2 16 190 30.3 2­3 11 103 16.4 3­4 4 101 16.1 >4 0 0 0.0 Percent improvement in headcount 2000 2000 index, 2000­2015 Number of countries Population (millions) Population share (percent) <10 9 223 35.6 10­20 16 244 38.9 20­30 10 69 11.0 30­50 6 48 7.7 >50 2 43 6.8 Source: World Bank staff estimates. basic ingredients of a successful poverty Prospects for Other MDGs reduction strategy are relatively well known. How countries and communities have applied Economic growth has a significant effect on them and with what results differs widely, non-income development goals--education, however. There is no one size that fits all, and health--just as it does on income poverty. the point of the conference was to enable However, the magnitude of the effect on the practitioners to learn about successful cases former is typically smaller than on the latter. and draw their own conclusions about what Prospects for progress on the human devel- may or may not be transferable to their own opment goals also depend importantly on the unique situation.14 scale and effectiveness of development inter- ventions specifically directed toward them, Hunger. Halving the proportion of the world's such as policies that improve the delivery of people who suffer from hunger is part of Goal key services. And the determinants of these 1. The target of halving the proportion of goals are multisectoral. Compared to the typ- underweight children under five years of age ical estimate of the elasticity between growth between 1990 and 2015, the key measure of and income poverty of 1 to 2, the typical esti- progress toward the goal, requires an average mate of the elasticity between growth and the annual reduction of 2.7 percent. Available primary completion rate or under-five mor- data show that, as for income poverty, the tality is around 0.5. However, these elastici- target is achievable at the global level, but ties are not fixed and can be higher with Sub-Saharan Africa is seriously off track, as policies and institutions that are better able to are a number of countries in other regions. In translate growth into improved human devel- Sub-Saharan Africa, on current trends, only opment outcomes.17 17 percent of countries expect to reach the Another reason that gives some cause for target.15 In some countries, notably in Europe optimism is that over time, education and and Central Asia, slippages are occurring, health outcomes have been improving for the resulting in rising malnutrition, particularly same income level, reflecting advances in in the former Soviet Union.16 knowledge and technology, such as break- 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 4 39 P A R T I : F R A M E W O R K FIGURE 2.3 Mortality at a given level of national income has been if current trends persist. East Asia and Pacific declining and Europe and Central Asia were fairly Changes in the association between GDP per capita and close to the target in 2000, with population- child mortality, 1990 to 2000 weighted completion rates of 97 and 93 per- cent, respectively (figure 2.4). Although both 6 regions would need to accelerate progress log) slightly over the trend observed in the 1990s, 5 the required pace appears achievable. 1,000, Of the other four regions, Latin America has (per 4 registered the fastest progress and is on track 1990 toward the goal. In South Asia and the Middle 3 East and North Africa, however, progress on mortality primary completion rates is slower than one 2 would expect from the regions' average per 2000 capita GDP growth. A sharp acceleration over Under-five 1 recent trends will be needed to meet the goal. 4 5 6 7 8 9 10 11 Sub-Saharan Africa could miss the target by a GDP per capita (1995 US$, log) wide margin. Because the annual improvement 1990 2000 in completion rates was just 0.2 percent in the 1990s, an annual improvement of more than 4.5 percent will be needed for the period Note: Lines show outcome as predicted by a nonlinear function of GDP per capita. Source: GDP per capita data from World Development Indicators database. Under-five 2000­15 to achieve the target (table 2.3). Even mortality from UNICEF (2002). if the economic growth rate doubles, other mechanisms and policies will be needed to achieve the education target in the region. The throughs in immunizations against infectious Education for All Fast Track Initiative specifi- diseases (figure 2.3). The changes are signifi- cally addresses the reform and financial needs cant, even among poorer countries. For of countries that are struggling to move toward example, at a national income of $600 per the education goals. capita, predicted child mortality fell from 100 per 1,000 births to 80 between 1990 and Gender equality. The third MDG seeks to pro- 2000--a full 20 percent.18 mote gender equality and empower women. In the discussion that follows, the prospects The targets include achieving gender parity in for the achievement of non-income poverty primary and secondary education preferably goals are reviewed, based on the growth out- by 2005 and at all levels of education by 2015. look described in the preceding section and Progress at the primary level has been rela- current assessments with respect to the status tively good, with the ratio of girls to boys of other determinants of these goals--relevant enrolled improving from 88 to 94 percent polices and institutions, multisectoral linkages. between 1990 and 2000. Girls' enrollments have increased faster than boys' in all regions, Primary education. The target for complet- and in the three regions where gender in- ing primary school is 100 percent by 2015. equalities are greatest--Sub-Saharan Africa, While a few regions are close to the target, as the Middle East, and South and West Asia-- measured by a new database on primary disparities have eased. Nonetheless, the target completion rates jointly developed by the of gender parity in primary and secondary edu- World Bank and the United Nations Educa- cation by 2005 will not be met. Moderate to tional, Scientific, and Cultural Organization serious gender disparities against girls at the (UNESCO), others are at risk of falling short primary level in about 35 percent of developing 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 4 M D G P R O S P E C T S : R E A S O N S F O R O P T I M I S M , G R A V E C O N C E R N S FIGURE 2.4 A few regions are close to the target on primary education; others are off track Primary education completion rates by region, 1990­2015 East Asia & Pacific Europe & Central Asia Latin America & Caribbean 100 93 100 ouprg 100 100 97 90 90 96 83 age 80 69 vant 70 eler of 60 centreP 50 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 100 100 ouprg 100 100 90 age 79 80 83 vant 70 68 74 eler of 60 50 51 centreP 50 40 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Goal Primary completion rate 1990 2000 2015 Actual Path to goal Source: United Nations; World Bank staff estimates. TABLE 2.3 Primary education completion rates, progress needed by region (percent) Annual improvement Required Observed Required Regions 1990­2015 1990­2000 2000­15 East Asia and Pacific 0.16 0.10 0.20 Europe and Central Asia 0.42 0.33 0.48 Latin America and Caribbean 1.50 1.86 1.25 Middle East and North Africa 0.95 0.50 1.25 South Asia 1.55 0.85 2.03 Sub-Saharan Africa 2.81 0.20 4.59 Source: United Nations; World Bank staff estimates. 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 4 41 P A R T I : F R A M E W O R K countries and at the secondary level in about 43 of girls' labor or concerned about their safety, percent of countries suggest that a number of particularly where schools are far away. Coun- countries may not reach this target even by tries such as Bangladesh and Guatemala have 2015 (table 2.4).19 Prospects for reaching the shown the effectiveness of targeted stipends for 2015 goal of gender parity at all levels of edu- girls. cation, including higher education, are remote. The prospects for achieving the broader Girls' primary school completion rates and MDG on gender equality and women's secondary-school enrollments, especially, will empowerment are even weaker than for the need to grow even faster than they did in the education targets. Almost one-quarter of 1990s. The fact that girls' enrollments are developing countries are not expected to growing at a faster pace than boys' in most achieve parity in literacy by 2015, and limited countries is encouraging, and suggests that data make it difficult to evaluate progress in gender parity will hinge importantly on gen- other areas. Unemployment rates, for exam- eral actions by governments, particularly in ple, are higher for women than for men in 21 Sub-Saharan Africa and South Asia, to expand of 37 countries with available data, and in no the coverage and increase the effectiveness of country with available data do women earn primary and secondary schooling. But in the same as men.20 Women are also vastly countries where girls' participation is lowest, underrepresented in national parliaments in targeted demand-side interventions may also all regions of the world. In only 14 countries be required, to reduce the direct and indirect do women hold more than 30 percent of seats costs of girls' schooling for households in need in national parliaments.21 TABLE 2.4 Distance from the goal of gender parity in primary and secondary education, by region, circa 2000 (number of developing countries) Have achieved Close to goal Medium position GPI between GPI between GPI between Far from goal Total number Region 0.97 & 1 0.95 & 0.96 0.80 & 0.94 GPI < 0.80 of countries Primary education East Asia and Pacific 11 2 4 17 Europe and Central Asia 18 2 2 22 Latin America and Caribbean 19 4 2 25 Middle East and North Africa 4 4 5 2 15 South Asia 2 2 1 5 Sub-Saharan Africa 10 5 14 12 41 Subtotal 64 17 29 15 125 Secondary education East Asia and Pacific 2 2 8 4 16 Europe and Central Asia 17 2 2 1 22 Latin America and Caribbean 4 4 13 2 23 Middle East and North Africa 2 1 8 2 13 South Asia 1 1 3 5 Sub-Saharan Africa 3 16 17 36 Subtotal 28 10 48 29 115 Note: The Gender Parity Index (GPI) is the ratio of the gross enrollment ratio (GER) for girls divided by that for boys. The GER is the number of pupils enrolled in a given level of education, regardless of age, expressed as a percentage of the population in the relevant official age group. For this table, in cases where girls' GER exceeds that of boys (which would produce a GPI greater than 1), the inverse of GPI was used in order to allow GPI values to be compared on a scale with a maximum value of unity. Thus, this table registers gender gaps against boys as well as against girls. While at the primary level, all of the moderate to serious gender disparities are against girls, this is not true at the secondary level, where gender gaps are observed in both directions. Source: Adapted from UNESCO 2003. 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 4 M D G P R O S P E C T S : R E A S O N S F O R O P T I M I S M , G R A V E C O N C E R N S Child mortality. Progress on child mortality which will comfortably attain the income has been particularly weak, and prospects for poverty target. Progress has been particularly reaching the under-five child mortality goal slow in Sub-Saharan Africa, where conflict are dim (figure 2.5). For developing countries and the HIV/AIDS epidemic have driven up on average, under-five child mortality was rates of infant and child mortality in several measured at roughly 80 deaths per 1,000 in countries. Not a single country in this region 1990. The goal is to lower this by two-thirds is on track to meet the child mortality target. by 2015. Progress is highly uneven across Meeting the child mortality target calls for regions and countries, as well as within coun- an average annual mortality reduction of 4.3 tries, often reflecting differences in income. percent during 1990­2015. Because improve- As of 2000, only 16 percent of developing ments in this indicator have been slow, a countries, with 22 percent of the developing reduction of this magnitude will be challeng- world's population, were on track to meet ing in the best of environments.23 the target.22 At the regional level, only one In some countries the gap in child mortal- region--Latin America and the Caribbean-- ity is widening between the poor and the bet- is on track. The target is unlikely to be ter-off. Results on the disparities between reached in other regions, including East Asia, rich and poor (comparing the bottom and FIGURE 2.5 Prospects for reaching the child mortality goal are dim Mortality rate for children under age five by region East Asia & Pacific Europe & Central Asia Latin America & Caribbean 180 150 births veli 120 90 1,000 59 53 per 60 44 44 36 34 ths 30 20 15 18 Dea 0 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 180 171 150 178 births 129 veli 120 99 90 77 1,000 59 54 per 60 ths 26 30 43 Dea 0 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Goal Under-five mortality 1990 2001 2015 Actual Path to goal Source: United Nations; World Bank staff estimates. 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 4 43 P A R T I : F R A M E W O R K top quintiles) for both infant and child mor- to 9 percent in 2002. In West and Central tality for four countries--Armenia, Bolivia, Africa, prevalence remains low (1 to 3 per- Cambodia, and Central African Republic-- cent), although Cameroon reports a preva- suggest that poverty underlies much of the lence of 12 percent. lack of progress in improving the health status Although the risks of failure to halt the of children.24 Low incomes, ignorance, and spread of HIV/AIDS are especially high in limited access to effective services contribute Sub-Saharan Africa, they are substantial in to the problem. Advances on intermediate many countries in other regions as well. Even factors that affect well-being (immunization though current estimates suggest overall low coverage, availability of effective diagnosis prevalence rates in India and China, the and treatment, water availability, responsive absolute number of cases is estimated at more provider behaviors) will be required to make than 4 million in India and is approaching 1 a serious dent in child mortality. million in China. In Latin America and the Caribbean, where the epidemic is well estab- Maternal health. Progress on reducing mater- lished, 12 countries report HIV prevalence of nal mortality has been insufficient, and 1 percent or more among pregnant women. prospects are rather bleak. The MDGs call The highest rates of increase in HIV/AIDS for a full three-quarters reduction in maternal infection are found in Europe and Central mortality between 1990 and 2015, equivalent Asia, where the absolute number of reported to an annual reduction of 5.4 percent. With cases is about 1.5 million. Denial, stigma, and an average annual decline of 3.2 percent in the institutional challenges of providing ser- the 1990s, the developing world as a whole is vices to marginalized and vulnerable sub- off target.25 Only 17 percent of countries, populations, such as injecting drug users, with 32 percent of the developing world's jeopardize progress in combating HIV/AIDS. population, are on track to achieve the target. Declines in the prevalence of HIV/AIDS Poverty, distance, limited hospital facilities, lag considerably behind efforts to contain the and uneven quality of services inhibit disease, making the achievement of the HIV/ progress and require investment in a broad AIDS-related goal especially challenging. range of areas to make meaningful advances Those newly diagnosed were infected 8 to 10 in saving mothers' lives. The cost of such years earlier. The long latency period sug- investment is high and likely out of reach for gests the imperative of mass education cam- the poorest countries, where maternal mor- paigns and other early preventive measures. tality rates are highest. Malaria has proven a stubbornly endemic disease in many parts of the world. Failed HIV/AIDS, malaria, and other diseases. The efforts to stop mosquito breeding with pesti- most prevalent and problematic communica- cides have left limited intervention options, ble diseases--HIV/AIDS, malaria, and tuber- among them the use of treated bed nets in culosis--have proven difficult to contain; endemic areas and drug prophylaxis and achieving a decline in incidence is even more treatment. Behavioral and economic factors challenging. HIV prevalence continues to limit progress, since the affordability and use increase--with but a few exceptions. The epi- of bed nets and pharmaceuticals require new demic remains most severe in Southern behaviors and spending on the part of house- Africa, where pregnant women 15 to 24 years holds and public and private providers of ser- of age display infection rates of 18 to 39 per- vices and goods. cent. In East Africa, there are some encour- The global incidence of tuberculosis (TB) aging signs that the prevalence of infection is is on the rise, with 9 million estimated cases declining, with the rate dropping in Uganda, in 2001. The increase is most affected by the for example, from nearly 30 percent in 1990 HIV epidemic in Sub-Saharan Africa. TB 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 4 M D G P R O S P E C T S : R E A S O N S F O R O P T I M I S M , G R A V E C O N C E R N S infection and disease are especially prevalent ples and partnership established at Monter- among those with impaired immune systems rey, all parties must scale up their action. The and poor nutrition. There has been a major agenda has three essential elements: expansion in the application of the approach for TB control recommended by the World Accelerating and deepening reforms to Health Organization (WHO), which was achieve stronger economic growth than adopted by more than 155 countries with an recently experienced or currently projected average cure rate of 82 percent in 2001. It is Stepping up action on the delivery of human estimated that only one-third of TB cases development and related key services-- were reported in 2001. The interim target is education, health, water and sanitation 70 percent reporting for 2005, suggesting that Speeding up the implementation of the the goals for TB will be difficult to achieve. Monterrey partnership, matching stronger Progress in Sub-Saharan Africa is slowest, but developing country efforts to spur growth there are encouraging signs of progress else- and improve service delivery to poor peo- where, even in low-income countries. ple with stronger support from developed countries and international agencies. Water and sanitation. The MDGs call for halving the proportion of the world's popu- Substantial reforms of domestic policy and lation without access to safe drinking water institutions will be necessary to boost growth. and sanitation between 1990 and 2015. To Particularly important are reforms to improve meet that target, 1.5 billion additional peo- the enabling environment for private sector ple (1 billion in urban areas and 0.5 billion activity--by extending progress on macroeco- in rural areas) will have to be provided with nomic stability, improving the regulatory and sustainable access to safe water and about 2 institutional framework governing markets, billion more with access to basic sanitation and strengthening basic infrastructure. Also (1.1 billion in urban areas and 0.9 billion in key are reforms to enhance the quality of gov- rural areas) in the period from 2000 to 2015. ernance and the capacity of the public sector. At current rates of service expansion, about Such reforms will improve the effectiveness of 20 percent of countries are on track, but existing resources and help mobilize more fewer than 10 percent of low-income coun- domestic resources. Moreover, they will allow tries appear to be on track. Much faster increases in aid to be productively utilized. access rates will be required if countries are Policy and institutional reforms will also to achieve the water and sanitation goals. boost MDG prospects by improving the deliv- Only one region--Latin America and the ery of key services, especially to the poor. Caribbean--currently appears likely to attain Investment in services such as education, the MDG for drinking water. Water access health, and water and sanitation needs to be rates will need to grow much faster, especially scaled up, in many cases substantially. But the in Sub-Saharan Africa--from a current pace effectiveness of the delivery of these services of 0.43 percent a year to 2.53 percent.26 will depend on improvements in the under- lying policy and governance framework. Too Accelerating Progress toward often, basic services fail to reach poor people.27 the Development Goals Since societies often view basic services such as education and health as largely the responsi- The implication of the foregoing assessment bility of governments, reforms that strengthen is clear. The achievement of the development public sector institutions--making them more goals will require rising above current trends responsive to the poor, more accountable, and and accelerating the pace of development, less corrupt--will be critical to improving and doing so swiftly. In line with the princi- access to and quality of services. 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 4 45 P A R T I : F R A M E W O R K The acceleration and deepening of reforms The rest of this report assesses the various in developing countries must be comple- elements of this powerful combination: how mented by increased support from developed developing countries are doing on improving country partners. Priorities include improv- policies and governance (Part II); how devel- ing market access to developing country oped countries are fulfilling their commit- exports and providing more and better aid. ments (Part III); and how the international Also important is the broad conduct of financial institutions are contributing to the macroeconomic and financial policies in a development effort (Part IV). way that is conducive to strong global eco- nomic growth and stable capital flows. A recent World Bank study of 18 low- Notes income countries with relatively good poli- cies found that reforms that substantially 1. United Nations 2003. strengthen policies and institutions, sup- 2. World Bank 2002. ported by additional external resources, can 3. Dollar and Kraay 2002; Adams 2002. In- be a very powerful combination.28 It showed come inequality, conversely, changes more slowly (Ravallion 1995, 2001; Adams 2002). All these that if better policies and institutions were studies used household survey data to examine combined with more aid, the number of coun- how growth affects inequality. The studies con- tries in the sample that would achieve MDGs cluded that income distributions are rather stable 1 to 7 would at least double--with all of them over time, and that economic growth does not achieving the poverty goal (figure 2.6). affect inequality. FIGURE 2.6 Reform combined with stronger partner support can substantially boost prospects for achieving the MDGs Results for 18 low-income countries undertaking reforms 20 Likely to reach the goal with reform and extra resources Likely to reach the goal with current policies 18 16 14 12 countries of 10 8 Number 6 4 2 0 Poverty Primary Gender Child Maternal HIV/AIDS Water education equality mortality mortality completion Source: Development Committee 2003. 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 4 M D G P R O S P E C T S : R E A S O N S F O R O P T I M I S M , G R A V E C O N C E R N S 4. Studies that have tried to disentangle these ture holds broadly over all developing countries, relationships typically have found income to be a including Sub-Saharan Africa, even though in the robust and strong determinant of outcomes. latter region manufacturing exports are still a 5. A word of caution regarding the economic small share because of the initial starting point. scenarios described here. The key word is sce- 8. Three factors have driven the decline in barri- nario. Unlike short- and medium-term forecasts-- ers. First, successive rounds of multilateral trade such as those presented regularly in the World negotiations have simultaneously lowered barriers Bank's annual Global Economic Prospects or the across a broad set of countries. Since the end of IMF's World Economic Outlook--long-term World War II, eight multilateral rounds have been forecasts are predicated on informed assump- concluded, with the ninth, the Doha Round, sched- tions, particularly as regards supply-side factors. uled to be concluded by the end of 2004. The sec- In this sense, the scenarios are more akin to ond factor has been the creation of several large growth-accounting exercises, where more attention regional free-trade areas--for example, the Euro- is paid to underlying growth fundamentals-- pean Union, North American Free Trade Agreement employment, productivity, savings, investment, and (NAFTA), and Southern Cone Common Market capital accumulation. These scenarios also try to (Mercosur). The third factor has been the wave of deduce long-term structural changes, such as the unilateral liberalization following the debt crisis of rising share of services in economic output, increas- the early 1980s--affecting mostly countries in Latin ing urbanization, and terms-of-trade impacts, par- America. Freer trade enabled producers to purchase ticularly as they affect commodity-dependent technology embodied in imported inputs and capi- exporters and importers. Some of these structural tal goods, contributing to productivity. changes can also be used to deduce potential 9. World Bank 2001b, 2003c. impacts on achieving the nonmonetary MDGs. For 10. The poverty forecast for most countries is example, increasing urbanization may make it based on an estimated functional form for the easier to provide health and educational services. Lorenz curve. The parameters of the Lorenz curve Unlike the short- and medium-term forecasts, long- are estimated from the latest available household term outlooks typically are not linked to econ- surveys, which are available for over 80 develop- ometrically validated economic relations with ing countries. For most regions, distribution neu- standard confidence intervals. While this may be trality is assumed. In technical terms, this means perceived as a weakness, the purpose of scenario that the shape of the Lorenz curve is assumed to be analysis is different from the short- and medium- constant between 2000 and 2015. The two excep- term forecasting exercise, and providing confidence tions are China and India, where some specific intervals would be either imparting a false sense of assumptions are made regarding change in the pat- certainty or producing such a wide band as to make tern of regional income disparities. Typical values the intervals meaningless. of the elasticity of the headcount index relative to 6. Nigeria almost eked out positive growth, los- growth are between ­1 and ­2. The elasticity ing 0.1 percent per capita over the five-year span. approach has limitations as a tool for making pro- The addition of Nigeria to the list of countries with jections over very long periods since the elasticity positive growth would have increased the propor- (assuming distribution neutrality) increases over tion of the region's population experiencing posi- time (in absolute terms). tive growth to nearly 75 percent. 11. While the income poverty MDG is defined 7. One of the most striking outcomes of this in terms of proportion of people living on less than structural transformation is the change in the com- $1 per day, that definition underestimates the position of developing-country exports since the extent of poverty in regions where the true poverty 1970s. Three decades ago, exports of primary line would be higher, such as in Europe and Cen- products (including processed foods), accounted tral Asia. Numbers in table 2.1 should be inter- for three-fourths of total developing-country preted with that caveat in mind. exports. Manufactured products now account for 12. The MDG is a 50 percent improvement the same percentage, or more, and trade growth between 1990 and 2015, not 2000 and 2015. At has been phenomenal over a broad range of sec- this time, the 1990 headcount by country is not tors. Though there are regional variations, this pic- available. 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 4 47 P A R T I : F R A M E W O R K 13. Only 8 countries in the sample of 43 have 18. Preston 1980. poverty elasticities above 1.25, 22 have elasticities 19. Seventy-seven countries have moderate to between 1 and 1.25, and the remainder are under serious gender gaps at the secondary level. In 49 of 1. Four countries have poverty elasticities under these countries the gender disparity is against girls 0.5. The average Gini coefficient is around 0.5, and in 28 the disparity is against boys. lower than in Latin America but significantly 20. United Nations Millennium Project Task higher than in most of Asia. Force on Education and Gender Equality 2004. 14. For more information on the conference, see 21. Based on data from Inter-Parliamentary http://www.worldbank.org/wbi/reducingpoverty/ Union (IPU) 2004: www.ipu.org. Also see World index.html. Bank 2001a. 15. World Bank 2004. 22. World Bank 2004. 16. Rokx, Galloway, and Brown 2002. 23. Monitoring health goals is challenging 17. The World Bank and its partner institu- because quality data are difficult to obtain. This is tions are conducting research into a framework partly due to the large element of judgment needed that will allow a better modeling of the relation- to classify causes of death, as well as constraints to ship between growth, other determinants, and the data collection by public and private providers. MDGs. A two-track approach has been laid. The The Partnership in Statistics for Development in first track involves pilot studies (initially in Ghana the 21st Century works with DAC members and and Ethiopia). Researchers will develop a frame- other donors to strengthen statistical capacity work for forecasting the MDGs at the country building in developing countries. See OECD 2004. level, with the intention of extending the approach 24. World Bank 2003d. to other countries. The second track will focus on 25. World Bank 2004. global analysis, using the findings of the pilot stud- 26. World Bank 2004. ies to inform regional and global level assessments. 27. World Bank 2003d. Preliminary results will be available for discussion 28. Development Committee 2003. by Spring 2005. 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 4 II Developing-Country Policies 3 Overall Picture A s discussed in Part I, achieving the chapters in Part II then focus on specific pol- MDGs will require stronger economic icy areas, using a host of indicators and data growth in developing countries than specific to those policy areas and drawn from recently attained or currently projected. It a multiplicity of sources. will also require actions to empower poor Overall, there is an improving trend in people and enhance their capabilities to par- developing-country policies. This progress is ticipate in growth, through improved delivery reflected in the World Bank's Country Policy of key services to them. Progress on this and Institutional Assessment (CPIA) ratings, agenda calls for improvements in policies and which have improved on average over the past governance in developing countries and five years (figure 3.1). This is true for both low- stronger support to these reforms from devel- and middle-income countries. Average ratings oped countries and international agencies, as have improved in all regions. And in most recognized in the Monterrey Consensus. To regions they have improved across the four achieve the goals, each of these three groups policy clusters that are assessed in the CPIA: of actors must scale up their efforts. Against economic management (comprising macro- this background, how are their policies and economic policies); structural policies (broadly actions actually evolving? The rest of this covering trade, financial sector, and regulatory report attempts to provide an assessment. policies that determine the enabling climate for As the quest for better development out- the private sector, as well as policies for envi- comes must begin with developing countries ronmental sustainability); policies for social themselves--their policies and institutions-- inclusion and equity (covering policies for this assessment likewise begins there. How human resource development, gender, social the developed countries and international protection, and equity of resource use); and agencies are playing their part is reviewed in public sector management and institutions Parts III and IV, respectively. This chapter (comprising public financial management, provides an overview of progress on reform quality of public administration, control of in developing countries, drawing on broad corruption, and rules-based governance).1 country policy assessments prepared by the While the ratings have improved, the various international agencies that cover change in general has been relatively modest, country policies and institutions in a rela- though encouraging nonetheless. Going for- tively comprehensive manner. The following ward, the scope for improvement remains 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 4 51 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S FIGURE 3.1 Developing countries' policies have improved; governance and institutions lag Trends in developing-country policies and institutions, 1999­2003 Low-income countries Middle-income countries 4.4 4.4 4.2 4.2 4.0 4.0 3.8 3.8 tings tings ra 3.6 ra 3.6 3.4 3.4 CPIA CPIA 3.2 3.2 3.0 3.0 2.8 2.8 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 Sub-Saharan Africa East Asia & Pacific 4.4 4.4 4.2 4.2 4.0 4.0 3.8 3.8 tings tings ra 3.6 ra 3.6 3.4 3.4 CPIA CPIA 3.2 3.2 3.0 3.0 2.8 2.8 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 Overall rating Economic management Structural policies Policies for social inclusion/equity Public sector management/institutions large. Notwithstanding the rise in the ratings, gories. This pattern provides part of the expla- average ratings remain in the 3 to 4 range, on nation of the developing countries' growth a scale of 1 (low) to 6 (high). Ratings for low- performance reviewed in chapter 2. While income countries on average are appreciably macroeconomic management has improved, lower than those for middle-income coun- providing a more stable enabling economic tries. And, across regions, average ratings climate, this progress has not been equally remain the lowest in Sub-Saharan Africa, reflected in an improved growth performance. though improving. The regional averages of Part of the explanation is that progress on course also hide large differences among structural and governance reforms has been countries within a region. slower, limiting private sector response. Across country groups, there is a fairly The low ratings for public sector gover- consistent pattern in terms of policy relativi- nance are also reflected in the relative weak- ties. Ratings are highest for macroeconomic ness of the more institutional dimensions of management; those for structural and social policy in other areas. Within the nexus of policies are in the middle; and those for pub- structural policies affecting private business lic sector governance are the lowest. This is environment, the weakest area is property true across regions and across income cate- rights. Within social sector policies, again the 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 4 O V E R A L L P I C T U R E FIGURE 3.1 (continued) Europe & Central Asia Latin America & Caribbean 4.4 4.4 4.2 4.2 4.0 4.0 3.8 3.8 tings tings ra 3.6 ra 3.6 3.4 3.4 CPIA CPIA 3.2 3.2 3.0 3.0 2.8 2.8 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 Middle East & North Africa South Asia 4.4 4.4 4.2 4.2 4.0 4.0 3.8 3.8 tings tings ra 3.6 ra 3.6 3.4 3.4 CPIA CPIA 3.2 3.2 3.0 3.0 2.8 2.8 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 Overall rating Economic management Structural policies Policies for social inclusion/equity Public sector management/institutions Note: World Bank CPIA ratings range from a low of 1 to a high of 6, with an increase denoting improvement. Source: World Bank CPIA database. weakest link in most cases is the quality and banks for their respective regions. The assess- capacity of the underlying institutional ments conducted by the African Development framework. These findings serve to focus Bank (AfDB), also called Country Policy and attention on governance and institution- Institutional Assessment, and the Asian building reforms as an area for particular Development Bank (AsDB), called the Coun- attention, as poor governance and weak insti- try Performance Assessment (CPA), are quite tutions can seriously undermine the effective- similar to the World Bank's CPIA in terms of ness of policy initiatives throughout an the policy criteria and clusters. Their country economy. Fortunately, developing-country policy ratings for recent years show broadly governments recognize this, and more and the same trend and pattern. There is a grad- more of them have launched governance and ual improving trend in policies across policy institutional reforms. This is reflected in the areas. In terms of policy relativities, gover- improving ratings for governance, but the nance and institutions are the weakest area pace of reform needs to be accelerated. (figure 3.2). These trends and findings are corrobo- In the context of its concessional resource rated by similar country policy assessments allocation system, the Inter-American Devel- conducted by other multilateral development opment Bank (IDB) also initiated in 2002 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 4 53 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S FIGURE 3.2 Other ratings corroborate that developing-country policies have improved but that governance and institutions lag Africa - AfDB CPIA Asia - AsDB CPA 3.6 3.6 3.5 3.5 3.4 3.4 3.3 3.3 3.2 3.2 3.1 3.0 3.1 2.9 3.0 1999 2000 2001 2002 2002 2001 2002 2003 Overall rating Macroeconomic policies Overall rating Government and public sector Structural policies Governance and public Socially inclusive management Policies for growth with equity sector performance development Sustainable economic growth and poverty reduction Europe & Central Asia - EBRD TI Latin America - IDB CIPE 3.4 4.5 3.2 4.0 3.0 3.5 2.8 3.0 2.5 2.6 2.0 2.4 1.5 2.2 1.0 2.0 0.5 1.8 0 1998 1999 2000 2001 2002 2003 Overall Economic Structural Policies Public sector rating management policies for management/ Overall rating Enterprises Markets and social institutions Financial institutions Infrastructure trade inclusion/ equity Note: AsDB and IDB ratings cover member countries eligible for concessional borrowing. AfDB and EBRD ratings cover all of their developing-country members. IDB ratings shown relate to 2002. AfDB, AsDB, and IDB ratings range from 1 to 6 and EBRD ratings from 1 to 4+. An increase denotes improvement in all cases. Source: For Africa, African Development Bank; for Asia, Asian Development Bank; for Europe and Central Asia, European Bank for Reconstruction and Development; for Latin America, Inter-American Development Bank. Country Institutional and Policy Evaluation indicators show sustained progress in the tran- (CIPE) exercise for the 12 eligible countries. sition process in Europe and Central Asia, with The CIPE does not as yet provide a time series the ratings on average higher for market liber- on the ratings, but the pattern indicated by the alization measures than for institutions under- 2002 CIPE is consistent with that of the other pinning markets: financial institutions; and the MDB ratings. The strongest policy area is regulatory and institutional framework for the macroeconomic management and the weakest provision of infrastructure.2 is public sector management and institutions. Progress on transition is also indicated by The European Bank for Reconstruction and the results of surveys of regional enterprises Development (EBRD) uses Transition Indica- in Europe and Central Asia jointly conducted tors (TI), which focus on policies related to by the EBRD and the World Bank in 1999 transition to a market-based economy. These and 2002 (Business Environment and Enter- 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 4 O V E R A L L P I C T U R E prise Performance Surveys, or BEEPS). These FIGURE 3.3 The transition countries are making broad progress surveys aim to provide more in-depth assess- in removing obstacles to business ment of key elements of the business environ- Index of progress for 26 transition countries in Europe and Central Asia ment and governance. Comparison between the 1999 and 2002 surveys shows broad progress. Areas where obstacles to business Finance are perceived to be greater are those involv- 2002 1999 4 ing firm-state interactions and the judicial 3 system (figure 3.3). Corruption Infrastructure Figure 3.4 maps the World Bank's CPIA 2 ratings into the four policy clusters identified for assessing progress on developing-country 1 policies as part of the global monitoring framework set out in chapter 1: economic and 0 financial polices; public sector governance; Crime Taxes human development; and policies and institu- tions for environmental sustainability. As the policies improve and the ratings rise, the "pol- icy diamond" defined by these four clusters increases in size. In the five-year period Judiciary Regulations between 1999 and 2003, the policy diamond has grown. The increase has been greater in the middle-income countries than in the low- Note: Numerals refer to scores on the BEEPS survey, where 1 indicates low obstacles to business and 4 indicates high obstacles, so a decrease denotes improvement. income ones. It is also clear that the diamond, Source: EBRD and World Bank Business Environment and Enterprise Performance Surveys. FIGURE 3.4 The developing-country policy diamond shows progress, but much more is needed Progress in developing countries, 1999­2003 Low-income 6.0 Middle-income 6.0 countries countries 5.0 5.0 Economic and Economic and financial policies financial policies 4.0 4.0 3.0 3.0 Human 2.0 Public sector Human 2.0 Public sector development governance development governance 1.0 1.0 1999 1999 2003 2003 Policies for Policies for environmental environmental sustainability sustainability Note: The diamond corresponds to the global monitoring policy diamond for developing countries (see figure 1.2). The scale is based on World Bank CPIA ratings, ranging from a low of 1 to a high of 6, with an increase denoting improvement. Source: World Bank CPIA 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 4 55 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S especially in low-income countries, is still Notes small relative to the boundary defined by best practice (a rating of 6). The shape of the dia- 1. There are 20 policy and institutional criteria in all, divided into these four clusters, that capture mond, as outlined by the four facets, shows the different dimensions of an effective growth and the policy relativities. These reflect the picture poverty reduction strategy and that are rated discussed earlier, with performance stronger annually on the basis of staff assessments. The in economic and financial policies and weaker individual criteria are assigned equal weights in in public sector governance. Policies and insti- averaging them. The CPIA methodology is period- tutions for environmental sustainability also ically reviewed as part of a continuing effort to are a relatively weak area.3 These have shown increase its robustness, for example, through some improvement, however, especially in improving the documentation of the evidence and middle-income countries. indicators on which the assessments are based. In summary, a review of assessments of Increased disclosure of the CPIA ratings for IDA- developing-country policies conducted by the eligible countries is currently under consideration. For a more detailed description of the CPIA, see World Bank and other development agencies http://siteresources.worldbank.org/IDA/Resources leads to the following main conclusions: /FinaltextIDA13Report.pdf. 2. Comparison between the ratings of other Policies in developing countries are MDBs and World Bank CPIA ratings for the improving and creating a more conducive respective regions shows broad consistency. While environment for development, including there inevitably are some differences at the level of more effective use of assistance provided detailed ratings for individual policy criteria or by partners. countries, the overall correlation is high. For While this is encouraging, the pace of example, the estimated correlation coefficients reform will have to be accelerated if the between the AfDB and the World Bank CPIA rat- ings for 2003 and between the EBRD TI and the development goals are to be achieved, World Bank CPIA for the same year exceed 0.9. especially in the low-income countries and The high correlation serves to enhance confidence in Sub-Saharan Africa. in the robustness of these ratings. The core of the reform agenda is institu- 3. These are included among structural policies tional--reform of public sector gover- in the CPIA but shown separately in the global nance and the building of institutions monitoring policy clusters. underpinning private sector activity. 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 4 4 Improving Enabling Climate for Growth Economic and Financial Policies T he preceding chapter makes clear that has acted to limit economies' supply response economic growth in developing coun- to the improvement in the macroeconomic tries needs to accelerate if the Millen- and trade policy environment. Going for- nium Development Goals are to be achieved. ward, stronger growth will depend crucially Strong growth requires an economic climate on more vigorous and consistent efforts to that is conducive to investment, job creation, ease the burden of regulation of private enter- and higher productivity. Key elements of such prise and build supportive institutions. an enabling economic climate are macroeco- nomic policies that help maintain economic Macroeconomic Policies and financial stability; openness to trade that promotes access to world markets for goods, Sound macroeconomic policies are an essential services, and knowledge; a regulatory and foundation for sustained growth. The impact institutional environment for private sector of macroeconomic policies on poverty reduc- activity that facilitates rather than impedes tion works largely through growth: policies entrepreneurship and competition; and a that contribute to macroeconomic stability financial sector that efficiently and sustain- help sustain growth, and growth is typically ably mobilizes resources and channels them associated with lower poverty. Policies that to their most productive uses. How are the impede the attainment of macroeconomic sta- developing countries doing with respect to bility, such as expansionary monetary policies these determinants of growth? that encourage high inflation and lax fiscal In general, there has been a notable policies that produce large budget deficits, can improvement in macroeconomic and trade hurt growth by reducing investment and the policies, which needs to be consolidated and rate of increase in productivity. deepened. There is also an improving trend in removing regulatory impediments to private Low-Income Countries activity and strengthening supporting legal frameworks, and in placing financial systems Macroeconomic policies in low-income coun- on a more solid footing and building their tries have improved over the past decade. Bet- capacity to play their role in contributing to ter macroeconomic management in turn has development. Progress on these more struc- contributed to the recent improvement in tural and institutional dimensions of reform, these countries' growth performance and out- however, has been less in many countries. This look, as reviewed in chapter 3. Inflation has 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 4 57 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S TABLE 4.1 Macroeconomic indicators for low-income countries, by region, 1983­2008 (annual averages) 2003 2004­08 Region 1983­87 1988­92 1993­97 1998­2002 (estimated) (projected) Inflation (median annual %) East Asia and Pacific 6.9 9.7 8.0 7.1 6.6 3.4 Europe and Central Asia 1.3 196.2 453.5 11.1 4.8 4.0 Latin America and Caribbean 5.2 11.7 7.4 3.7 3.3 3.2 Middle East and North Africa 13.7 17.8 26.3 6.4 6.4 4.6 South Asia 7.7 10.5 8.8 4.7 4.7 4.3 Sub-Saharan Africa 10.8 10.3 13.5 4.7 6.6 3.8 All low-income 7.1 10.0 12.4 5.1 5.0 3.8 Current account balance (% of GDP) East Asia and Pacific ­1.3 ­6.3 ­2.2 ­1.0 ­3.1 ­3.7 Europe and Central Asia ­0.7 ­5.6 ­13.2 ­8.4 ­8.3 ­5.2 Latin America and Caribbean ­10.6 ­14.2 ­14.0 ­13.0 ­13.1 ­11.1 Middle East and North Africa ­7.4 ­5.3 ­2.2 0.3 ­2.8 ­9.8 South Asia ­8.8 ­5.4 ­6.9 ­2.0 ­2.0 ­1.9 Sub-Saharan Africa ­7.0 ­8.8 ­9.3 ­9.5 ­9.1 ­8.5 All low-income ­6.0 ­8.3 ­8.7 ­7.4 ­7.6 ­7.0 Debt service (% exports of goods/services) East Asia and Pacific 22.2 14.2 12.9 13.4 10.9 9.4 Europe and Central Asia 0.0 2.0 8.5 14.3 14.5 11.7 Latin America and Caribbean 18.5 39.4 37.6 12.3 11.5 9.2 Middle East and North Africa 6.7 18.8 25.3 7.2 3.8 4.3 South Asia 20.4 19.5 20.8 15.9 13.2 11.2 Sub-Saharan Africa 17.5 21.4 21.2 24.5 17.7 16.6 All low-income 16.5 20.1 20.5 18.8 14.7 13.2 Fiscal balance (% of GDP) East Asia and Pacific ­8.7 ­6.7 ­4.4 ­4.3 ­4.5 ­3.5 Europe and Central Asia ­1.3 ­6.8 ­11.1 ­4.4 ­1.8 ­1.2 Latin America and Caribbean ­8.5 ­6.0 ­2.4 ­4.5 ­5.7 ­3.7 Middle East and North Africa ­17.6 ­11.8 ­8.1 ­0.5 ­1.8 ­1.9 South Asia ­6.1 ­5.1 ­4.8 ­5.9 ­5.5 ­4.5 Sub-Saharan Africa ­6.2 ­6.9 ­5.8 ­5.7 ­4.8 ­2.6 All low-income ­6.6 ­6.7 ­5.7 ­5.0 ­4.4 ­2.9 Memo Item: Real GDP per capita growth (%) All low-income 0.7 ­0.8 0.7 1.2 1.7 3.1 Note: Averages are calculated as unweighted means of country values. Median inflation is calculated from the annual medians and then averaged over five-year periods. Source: IMF World Economic Outlook database, staff calculations. slowed on average to half the rate of a decade While all regions show some improvement ago. Other indicators also show improvements, in the macroeconomic policy indicators, though less spectacular. Fiscal and external cur- progress has been uneven and remains fragile rent account deficits have narrowed, and exter- in many countries, especially in Sub-Saharan nal debt service ratios typically have improved. Africa. In these countries, therefore, the need Looking ahead, this trend is expected broadly remains for a broad strengthening of macro- to continue (table 4.1). economic policies. Even in countries with bet- 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 4 I M P R O V I N G E N A B L I N G C L I M A T E F O R G R O W T H : E C O N O M I C A N D F I N A N C I A L P O L I C I E S ter performance, maintaining and building on The deficiencies are more serious with respect progress on macroeconomic stability, espe- to structural aspects of fiscal policy: almost cially in the face of possible shocks, will be a half of low-income countries are assessed to continuing challenge. have unsatisfactory composition of public To get a better perspective on the quality expenditures. In contrast, there are serious of macroeconomic policies in low-income concerns in only a relatively small proportion countries, IMF staff have assessed recent of countries in monetary areas--monetary country experience with a view to evaluating policy, foreign exchange regime. Looking at and categorizing them on several key policy the consistency of macroeconomic policy as a dimensions.1 The results show that there are whole, the picture is unsatisfactory in about substantial differences in the quality of poli- one-fifth of the countries. cies across the different policy areas (figure Staff assessments suggest that faster- 4.1). Broadly, fiscal areas seem to be of the growing low-income countries typically most concern. Overall fiscal management, in have better macroeconomic policies (see fig- relation to the goals of public debt sustain- ure 4.1). While this result does not reveal the ability and containment of fiscally derived direction of causality, it is consistent with inflationary pressures, remains unsatisfactory studies that suggest that better policies are in about one-third of low-income countries. good for growth.2 Faster-growing countries FIGURE 4.1 Faster growing countries typically have better macroeconomic policies Growth performance and quality of macroeconomic policies, low-income countries Percentage distribution of countries Percentage distribution of all countries distinguished by growth performance Low High Low High Low High 100 8 18 30 80 36 42 47 51 33 57 54 32 77 60 78 13 32 centreP 19 29 40 29 27 59 30 49 51 20 34 12 38 13 29 22 12 16 16 9 0 Fiscal Composition Monetary Liberality Consistency Fiscal Composition Consistency policy of public policy of exchange of macro policy of public of macro spending regime policies spending policies Good Satisfactory Unsatisfactory Note: Low and high refer to countries with GDP growth below or above the median rate for the whole group. Some numbers do not add up to 100 because of rounding. Source: IMF staff assessments. 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 4 59 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S appear to have markedly better fiscal poli- governance indicators. The quality of the cies, as well as public sector spending com- composition of public expenditures and the positions that are more consistent with overall consistency of macroeconomic poli- growth and poverty reduction. They also cies are particularly strongly correlated with have superior consistency in their overall government effectiveness (for example, over macroeconomic frameworks. Differences in two-thirds of countries with low government monetary policy areas are less pronounced. effectiveness have unsatisfactory public Analysis of the factors in terms of different expenditure compositions compared with country characteristics that underlie the vari- half of all low-income countries). ation in the quality of macroeconomic poli- Countries with undiversified commodity cies shows some interesting patterns (table exports generally have significantly weaker 4.2). The quality of fiscal policy is typically policy performance.3 Differences in policy higher in countries with a higher general level performance associated with the degree of of economic development (proxied by per export diversification are broadly similar to capita income). The association is much those linked to government effectiveness. This stronger with respect to government effec- finding is consistent with the view that tiveness (quality of institutions for policy reliance on just a few exports tends to be asso- implementation), as suggested by World Bank ciated with weak governance, resulting from TABLE 4.2 Quality of macroeconomic policies for low-income countries, by country characteristics (percent of countries) Composition of Monetary Liberality of Consistency of Country characteristic Fiscal policy public spending policy exchange regime macro policies Income per capita Below median Unsatisfactory 41 51 16 16 24 Good 43 22 68 73 43 Above median Unsatisfactory 28 48 8 3 21 Good 49 38 85 82 54 Exports Undiversified Unsatisfactory 45 66 17 17 24 Good 31 21 69 66 31 Diversified Unsatisfactory 27 40 10 4 21 Good 56 17 81 85 60 Government effectiveness Below median Unsatisfactory 48 69 18 13 34 Good 34 8 68 68 32 Above median Unsatisfactory 23 31 5 5 11 Good 59 28 85 87 66 All low-income countries Unsatisfactory 34 49 12 9 22 Good 47 18 77 78 51 Note: Policies are assessed good, satisfactory, or unsatisfactory. Percentages in the table do not add up as the intermediate category--satisfac- tory--is not shown. Source: IMF staff assessments. 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 4 I M P R O V I N G E N A B L I N G C L I M A T E F O R G R O W T H : E C O N O M I C A N D F I N A N C I A L P O L I C I E S nontransparency of payment of revenues. (table 4.3). This advantage, however, has Lack of export diversification also renders been blunted by the risk of financial crisis. countries more prone to shocks that can These countries are typically more integrated adversely affect fiscal revenues and macro- with international capital markets, and finan- economic performance. Small economies and cial globalization has increased the vulnera- low-income countries are particularly vulner- bility to fluctuations in these markets.4 The able to natural disasters and terms-of-trade consequent risk of economic volatility has shocks. IMF staff calculations show that also made sustained reductions in poverty losses per large natural disaster averaged more more difficult. The 1990s have witnessed sev- than 6 percent of the GDP of the affected low- eral financial crises, of which the East Asian income countries from 1997 to 2000. Losses crisis is perhaps the best known. In East Asia, from terms-of-trade shocks averaged more poverty increased markedly (table 4.4) as real than 4 percent of the GDP of the affected low- wages fell and unemployment rose. income countries during the same period. A number of measures are needed to make Broadly, governance factors seem to be the economies of middle-income countries, important in determining the quality of fiscal and particularly those of emerging market policy and public expenditure management countries, more resilient to economic shocks. and the consistency of policies. The quality of First, reducing public debt, and particularly monetary policy and the liberality of the external debt, relative to GDP is a central item exchange regime also vary with these country on the agenda as high debt levels increase the characteristics, but proportionally less. Vari- likelihood of debt crises. Increased flexibility ations in these policy areas can be as readily in exchange rates can also help, both by explained by the general level of economic dampening destabilizing capital flows and by development. facilitating adjustments between tradable and nontradable sectors. Other structural reforms are also important, particularly in the finan- Middle-Income Countries cial and corporate sectors, to prevent the Middle-income countries have enjoyed con- build-up of balance-sheet vulnerabilities. Sev- sistently higher average growth than low- eral of these countries also need to improve income countries since the late 1970s; the their social protection systems to cushion the indicators suggest that such growth has been impact of shocks and economic adjustments supported by better macroeconomic policies on the poor and vulnerable. TABLE 4.3 Macroeconomic indicators for middle-income countries, 1983­2008 (annual averages) 2003 2004­08 Indicator 1983­87 1988-92 1993-97 1998-2002 (estimated) (projected) Inflation (median annual %) 7.9 14.4 11.5 5.0 4.5 3.6 Fiscal balance (% of GDP) ­4.4 ­2.7 ­2.7 ­3.6 ­3.0 ­1.4 Current account balance (% of GDP) ­2.6 ­1.2 ­4.1 ­3.4 ­1.5 ­1.3 Debt service (% exports of goods/services) 25.4 22.5 19.0 21.7 20.1 18.0 External debt (% of GDP) 44.0 43.5 42.1 44.8 44.4 38.1 Broad money (% of GDP) 52.8 54.2 46.3 51.9 55.9 57.0 Real GDP per capita growth (%) 1.4 0.0 1.7 2.1 2.8 3.3 Note: Averages are calculated as unweighted means of country values. Mean inflation is calculated from the annual medians and then averaged over five-year periods. Source: IMF World Economic Outlook database and staff calculations. 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 4 61 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S TABLE 4.4 Impact of financial crises on poverty, East Asia, 1997­98 Poverty headcount index (percent) Country Crisis year Overall Urban Rural Indonesia 1997 11.0 9.2 12.4 1998 19.9 15.8 23.0 Korea 1997 2.6 7.5 -- 1998 7.3 10.0 -- Malaysia 1997 8.2 -- -- 1998 10.4 -- -- Thailand 1997 9.8 1.2 11.8 1998 12.9 1.5 17.2 -- Not available. Source: Fallon and Lucas 2002. Some progress has been made in all of these areas where countries have a comparative areas. On average for middle-income coun- advantage. The primary determinant of the tries, fiscal deficits and debt and debt service benefits from trade is a country's own poli- ratios have fallen since the late 1990s. There cies, though, as discussed in chapter 10, has also been a clear shift among emerging restrictions imposed by trading partners can market economies toward more flexible significantly limit the possibilities for trade. exchange rate regimes. For example, in 2001, Progress in trade reform by developing coun- half of these economies had floating regimes, tries in the past several years has been encour- compared with only 17 percent in 1990. Even aging. However, while many developing within emerging market economies that main- countries have done well in using trade as tain exchange rate regimes that are intermedi- part of a growth strategy, several others have ate between hard pegs and floating regimes, not. Thus, the benefits of trade are distributed there has been a shift toward greater flexibil- asymmetrically across (and within) countries. ity. As a cushion against volatility, foreign reserve positions have in general been appre- Merchandise Trade Liberalization ciably strengthened. As discussed later in this chapter, the financial soundness of banks in The average nominal tariff in developing developing countries has also improved, and countries was cut by half during the past reforms have been initiated to improve corpo- decade, dropping to 13.5 percent (table 4.5). rate governance. And some countries have Particularly notable progress has been made taken steps to strengthen their social protec- in reducing nontariff barriers (NTBs). The tion systems, while taking care to ensure their prevalence of core NTBs (quotas on trade, sustainability. nonautomatic licensing, minimum prices, and similar policies), as measured by the number Trade Policy of tariff lines covered, has fallen dramatically in almost all regions during the past decade, Complementing sound macroeconomic poli- dropping from over 50 percent in some cies, openness to international trade con- regions (South Asia) to the 2 to 15 percent tributes to an environment fostering growth, range (table 4.6). Currently, core NTBs cover by giving firms and households access to some 11 percent of imports in developing world markets for goods, services, and countries. Despite this significant liberaliza- knowledge and encouraging investments in tion, trade policies continue to generate sig- 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 4 I M P R O V I N G E N A B L I N G C L I M A T E F O R G R O W T H : E C O N O M I C A N D F I N A N C I A L P O L I C I E S nificant anti-export bias in some regions; for TABLE 4.5 Decline in tariffs in developing countries, example, even after the significant decline, the late 1980s to 2003 average tariff in South Asia remains around (simple averages of MFN tariffs, percent) 20 percent. The above picture is confirmed by the IMF's Region Late 1980s 2003 trade restrictiveness index. The average rating East Asia and Pacific 18.8 10.4 for low-income countries was 3.8 (relatively Europe and Central Asia 10.2 8.9 open) in 2003, down from 5.4 (moderately Latin America and Caribbean 22.4 12.0 restrictive) in 1997. Trade liberalization has Middle East and North Africa 17.3 14.8 contributed to a rise in developing countries' South Asia 68.9 19.8 Sub-Saharan Africa 25.1 17.6 share of world trade, which rose from 17 per- cent in 1995 to 22 percent in 2002. The share All developing countries 25.4 13.5 of low-income countries also rose, though in Least developed 28.4 16.4 Low income 31.7 15.8 absolute terms it remains small, at around 3 Middle income 21.8 12.7 percent. While traditional trade policy barriers have been lowered, there has been a tendency Source: World Bank, World Development Indicators, various years; IMF tariff data. for technical product regulations (mandatory health and safety standards) to rise. Although not generally protectionist in intent, they are increasingly becoming a factor in interna- TABLE 4.6 Decline in core nontariff barriers in developing countries, 1989­94 to 2000 tional trade and have been argued to be an (percent of tariff lines affected) impediment for low-income countries to pen- etrate export markets.5 The incidence of such standards is four times higher in middle- Region 1989­94 2000 income countries than in low-income coun- Latin America and Caribbean (13, 17) 18.3 15.3 tries. Countries in Latin America and in the Europe and Central Asia (11) N.A. 3.4 Middle East and North Africa subject around East Asia and Pacific (7, 9) 30.1 5.5 Sub-Saharan Africa (12, 17) 26.0 2.3 20 percent of all imports to product stan- Middle East and North Africa (4, 8) 43.8 8.5 dards, compared with less than 5 percent in South Asia (4, 3) 57.0 13.3 the least developed countries. In a number of (mostly) middle-income countries, there has also been an increase in the Note: Numbers in parentheses indicate the number of countries for which data are available for 1989­94 and 2000, respectively. Due to differences in country coverage, data are not use of contingent protection--antidumping strictly comparable across years by region. and safeguard actions. Measured on a "per Source: World Bank. dollar of imports affected" basis, many of the largest developing countries are now more intensive users of antidumping than the regional trade negotiations with different advanced countries (table 4.7). Although it is partners at the same time. As of March 2003, often argued that such "safeguard" instru- only four WTO members--Macao SAR; ments are needed to allow countries to pursue Mongolia; Taiwan, China; and Hong Kong, trade liberalization, the country incidence of China--were not members of any RTA. The these actions is biased against other developing question has often been posed whether countries; it also imposes substantial costs on regionalism is a building block toward multi- the economies invoking such protection. lateral liberalization or whether it is more The spread of bilateral and regional trade likely to be a stumbling block. There is no agreements (RTAs), of both South-South and clear consensus on this issue. Much depends North-South types, has continued. Many on the specifics of the agreements. Overall, countries are involved in both bilateral and however, discrimination can be costly; it not 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 4 63 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S TABLE 4.7 Major users of antidumping, developing countries, The policy indicators reviewed above--tar- 1995­2002 iffs, core NTBs, technical standards, and pref- erential arrangements--cannot be readily Against all economies compared across countries. To enable a com- parison that encompasses tariffs and different Initiations per US dollar Number of of imports Index types of NTBs, an index has recently been Country initiating antidumping initiations (USA=100) developed at the World Bank that measures Argentina 176 2,549 the overall policy restrictiveness implied by Brazil 98 580 these barriers. It measures the uniform tariff India 273 2,197 equivalent of the actual structure of tariffs and Indonesia 39 90 NTBs that would generate imports at the Korea 48 126 observed levels in a given year.6 The index, Malaysia 22 106 Mexico 56 144 called the Overall Trade Restrictiveness Index South Africa 157 2,006 (OTRI), has been estimated for some 100 developing and developed countries for which underlying data are currently available. Source: World Bank staff based on notifications to the WTO. The average OTRI across all developing TABLE 4.8 Overall trade restrictiveness of developing-country groups, 2001 countries in the sample was 15.1 percent in (in percent) 2001 (table 4.8). The most restrictive region is South Asia. On average, trade barriers against low-income countries imposed by OTRI toward low-income OTRI toward middle-income countries are somewhat lower Region Overall OTRI countries LDCs than the average restriction on overall trade, East Asia and Pacific 12.1 12.6 11.4 and barriers against the least developed coun- Europe and Central Asia 11.6 12.0 12.1 tries (LDCs) are somewhat lower still (12.7 Latin America and Caribbean 16.8 16.5 18.3 percent). However, low-income countries as a Middle East and North Africa 17.7 14.0 12.4 group impose higher barriers against LDCs South Asia 32.2 26.4 29.9 Sub-Saharan Africa 10.7 13.1 11.8 than against low-income countries. LDCs impose, on average, lower barriers against All developing countries 15.1 14.8 16.6 Least developed 18.2 14.4 11.6 trade with other LDCs than on trade with the Low income 23.3 20.0 24.2 rest of the world. As is often the case, the Middle income 14.2 13.5 12.7 regional and income-based aggregations hide considerable variance across countries. OTRIs are negatively correlated with per Source: World Bank staff estimates. capita income, indicating that richer coun- only hurts those excluded but also imposes tries tend on average to have less restrictive costs on those included. By reducing trade trade regimes (figure 4.2).7 Developing coun- barriers on a subset of partners, countries gen- tries with the highest OTRIs include India, erally increase the real cost of their imports, Tunisia, Jordan, Morocco, Bangladesh, Alge- reduce the flow of technology from nonmem- ria, and Lebanon (OTRIs above 20 percent). ber countries, and increase dependence on India is the most restrictive country in the particular export markets. If liberalization sample, with an OTRI of 36 percent. Coun- proceeds on a discriminatory basis, there is a tries in the Middle East and North Africa danger of stronger pressure against further tend to have more restrictive trade regimes: of opening up of the regional market through the the 10 most restrictive countries in the sam- WTO. Finally, given the limited administra- ple, 5 are in that region--Tunisia, Jordan, tive resources of poor countries, diverting Morocco, Algeria, and Lebanon. In Latin these away from multilateral negotiations can America, Mexico and Argentina have the entail a substantial opportunity cost. most restrictive trade regimes. Among Sub- 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 4 I M P R O V I N G E N A B L I N G C L I M A T E F O R G R O W T H : E C O N O M I C A N D F I N A N C I A L P O L I C I E S Saharan African countries, Nigeria and Mau- FIGURE 4.2 Better-off countries tend to restrict trade less ritius have the highest OTRIs. China and Overall Trade Restrictiveness Index and GDP per capita, 2001 Thailand are the most protective countries in East Asia, and Romania and Poland in Europe 40 and Central Asia. Developing or transition India economies with the lowest OTRIs include the Baltic states, Costa Rica, Guatemala, Indo- Tunisia 30 nesia, Philippines, South Africa, Trinidad and Morocco Jordan Tobago, Ukraine, and the low-income coun- percent Bangladesh tries of Sudan, Madagascar, and Uganda (with Algeria Lebanon OTRIs below 7.5 percent). Mauritius values, 20 Romania Mexico Nigeria China Argentina South Africa Poland Fitted/ Trinidad & Tobago Services Liberalization and Thailand Uganda European Union "Behind-the-Border" Agenda OTRI10 Norway Madagascar Guatemala Costa United Developing countries' services trade has been Sudan Rica Canada States Indonesia Latvia Hong Kong Japan rising more rapidly than merchandise trade, Philippines Ukraine Estonia Singapore 0 Lithuania fueled by falling communications and trans- 4 6 8 10 12 port costs and the associated rise in global out- Log GDP per capita sourcing. The share of services in total developing-country exports rose from 20 per- Source: World Bank staff. cent in 1990 to 26 percent in 2000. India is a well-known example of a country that has trade regime can contribute to the lowering of greatly expanded distance business services such key behind-the-border costs. It can also exports, but several other countries also generate broader spillover benefits arising have increased such exports. Business service from increased competition and new technol- exports from Brazil, Dominica, India, and ogy and know-how brought by foreign ser- Mauritius grew at rates around or above 20 vice providers. percent per year from 1995 to 2000. The Research provides supporting evidence that potential for further growth of services exports openness to services trade contributes to better from developing countries is substantial. longer-term growth performance. A study The benefits of services trade extend finds that, controlling for other determinants beyond services exports and can generate of growth, countries that fully reformed the substantial gains on the import side as well. financial services sector grew, on average, Services, such as customs clearance, logistics about 1 percentage point faster than other relating to product labeling and standards, countries. An even greater impetus to growth transport and telecommunications, and was found to come from fully reforming both financial services, are an important input into the telecommunications and the financial ser- the production process and affect the com- vices sectors, with countries that fully liberal- petitiveness of an economy more broadly. ized both sectors achieving average growth of Progress on this "behind-the-border" agenda about 1.5 percentage or higher than others.8 is crucial for countries to take full advantage While these estimates are only suggestive, they of the increased market access resulting from do indicate the scope for substantial gains reduction in border barriers (tariffs, NTBs). from liberalizing key service sectors. The availability of these services at low cost Developing countries have made progress is becoming increasingly important as inter- on liberalization, but policy remains relatively national competition becomes sharper and restrictive in many of them. Services tend to be efficient and just-in-time supply chain man- less tradable across borders than goods, agement more crucial. A more open services implying the need to open up to foreign direct 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 4 65 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S FIGURE 4.3 Overall policy on trade in services remains more restrictive alization of financial services is not supported in developing countries by strengthening of the regulatory and institu- Liberalization indices for financial services and tional framework for prudential regulation and telecommunications, most recent years supervision, the soundness of the financial sys- tem could be placed at risk. If privatization of state-owned service monopolies is conducted South Asia (3) without attention to creating conditions for competition and appropriate regulatory over- East Asia and Pacific (5) sight, the result may largely be transfers of Sub-Saharan Africa/Middle East Financial monopoly rents to private owners--perhaps and North Africa (17) services foreign ones. Also, if policies to ensure broad Europe and Central Asia (3) access are not put in place, liberalization may Latin America and not improve access to essential services for Caribbean (18) smaller businesses and the poor. Getting the elements and sequencing right, therefore, is High Income (26) important to the realization of benefits. Sub-Saharan Africa/Middle East Private Sector Regulatory and and North Africa (42) Institutional Environment Europe and Central Asia (3) A vibrant private sector requires a favorable South Asia (5) regulatory environment. But in many coun- Telecoms tries, especially low-income ones, businesses East Asia and Pacific (8) are hampered by bureaucratic regulations Latin America and and weak protection of property rights. The Caribbean (21) result is slower development. The more time High Income (21) entrepreneurs spend dealing with red tape or defending property rights, the less time they 0 2 4 6 8 10 spend building their business. A host of evi- Less restrictive dence shows that heavy regulation of busi- ness is associated with poor economic outcomes--less investment (both domestic Note: Numbers in parentheses show the number of countries covered. Source: Mattoo, Rathindran, and Subramaniam (2001). and foreign), employment, and productivity (figure 4.4).9 The ultimate effect is slower investment. Many countries restrict trade in growth and more poverty. services through barriers to labor movement As an example, compare China and South or to entry of foreign-owned firms. With Asia. Recent studies show that a sizable part respect to financial services and telecommuni- of the gap between their economic perfor- cations, for example, the picture varies sub- mance is the result of differences in invest- stantially across regions. While some regions ment climates.10 Similarly, by improving have made appreciable progress, overall pol- infrastructure and regulatory conditions to icy remains significantly more restrictive than the levels of Shanghai, studies show that firms in developed countries (figure 4.3). in Dhaka could increase productivity by 43 Successful reform of trade policy in services percent; those in Calcutta, 78 percent; and requires more than lowering entry barriers. those in Karachi, 81 percent. Even cities They need to be underpinned by complemen- within China would experience dramatic tary changes in domestic regulation. Badly gains by emulating Shanghai. For instance, if designed reform can seriously undercut the Chengdu could attain investment climate benefits of liberalization. For example, if liber- indicators identical to those of Shanghai, pro- 66 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 4 I M P R O V I N G E N A B L I N G C L I M A T E F O R G R O W T H : E C O N O M I C A N D F I N A N C I A L P O L I C I E S FIGURE 4.4 Heavy regulation is associated with procedures are associated with higher levels lower productivity of corruption (figure 4.5). Ease of starting a business and labor Burdensome regulation excludes vulnera- productivity ble groups from the opportunity to partici- pate in markets. The wealthy and connected er)k 40 can find ways around cumbersome rules. They may even be protected by them. But wor new entrants and the disadvantaged are shut per 30 out. For example, rigid employment regula- tion is associated with higher female and youth unemployment. There is no evidence thousands 20 that countries with stronger employment pro- (US$ tection have more equal income distributions. vity If anything, the rigidity of employment laws 10 may be associated with more inequality (fig- oducti pr ure 4.6). Relatedly, poor credit laws particu- larly hurt small firms' access to credit.12 bor La 0 Complex and rigid business regulation 1 2 3 4 Less More thus brings both poor economic and social Countries ranked by regulatory outcomes. But this does not of course suggest difficulty of starting a business (quartiles) that all regulation is harmful. All countries regulate business activity. The most success- ful ones do so in a simple and transparent Source: World Bank Doing Business database 2003. manner. Rather than intervene heavily in business operations, successful governments ductivity of its firms could be increased by channel their resources into regulations and about 30 percent, their investment rate from institutions that protect property rights and 14 percent to 19 percent, and their average ensure an even playing field for firms. Doing sales growth by up to one-half.11 so encourages investment, facilitates trade The cost of poor business regulation is not beyond a narrow circle of established busi- just economic. Heavy business regulations ness networks, and enhances access to credit. hurt the very people they are supposed to As one example, protection of creditor rights protect. Faced with burdensome rules and and efficient enforcement of contracts through little benefit from registering officially, many courts is associated with deeper credit markets entrepreneurs tend to operate in the informal (figure 4.7). sector (figure 4.5). There, there are no worker safety or product standards, there is Current Picture and Agenda no social security, access to credit and use of the courts is more difficult, and firms do not The countries that most need a vibrant private contribute to government and social services sector--low-income countries--are the very by paying taxes. This is the case for well over ones that place the most obstacles in front of half of business activity in many developing entrepreneurs. Indicators developed under the countries. Another social cost is corruption, World Bank's Doing Business Project (DB) a regressive tax that hits poor people the show that on average it takes 30 days and hardest. Without checks and balances, com- costs less than 10 percent of income per capita plex rules breed discretion. Each encounter to start a business in high-income countries.13 between a bureaucrat and an entrepreneur In low-income countries, it takes 74 days and becomes an opportunity to extract a bribe. costs twice income per capita--prohibitive Not surprisingly then, more bureaucratic for the ordinary person. Among low-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 4 67 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S FIGURE 4.5 Heavier regulation contributes to the informal economy and corruption Employment laws and Business registration and corruption the informal economy High High capita) per economy income Corruption Informal (percent 1 2 3 4 5 1 2 3 4 5 Low High Less More Countries ranked by rigidity of Countries ranked by procedures to employment law index (quintiles) register a business (quintiles) Source: World Bank Doing Business database 2003. FIGURE 4.6 More regulation does not necessarily produce better social outcomes Restrictiveness of employment laws and income inequality 0.7 0.6 ­2000 0.5 1995 index 0.4 Gini 0.3 0.2 0.50 0.70 0.90 1.10 1.30 1.50 1.70 1.90 2.10 2.30 2.50 More restrictive Employment laws index 1999 Source: World Bank staff estimates. 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 4 I M P R O V I N G E N A B L I N G C L I M A T E F O R G R O W T H : E C O N O M I C A N D F I N A N C I A L P O L I C I E S FIGURE 4.7 Protecting property rights is associated with more credit Contract enforcement and availability of private credit Creditor rights and availability of private credit More More GDP) GDP) of of (percent (percent credit credit Private Private Less More Less More Countries ranked by days to Countries ranked by legal enforce a contract (deciles) creditor rights (deciles) Source: World Bank Doing Business database 2003. countries, the time varies from 22 days in Pak- Regulation typically is heavier and more istan to 215 days in the Democratic Republic complex in low-income countries than in of Congo, and the cost ranges from 9 percent high-income countries, contrary to what one of income per capita in Armenia to as much as would expect given the greater enforcement 10 times income per capita in Sierra Leone. By capacity and more developed regulatory contrast, in Australia it takes only two days to regimes for protecting workers, consumers, register a business and in Denmark there is no and the environment in the latter (figure 4.8). cost to register a business. Most strikingly, in low-income countries, it A similar picture emerges when an entre- takes on average 30 procedures to enforce a preneur uses the courts to resolve disputes, or contract through the court. By contrast, it goes through bankruptcy procedures. Delays takes only 18 procedures in the high-income are much shorter in high-income countries. countries. Similarly, an entrepreneur must For example, insolvency procedures on aver- undergo an average of 11 procedures to start age take around four years in low-income a business in low-income countries, compared countries, compared with two in high-income with only 7 in high-income countries. Indexes countries. It costs on average 8 percent of of the rigidity of employment law and court income per capita to enforce contracts involvement in bankruptcy are over 20 per- through courts in the latter but 64 percent in cent greater in low-income countries. the former. In Cambodia, Indonesia, Kyrgyz In which areas do lower-income countries Republic, and Malawi, for example, fees lag the most? The costs to start a business and could amount to more than twice income per enforce a contract are areas where there capita. Faced with such high fees, most busi- appear to be large opportunities for reform. nesses avoid the courts and opt for informal Average costs of business in these respects are means of enforcement, and limit trade to only a large multiple of those in best-practice a narrow circle of known partners. countries (figure 4.9). 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 4 69 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S FIGURE 4.8 Poor countries regulate the most Degree of regulation, developed and developing countries, 2003 More regulation 30 12 66 11 27 63 27 55 56 10 53 53 18 43 7 43 Less Low-income Lower-middle-income Upper-middle-income High-income regulation countries countries countries countries Contract procedures Court powers in bankruptcy index Entry procedures Employment laws index Note: The indicators for high-income countries are used as benchmarks. The average value of the indicator is shown above each column. Source: World Bank Doing Business database 2003. These findings are corroborated by evi- ratings for low-income countries are lower dence gathered through the World Bank's than those for higher-income countries for investment climate assessments (ICAs).14 all dimensions of private sector regulatory These studies find bureaucratic harassment to and institutional environment covered by be a major constraint to business. For exam- these ratings. The area of property rights ple, customs clearance typically takes much and rules-based governance emerges as the longer in low-income countries. Firms in weakest element of the business environ- these countries in general also experience ment. This is an area of relative weakness greater production losses from power failures for all developing countries, low or middle and have less access to credit (table 4.9). income, but the ratings are particularly low Related research finds that these deficiencies for the former. in investment climate tend to offset the low- Although the developing countries regu- wage advantages of the low-income countries late more heavily on average, the picture and make it much harder for them to compete varies appreciably across countries and even with better-off middle-income countries.15 within the same country across different types Economic growth will have greater impact on of business regulation. This is encouraging, as reducing poverty if countries do not have to it suggests that good practices do exist in rely on low-wage strategies to make up for developing countries and that partial reforms investment climate deficiencies. are possible as a step toward more compre- A similar picture emerges from the World hensive, longer-term reform. Over the past Bank's Country Policy and Institutional decade, countries such as Jamaica, Latvia, Assessment ratings (figure 4.10). Average Pakistan, Serbia and Montenegro, Slovakia, 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 4 I M P R O V I N G E N A B L I N G C L I M A T E F O R G R O W T H : E C O N O M I C A N D F I N A N C I A L P O L I C I E S South Africa, Thailand, Tunisia, and Vietnam FIGURE 4.9 Low-income countries lag far behind best practice in have greatly improved certain aspects of busi- promoting business ness regulation. Following reforms to its judi- Low-income country average relative to the 10 best-practice countries cial procedures in 1996, Tunisia is now among the most efficient countries in resolv- ing commercial disputes. The 1999 Thai Days to start a business 10.7 bankruptcy reforms have achieved great suc- cess, as have revisions to collateral law in Slo- Cost to start a business 128.2 vakia. And recent streamlining of business registration in Latvia, Pakistan, Serbia and Procedures to start a business 3.3 Montenegro, and Vietnam has significantly Rigidity of employment law index 2.1 reduced the regulatory requirements to start a business. Although time-series data on busi- Days to enforce a contract 5.7 ness regulations are scant, evidence from the CPIA suggests a trend toward improvement. Cost to enforce a contract 52.2 While average CPIA ratings for business envi- Procedures to enforce a contract 2.1 ronment remain relatively low (on a scale of 1 to 6), indicating continuing weaknesses, Creditor rights index 2.2 they are rising (figure 4.11). Days to go through insolvency 4.4 Low-income countries are making particu- larly notable progress in the competitive envi- Cost to go through insolvency 7.4 ronment for the private sector, narrowing the 0 30 60 90 130 gap with the average for all developing coun- tries (including middle-income ones). Less progress has been made in property rights and Note: Numbers denote multiples by which low-income country indicators fall short of those rules-based governance, although the overall in the top 10 countries. Source: World Bank Doing Business database 2003. trend in this respect also is positive. Reforms are also taking place in the area of corporate governance. This is a particularly important area of reform in middle-income The foregoing assessment suggests two countries; weak corporate governance con- broad themes for the reform of the private tributed to the corporate financial vulnerabil- sector regulatory and institutional environ- ities that underlay the East Asian crisis in the ment. First, countries need to simplify regula- late 1990s. But it is also relevant to low- tions related to the start and conduct of income countries seeking to attract capital for business. Eliminating unnecessary procedures growth. For the past three years, the World and simplifying those that are necessary will Bank has been conducting assessments of cor- reduce business costs, minimize chances of porate governance in client countries, and by corruption, and boost firms' competitive- the middle of 2004, 38 such assessments ness--while reducing costs for government. (known as Reports on Observance of Stan- Second, emphasis should shift from regulat- dards and Codes, or ROSCs) will have been ing business operations to strengthening insti- completed.16 In almost all of the countries sur- tutions that facilitate business by supporting veyed, there is now a wide acceptance of the efficient and fair functioning of markets. importance of corporate governance reform. A key area is strengthening property rights However, reforms are only just beginning to and the legal and judicial system underpin- penetrate the business cultures in most coun- ning contract enforcement. Another priority, tries. Table 4.10 summarizes some of the especially in middle-income countries, is the lessons learned from the corporate gover- continued building of the institutions of cor- nance ROSC assessments. porate governance. 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 4 71 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S TABLE 4.9 Investment climate, selected low- and middle-income countries, 2002 Firms with a loan Avg. days to clear % of production lost Have own Firms with overdraft from a bank or Country customs (exports) from power loss generator (%) or line of credit (%) financial institution (%) Middle-income countries Algeria 8.6 5.3 29.5 38.6 50.4 Brazil 8.4 2.5 17.0 74.4 34.7 China 5.5 1.8 17.0 26.6 57.0 Ecuador 7.1 5.7 33.8 71.5 72.8 Honduras 1.9 5.2 33.3 43.1 51.6 Malaysia 2.6 -- 22.6 71.7 87.1 Moroccoa 1.7 -- 16.7 78.9 45.1 Peru 5.2 3.3 27.6 47.7 44.6 Mean 5.1 4.0 24.7 56.6 55.4 Low-income countries Bangladesh 8.8 3.3 71.5 66.2 58.8 Eritrea 3.2 5.5 43.0 47.4 44.9 India 5.1 6.5 68.5 57.4 11.6 Mozambique 17.0 5.1 23.3 12.1 29.0 Nicaragua 2.0 6.5 18.4 29.5 44.0 Pakistan 9.2 5.4 41.8 22.8 19.5 Mean 7.6 5.4 44.4 39.2 34.6 -- Not available. a. Data from a year 2000 survey. Source: World Bank investment climate assessment surveys. FIGURE 4.10 Low-income countries lag the most in property rights and Financial Sector Policies rule of law Property rights, rule of law, and competitive environment, An effective financial system promotes eco- developing countries nomic growth and reduction of poverty by mobilizing savings and allocating them to pro- Better ductive uses. It can also reduce poverty institutions directly: it protects savings, allows migrants to remit funds, and provides small entrepreneurs 4.2 4.2 access to credit, including women through 4.0 microfinance programs responsive to their needs. Higher incomes and financial assets 3.6 3.6 3.4 feed back into gains on the non-income 3.2 poverty MDGs as well, such as education and 3.1 health. A sound financial system also strength- ens an economy's resilience to shocks, thereby Weaker 2.6 institutions protecting growth and the hard-won gains in Low-income Lower-middle- Upper-middle- reducing poverty. countries income income countries countries Financial Deepening Property rights and rules-based governance Competitive environment For most of the last decade, banking sector Factor and product markets penetration, as measured by the ratio of bank deposits to GDP, has been on the rise for Source: World Bank CPIA ratings 2003. developing countries as a whole. The ratio 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 4 I M P R O V I N G E N A B L I N G C L I M A T E F O R G R O W T H : E C O N O M I C A N D F I N A N C I A L P O L I C I E S rose from 27 percent in 1990 to 34 percent in FIGURE 4.11 Countries are improving their private business environment 2002 (figure 4.12). The aggregate indicators, Business environment indicators, developing countries however, mask wide differences between groups of countries both across income levels 3.7 and across regions. Looking across income levels, countries with higher income have 3.5 higher banking sector penetration, with the ratio ranging from 21 percent of GDP in low- 3.3 income countries to 42 percent in middle- income countries in 2002 (49 percent in 3.1 upper-middle-income countries). The overall trends in banking penetration 2.9 also mask considerable inter- and intra- regional differences. The process has pro- 2.7 gressed most in emerging market countries in Southeast Asia, and recently in the develop- 2.5 ing and transition countries in Europe and Central Asia. In Latin America, penetration 2.3 1999 2000 2001 2002 2003 rates were on the rise during most of the 1990s, reflecting economic reform and price Competitive environment (low income) stability, but have receded since 2000, fol- Competitive environment (all) Factor and product markets (low income) lowing the ebbing of capital flows and a wave Factor and product markets (all) of financial crises. In Sub-Saharan Africa, Property rights and governance (low income) bank penetration continues to be low, owing Property rights and governance (all) to long-standing legal, judicial, and institu- tional weaknesses. Bank credit to the private sector has also Source: World Bank CPIA ratings 2003. grown, but more slowly than deposits. For developing countries as a whole, bank credit foreign liabilities) also has contributed to the to the private sector increased from 24 per- outcome (figure 4.13). Analysis of a sample of cent of GDP in 1990 to 27 percent in 2002. 14 developing countries with relatively large As for deposits, there are large variations financial systems and 10 African countries across income levels, with the ratio ranging shows that, in most cases, relatively little of from 13 percent for low-income countries to the growth in deposits was reflected in an 35 percent for middle-income countries in increase in credit to the private sector. In the 2002 (40 percent for upper-middle-income case of the African countries in the sample, in countries). Private credit to GDP ratios in aggregate, none of the deposit growth was general stagnated during this period for low- translated into growth in private credit. income countries, and rose only marginally Access to credit remains a difficult issue in for lower-middle-income countries, while most developing countries, reflecting not only displaying a more dynamic trend in upper- crowding-out by public sector credit, but also middle-income countries.17 weaknesses in the informational and legal In many countries, the slower growth in and judicial frameworks. Attempts simply to private sector credit reflects increases in net channel low-cost funds to small borrowers to credit to government arising from restructur- overcome these and other obstacles are likely ings of banking systems and fiscal deficits, and to undermine sustainable finance for rural in central bank debt related to the conduct of and other small and medium enterprises monetary policy. A rise in banks' own hold- (SMEs), as occurred in the era of repressed ings of foreign assets (in part to hedge their finance. A sustainable improvement in access 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 4 73 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S TABLE 4.10 Summary of lessons learned from corporate governance assessments Successes Improvements needed Basic shareholder rights · Improving shareholder record-keeping infrastructure · Several items of interest to international investors remain unresolved · Improved shareholder meeting mechanics in many countries (such as share blocking, shareholder meeting · Powers of board and shareholders being clarified notification period) · In some countries fundamental decisions can be taken by board (not shareholders) Ownership and related party transaction disclosure · Basic rules in place in many countries · Compliance with ownership and related party transaction disclosure is still spotty in many countries · Understanding ownership remains difficult Financial and nonfinancial disclosure · Greatly improved rules, standards, and formats · Compliance with new rules is growing more slowly · Gradual progress on accounting and auditing reform · Quality of financial reporting is still mixed in many countries · Audit committee introduced in many countries · Electronic information dissemination now standard Duties of board of directors · Board role being strengthened and clarified · True independence remains rare · Duties better described in law · Most director training is in early stages · Idea of "independence" introduced in many countries · Many efforts at improving director training Shareholder redress and enforcement · Lowered thresholds for shareholder action · Results in basic legal reform are limited · More active regulators and exchanges · Implementation of new laws is lacking · Enforcement remains key challenge Source: Corporate Governance ROSCs, World Bank. to credit requires improvement of credit Many countries are now reforming their laws information and strengthening of creditors' with respect to collateral execution and bank- rights, to increase incentives for sound lend- ruptcy, but, unless accompanied by a stronger ing to small borrowers. Attempts are under judicial system, enforcement will remain weak. way in many countries to improve informa- Another key area for improvement is titling, tion on borrowers. For example, 23 develop- particularly for small mortgages and land. ing countries have established public credit There are institutions in developing coun- bureaus since 1994. In several other countries tries that have successfully sustained credit the functioning of existing public and private access to small borrowers and that provide credit bureaus is being improved.18 good examples. Microbanking institutions The legal and judicial framework, particu- are of all sizes, ranging from Bank Rakyat, larly with regard to execution of collateral Indonesia's unit desa program (with a small- but also bankruptcy, is important to credit loan portfolio of $2.5 billion) to Bangladesh's access. In many countries, the legal system Grameen Bank ($275 million), Peru's Mi- favors debtors, making collateral execution Banco ($100 million), Ecuador's CrediFe almost impossible. Furthermore, even if the ($35 million), India's SEWA ($10 million), legal system provides for creditors' rights in and Uganda's FOCCAS ($1 million). Whether theory, weaknesses in the judicial system may large or small, successful institutions follow a make collateral execution difficult in practice. few key principles: collect on loans; charge 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 4 I M P R O V I N G E N A B L I N G C L I M A T E F O R G R O W T H : E C O N O M I C A N D F I N A N C I A L P O L I C I E S FIGURE 4.12 The financial sector is deepening in the developing world, but at a varying pace Trends in financial intermediation in developing countries, 1990­2002 80 70 60 GDP of 50 cent per 40 Deposits Private sector credit values, 30 Mean 20 10 0 Asia Middle East Latin America Europe Sub-Saharan Low- Middle- & & & Africa income income North Africa Caribbean Central Asia countries countries 1990 (1995 for Europe and Central Asia) 2002 Source: IMF, International Financial Statistics. enough to cover costs; contain costs and select Yet much remains to be done to reduce the borrowers well; mobilize deposits and reduce risk of crises. The variation in the health of dependence on donors; and provide transpar- the banking systems across developing coun- ent information on accounts, clientele, and tries is reflected in key indicators of financial any subsidies.19 soundness, such as the return on assets, the ratio of nonperforming loans to total loans, and the ratio of capital to assets (table 4.11). Systemic Soundness and Stability A key indicator of financial soundness, the A sound financial system is essential for average ratio of performing loans to total macroeconomic stability. Crises in financial loans, does show some improvement in most systems during the 1990s spilled over into regions recently. However, improper loan slower economic growth and led to a costly classification and regulatory forbearance overhang of debt. Some improvements have mean that the figures likely understate the size occurred, notably an increased role of rep- of problem loans. The average capital to asset utable international banks in Eastern Euro- ratios, on the other hand, have not increased pean and Latin American banking systems. much. 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 4 75 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S FIGURE 4.13 Deposit growth has not been equally reflected in growth in private sector credit Changes in ratios of bank assets and liabilities plus capital to GDP in the 1990s 20 Liabilities + capital 15 10 GDP of 5 Percent 0 ­5 Latin America (7) East Asia (4) Transition countries (3) Africa (10) ­10 Private sector credit Net public sector credit Net foreign assets Source: IMF, International Financial Statistics. TABLE 4.11 Evolution of selected financial soundness indicators, 1998­2002 (percent) Nonperforming loans Return on assets to total loans Capital to assets Region 1998 2000 2002 1998 2000 2002 1998 2000 2002 Latin America Mean 1.2 0.3 0.7 7.2 10.3 9.5 11.9 11.0 10.3 Standard deviation 2.0 1.5 2.3 3.1 7.1 5.3 4.2 2.5 4.7 Eastern and Central Europea Mean ­0.5 1.0 1.3 11.6 10.4 8.9 11.2 10.6 10.5 Standard deviation 1.8 0.9 0.5 8.3 7.6 6.7 5.1 3.7 2.4 Asiab Mean ­2.7 0.3 0.8 20.9 14.8 12.9 5.0 6.6 7.4 Standard deviation 6.8 0.9 0.4 15.2 5.8 8.5 7.1 3.4 3.8 Middle East and North Africa Mean 1.4 1.1 1.1 10.5 13.7 16.3 8.8 9.6 9.3 Standard deviation 0.6 0.5 0.6 3.7 5.6 8.2 1.9 2.7 2.5 Sub-Saharan Africa Mean 2.6 3.9 3.2 20.4 18.9 16.5 9.7 9.8 9.9 Standard deviation 1.8 2.3 1.5 10.5 11.4 14.0 1.8 1.9 1.8 a. Includes Israel and Turkey. b. Excludes Japan. Source: National authorities, EDSS, Bankscope, Moody's, IMF staff estimates. 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 4 I M P R O V I N G E N A B L I N G C L I M A T E F O R G R O W T H : E C O N O M I C A N D F I N A N C I A L P O L I C I E S Evidence shows that the financial strength FIGURE 4.14 Financial system strength is typically positively correlated of a country's banking system goes hand in with compliance with Basel Core Principles hand with the quality of its regulatory and Correlation between financial strength and compliance with Basel Core Principles institutional framework (figure 4.14). A sim- ple comparison of indices of financial strength and compliance with Basel Core Principles for 90 Effective Banking Supervision (BCPs) shows a 80 index close association between the two indexes (the 70 simple correlation is 0.65).20 It also shows 60 strength that the financial strength of institutions is 50 generally lower in developing countries. By 40 and large, this is associated with weaker com- 30 financial 20 pliance with BCPs--although in some coun- 10 tries, institutions remain financially weak Moody's 0 despite a higher degree of compliance. 0 10 20 30 40 50 60 70 80 A more detailed comparison of individual Basel Core Principles compliance index BCPs across developing countries reveals pat- Developing countries Developed countries terns that suggest areas for particular atten- tion. In banking, close to half of the countries for which supervisory assessments have been Sources: Moody's and IMF Basel Core Principle Assessment, staff calculations. completed have weak arrangements for man- aging credit risks (credit policies, connected lending, loan classification and provisioning) and market risks. Similarly, half of the coun- An area important to both financial sector tries assessed have weak supervisory indepen- deepening and stability is the development dence, including the adequacy of resources to and sound functioning of domestic capital conduct a proper supervision, and institutional markets. In most cases, secondary markets in arrangements for consolidated supervision are developing countries are shallow and illiquid. weak in 70 percent of the countries assessed. This prevents the diversification of risks away Weak accounting and auditing, limited avail- from the banking system and limits the means ability of corporate financial information, and available to entrepreneurs to raise finance for widespread government guarantees limit mar- investment (figure 4.15). As a precondition for ket discipline. the development of domestic capital markets, Efforts are under way in many countries to countries need to improve their corporate remedy these deficiencies. An important focus governance regimes, regulatory framework of these efforts is to strengthen the regulatory for financial information and reporting, and and supervisory framework. Measures are also clearance and settlement infrastructure. being taken to improve market discipline. Both the IMF and the World Bank are providing Notes technical assistance to countries in these areas. Looking ahead, the New Capital Accord 1. For this purpose, IMF staff assessed each low- income country according to a common set of cri- (Basel II, or NCA), which proposes to improve teria. For example, a country with an unsustainable the risk sensitivity of capital requirements, is a level of public debt and a large fiscal deficit would particularly important initiative, even though be judged to have an unsatisfactory fiscal policy. some of its elements have proved controver- 2. See, for example, Barro 1997 and Berg and sial, including the concern that it may not be Krueger 2003. appropriate to the less sophisticated banking 3. For the definition of export diversity, see IMF systems in many developing countries. 2003, p. 188. 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 4 77 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S FIGURE 4.15 Capital markets are shallow in low-income countries tural support) was calculated for each country in Stock market capitalization, 2002 the sample. Finally, tariffs (ad valorem and AVEs of specific tariffs) and AVEs of NTBs at the product level were aggregated to produce an overall mea- 80 sure of trade restrictiveness. The index is calculated 70 bilaterally for every country and its partners. Data on technical product regulations (such as labeling 60 and testing requirements, product requirements to GDP 50 protect human and animal health) were not used in of 40 the estimation of the OTRIs, because of incomplete centreP reporting by countries. However, estimates of the 30 AVEs of such measures are available on request and 20 can be found in the background document (Kee, 10 Nicita, and Olarreaga 2004). 7. The simple correlation coefficient between 0 OTRI and GDP per capita is ­0.32, and is statisti- Low-income Middle-income High-income countries countries countries cally significant at the 1 percent level. 8. Mattoo, Rathindran, and Subramaniam 2001. The measure of reform included not just lib- Source: Standard & Poor's 2003; World Bank. eralization but also regulatory improvements. 9. World Bank 2003; Alesina and others 2003; Scarpetta and others 2002; Dollar and others 4. One recent study, focusing on currency crises 2003; Batra 2003. in 30 developing countries and 20 advanced coun- 10. Dollar and others 2003. tries over 1975­97, found that the developing 11. Dollar, Hallward-Dreimeier, and Mengistae countries experienced an average of one crisis per 2003; Hallward-Dreimeier, Wallsten, and Xu 2003. country every five years--roughly twice the aver- 12. World Bank 2003. age for advanced economies (Aziz, Caramazza, 13. These indicators of business regulation cover and Salgado 2000). more than 130 countries and are based on data 5. Maskus and Wilson 2002; Wilson 2002. gathered through study and assessment of laws and 6. The measure calculated is a variant of the regulations in force, with input and verification by trade restrictiveness index developed by Anderson local experts. For more on the Doing Business Proj- and Neary (2003). The index is a theoretically well- ect, see http://www.worldbank.org/doingbusiness. grounded measure of protection that allows for 14. Country investment climate assessments are consistent comparisons of the level of restrictive- based on standardized firm surveys that cover a ness of trade policy across countries and time. The range of potential constraints to business opera- OTRI does not suffer from the well-known draw- tions. For more details on the ICAs, see http:// backs of simple or import-weighted tariff averages www.worldbank.org/privatesector/ic. and allows the impact of both tariffs and NTBs to 15. For example, Dollar, Hallward-Dreimeier, be estimated. The methodology used for the mea- and Mengistae (2003) find that despite low wages, sure comprises four steps. First, import demand low productivity resulting from a poorer invest- elasticities by country and by product were esti- ment climate makes it hard for Cambodian gar- mated at the 6-digit level of the Harmonized Sys- ment firms to compete in open markets with those tem of commodity classification (HS) (some 4,200 in China, India, and Pakistan. product categories). Second, an estimate was made 16. The corporate governance ROSCs are of the impact on imports, again at the 6-digit HS benchmarked against OECD Principles of Corpo- level, of core NTBs (such as quotas, nonautomatic rate Governance. For more on these assessments, licensing, and minimum prices) and domestic sup- see http://www.worldbank.org/ifa/rosc_cg.html. port granted to agriculture. Third, using these 17. Even these figures may overstate the growth demand elasticity and impact estimates, the prod- of private sector credit. Many countries, such as uct-level ad valorem equivalent (AVE) of the two China, report all nongovernment credit, including types of NTBs (core NTBs and domestic agricul- public enterprise credit, as private sector credit. 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 4 I M P R O V I N G E N A B L I N G C L I M A T E F O R G R O W T H : E C O N O M I C A N D F I N A N C I A L P O L I C I E S 18. World Bank Doing Business Project database. pliance with BCPs. (Since 2001, almost 60 country 19. Yaron, Benjamin, and Piprek, 1997. assessments have been conducted in Financial Sector 20. The first index is the Moody's indicator of Assessment Programs, or FSAPs), of which 41 have financial strength, with a scale of 0 to 100. It is a been for developing countries.) The index is con- composite of the financial strength of individual structed by mapping the qualitative assessment of banks measured by key financial ratios. The second each of the 25 BCPs on a scale from 0 to 100 and index is based on the qualitative assessments of com- taking the average across BCPs for each 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 4 79 5 Upgrading Public Sector Governance P ublic sector governance is related to the governance institutions. Those institutions Millennium Development Goals in two interact to shape the incentives of state actors critical ways. First, alongside the eco- and thus the quality of governance--the extent nomic and financial policies reviewed in to which high-quality public goods and services chapter 4, governance is a key element of the are provided to the citizenry and the business enabling environment for economic growth. community. Capacity means that the state has Better governance produces better growth appropriately skilled personnel, sufficient outcomes.1 Growth, in turn, contributes to financial resources, and adequate supporting the reduction of income poverty and to other processes, such as a working budget system. MDGs.2 Higher incomes increase citizens' Accountability means that the state is respon- effective demand for health and education, as sible to citizens for delivering public goods well as resources with which to satisfy that and services; its stewards (politicians, policy- demand. makers, bureaucrats, judges) are prepared to Second, better governance contributes to explain and face the consequences of failures more efficient and effective delivery of educa- occurring within their jurisdiction. Weak tion, health, and other services that are key capacity and low accountability--poor gov- to the achievement of non-income MDGs. ernance--translate into inefficient and inade- Indeed, it is a critical element in ensuring that quate provision of public goods and services. public spending translates into quality ser- Progress in improving public financial vices that reach target groups. Where corrup- management--expenditure management, tion is prevalent, funds may be diverted from revenue mobilization--in developing coun- programs that would benefit the poor toward tries is assessed in the next section. There is activities that benefit well-connected people slow but steady improvement in developing or public officials themselves. Resources are countries on these dimensions of public sec- wasted if procurement contracts or jobs are tor governance, but reforms need to go much allocated on the basis of connections, rather further. Transparency, accountability, and than on merit.3 control of corruption in government are Governance consists of the manner in which assessed in the subsequent section. Progress is the state acquires and exercises the authority to more modest in these areas than in those provide and manage public goods and ser- more amenable to "technocratic" reforms-- vices.4 Its two pillars--capacity and account- public financial management--and serious ability--are anchored on sets of rules called weaknesses persist in many countries. 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 4 81 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S The analysis underscores the need to accel- the quality of governance are reviewed in the erate governance reform and capacity build- last section. ing in the public sector, with special attention to improving the quality of governance-- Public Financial Management reduction of corruption, enhancement of accountability. As compared to other policy The importance of improved public resource areas, performance in developing countries is mobilization and use is underscored by the in general weakest in public sector gover- need to support stronger programs in infra- nance. And within public sector governance, structure and human development as part of it is weakest with respect to transparency, the effort to achieve the MDGs, as discussed accountability, and control of corruption. in chapters 6 and 7. While increased external The weaknesses are most pervasive precisely assistance will help, more resources will also in countries where stronger institutional have to be found domestically to support capacities are needed to manage development these priorities--through raising more rev- interventions that will spur progress toward enues and improving expenditure allocation the MDGs--poor countries. Governance and management. reform is of crosscutting significance, since poor governance and weak institutions can Public Expenditure and Budget seriously undermine the effectiveness of poli- Management cies and programs throughout an economy. Fortunately, recognizing the centrality of Developing countries' performance in public good governance, governments in more and financial management improved slowly from more developing countries are stepping up 1999 to 2003, according to the World Bank's reform efforts. The New Partnership for Country Policy and Institutional Assessment Africa's Development initiative is a particu- (table 5.1). Not surprisingly, average ratings are larly encouraging development, especially as lower for low-income countries, and are lower it manifests clear and strong African owner- still for low-income countries under stress. ship of the governance reform agenda. Improved expenditure tracking and man- Measuring the quality of public sector gov- agement is an important element of reform in ernance is difficult. While recent years have the heavily indebted poor countries covered seen much progress in this area, more work is by the HIPC initiative. The HIPC Assessment needed. Efforts to improve the indicators of and Action Plan (AAP) assesses the quality and capacity of public expenditure systems in these countries and formulates action plans to TABLE 5.1 Improvement in public financial management strengthen those systems. The assessment in developing countries, 1999­2003 (average CPIA ratings) focuses on government capacity to manage priority public spending as defined in each country's PRSP. It covers a minimum of 15 Quality of budgetary Efficiency of measures indicative of the quality of a coun- and financial revenue management mobilization try's public expenditure management system (table 5.2). Income category 1999 2003 1999 2003 The first major assessment under the AAP All developing countries 3.21 3.43 3.27 3.56 was completed in 2002, based on field assess- LICUS 2.05 2.30 2.50 2.73 ments carried out during 2001­02. Covering Low income 2.95 3.18 3.09 3.32 Middle income 3.54 3.73 3.27 3.56 24 countries, the assessment concluded that public financial systems of 15 countries needed substantial upgrading; those of the 9 Note: Table entries are mean values for indicated country groups. Ratings are on a rising other countries also needed some improve- scale of 1 to 6. Source: World Bank CPIA database. ment. Twenty-one countries had inactive or 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 4 U P G R A D I N G P U B L I C S E C T O R G O V E R N A N C E TABLE 5.2 Public financial management benchmarks used in HIPC assessments Budget management Benchmark description Comprehensiveness 1. Composition of the budget entity Meets GFS definition of general government 2. Limitations to use of off-budget transactions Extra- (or off-) budget expenditure is not substantial 3. Reliability of budget as guide to outturn Level and composition of outturn is "quite close" to budget 4. Data on donor financing Both capital and current donor-funded expenditures included ulation mroF Classification 5. Classification of budget transactions Functional and/or program information provided 6. Identification of poverty-reducing expenditure Identified through use of classification system (such as a virtual poverty fund) Projection 7. Quality of multiyear expenditure projections Projections are integrated into budget formulation Internal control 8. Level of payment arrears Low level of arrears accumulated 9. Quality of internal audit Internal audit function (whether effective or not) 10. Use of tracking surveys Tracking use on regular basis ecutionxE Reconciliation 11. Quality of fiscal/banking data reconciliation Reconciliation of fiscal and monetary data carried out on routine basis Reporting 12. Timeliness of internal budget reports Monthly expenditure reports provided within four weeks of end of month ting 13. Classification used for budget tracking Timely functional reporting derived from classification system poreRFinal Audited Accounts 14. Timeliness of accounts closure Accounts closed within two months of year end 15. Timeliness of final audited accounts Audited accounts presented to legislature within one year Source: IMF­World Bank 2002. ineffective audit arrangements, and 20 lacked reducing spending--and to report that such a medium-term perspective integrated into spending was rising in relation to GDP and their budget formulation process. On the total expenditures.5 brighter side, in 16 of the countries it was The 2004 HIPC AAP reassessment will possible to establish a broad mapping of bud- yield results for 28 countries in mid-2004, get data to the poverty-reducing spending cat- although fewer than seven assessments had egories defined in final or interim PRSPs. been completed as of February 2004. Prelim- Fifteen of the 24 countries had conducted inary results suggest mixed progress, with public expenditure tracking surveys to moni- some countries improving and others falling tor whether budget allocations were reaching in the number of benchmarks met. The for- the intended service providers. mer, unsurprisingly, were the ones that the A 2003 update on the assessment indi- 2003 update found as more active in imple- cated that most countries were making menting their action plans. progress in implementing action plans that The IMF prepares Reports on the Obser- were developed to address the weaknesses vance of Standards and Codes that have been identified in the earlier assessment. More than agreed upon for fiscal transparency. The three-fourths of the measures described in the reports examine transparency practices in action plans had been implemented or were relationships between levels of government, under implementation. An increasing number adequacy of budget preparation, execution of countries were able to report on poverty- and reporting, and strength of oversight. 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 4 83 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S BOX 5.1 Improving fiscal transparency through ROSCs As of the end of April 2004, fiscal reports on standards and codes (ROSCs) had been completed for 46 developing countries; 41 are published on the IMF Web site. Analysis of the completed ROSCs points to a number of common areas for attention. Reporting and dissemination of fiscal information tend to be incomplete and subject to consid- erable lags. Many developing countries do not meet adequate standards of timeliness or relia- bility in reporting. Coverage of general government expenses is weak in many countries because of inadequate subnational data. Moreover, a wide range of governments resort to off-budget fis- cal activity, such as quasi-fiscal activities and unreported contingent liabilities (for example, Malawi, Mali, Poland, Romania, and Tanzania). Unrealistic budgeting is a widespread phenomenon. Because of the absence of clear legal and regulatory provisions governing the budget (for example, in Azerbaijan, Mali, and the Philip- pines) or weak compliance with such provisions (such as in Bangladesh and Papua New Guinea), actual spending often differs substantially from the budget. This, together with poor reporting of expenditures, limits the usefulness of the budget as an indicator of fiscal policy. Many of the above issues arise because government activities are not clearly distinguished from those of nongovernmental public sector agencies. This factor is often the genesis of excessive quasi-fiscal activity (for example, in Bangladesh, Iran, and Malawi). In addition, the roles and responsibilities of the different levels and branches of government are not yet clearly defined in some transition countries (such as Azerbaijan and the Kyrgyz Republic). Widespread tax exemptions, excessive discretion in tax administration, and inadequate enforce- ment are also common in many developing countries (such as Bangladesh, the Kyrgyz Republic, and Malawi). External audit mechanisms are weak in a number of countries (Azerbaijan, Benin, Honduras, and Mauritania, for example). Many countries participating in fiscal ROSCs have since undertaken or are undertaking signifi- cant fiscal reforms that will lead to improved fiscal transparency practices. These reforms include strengthening budget execution and reporting (Cameroon, Honduras, Papua New Guinea, Zam- bia), implementing program budgeting (Brazil, Mexico, South Africa), developing modern budget laws (Brazil, the Czech Republic, Hungary, Poland, South Africa), and reducing the scope of quasi- fiscal activities through privatization and price liberalization (Benin, Burkina Faso, Mozambique, Nicaragua, Tunisia, Uganda, Zambia). Source: IMF Fiscal Affairs Department. reports find that there has been progress in formance measurement framework that could these areas, but much remains to be done in a be used in a wider group of client countries. number of countries (box 5.1). The HIPC AAP indicators are the foundation Building on the assessment work under the of this system, but it will include some addi- HIPC AAP, efforts are under way at the IMF tional indicators as well, for example, those and the World Bank--working with the mul- relating to fiscal risk management, govern- tidonor Public Expenditure and Financial ment procurement, external audit, and parlia- Accountability Program (PEFA)6 and in coop- mentary scrutiny. The proposed framework eration with the OECD-DAC Joint Venture will be a central element of an integrated diag- on Public Financial Management--to develop nostic assessment of public financial manage- a broader public financial management per- ment, undertaken increasingly in the context 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 4 U P G R A D I N G P U B L I C S E C T O R G O V E R N A N C E of country-owned and -led development Overall, it appears that there is scope in many strategies. The approach going forward is countries for raising additional revenues. anchored on the following key principles: gov- Policies to enhance domestic revenue ernment articulation of a public expenditure mobilization need to focus on a few taxes that reform strategy in the PRSP or other country- can generate significant revenues at relatively owned document; an integrated and well- low cost. In view of the high share of agricul- sequenced program of diagnostic work by ture and informal economic activity in many development partners; well-coordinated tech- countries, corporate and personal income nical and financial support from development taxes are unlikely to be a major source of partners for implementation of the countries' domestic revenues in the short to medium public expenditure reform strategies; and peri- term. The value-added tax (VAT) perhaps odic reporting by countries of performance in offers the greatest potential. To maximize rev- public expenditure policy, financial manage- enues from a VAT, countries need to ensure ment, and procurement.7 that the tax base is as broad as possible and the rate structure is simple. Excise taxes also have significant potential, although care Revenue Mobilization needs to be taken in their design, as some of Excessive taxation can impede private sector them can be regressive. Currently, excise rev- development, but in most developing coun- enues amount to less than 2 percent of GDP tries the problem is collecting enough revenue in low-income countries, compared with to provide essential public infrastructure and about 3 percent in high-income countries. human development services. Tax revenue in Levied on products such as alcohol, tobacco, low-income countries as a share of GDP is petroleum products, vehicles, and spare about 14 percent, compared with about 19 parts, this tax has a potentially buoyant base percent in lower-middle-income countries and can be administered at a low cost. and 23 percent in upper-middle-income coun- Reducing tax exemptions and tax incen- tries (table 5.3). The ratios, however, conceal tives can generate substantial revenues. In large variations across and within regions. many developing countries, tax incentives TABLE 5.3 Central government tax revenue, 1990­2001 (percent of GDP) Total tax Taxes on General Social Countries/regions revenue international trade Excises sales tax security Low income (21) 14.1 4.2 1.8 3.1 1.8 Lower middle (26) 18.5 3.4 2.3 4.9 3.7 Upper middle (20) 23.1 3.1 2.5 5.9 6.4 High income (31) 26.7 1.4 2.7 6.0 7.4 Asia (12) 13.4 3.7 2.1 2.6 0.3 Latin America and Caribbean (16) 17.0 2.0 2.4 4.7 2.6 Middle East and North Africa (6) 17.9 4.5 2.3 3.3 1.7 Sub-Saharan Africa (12) 16.6 6.8 1.4 3.1 0.5 Europe and Central Asia (20) 23.9 1.6 2.6 6.4 7.7 OECD (23) 29.1 0.6 3.0 6.0 8.4 Note: Figures are unweighted averages over the indicated period. Some taxes are omitted; hence, columns may not add to the total. Numbers in parentheses represent the maximum number of countries in each group for which data are available. Because of data availability, sample size varies across taxes. Source: IMF Government Finance Statistics; IMF World Economic Outlook, various 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 4 85 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S and exemptions are a major source of revenue have to come from improving the efficiency of loss. They not only shrink the tax base but existing spending, economic growth, and exter- also complicate tax administration. Tax nal resources. incentives are often used to attract invest- ment. But studies have shown that investment Quality of Public Administration decisions depend on a host of other factors and Control of Corruption that can be more important than tax incen- tives.8 Once established, tax incentives and Policy ratings for developing countries on the exemptions are difficult to abolish. In addi- quality of governance--quality of public tion, their budgetary cost is not made explicit. administration, transparency, accountability, Eliminating or reducing tax incentives and and control of corruption--are lower on exemptions can enhance the efficiency of the average than their ratings for public financial tax system by enlarging the tax base and sim- management (table 5.4). This is not alto- plifying tax administration. gether surprising. Changing public expendi- Efforts to mobilize tax revenues should ture or revenue management or budget include steps to strengthen tax administra- processes, where technocratic improvements tion. Policies should focus on strengthening can bring quick returns, is likely to be easier the technical capacity and organization of than changing the culture of public bureau- revenue authorities through computerization cracies and strengthening accountability. and improved operating procedures. Stricter There may be powerful interests with a stake enforcement mechanisms and improved tax in blocking reform in any policy area. How- audits and inspections could increase tax- ever, opposition to reforms that embrace payer compliance. Countries could increase known international best practices is more their tax-to-GDP ratio by an estimated 1 to easily exposed as self-interested. Best practice 2 percentage points through elimination of is clearer in budget management and tax pol- tax incentives and exemptions and better icy than in other areas, where accountability administration.9 mechanisms are weak. Less is known about But the potential for generating additional how to change the culture of dysfunctional revenues is almost certainly less than what is public bureaucracies, or how to implement needed to achieve the MDGs in most develop- the checks on executive power necessary to ing countries. The bulk of the financing will ensure an open and accountable administra- tion. Progress in these areas depends on a careful understanding of the underlying con- TABLE 5.4 Quality of public sector governance, 1999­2003 (average CPIA rating) text and behavior and fostering of reform ownership. Although public sector governance ratings Transparency, are low on average compared to the ratings accountability, Quality control of for other policy areas--making it the weakest of public corruption policy area--there is a trend toward improve- administration in public sector ment. All developing country regions showed Income category 2001 2003 1999 2003 some improvement in the quality of gover- All developing countries 3.13 3.19 2.92 3.18 nance from 1999 to 2003, as measured by the LICUS 2.03 2.25 2.05 2.23 World Bank CPIA (figure 5.1). The largest Low income 2.87 2.95 2.73 2.97 improvement was in Europe and Central Middle income 3.33 3.49 3.16 3.44 Asia, followed by South Asia. The lowest average ratings are in Sub-Saharan Africa, Note: Table entries are mean values. Ratings are on a rising scale of 1 to 6. For the quality of but there is evidence that increased attention public administration, the base year shown is 2001 rather than 1999, because the CPIA defini- to governance issues is beginning to pay off, tion of that criterion was revised significantly in 2001. Source: World Bank CPIA database. as reviewed in the next section. 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 4 U P G R A D I N G P U B L I C S E C T O R G O V E R N A N C E The patterns and trends in governance FIGURE 5.1 The quality of governance is weak but improving in revealed by CPIA assessments are corrobo- developing countries rated by similar assessment exercises under- Scores for overall quality of governance by region, 1999­2003 taken by the regional development banks. As reviewed in chapter 3, country ratings by the African Development Bank, Asian Develop- 5 ment Bank, and Inter-American Development ting ra 4 Bank show public sector governance to be the 3.61 3.68 3.19 3.223.35 3.49 3.60 3.22 3.203.41 3.39 weakest policy area on average across coun- 2.96 3 tries. Where ratings are available across years-- as in the AfDB and ADB assessments--they overnanceg 2 also show that governance is improving, albeit 1 gradually. The particularly notable improve- Average ment in governance in Europe and Central Asia 0 is confirmed by the results of the Business Envi- Sub- East Asia Europe & Latin Middle South Saharan & Pacific Central America East & Asia ronment and Enterprise Performance Surveys Africa Asia & North (BEEPs), conducted jointly by European Bank Caribbean Africa for Reconstruction and Development and the World Bank. For example, the BEEPS surveys 1999 2003 found that in a majority of the developing and transition countries in the region, the incidence Note: Because the differences across regions are similar for each of the CPIA public sector of payment of bribes by firms fell substantially governance criteria, ratings for criteria 4, 17, 18, and 20 are averaged in this figure. Criterion between 1999 and 2002.10 19 was omitted because comparable data are available beginning only in 2001. In all, CPIA has 20 criteria, of which these 5 are more directly related to public sector governance. The worldwide governance indicators com- Source: World Bank CPIA database. piled by the World Bank Institute (WBI) and the Bank's Development Economics Group (DEC) are an important source of cross-country assess- developing countries, and lowest for the LICUS ments of the quality of governance. They take group (table 5.5). The gaps relative to the indi- the form of indices of various aspects of the cators for advanced countries are large. How- quality of governance, aggregated from several ever, there is no clear trend over time in country sources.11 Consistent with the CPIA results, group ratings relative to those of other groups. average ratings on the WBI/DEC indicators are The indicated changes between 1998 and 2002 lower for low-income countries than for all are too small to be statistically significant. TABLE 5.5 Worldwide governance indicators, 1998­2002 Control of Voice and Government corruption accountability effectiveness Income category 1998 2002 1998 2002 1998 2002 All developing countries ­0.44 ­0.48 ­0.19 ­0.24 ­0.34 ­0.39 LICUS ­0.93 ­1.10 ­0.95 ­1.08 ­1.16 ­1.24 Low income ­0.72 ­0.80 ­0.40 ­0.49 ­0.54 ­0.65 Middle income 0.44 0.41 0.27 0.31 0.39 0.44 OECD DAC members 2.02 1.77 1.35 1.43 1.81 1.71 Note: Table entries are mean values for country groups. Values represent the number of standard deviations above or below (indicated by a minus sign) the overall mean value (of 0). The approximate range of values for each index is +2 to ­2. Source: World Bank, WBI/DEC governance 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 4 87 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S FIGURE 5.2 Civil liberties are gradually improving in developing published since the mid-1970s and have used countries a fixed methodology since 1990. The indica- Trend in civil liberties in developing countries, 1995­2002 tors show a gradually improving trend in civil liberties in developing countries (figure 5.2).13 5.0 Objective indicators corroborate the trend in Freedom House indicators. Over time, 4.5 there has been an increase in the number of index 4.0 chief executives in developing countries who have been elected rather than appointed by House 3.5 other means. Moreover, the number of chief 3.0 executives who have been elected in contests eedom featuring candidates from multiple parties Fr 2.5 has increased. There is some indication of 2.0 increasing fairness and integrity in electoral 1995 1996 1997 1998 1999 2000 2001 2002 procedures. For example, the percentage of Middle-income countries chief executives who have been chosen in Low-income countries multiparty elections in which the winner Low-income countries under stress received less than 75 percent of the official vote has increased since 1993 (figure 5.3).14 The data on executive elections, together with Source: Freedom House. the Freedom House data, indicate a trend toward broader participatory processes by FIGURE 5.3 Participatory processes are also improving in developing countries which citizens can influence policymaking Percentage of country leaders elected in multiparty and hold their leaders accountable. elections with less than 75 percent of the vote Increased Focus on Governance 80 in Africa 70 Good governance is an increasingly impor- 60 tant topic in Sub-Saharan Africa, which his- 50 torically has been a weak performer in this centreP area. A powerful consensus is evolving across 40 Africa on the critical role of good governance 30 as a precondition for Africa to meet its devel- 20 opment challenges. The MDGs are being instrumental in focusing the attention of pol- 10 1993 1994 1995 1996 1997 1998 1999 2000 icymakers on the need to accelerate reforms to deal with governance-related impediments Middle-income countries to the achievement of poverty reduction and Low-income countries Low-income countries under stress other development goals. The PRSP process is helping to integrate these reforms into over- all country development strategies. Source: Beck and others (2000). A key manifestation of the strengthened resolve in the region to come to grips with the Some of the data sources used in the governance agenda is the New Partnership for WBI/DEC governance indicators provide a Africa's Development (NEPAD). Launched in good basis for a comparison of the level of rat- 2002, this initiative, owned and led by African ings over time.12 The Freedom House indica- countries, places improvement of governance tors of civil liberties, for example, have been at the center of the reform agenda. To give 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 4 U P G R A D I N G P U B L I C S E C T O R G O V E R N A N C E BOX 5.2 The African Peer Review Mechanism: self-assessing governance The New Partnership for Africa's Development (NEPAD), an organization of African leaders who have pledged to place their countries on a path of sustainable growth and development, has launched the African Peer Review Mechanism (APRM) "to foster the adoption of policies, stan- dards, and practices that lead to political stability, high economic growth, sustainable development, and accelerated subregional and continental economic integration through sharing of experiences and reinforcement of successful and best practice, including identifying deficiencies and assessing the needs of capacity building." The APRM addresses all dimensions of governance, organized under four headings: democracy and political governance; economic governance and management; corporate governance; and socio- economic development. By the end of 2003, 16 countries had formally joined the APRM: Algeria, Burkina Faso, Cameroon, Republic of Congo, Ethiopia, Gabon, Ghana, Kenya, Mali, Mauritius, Mozambique, Nigeria, Rwanda, Senegal, South Africa, and Uganda. An independent panel of seven eminent Africans, working with the countries, is responsible for producing country reviews to be sub- mitted to NEPAD and the African Union. The first reviews are scheduled to begin in April 2004. In March 2003, NEPAD agreed on a set of objectives, standards, criteria, and indicators to be applied in each country review. The set includes 25 broad governance and development objectives and 76 African and international standards. Among the objectives are the following: An objective on constitutional democracy, political competition, and the rule of law that takes as its standard the African Charter on Human and Peoples' Rights An objective on transparent, predictable, and credible economic policies that includes interna- tional accounting and auditing standards and codes of good practices An objective on accountable, efficient, and effective public office holders and civil servants that refers to the African Union's Convention on Preventing and Combating Corruption. The APRM process will build upon in-country self-assessments that involve extensive consulta- tions with all branches of government, civil society, and the private sector. The challenge is to build upon existing processes, such as the PRSPs, and add value with governance assessments made by African stakeholders, their governments, and eminent independent opinion leaders from the region. Expanding the APRM to all NEPAD member countries and ensuring wide discussion of its findings will be important to the success of the APRM initiative. Source: NEPAD 2003a, 2003b. concreteness to its reform focus and objectives, that while the reform agenda is huge, African NEPAD is putting in place an African Peer countries are making progress toward good Review Mechanism that aims to improve gov- governance. It emphasizes African achieve- ernance policy and practice through mutual ments but recognizes the occurrence of set- learning from national governance assess- backs and the depth of the challenges ahead ments prepared by the African countries them- (box 5.3). selves (box 5.2). An increased focus on governance is also Improving the Monitoring reflected in the work of regional development of Governance agencies. An example is a major new report on governance in Africa prepared by the The centrality of good governance to devel- United Nations Economic Commission for opment effectiveness underscores the impor- Africa (UNECA). The report, which draws on tance of reliable measures of the various detailed individual country studies, indicates dimensions of the quality of governance. 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 4 89 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S BOX 5.3 Governance in Africa--progress on a difficult agenda The United Nations Economic Commission for Africa (UNECA) has launched a multiyear project to monitor progress toward good governance in Africa. Twenty-eight country studies have been undertaken, each based on a household survey, a survey of national experts, and a desk-study with a range of governance indicators. The project explores three components of good governance: polit- ical representativeness, institutional effectiveness and capacities, and economic governance and man- agement. Summarizing the country reports, UNECA's African Governance Report (forthcoming) finds that: African countries have made significant strides toward political representation. The political sys- tem has been liberalized, more political parties are being allowed to operate, civil society has gained a place in social and political bargaining, elections form the basis of political leadership, and the integrity of the political system is on the rise in many countries. Most countries have embarked upon the process of constitutional review, to promote a culture of constitutionalism with adherence to the rule of law, due process, and political accountability. The issue of leader- ship succession and change through the electoral process constitutes a significant step in the process of democratic renewal and a new culture of governance in Africa. Despite progress on social inclusiveness in the elected organs of government, drawbacks remain in two major areas: domination of the political process by an urban-based political elite, and unfair treatment of minority groups. Although the political regime is becoming more inclusive through more robust public participation achieved by the media, civil society, and high voting rates, political parties remain weak. Democracy, good political governance, effective economic governance, and prudent public finan- cial management are intertwined. Management weaknesses persist, especially in public pro- curement, and in equity in resource mobilization and public expenditure. Several African countries are using the Medium-Term Expenditure Framework (MTEF) to improve macroeco- nomic stability, resource allocation, and prioritization of public expenditures, leading to greater accountability for the outcomes of public expenditures. Dominance of the executive branch is gradually decreasing. Laws, rules, and regulations pro- posed by the executive are debated in standing or select committees of the legislature and sub- sequently enacted. Other emerging checks and balances are the laws and regulations managing the ways in which a government conducts its business: conflict of interest laws, codes of conduct for elected and appointed officials, and asset declarations by politicians. The judiciary remains in a formative stage, as many African governments are still defining judicial independence. In many countries, an overburdened court system denies poor and disadvantaged citizens access to justice, encourages corruption, and undermines the rule of law. African governments are making headway in terms of institutional capacity, accountability, transparency, and policy coherence, whereas service delivery is still inadequate. In many coun- tries, criteria other than merit still take precedence in recruitment, promotion, and discipline of public servants. While government business is often shrouded in official secrecy, some countries have passed legislation on administrative justice and access to information. Although the state bureaucracy exercises growing institutional and professional competence in policy design and implementation, there is considerable variation among African countries in the adequacy, qual- ity, and efficiency of basic public services. Source: UNECA forthcoming. 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 4 U P G R A D I N G P U B L I C S E C T O R G O V E R N A N C E More and better measures of governance are an inevitable element of these measures, given available today than was the case about a the difficulty of quantifying behavioral aspects decade ago. But work continues to improve of governance. There is also an increasing use the indicators to enhance their robustness. of citizen surveys, which would complement-- Effective monitoring of governance must and provide a check against--assessments ideally meet the following requirements: agree- based on expert opinion. ment on a set of international benchmarks for Another area of emphasis in the future good governance; identification of specific gov- work on public sector governance is the ernance measures that indicate change toward development of better information at the sub- or away from the agreed benchmark; and for- national level of governance. In an effort to mulation of indicators that are cost-effective improve service delivery at the local level, and replicable and that can be applied and many governments in developing countries managed by the countries themselves. Espe- are devolving more responsibilities to local cially difficult challenges attend the search for governments. Effective public resource man- robust indicators in areas of governance not agement and adequate institutional capacities related to the public budget--accountability, at the local level will become increasingly corruption--where agreed international bench- important to development effectiveness and marks and good quantitative measures are to the effort to achieve the MDGs. Monitor- lacking in comparison. ing at the subnational level is at present At the World Bank, efforts include both hampered by major data gaps relating to sub- improving indicators that allow cross-country national finances and administrative arrange- comparisons to be made (for example, im- ments. Filling these gaps should receive more proving the quality of the CPIA governance attention in the work ahead. indicators by underpinning them with more detailed and specific assessment criteria) and Notes deepening the analysis of governance issues at the individual country level, for example, 1. Mauro 1995; Knack and Keefer 1995; Evans through in-depth Institutional and Gover- and Rauch 1999; IMF 2003. Knack and Keefer nance Reviews (IGRs)15 and Governance and found that each 10-point increase in a 50-point Anti-Corruption (GAC) Diagnostic Surveys.16 index of the quality of governance was associated Several partner institutions also are involved with a 1-percentage-point increase in growth of per capita income. The Spring 2003 IMF World in similar efforts, individually as well as with Economic Outlook found that an improvement in others. The work being carried out in the Sub-Saharan Africa's level of institutional devel- framework of PEFA and by NEPAD APRM opment from its current average to the mean of and UNECA, as noted above, are examples. developing Asia would imply an 80 percent The Africa work is especially promising in view increase in the region's per capita income. of its strong ownership and leadership by the 2. Dollar and Kraay 2002; Bruno, Ravallion, countries themselves, and its use of self-assess- and Squire 1998. Pritchett and Summers (1996) ment and peer review mechanisms. Gover- showed that each 10 percent increase in income nance is also an area where private think tanks reduces infant and child mortality in developing and civil society are active. Their measures pro- countries by between 2 and 4 percent. vide a useful supplement to those developed by 3. Kaufmann, Kraay, and Zoido-Lobaton (1999) showed that countries with better governance--as official entities. measured by measures of corruption, voice, and Future assessments of governance will ben- accountability--have lower infant mortality and efit from an increased emphasis on the need to higher literacy rates. They found that an improve- ground governance measures as much as possi- ment of 1 standard deviation in the quality of gov- ble in objective, quantifiable indicators.17 ernance produces an increase of 15 to 25 percentage Nonetheless, qualitative assessment will remain points in literacy. Much of this effect is indirect, 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 4 91 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S through the impact of governance on income levels; given year, so the indexes are not designed to track but part of it is attributable to the direct effect of change over time on an absolute scale (Kaufmann, better governance on more accountable and effec- Kraay, and Mastruzzi 2003). tive delivery of public services. The quality of gov- 12. The benefit of disaggregated indexes comes ernance has also been linked to volatility in income at the potential cost of increased measurement growth (IMF 2003), which can affect service deliv- error, which results from relying on a smaller num- ery quality by increasing the unpredictability of ber of sources. However, because the purpose here both revenues and demand for services. is to describe the performance of large groups of 4. World Bank 2003. countries, errors in measuring the performance of 5. World Bank 2003. individual countries are of less relevance. 6. The Public Expenditure and Financial 13. Freedom House assigns a rating of 1 for Accountability Program was established in 2001. countries with the most civil liberties and 7 for those PEFA is a partnership of U.K. Department for with the least. For figure 5.2, the index was reversed International Development, the European Com- so that higher values indicate more civil liberties. mission, France, Norway, SECO (Switzerland), the 14. These data are from the Database on Polit- Strategic Partnership with Africa, and the IMF and ical Institutions (Beck and others 2000). The 75 World Bank. PEFA supports integrated and har- percent threshold used is meant to capture com- monized approaches to assessment and reform of petitive elections with candidates from multiple public expenditure, procurement, and financial parties; a greater than 75 percent vote share often accountability systems. See http://www.pefa.org. is associated with questions about the fairness of PEFA cooperates with the OECD-DAC Joint Ven- the election. ture on Public Financial Management, for which 15. Fifteen Institutional and Governance Reviews the establishment of a means to monitor public were completed during 2001­03, and a similar num- financial management performance in partner ber is planned for 2004. More information on the countries is a priority objective. IGRs is available at: http://www.worldbank.org/ 7. IMF­World Bank 2003. prem/PREMNotes/premnote 75.pdf. 8. OECD 1994; Tanzi and Zee 2000. 16. The Governance and Anti-Corruption Sur- 9. World Health Organization 2002. veys cover citizens, firms, and public officials, and 10. Not all data sources, however, show the are used to diagnose areas of particular strengths same large improvements in Europe and Central and weaknesses in governance, such as the inci- Asia as shown by the CPIA and BEEPS. dence of corruption across government agencies or 11. The advantage of aggregating indicators public services. Surveys have been completed or from different sources is that it reduces the impact are under way in 25 countries, about half of them of measurement error in any single source, pro- in Europe and Central Asia. ducing more accurate comparisons at a point in 17. These are sometimes referred to as "second time. However, index values for each country are generation governance indicators." See Knack, defined relative to the mean for all countries in a Kugler, and Manning 2003. 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 4 6 Strengthening Infrastructure I nfrastructure plays a dual role in the effort rural areas, where the majority of the poor to achieve the MDGs. It is an important population lives; but coverage in urban areas element of the enabling environment for also is under pressure from rapid rural-to- economic growth--energy to power industry, urban migration in many countries. transport to support commerce. Reducing Narrowing gaps in access and quality will poverty by promoting growth is one channel require sizable increases in investment and in through which infrastructure contributes to associated spending on operation and mainte- the achievement of the MDGs. But the avail- nance (O&M). Efforts must continue to im- ability of reliable and affordable infrastruc- prove the enabling environment for private ture also contributes more directly to the investment, which has increased but not as attainment of the MDGs by providing or sup- much as expected. At the same time, public porting the delivery of key services. Some investment in infrastructure will need to MDGs relate to particular infrastructure ser- reverse the decline of the past decade. This will vices, such as those that aim to reduce the pro- require stronger domestic resource mobiliza- portion of people without sustainable access tion, as well as increased foreign assistance. to safe drinking water and basic sanitation, Increased investment alone, however, is not and to make housing and shelter more acces- the answer. Investment must be underpinned sible. The MDGs related to human develop- by improvements in policy and governance to ment (education, health, empowerment of ensure effectiveness and sustainability. Many women) rely on services whose effective countries have made progress in this respect by delivery depends greatly on supportive infra- implementing policy and regulatory reform. structure: improved water and sanitation to Progress has been uneven across regions and prevent disease and free up women's time income groups. Africa and low-income coun- from daily chores; electricity to serve schools tries have tended to lag behind other groups, and health clinics; and roads to access them. although not on all dimensions. Progress has But there are large gaps in the availability also been uneven across sectors. In general, and quality of the key infrastructure services telecommunications is well ahead of the curve; in developing countries. Although particu- electricity, transport, and housing are at inter- larly great in low-income developing coun- mediate stages of reform; and water and sani- tries, those gaps remain sizable in most tation lag behind. middle-income countries. Within countries, Assessment of policies and needs in infra- coverage rates are typically much lower in structure is seriously constrained by gaps 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 4 93 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S data. A better information base is needed, not states. Similar conclusions emerge from the only for effective monitoring but also to cross-country data sets. inform policymaking. Filling the data gaps The studies of Spain make a much stronger should be a priority area for donor support. case for investment in infrastructure. In the Spanish context, infrastructure has generally Infrastructure and the been found to be a major determinant of Millennium Development Goals growth and productivity convergence across regions. Studies of developing countries con- A growing body of evidence, across and firm the role of infrastructure in reducing dis- within countries, supports the importance of parities between rich and poor regions. infrastructure in facilitating growth, reducing Research on Argentina, Brazil, Colombia, poverty, and achieving related development India, and the Philippines demonstrates the goals.1 In a sample of 102 studies conducted significant impact on growth and productiv- over the last 15 years, few report a negative ity of various types of infrastructure. Taken effect of infrastructure investment on pro- jointly, the results suggest that the returns on ductivity or growth (table 6.1). The sample investment in infrastructure are probably includes 30 multicountry studies (including high in the early stages of development, when developing countries); 41 studies on the United infrastructure is scarce and basic networks States; 19 on Spain; and 12 on specific devel- have not been completed. Returns on infra- oping countries (Argentina, Brazil, Colombia, structure investment tend to fall, sometimes India, and the Philippines). sharply, as economies reach maturity. Studies of the United States and of multi- Measuring the elasticity of output to ple countries offer mixed results: the effect of improvements in infrastructure quantity or infrastructure investment does not appear to quality gives a more concrete sense of the be significant in about half of the cases. The potential impact of infrastructure investment results for the United States reflect the effects and associated policies. Depending on the of differences in infrastructure endowments sector, country (or country groups), and the in a mature economy. Findings of negative period covered, the elasticity estimates range effects often can be explained by saturation of from 0.14 to 1.12, but the lower bound is not some types of infrastructure or by negative as small as it may seem. Consider the case of externalities. For example, a new transport Latin America. In the 1990s, the elasticities project in a specific state may facilitate an estimated for that region imply that a 10 per- exodus of workers or industries from other cent increase in infrastructure stocks would states, hence slowing down growth in those have enabled an increase of 1.4 to 1.6 percent in output--quite significant, since a rise of 1 percentage point in per capita income would TABLE 6.1 Distribution of studies according to their findings on impact reduce the share of people living in poverty by of infrastructure investment on productivity or growth half a percentage point.2 Another recent study of Latin America estimated that lack of Percent of studies showing investment in infrastructure during the 1990s Number Positive No significant Negative reduced long-term growth by 1 to 3 percent- Country/group of studies effect effect effect age points, depending on the country.3 This Multiple countries 30 40 50 10 assessment suggests that infrastructure insuf- United States 41 41 54 5 ficiencies account for about one-third of the Spain 19 74 26 0 difference in output per worker between Developing countries 12 100 0 0 Latin America and East Asia. Total 102 53 42 5 The story for Africa is similar. One of the most extensive multicountry studies suggests Source: De la Fuente and Estache 2004. that if Africa had enjoyed growth rates in 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 4 S T R E N G T H E N I N G I N F R A S T R U C T U R E telecommunications and power generation ability to pay.9 A second solution is to design infrastructure comparable to those observed tariff structures that include an explicit, well- in East Asia in the 1980s and 1990s, its targeted subsidy to ensure that the share of annual growth rate would have been about their income users spend on infrastructure 1.3 percent higher.4 The authors' overall con- services stays within reasonable boundaries. clusion is that for developing and transition A common rule of thumb is that expenditures economies, the quantity and quality of infra- on utilities and transport should not exceed structure are critical components of the 15 percent of a poor individual's income.10 growth equation, even if the relative impor- Other recent research emphasizes the tance of each subsector may vary by country importance of core infrastructure inputs for and over time. the achievement of the MDGs. Leipziger, Fay, A more limited body of literature looks at and Yepes, for example, estimated from a the direct impact of improvements in infra- sample of 43 countries that differences in structure on the poor. Datt and Ravallion access to water explained about a quarter of found that rural poverty rankings of Indian the difference in infant mortality between the states in 1990 were very different from those poorest and richest quintiles and 37 percent of 1960.5 States starting with better infra- of the difference in child mortality. Similarly, structure and human resources saw signifi- the difference in access to sanitation accounts cantly higher long-term rates of poverty for 20 percent and 10 percent, respectively, of reduction. Deininger and Okidi obtained sim- the difference between the poorest and rich- ilar results in exploring factors underlying est quintiles in the prevalence of malnutrition. growth and poverty reduction in Uganda dur- In rural India, Jalan and Ravallion found that ing the 1990s.6 In their work, the importance the prevalence and duration of diarrhea of improving access to basic education and among children under five were significantly health care emerges clearly, but benefits also lower on average for families with piped depend on complementary investments in water than for those without it.11 electricity and other infrastructure. A study by Fan, Zhang, and Zhang documents the Supply Gaps and Policies critical role of infrastructure development, in Infrastructure Services: particularly roads and telecommunications, The Current Picture in reducing rural poverty in China between 1978 and 1997.7 The authors show that the The preceding section gave a sense of the reduction in poverty is due to growth in rural implicit demand for infrastructure; this sec- nonfarm employment following expansion of tion provides an assessment of supply. The infrastructure. monetary value of the world's infrastructure Access to infrastructure can have little stock, at best-practice average prices and effect, however, if the service is not afford- excluding housing, is approximately $15 tril- able.8 Governments must bear this in mind lion.12 Of the total, about 60 percent is found when setting tariffs, particularly in cases in high-income countries (16 percent of total where average tariffs must cover average population), 28 percent in middle-income costs to support private sector participation. countries (45 percent of total population), Two main solutions are being pursued. A and 13 percent in low-income countries (39 large body of experience across regions--par- percent of total population). Electricity and ticularly with water supply and sanitation, roads account for about 80 percent of the rural electrification, and secondary roads-- total asset value. demonstrates the effectiveness of offering The assessment of the current status of households (and businesses) a range of service infrastructure services in developing coun- levels at a range of costs, allowing them to tries in terms of access to and quality of ser- choose according to their preferences and vices and progress on sector policy reform 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 4 95 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S constrained by major gaps in data. Indeed, roughly 30 percent lower (table 6.2). The dis- obtaining better infrastructure data should be crepancy does not mean that investment among donors' priorities for improving requirements are significantly larger for rural developing-country data. The World Bank, in areas than for urban areas, however, because collaboration with partner agencies in the costs are lower in rural areas. United Nations system and elsewhere, has Similar differences can be seen in access to initiated an infrastructure indicators project housing. The percentages of the population that aims to develop a more systematic data- with authorized housing are 36, 73, and 91 base of core infrastructure indicators.13 The for low-, lower-middle-, and upper-middle- most serious data gaps are found in the trans- income countries, respectively.14 Behind these port sector, where the poorest spend half of overall figures lie major disparities within the resources they allocate to public services. countries between low-income slums and bet- For lack of an appropriate international data- ter-off areas. For example, whereas 33 per- base, it is not possible to monitor access rates cent of households in Mysore, India, have to transport services on a regular basis. water connections, only 8 percent of those in informal settlements do. The result of such disparities is evident in health outcomes: Access to Infrastructure Services whereas the under-five mortality rate in urban City dwellers in low-income countries have far Kenya averages 84 (and 62 in Nairobi), in the less access to infrastructure services of all types two largest slums it averages 187 (Kibera) than do urban residents of middle-income and 254 (Embakasi).15 countries (table 6.2). This means that any effort to catch up will require major investments. Quality of Infrastructure Services Rural populations, which make up more than 60 percent of the population of low- and mid- Although data on access are more meaning- dle-income countries, have significantly lower ful when combined with data on service qual- rates of access than do urban populations-- ity, most current access data are not "quality TABLE 6.2 Access of population to infrastructure services Country Electricity Water Sanitation Telecoms Transport income category (1997­2001)a (2000)a (2000)a (1999­2002)b (1994­2001)c Urban Low 62.4 (24) 76.9 (56) 74.6 (55) 4.6 (65) 90 (7) Lower middle 95.1 (8) 90.8 (40) 90.5 (37) 22.0 (52) -- Upper middle -- 92.3 (23) 92.5 (22) 53.9 (36) -- Rural Low 20.3 (24) 52.7 (54) 41.8 (52) 1.7 (55) 61 (21) Lower middle 67.3 (8) 75.0 (40) 59.8 (37) 8.7 (43) -- Upper middle -- 76.4 (23) 81.3 (22) 22.5 (24) -- -- Not available. Note: Figures in parentheses indicate the number of countries for which data are available. a. Percent of population b. For urban populations: telephone subscribers per 100 people; for rural populations: main lines per 100 people c. For urban populations: percent of population within 20 minutes of public transport; for rural populations: percent of population within 2 km of an all-season road Source: USAID, Demographic and Health Surveys; World Bank, World Development Indicators, various years; International Telecommunications Union; Roberts 2003. 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 4 S T R E N G T H E N I N G I N F R A S T R U C T U R E adjusted." Access data usually include indi- (table 6.3). Reasonable technical indicators viduals with all-day access, as well as indi- are widely available for electricity and tele- viduals with access for just a few hours a day. communications. The usual approximation But quality matters. A recent study covering for transport, the ratio of paved roads to total seven Latin American countries suggests that roads, is useful, but it may be somewhat mis- the effectiveness of public infrastructure in leading, since paving roads is not necessarily that region is only about 74 percent of that a priority for the poorest countries. Most in industrialized countries because of poor worrisome is the water supply and sanitation quality.16 According to the same study, the sector, which does not systematically generate long-run cost of this underperformance is indicators such as water losses, number of equivalent to about 40 percent of real GDP hours of service per day, water quality, or vol- per capita. Raising infrastructure effective- ume and quality of treated sewage. ness to industrialized-country levels would The available data suggest that the corre- reduce the per capita income difference lation between income levels and technical between Latin America and the United States quality is extremely high. The main practical from tenfold to about sevenfold. consequence of that correlation is that the dif- Despite growing recognition of the eco- ference in investment requirements across nomic and social significance of service qual- income groups is probably much more signif- ity, there is currently no indicator of the icant than the access data alone would sug- combined dimensions of quality. So in the gest. Not only must access be improved, but short run, the only option is to rely on partial major rehabilitation efforts and capacity indicators. In some cases, for example, qual- building are probably also needed to address ity must be inferred from associated health weak technical performance. indicators. While this is clearly not satisfac- With new investment, policy changes are tory, analysis based on partial indicators pro- required to ensure that service quality is vides a global sense, for each sector and each improved and maintained at a reasonable country group, of the importance of objective level--and that assets are effectively operated quality indicators. and systematically maintained. Preventive The amount of information available on maintenance translates into lower operating technical quality varies widely across sectors costs, reduced adverse external impacts, and TABLE 6.3 Technical quality of infrastructure services Electricity Water Telecoms Transport Housing Percentage of urban households Permanent Transmission with water access Reported structures: and distribution that get water phone faults Percentage percentage of losses as percent from piped or well per 100 of total structures built Country of total output water source main lines roads paved to last 20 years income category (1999) (1997­2001) (1997­2000) (1997­2000) (1994­2000) Low 24.1 (33) 89.4 (48) 77 (48) 28.6 (59) 76 Lower middle 16.2 (31) 84.5 (18) 42.9 (38) 46.9 (46) 94 Upper middle 13.6 (23) -- 25.3 (27) 55.1 (33) 97 Best practice in OECD 8­12 100 <5 >80 100 -- Not available. Note: Figures in parentheses indicate the number of countries for which data are available. No information was available on sanitation as measured by volume and quality of treated wastewater. Source: USAID, Demographic and Health Surveys; World Bank, World Development Indicators; International Telecommunications Union. Housing estimates are from Angel 2000. 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 4 97 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S TABLE 6.4 Quality of infrastructure services as perceived by commercial users (ratings scaled 1 to 7, with 7 indicating highest quality) Quality of water Quality of Quality of pollution telephone delivered services regulation infrastructure Quality of delivered services Country Electricity Water Sanitation Telecoms Roads Railroads Ports Airports income category (2001­02) (2001­02) (2001­02) (2001­02) (2000) (2001­02) (2001­02) (2001­02) Low 2.6 (9) 4.0 (27) 2.3 (9) 3.4 (9) 3.4 (27) 2.7 (9) 2.6 (9) 3.6 (9) Lower middle 4.2 (25) 4.8 (24) 3.1 (25) 4.9 (25) 4.2 (24) 2.6 (25) 3.5 (25) 4.2 (25) Upper middle 5.1 (20) 5.0 (18) 4.0 (20) 5.6 (20) 4.1 (18) 2.9 (26) 3.8 (20) 4.5 (20) Note: Figures in parentheses indicate the number of countries for which data are available. Source: World Economic Forum 2003; World Bank 2000. extended asset life--savings that are generally outcomes. A review of available indicators, underestimated when maintenance budgets however, shows that the policy and regula- are cut to meet specific fiscal targets. tory environment for infrastructure has been Available data on the perceived quality of improving--although much remains to be infrastructure services reflect commercial and done. The picture varies appreciably across industrial perspectives (table 6.4). There is no regions, countries, and sectors. systematic effort to collect comparable data A 1998 scorecard on the electricity sector from residential users--a clear information in 115 countries consisted of questions on gap. commercialization, restructuring, regulation, The available evidence suggests three con- legal reform, and private investment in the clusions: sector.17 At the time, less than half the steps identified as necessary for fully effective Perceived quality is higher in all sectors in reform had been taken in the energy sectors of countries with higher income levels, except the countries studied. Reforms have pro- for roads. gressed significantly since then, as the forth- Even for upper-middle-income countries, coming update of the scorecard is expected to perceived quality is lower than best prac- show. Updated results on the scorecard indi- tice. cators are available for a selected number of In all country groups, the water sector is low-income countries (table 6.5). Expert perceived by commercial users to be the respondents in each sampled country were most effective. The favorable perception of asked whether a variety of reforms had been the water sector illustrates the bias intro- completed and to grade reforms in progress duced by the use of indicators collected on a scale of 1 to 5 (from low to high from the business community. Water is not progress). All but one of the countries in the a major issue for many businesses, many of sample have a new electricity law; all but three which have their own water supplies and have or will soon have an independent regu- do not depend on urban utilities for their lator. Progress on corporatization and restruc- supply. turing is less uniform. Even more disparate is the presence of the private sector, except per- haps in the form of independent power pro- Progress on Policy Reform ducers (IPPs) in the generation subsector. Reliable data on infrastructure policies are no A survey of urban water issues showed easier to come by than data on infrastructure that 65 percent of countries had achieved a 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 4 S T R E N G T H E N I N G I N F R A S T R U C T U R E TABLE 6.5 Electricity reform in selected countries, 2003 Commercialized/ Independent Private Private Country corporatized Law regulator IPPs Restructureda generation distribution Albania Y Y Y N IP-1 N N Bangladesh Y Y IP-4 Y IP-2 N N Benin N Y N N Y N N Bolivia Y Y Y Y Y Y IP-4 Burkina Faso N Y N N N N N Ethiopia IP-3 Y Y N N N N Honduras N Y Y Y N N N Indiab N Y Y Y Y N N Indonesia Yc Y IP-4 Y Y Y N Kyrgyz Republic Y Y Y Y Y Nd N Madagascar IP-4e Y IP-5 Y N N N Mali N Y Y IP-1 IP-4 Y Y Mauritania N Y Y N N N N Mozambique Y Y IP-2 Y IP-2 N IP-1 Pakistan Y Y Y Y Y IP-3 IP-3 Tanzania IP-4 IP-3 IP-4 Y IP-3 N IP-4 Uganda Y Y Y Y Y Y IP-4 Vietnam Y N N Y IP-3 N N Note: Y and N stand for yes and no, respectively, to the question about whether significant reform has been completed. Reforms in progress are indicated by IP, where IP-1 indicates an early stage of implementation and IP-5 indicates that implementation is nearing completion. a. A state-owned utility is deemed to have been restructured if it has successfully completed accounting separation. b. Some of India's states have done much more than others. c. The state utility, PLN, is a limited liability company. d. The government does not intend to privatize existing strategic generation assets but is seeking private investment in small hydro schemes. e. Moving toward a management contract. Source: World Bank, Infrastructure Vice Presidency. degree of separation between operator and incumbents--had introduced private sector government, whereas only 17 percent had a participation through licensing of new fixed, functioning regulatory body in place.18 An international, or mobile operators. Today, increasing number of countries were using fewer than one-fifth of countries have no form more appropriate policies, governance, and of private participation in their telecommuni- management arrangements. But the challenge cations sector. Most are low-income countries. remains formidable, especially in low-income The introduction of competition has been countries. Out of a maximum score of 7, low- uneven, with a majority of countries retaining income countries averaged 1.8, compared to monopolies in fixed-line services such as local 3.1 for lower-middle-income countries and and long-distance telephony. An overwhelm- 3.9 for upper-middle-income countries. These ing majority of countries, however, now results show that although progress has been allow competition in the mobile and Internet made in the past decade, most countries have access markets. International long-distance a long way to go in establishing an environ- market competition also grew dramatically ment that will stimulate increased investment. throughout the 1990s. By mid-2003, 73 According to the International Telecommu- countries were allowing users a choice of nications Union, by the end of 2002 more than more than one facility-based operator for half the countries of the world had fully or international telephone calls--up from just partly privatized their telecommunication 8 countries in 1992. operators. A further quarter (24 percent) of There has been progress in regulation as countries--although retaining state-owned well. The number of telecommunications 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 4 99 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S regulatory agencies has increased dramati- culture, commerce, and industry. This means cally over the last decade. In 1990, only 12 that requirements need to be related to the countries had regulatory agencies that func- broad growth prospects of the economy. One tioned separately from telecom operators. set of estimates developed on this basis shows The number had increased to 123 by mid- that the investment requirements are large. 2003. A further 28 countries have indicated For the first decade of the new millennium, their intention to establish a separate regula- preliminary estimates of new investment tor in the coming years. In Latin America needs vary from a high of 3.2 percent of GDP and Sub-Saharan Africa, more than three- for low-income countries to a low of 0.4 per- quarters of countries have regulatory agen- cent of GDP for upper-middle-income coun- cies. South Asia and Europe and Central Asia tries, with an average of 2.7 percent for all follow closely with more than 60 percent. developing countries.20 The East Asia and Pacific Region remains Operation and maintenance requirements behind, with only 18 percent of countries follow a similar pattern. Total resources having a separate regulator.19 needed, for both investment and mainte- nance, are estimated at roughly 6.9 percent of The Agenda Ahead GDP in low-income countries and 5.1 percent in lower-middle-income countries, with an Addressing the large gaps in access and qual- average of about 5.5 percent of GDP for all ity identified in the preceding section will developing countries (table 6.6). In terms of require action across a broad front. Substan- sectoral allocation, three sectors (electricity, tial new investment will be needed. But that telecommunications, and roads) account for is only part of the challenge. Policy and gov- four-fifths of the total new investment. ernance regimes must continue to improve, The needed investments and maintenance building on past gains, to ensure that new expenditures amount to roughly $465 billion investments translate into improved infra- a year for the years between 2005 and 2010. structure services for underserved segments Most are related to telecommunications of the population and economy. (about $185 billion), followed by power gen- eration (about $140 billion), roads (about $90 billion), and water and sanitation (about Gauging the Need for New Investment $30 billion). Estimating the amount of investment needed The numbers presented in table 6.6 under- to fill gaps in access and quality is difficult. estimate the actual investment requirements The estimate should reflect the needs of both because they do not take into account the the household sector and businesses--in agri- needs in transmission and distribution. TABLE 6.6 Expected annual needs for new investment and maintenance in infrastructure, 2005­10 New investment Maintenance Total Billions Percent Billions Percent Billions Percent Country income category of dollars of GDP of dollars of GDP of dollars of GDP Low 50.0 3.18 58.6 3.73 108.6 6.92 Lower middle 183.2 2.64 173.0 2.50 356.2 5.14 Upper middle 136.0 0.42 248.0 0.76 384.0 1.18 All developing countries 233.1 2.74 231.7 2.73 464.8 5.47 Note: These estimates exclude the needs in electricity transmission and distribution as well as in ports and airports. Source: World Bank staff estimates. 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 4 S T R E N G T H E N I N G I N F R A S T R U C T U R E Including these two business lines could 10 percent.24 These proportions of course roughly double the estimates of the needs for vary across sectors, with telecommunications, energy and add, for low-income countries, up for example, attracting more private invest- to 3 percent of GDP to the estimates of the ment and relying less on official assistance investment needs in the table. Another exclu- than water and sanitation. sion from these estimates is investment in Private sector commitments to infrastruc- ports and airports. However, as these types of ture in developing countries during the 1990s infrastructure represent a relatively small pro- amounted to some $805 billion (table 6.7). portion of the total, it is unlikely that includ- The bulk of investments went into energy and ing them would change the estimates greatly, telecommunications in Latin America, East especially for poor countries.21 Asia, and, to a lesser extent, Eastern Europe. While there are no formal international The commitments increased sharply during statistics on past investment levels in infra- the 1990s before declining rapidly after 1997, structure, investment estimates can be gener- affected by the series of major crises starting ated from past changes in stocks. Five-year in East Asia and ending in Argentina in 2001. averages of past investment levels can be very Indeed, as uncertainty grew in emerging mar- roughly approximated by pricing changes in kets, the cost of capital shot past the point stocks (at a constant price). Doing so yields a where most new projects could generate ade- monetary value that can then be normalized quate rates of return. In 2002, private invest- to GDP.22 Such a rough approximation based ments totaled $46.7 billion, the lowest level on the evolution of stocks suggests that of investment since 1994. investments in the past 5 to 10 years were During the 1990s the public sector in many about 4 percent of GDP in low-income coun- developing economies reduced its participation tries, 2.9 percent in lower-middle-income countries, and 2.6 percent in upper-middle- income countries--a decline of 2 to 4 per- FIGURE 6.1 Gaps in infrastructure call for significantly increased centage points from previous decades.23 spending, which must be managed well for effectiveness Comparing the past investment and O&M Annual spending on infrastructure services, actual vs. needed rates to the projected requirements, and allowing for efficiency improvements, the gap could be 3.5 to 5 percent of GDP for low- 7.5­9 income countries and 2.5 to 4 percent for lower-middle-income countries (figure 6.1). The gap is likely to be less than 0.5 percent of Needed 5.5­7 GDP for upper-middle-income countries-- most of it ascribable to O&M and major GDP of rehabilitation. This suggests that sizable in- creases in investment from recent levels are 4 Actuals needed. In water and sanitation, for example, centreP 2.9 3 investment would need to double from his- 2.6 torical levels. Traditionally, most investment in infra- structure has been publicly funded. According to a recent estimate, 70 percent of all infra- Low-income Lower-middle- Upper-middle- structure spending in developing countries in countries income countries income countries the 1990s was financed by governments or public utilities' own resources. The private sector contributed 20 to 25 percent, while Note: Actual = levels in the 1990s. Needed = estimated requirements for 2005­10. Annual spending includes investment plus spending on operations and maintenance. official development assistance financed 5 to Source: World Bank staff estimates (work in 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 4 101 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S TABLE 6.7 Private commitments for infrastructure, 1990­2002 (US$ billions) Region Telecoms Electricity Natural gas Airports Railways Seaports Toll roads W & S Total East Asia and Pacific 56.2 68.3 6.8 2.8 10.3 10.3 26.8 17.0 198.4 Europe and Central Asia 68.1 21.1 11.3 1.5 0.3 0.7 2.6 3.5 109.0 Latin America and Caribbean 182.9 100.4 19.5 7.5 18.3 6.9 40.6 21.3 397.4 Middle East and North Africa 10.6 8.4 3.9 0.9 0.2 1.2 -- 1.3 26.5 South Asia 19.7 22.6 0.2 0.2 -- 2.1 0.8 0.2 45.8 Sub-Saharan Africa 18.5 5.0 1.3 0.4 0.3 0.1 2.0 0.2 27.8 Total 355.9 225.7 43.0 13.2 29.4 21.2 72.8 43.6 804.9 -- Not available. Source: World Bank, Private Participation in Infrastructure Database. in infrastructure. This unexpected development banks has declined since 1995, reaching a low was the result of anticipated increases in private of $13.5 billion in 1999 before rebounding to sector participation and fiscal adjustment pro- $16 billion in 2002. Even at their peak, com- grams. There is growing evidence that fiscal mitments were small in relation to needs. retrenchment usually leads to a disproportion- ate reduction in public capital expenditures, The Conditions for Increased Investment particularly in infrastructure. Easterly and Servén found that during the 1990s, reductions If developing countries are to reach investment in public infrastructure investment in Latin levels consistent with their needs in a context America made up a sizable share of fiscal of fiscal constraints and limited private invest- adjustment in the region--ranging from 31.5 ment, external assistance to infrastructure will percent in Mexico to 174.3 percent in Brazil.25 need to increase. This is particularly true for But the problem is more generalized. In India, low-income countries, but foreign assistance total investment in infrastructure was 5.4 per- plays an important catalytic role in middle- cent of GDP in 1990, including 4 percent of income countries as well. The impact of aid public sector money. By 1998, total investment can be enhanced through reallocations that in infrastructure had dropped to 4.6 percent, reflect the relative effectiveness of the various with a decline in public investment of 1 per- forms and uses of support. Moreover, with centage point of GDP. Private investment innovation and coordination efforts across the increased, but not enough to offset the drop in development community, ODA could be used public investment. to better leverage private and local public That most urban infrastructure (secondary resources. Better coordination between bilat- roads, drainage, sanitation) is the responsi- eral and multilateral donors would help max- bility of local governments has contributed to imize leverage of funding from all sources, the decline in public investment. Local gov- including the private sector. ernments are increasingly dependent on local The use of resources, both foreign and taxation since, with fiscal decentralization domestic, needs to be guided by clear priori- and consolidation, many countries have ties at the country level. Access and quality reduced central government fiscal transfers. deficiencies are typically much more serious Evidence suggests that changes in ODA in rural areas, implying the need for a special also may have contributed to the decline. For focus on the needs of rural and underserved example, the level of commitment to infra- areas. At the same time, the rapid increase in structure of the multilateral development urbanization will require attention to the 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 4 S T R E N G T H E N I N G I N F R A S T R U C T U R E infrastructure needs of the migrating pop- the local level calls for adequate intergovern- ulation. Better planning of investment in mental arrangements for sharing the invest- infrastructure networks (secondary roads, ment costs of local public-good infrastructure, sanitation, drainage) and protection of green enhanced resource mobilization by local gov- spaces can help ensure economic, social, and ernments, and stronger efforts at local capac- environmental sustainability in the context of ity building. urban expansion. Increased private sector participation in Cutting across the various infrastructure infrastructure requires an adequate regula- sectors is the need to emphasize quality and tory framework, including competent regula- to make adequate provisions for O&M in the tory agencies. Such agencies now exist in allocation of resources. It is not uncommon many countries but often lack adequate to find underinvestment in O&M because the capacity. Coordinated efforts by governments incentive structure is such that it is easier to and donors to provide the necessary technical raise resources to finance new investment or assistance for capacity building would have a major rehabilitation than to design tariffs to high payoff. Governments and donors can recover O&M expenses. Such a bias in incen- also bring pressure to bear on the private sec- tives must be corrected, as the impact and tor to contribute to the effort to improve gov- productivity of investment depend crucially ernance--for example, by adopting a code of on its quality and upkeep. ethics to commit to due process in regulatory Affordability is a key determinant of the interactions. Increasing the transparency of effective access of the poor to infrastructure decisionmaking processes can minimize the services. It is important to consider the extent risk of corruption. to which the pricing of services and the qual- To better assess and monitor infrastructure ity options offered to consumers are consis- needs and policies along these and related tent with ability to pay. Without affordability, dimensions, the availability of information expanded access is of only limited use to the will need to improve markedly. The monitor- poorest. As illustrated in the recent debate on ing of service quality, affordability, fiscal cost, public utilities in Argentina, the many indi- and governance quality is handicapped by rect taxes levied on infrastructure services, major information gaps, and data are lacking many of which are regressive, must be docu- even on basic access to some key infrastruc- mented. While such taxes may reflect fiscal ture, especially transport. The international concerns, governments need to recognize that community should commit to supporting a they may thwart the desired improvement in systematic effort to develop a better informa- the poor's access to public services. tion base, including statistical capacity build- Institutional capacity building is a key ing in developing countries. cross-cutting element of the reform agenda. Countries, supported by their development The problems of quality deficiencies, the partners, are responding to these challenges. declining interest of potential private Declining public investment in infrastructure investors, misallocations of resources, and and overoptimistic expectations of private excessive costs observed in many countries sector participation, combined with growing often can be traced to insufficient institu- appreciation of infrastructure as a foundation tional capacity. Capacity constraints can be for achievement of the MDGs, have forced the especially acute at the local level. With urban international development community to growth and fiscal decentralization, public sec- begin reassessing its priorities. At the World tor responsibilities for infrastructure plan- Bank, this reassessment has resulted in the ning, financing, and management are Infrastructure Action Plan (IAP).26 The IAP is increasingly falling to local governments, designed to respond to client-country demand many of which lack the requisite capacity. for infrastructure with a broad menu of Effective delivery of infrastructure services at options for public and private 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 4 103 BOX 6.1 Water supply and sanitation in the MDGs The MDG for water supply and sanitation aims to halve by 2015 the proportion of people who lack access to safe drinking water and adequate sanitation. Currently, one in five people in the develop- ing world lacks access to clean water; one in two has inadequate sanitation. For four out of five-- 4 billion people--wastewater disposal is inadequate. Every day, 25,000 people die from diseases associated with poor water supply, sanitation, and hygiene. Morbidity is even higher.a Improving water supply and sanitation is known to reduce child mortality and protect health, while promoting gender equality, educational opportunity, and environmental sustainability. Yet at current rates of service expansion, only about 20 percent of countries are on track to meet the goal, and fewer than 10 percent of the low-income countries are on track. The actual number may well be lower, due to huge gaps in data on access. To meet the goal, about 1.5 billion people (1 billion in urban areas, and 0.5 billion in rural areas) will have to be provided with sustainable access to safe water, and about 2 billion to basic sanita- tion (1.1 billion in urban areas and 0.9 billion in rural areas). Various analyses suggest that invest- ment will need to double, from $15 billion to $30 billion annually.b Existing assets must be properly operated and maintained, and new investments will have to be efficient. Additional investment will be needed for wastewater treatment, rehabilitation of existing infrastructure, and infrastructure for water storage and conveyance to deal with urbanization and growing climatic variability. The bulk of the financing needed will have to come from the public sector and official external assis- tance, even if efforts succeed in mobilizing increased private participation in the sector. In the past decade, 43 percent of the funding for water supply and sanitation came from government budgets and about 28 percent from external assistance. Another 17 percent was funded by small-scale providers, communities, and households. Internal cash generation from utilities provided only 7 percent, in part reflecting inappropriate pricing policies. The international private sector contributed 5 percent.c Focusing solely on investment will not generate sustainable service improvements, however, as the experience of the International Drinking Water Decade has shown. Success in achieving the mil- lennium goal requires a combination of sound policies, improved governance, capable institutions, increased investment and financing, and more effective financing modalities. A rapid water sector survey carried out in 2002 showed that while 65 percent of the countries had achieved a degree of separation between operator and government, only 17 percent had a func- tioning regulatory body in place. And 13 percent of the countries still had to embark on any form of urban sector reform.d A recent survey of 246 water utilities in 51 countries showed that overall quality was unacceptable, although with significant exceptions.e That 25 percent of the operators were performing well shows that efficient service delivery is possible where sound policies and gov- ernance are in place. Access to water and sanitation by region, 2000 Percentage of population with access To improved water supply To improved sanitation Region Urban Rural Total Urban Rural Total East Asia and Pacific 93 67 76 73 35 48 Europe and Central Asia 95 82 91 97 81 91 Latin America and Caribbean 94 66 86 86 52 77 Middle East and North Africa 95 77 87 93 70 83 South Asia 94 80 85 67 22 34 Sub-Saharan Africa 83 44 57 73 43 53 Developing countries 95 71 82 77 35 52 Least developed countries 82 55 62 71 35 44 Source: JMP 2000. 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 4 An increasing number of countries are now Investment in water and sanitation will need to double using more appropriate policies and institutional Historical and required MDG investment levels arrangements, but the challenge ahead is still for- midable, especially in low-income countries. Effectively managing existing assets and sizable 35 new investments will require stronger efforts at policy reform and institutional upgrading, sup- 30 ported by increased international assistance. A 25 broad consensus on the main elements of the pol- year icy agenda at the country level, and of interna- 20 tional support, is beginning to emerge. These are: per Providing incentives to invest and operate effi- 15 billions ciently and promoting sustainable access for the poor. Existing capacity must be optimally used US$10 to meet demand through tariffs that recover costs while taking into account the ability of 5 consumers to pay; and policies that emphasize managerial autonomy and accountability. 0 Present MDG needs Strengthening the capacity of local institutions to scale up activities. Efforts need to focus Water Sanitation more on building the financial and adminis- trative capacities of subnational institutions responsible for service delivery. This should be Source: Global Water Partnership 2000 and World Bank. accompanied by institutional reforms that enable stakeholders, especially poor people, to monitor and discipline service providers. Creating and disseminating knowledge needed to set priorities and improve resource use. Policy- makers and stakeholders need reliable information to make good decisions, to use resources effi- ciently, and to hold providers accountable for the quality of service they deliver. Mobilizing financing for investments to expand access and improve service quality. Appropriate cost-recovery policies and practices are a prerequisite for raising the large amounts of investment financing needed in the sector. Increased domestic resource mobilization should be supported by increased external assistance. Enhancing the range and reliability of financial instruments. Most IFIs provide contractual and regulatory risk coverage, credit risk coverage, and foreign exchange risk coverage. Yet demand for risk mitigation instruments is low because few international investors are willing to invest in water supply and sanitation in developing countries. Only a few IFIs provide subsovereign lending on a significant scale. The IFIs are now stepping up the deployment of risk mitigation instruments and considering how to increase financial and technical support to subsovereigns, as proposed by the Camdessus Panel in 2003.f Aligning development assistance programs with country priorities and capacities, pooling aid at the country level, and ensuring continuity of support. Toward these ends, several consultative meetings have been held in the past year to increase donor coordination--among them an infor- mal consultative meeting between bilateral donors and the World Bank in May 2003 and a Feb- ruary 2004 consultative meeting of IFIs and bilateral donors to coordinate support for millennium goals in water supply and sanitation. In the Water Action Plan adopted at the Evian Summit in June 2003, the G-8 governments requested the World Bank and other IFIs to study and recommend measures to facilitate subsovereign lending and improve risk mitigation. A comparative review of IFIs showed that only EBRD and the Islamic Devel- opment Bank presently have a sizable subsovereign lending program; others reported legal or policy con- straints on subsovereign lending. Four more IFIs (AfDB, EIB, IDB, and IFC) are planning to increase this type of financial support; IFC and IBRD are piloting a municipal fund to enable such lending. Notes: (a) JMP 2000. (b) Global Water Partnership 2000; Winpenny 2003; United Nations Millennium Project Task Force on Water and Sanitation 2003. (c) Development Committee 2003. (d) World Bank 2002. (e) Kingdom and Tynan 2002. (f) Camdessus 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 4 105 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S provision and a scaling up of the project 11. Jalan and Ravallion 2001; Jayasuriya and pipeline, with a better integration of infra- Wodon 2003; Leipziger, Fay, and Yepes 2003; structure into country assistance strategies Development Committee 2003. and poverty reduction strategy papers. The 12. Fay and Yepes 2003. IAP also aims at rebuilding the knowledge 13. The project is part of the Bank's Infrastruc- ture Action Plan, which is described later in this base for infrastructure by strengthening ana- chapter. lytic work to support policy reforms and insti- 14. Angel 2000. tuting more systematic collection of data. 15. APHRC 2002. The scale of the challenge ahead is huge. 16. Roja 2003. The response needs to span all the elements of 17. Bacon 1999. the agenda outlined above. And it needs 18. World Bank 2002. increased international support--from bilat- 19. Qiang 2004. eral donors and multilateral agencies--and 20. These estimates are calculated with an more effective coordination of that support. econometric model estimating the elasticity of Efforts under way to scale up investment, pol- demand with respect to GDP growth. For details, icy reform, and support in water and sanita- see Fay and Yepes (2003). This type of approach is much better suited to producing aggregate results, tion provide a good example of the way which usually provide reasonable ballpark esti- forward (box 6.1). But these efforts are still at mates, than it is to producing individual country an early stage, and success will require sus- predictions. Also, it cannot adequately capture the tained commitment to the goals. impacts of improvements in efficiency, differentia- tion in service levels, and cross-sectoral linkages between infrastructure sectors. Notes 21. Extending the forecast to 2015--the MDG horizon--requires much more analysis of the sen- 1. The 1994 World Development Report on sitivity of various determinants of investment infrastructure (World Bank 1994) highlighted an demand and would be much less robust. Simula- emerging debate on the relationship between tions for 2010­15 imply that for low-income coun- access to infrastructure, productivity, and growth. tries, annual investment needs would be roughly 2. Estache, Foster, and Wodon 2002. the same as for the previous period with a margin 3. Caldéron, Easterly, and Sérven 2003. of +/­0.5 percent of GDP. They could be as much 4. Ramirez and Esfahani 2000. as 1 percent lower for middle-income countries. 5. Datt and Ravallion 1998. 22. This is clearly a rough approximation, since 6. Deininger and Okidi 2003. it ignores the effects of technological changes on 7. Fan, Zhang, and Zhang 2002. prices. This effect is particularly important, for 8. Estache, Foster, and Wodon 2002. example, for telecommunications, but much less 9. Estache, Foster, and Wodon 2002. so for water and roads. 10. Households in Guatemala spend around 10 23. Note that a major difference between the percent of their household budget on water, energy, forecast and the past is that past investment levels and telecommunications services (Foster and Tre include major rehabilitation requirements resulting 2000). More than half is spent on energy for cooking from weak allocation of resources to O&M. In a and heating, and more than 25 percent on energy for sense, it could be argued that ex post O&M is "cap- lighting and powering appliances. Barely 0.5 percent italized" and that the best approximation for it is of income is spent on water services. The overall bud- the rehabilitation component of past investments. get share is relatively constant across consumption On the other hand, the forecast bets on a commit- quintiles, although the composition of the budget ment to adequate O&M. This is why it is more use- shifts away from cooking fuels and toward telecom- ful to rely on the sum of investment and O&M to munications for richer households. Although only a get a fuller sense of the resource needs of the sector. tiny fraction of the poorest households have access 24. DFID 2002. to telephones, those that do so spend as much as 5 25. Easterly and Servén 2003. percent of their income on the service. Such break- 26. http://www.worldbank.org/infrastructure/ downs, however useful for designing tariff structures files/iaPPublic.pdf. to ensure affordability, are seldom available. 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 4 7 Accelerating Human Development T he Millennium Development Goals example, if the quality of service is so poor as related to human development-- to discourage their use, or if the poor do not achievement of universal primary edu- have the resources to afford the service or cation; elimination of gender disparities in lack the knowledge of its availability and education; reduction of child and maternal value, or if the services are not properly mortality; control of major diseases such as funded and providers require "unofficial" pay- HIV/AIDS, tuberculosis, and malaria-- ments. Moreover, those efforts must address require a multidisciplinary and cross-sectoral the complex connection between progress in approach if they are to be achieved. This is other development areas and human develop- particularly so because a key factor in the suc- ment programs. cess or failure of human development pro- Outcomes in education and health may be grams is improvement of governance--the determined as much by what happens in other policy and institutional framework govern- sectors as within these sectors. Do people have ing public resource management, institu- access to safe drinking water and basic sanita- tional capacities, control of corruption, tion? Do rural roads provide access to schools community involvement, and empowerment and clinics? Is there electricity to power those of stakeholders. While substantial addi- schools and clinics? Thus policies and pro- tional resources will be needed to finance grams need to be framed within an integrated expanded and improved access to education, country strategic framework that internalizes health, and related services (requiring both such linkages. stronger domestic resource mobilization and If current worldwide trends (reviewed in increased foreign support), the effectiveness chapter 2) continue, the human development of those investments in providing quality MDGs are unlikely to be achieved by the tar- services, especially to the poor, will hinge on get dates. Progress is being made on the pol- improvements in the underlying policy and icy agenda. Investment in human capital in governance regime. developing countries is on the rise, and the Achieving the human development goals underlying policy framework bearing on its will require efforts on multiple fronts to effectiveness is improving (see chapter 3 for deliver more and better services. Those efforts ratings by multilateral institutions of social must address both supply- and demand-side sector policies). Some countries are providing constraints within each program. It is not encouraging examples of successful innova- enough to build more schools and clinics, for tion in service delivery to the poor. Overall, 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 4 107 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S however, progress has been slow and uneven, recent findings and recommending direc- and many gaps remain, particularly with tions for the international community.1 respect to the institutional aspects of the The United Nations Development Pro- agenda. The deficiencies are most serious in gramme (UNDP) is monitoring progress Sub-Saharan Africa and South Asia, but even on the millennium goals; its latest Human in these regions individual countries (Cape Development Report assesses the prospects Verde in education, health, and gender; for attaining them.2 Ghana in child mortality; and Ethiopia in The World Bank's 2004 World Develop- primary enrollment) are making progress and ment Report focuses on service delivery to are likely to meet at least some of the ambi- the poor, paying considerable attention to tious MDG targets. education and health services.3 The unreliability of information and wide gaps in data complicate the task of assessing Drawing on those sources and others, this progress toward the human development chapter reviews trends in the financing of MDGs and of making policy to achieve them. human development programs, assesses the Social sector data in many countries are par- overall effectiveness of those programs, and ticularly weak. Administrative data suffer finally, sets out an agenda for accelerating from gaps and low quality, while survey data progress toward the human development are available only periodically and capture MDGs. only some characteristics. The need to moni- tor improvements and determine priorities Trends in Spending for action increases the urgency of strength- for Human Development ening the information base. To accelerate progress toward the goals, Available data show that spending on educa- countries and their partners in the interna- tion, health, and other human development tional community will need to scale up their activities in developing countries has risen efforts substantially. Priorities include: over the past decade, although it remains low relative to needs in many countries, especially Expanding investment in human capital in the low-income ones.4 The rising trend signi- low-income countries, while maximizing fies a growing commitment on the part of the impact of existing public spending by governments to human development goals. improving the targeting of public services Analysis shows that further increases in in education, health, and social assistance spending on these sectors, along with spend- Focusing on governance issues in service ing on related priority infrastructure such as delivery to determine priority interven- water and sanitation, will be necessary to tions to address service quality problems achieve the MDGs. To that end, public spend- Piloting and evaluating empowerment ing will need to shift further toward those sec- options to strengthen the role of clients, tors; and the shift must be accompanied by especially poor people, in the design, measures to enhance efficiency and effective- scope, and delivery of key services. ness. Higher spending alone will not deliver the desired results. Much recent and ongoing work analyzes aspects of the challenges posed by the human Rising Public Spending on Education development MDGs: and Health Working groups on education, gender, Public spending on education in low-income health, and major diseases of the United countries rose from 4.3 percent of GDP in Nations' Millennium Project are reviewing 1990 to 4.7 percent in 2000 (figure 7.1). 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 4 A C C E L E R A T I N G H U M A N D E V E L O P M E N T After dipping in the mid-1990s (to an aver- about half the average level in high-income age of 3.7 percent in 1995) it recovered later countries. In some low-income countries, in the decade. Spending rose in all regions, spending on health is particularly low. In 24 though in some it is well below the low- of the countries for which data are available, income country average. In 2000 public including 14 in Sub-Saharan Africa, public spending on education relative to GDP was spending on health is less than $5 per capita. 3.8 percent in Europe and Central Asia and The rise in education and health spending 4 percent in Sub-Saharan Africa and South relative to GDP in developing countries has Asia, implying the need for special efforts been supported by the allocation of a higher there. Spending also rose in middle-income share of total government spending to these countries, to reach an average of 5 percent of services (figure 7.2). In 2000, on average, GDP in 2000. The biggest leap occurred in developing countries allocated 15.6 percent Latin America, where historical underspend- of total public spending to education and 8 ing in education has contributed to relatively percent to health, up from 13 percent and 6.2 high economic inequality and lagging pro- percent, respectively, in 1990. ductivity. Interestingly, middle-income Sub- Significant progress has been made in mobi- Saharan African countries spent more on lizing international and domestic resources to education, as a share of GDP, than any other combat HIV/AIDS, tuberculosis, malaria, and region in both 1990 and 2000. In compari- other major diseases, although financing gaps son to the numbers for the developing world, remain. Spending on HIV/AIDS in low- and OECD countries spend an average of 5.0 to middle-income countries in 2003 was approx- 5.5 percent of GDP on education. imately $4.7 billion, a 20 percent increase over Public spending on health also rose relative 2002 and almost five times the level of spend- to GDP, but modestly, and mainly because of ing in 1996. International spending in 2003 the increase in middle-income countries (see included a projected $1.6 billion in bilateral figure 7.1). Public spending on health in devel- assistance. Bilateral assistance is enhanced by oping countries as a share of GDP remains at the U.S. Emergency Plan for AIDS Relief, an FIGURE 7.1 Investment in human capital is up, but more is needed Public spending on education and health, 1990­2000 Education Health 6 2.9 5.0 5 4.6 4.7 4.3 4.4 2.8 2.8 4 3.7 GDP of 2.7 3 2.7 centreP2 2.6 2.6 2.6 2.6 2.6 1 0 2.5 1990 1995 2000 1990 1995 2000 Low-income countries Middle-income countries Source: Compiled by IMF staff on the basis of country authorities' estimates. 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 4 109 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S FIGURE 7.2 Developing countries are allocating more public spending to human development Public spending on education, Public spending on health, low- and middle-income countries low- and middle-income countries 25 25 20 20 spending 15 15 public total 10 10 of centreP 5 5 0 0 Sub- East South Middle Latin Europe & Sub- East South Middle Latin Europe & Saharan Asia & Asia East & America Central Saharan Asia & Asia East & America Central Africa Pacific North & Asia Africa Pacific North & Asia Africa Caribbean Africa Caribbean 1990 2000 Source: Compiled by IMF staff on the basis of country authorities' estimates. initiative that promises $10 billion over the Private Supplements to Public Spending next decade, with $2.4 billion approved for FY04. The sources of most multilateral fund- Although greater public resources for educa- ing, estimated at $600 million in 2003, are tion and health are helping to fill critical gaps the Global Fund to Fight AIDS, Tuberculo- in some countries, in most low-income coun- sis, and Malaria, a multidonor initiative tries, public revenues remain inadequate to launched to expedite the channeling of criti- provide the full range of needed services. cal assistance to needy countries, and the Moreover, efficiency of resource use is World Bank. The Joint United Nations Pro- uneven. One reflection of these shortcomings gramme on HIV/AIDS (UNAIDS) is provid- is the sizable reliance on private financing for ing leadership and financing for technical basic social services, even in poor countries. assistance and international coordination. In education, a study found that fees were UNDP and others are also providing funding common at all levels of schooling in 97 per- for specific activities. Currently, more than cent of countries, with unofficial (often ille- one-half of the total international assistance gal) fees charged in almost 40 percent of flows to Sub-Saharan Africa. countries.5 Some types of contributions exist, Domestic spending on HIV/AIDS also is even in widely publicized no-fee countries increasing, to an estimated $1 billion for 58 such as Malawi and Uganda. low- and middle-income countries--double With public resources inadequate to pro- the amount documented in 1999. This esti- vide access to quality education for all citizens, mate is rough, however, as many countries private spending plays a useful supplementary lack adequate systems for tracking domestic role. Community contributions can help sup- spending on HIV/AIDS. plement low teachers' salaries and support the 110 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 4 A C C E L E R A T I N G H U M A N D E V E L O P M E N T cost of books, supplies, and basic mainte- FIGURE 7.3 Public spending covers more of the cost of health care nance.6 The key is to ensure that public in high-income countries than in low-income countries resources that do exist are sufficiently targeted Public and private spending on health, developing versus developed countries to the poor and that private financing is mobi- lized from those with the ability to pay. The same situation exists--and the same principles apply--in health care, where pri- 10 30 vate expenditures often exceed public spend- ing, especially at low levels of GDP per capita 9 25 (figure 7.3). In India, for example, more than 8 thousands) 80 percent of health spending is private. Much 7 20 (US$ of private spending in the poorest countries is GDP 6 of out-of-pocket payments to private providers, 5 15 PPPta whereas in some middle-income countries 4 insurance payments make up an important centreP 10 3 income share of private spending. 2 5 Where services are "free" but not suffi- pita 1 ciently funded by national or local govern- 0 careP ment, informal side arrangements with Low Lower Upper High- High- providers tend to emerge. In the transition income middle middle income income income income non-OECD OECD countries of Europe and Central Asia, where free services are "guaranteed" and the pri- ODA to health sector Domestically financed vate sector is in nascent stages, and in South government health spending Asia, where the private sector is vibrant, Private health spending GDP per capita under-the-table fees may finance up to 85 percent of all health spending. Since informal or illegal payments are common in many Source: World Bank 2004. countries, official data can seriously under- estimate the extent of reliance on private expenditures. In a study of seven Latin Amer- TABLE 7.1 Private health expenditure (as a percentage of annual household income) ican countries, perceptions of informal pay- ments were found to be the highest in Costa Rica, the country considered to have the Income level (quintiles) Russia South Africa Brazil Tanzania broadest free system in the region.7 Poorest 11.9 34.6 20.6 4.4 The poor tend to be affected more by such Second poorest 5.3 20.3 11.6 2.7 informal or illegal payments. As a propor- Middle 3.3 13.3 7.2 2.0 tion of household income, private expendi- Second richest 2.1 9.2 4.1 1.3 ture on health is much higher for the poorer Richest 0.8 3.2 1.2 0.5 segment of the population in many countries (table 7.1). Source: World Bank 2003c. Although governments around the world, and particularly in Africa, have committed themselves to strengthening public programs and financial ruin for poor households to combat HIV/AIDS and help those affected affected by the disease. by it, much of the burden of paying for Despite the increased commitment of HIV/AIDS services continues to fall on indi- donor support, projected funding continues viduals (box 7.1). Major gaps in the coverage to fall short of what UNAIDS and others esti- of services translate into inequity in access mate is required for HIV/AIDS prevention, 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 4 111 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S BOX 7.1 Rwanda: HIV/AIDS and health expenditures Recognizing the importance of documenting the overall flow of health funds--and funds related to HIV/AIDS--the Rwandan Ministry of Health reviewed the country's national health accounts. The analysis showed that the growing HIV/AIDS burden was a significant challenge in an already under- funded health system. The study estimated that 40 percent of total per capita spending on health was funded by house- holds. Of the total spending, about 10 percent was used for HIV/AIDS-related costs (prevention, treatment, and mitigation). HIV/AIDS expenditures were financed primarily by households (93 per- cent), followed by donors (6 percent), and government (1 percent). About 80 percent of HIV/AIDS expenditure was for treatment of related symptoms and infections in about 400,000 patients, 14 percent for antiretroviral treatment for a very small number of patients (202), and about 7 percent for prevention. Prevention was to a large extent financed by donor funds, whereas treatment costs were the financial burden of households. Thus, access to treatment of HIV/AIDS-related diseases was virtually defined by the patient's socioeconomic background and ability to pay the full cost of treatment, posing serious equity issues. Few countries have completed a similar analysis. This makes it difficult to identify and address the serious fiscal implications of the epidemic, slowing consideration of future options, and cloud- ing questions concerning the relative roles of households, government, and donors in developing HIV/AIDS policies and programs. Source: Schneider and others 2000. care, and support efforts, including access to cost. Social transfers can help poor families antiretroviral therapies. Current spending keep their children in school. Creative mea- represents less than half the $10.7 billion that sures to compensate poor families through UNAIDS estimates is required to finance a conditional cash transfers linked to schooling comprehensive health benefit package and and health center visits (as in Brazil, Colom- less than a third of the $14.9 billion thought bia, Mexico, and Nicaragua) have raised to be needed by 2007--a major challenge to attendance at schools and induced a more mobilize additional resources, strengthen regular use of preventive health care services. institutional implementation capacities, and Systematic information on the scale of scale up programs. social assistance programs is not available for many countries, but it appears that spending averages less than 1 percent of GDP in most Social Safety Nets regions other than Europe and Central Asia Social assistance programs cushion the and Latin America. There is a great deal of income of the poor from major shocks, such variation among countries, not always as an AIDS-related illness or a job lost in an related to national income (table 7.2). In economic crisis. Social assistance enables Europe and Central Asia, the socialist legacy poor families to continue financing critical has left in place large social support programs inputs, such as schooling and health clinic vis- that absorb significant public resources. For its. The mounting HIV/AIDS orphan crisis in example, social assistance spending in Bul- Africa is increasing the need for such assis- garia and Serbia-Montenegro is estimated at tance programs. 4.5 and 6.3 percent of GDP, respectively. Wherever children contribute to house- Total spending on social protection, including hold income, schooling has an opportunity social insurance, is typically much higher, 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 4 A C C E L E R A T I N G H U M A N D E V E L O P M E N T averaging around 10 percent of GDP for the TABLE 7.2 Public spending on social protection for selected countries transition countries in the region for which by region data are available. By contrast, Pakistan and (percent of GDP) Malawi come in at the low end, spending only 0.1 and 0.2 percent of GDP, respectively, Social Social protection on social assistance. Typically, in poor coun- Region assistance overall tries, public resource constraints mean that Europe and Central Asia (21) 2.50 10.4 spending on social assistance falls well short Latin America and Caribbean (18) 2.30 4.6 of the levels needed. East Asia and Pacific (6) 0.70 2.3 Middle East and North Africa (5) 0.73 2.4 Sub-Saharan Africa (1) 0.24 1.9 Quality and Effectiveness South Asia (1) 0.90 1.9 of Programs The implication of the foregoing analysis is Note: Numbers in parentheses indicate the number of countries for which data are available. Social protection includes social assistance plus social insurance (such as pensions, sickness clear. Public spending on human development and disability benefits, unemployment benefits). services, particularly in low-income coun- Source: Blank, Grosh, and Weigand 2003. tries, must rise if the development goals are to be achieved; and this rise must be supported Are Resources Reaching Targets? in part by additional donor assistance. But increased spending will not deliver results if it A review of the delivery of human develop- is poorly directed and inefficiently imple- ment services across countries shows, how- mented. A vital part of the agenda consists of ever, that there remains substantial scope for actions to enhance the quality and effective- more effective use of resources. One key ness of spending at two levels: dimension of effectiveness is how well public programs are reaching and meeting the needs Allocation of resources must be better of the poor. Analysis of the incidence of pub- aligned with development priorities and lic education and health spending in a range better directed at target populations. of developing countries shows that, contrary The institutional framework through to the declared objectives of the programs, which resources pass must be improved to spending is often skewed toward better-off strengthen capacity for effective imple- households and not the poor (figure 7.4). mentation and accountability for results. In some countries, public subsidies on edu- cation and health do benefit low-income In general, the policy and institutional households disproportionately--for example, regime in developing countries has been in Colombia, Costa Rica, Honduras, Jamaica, improving, both broadly and in the social sec- and Romania. But the overall pattern suggests tors. This progress is confirmed by the World considerable scope for improved targeting of Bank and other MDB ratings reviewed in subsidies. In education, for example, this chapter 3. The improvements should enhance would involve redirecting subsidies toward the effectiveness of programs. A recent study lower levels of education, which typically ben- found that the elasticity of government spend- efit the poor more, and improving service ing in terms of its impact on desired outcomes delivery to enhance the poor's effective access rose with the score on the Country Policy and to and use of available services. Institutional Assessments (CPIA). For exam- A commitment to spend does not necessar- ple, at a CPIA score of 4 (a satisfactory rating), ily translate into actual expenditures on service a 10 percent increase in public health and edu- delivery. Recent evidence from several coun- cation spending was associated with a 7.2 per- tries indicates that funds are not always reach- cent decline in the maternal mortality rate.8 ing the front line (box 7.2) due to bureaucratic 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 4 113 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S FIGURE 7.4 Public spending on human development often benefits the rich more than the poor Share of public spending for health and education that accrues to the richest and poorest quintiles, selected countries All health spending All education spending Guinea 1994 Nepal 1996 Guinea 1994 India (UP) 1995/96 Madagascar 1993/94 Armenia 1999 FYR Macedonia 1996 Kosovo 2000 Ecuador 1998 Tanzania 1993/94 Ghana 1994 South Africa 1994 Côte d'Ivoire 1995 India 1995/96 Nicaragua 1998 Côte d'Ivoire 1995 Lao PDR 1993 Guyana 1993 Madagascar 1993 Bangladesh 2000 Tanzania 1992/93 Uganda 1992/93 Indonesia 1989 Indonesia 1990 Cambodia 1996/97 Vietnam 1993 Pakistan 1991 Armenia 1996 Bangladesh 2000 Kyrgyz Rep 1993 Bulgaria 1995 Kazakhstan 1996 Brazil 1997 (NE&SE) Kenya 1992 (rural) Malawi 1995 Sri Lanka 1995/96 Ecuador 1998 Morocco 1998/99 Nicaragua 1998 Peru 1994 South Africa 1994 Yemen 1998 Azerbaijan 2001 Colombia 1992 Vietnam 1998 Costa Rica 1992 Mexico 1996 Panama 1997 Honduras 1995 Kenya 1992 Argentina 1991 Ghana 1992 Costa Rica 2001 0 10 20 30 40 50 Romania 1994 Percent Jamaica 1998 Colombia 1992 0 10 20 30 40 50 Percent Richest Poorest Source: World Bank 2003c. 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 4 A C C E L E R A T I N G H U M A N D E V E L O P M E N T BOX 7.2 The case of the missing money: monitoring public expenditure In the early 1990s the Ugandan government dramatically increased spending on primary education. Yet school enrollments stagnated. Could it be that the money was not reaching schools? To answer the question, a public expenditure tracking survey started collecting data in 1996 on government transfers to schools. It found that 87 percent of the nonwage resources intended for the schools were diverted to other uses. This information was made public, prompting a vigorous information campaign from the national government, which began publishing data on monthly transfers to local governments in newspapers. The central government also required primary schools and local administrations to post notices on receipt of funds. The information campaign brought large improvements: capture by interests along the way was reduced to less than 20 percent in 2001. Because poor people had been less able than others to claim their entitlement from the local officials before the information campaign, they benefited most from it. Tracking surveys can find problems in unexpected places. A survey in Peru tracking a participa- tory food supplement program (Vaso de Leche, or "glass of milk") revealed that less than a third of each dollar transferred from the central government reached intended beneficiaries. Most of the leakage occurred below the municipal level--in the mothers' committees and households. The results challenged the belief underlying the program that local community organizations were always more accountable than public agencies. Authorities have decided to merge all nutrition pro- grams into a social fund that will transform Vaso de Leche into a conditional, multipurpose, cash- transfer program with stronger accountability. These and other tracking surveys in Ghana, Honduras, Madagascar, Mozambique, Papua New Guinea, Rwanda, Senegal, Tanzania, and Zam- bia suggest several lessons. They confirm that budget execution is a major problem and show that procedural clarity and due process are often missing. The surveys find that poor resource management is often a result of too much discretion in resource allocation under conditions of limited information, weak controls, and strong vested inter- ests. They provide insights into the actual (rather than the formal) operation of schools and health clinics and allow comparisons of public, private, and nongovernmental providers. Tracking surveys can be highly cost-effective. But they need an authorizing environment: unless there is a solid polit- ical commitment for more transparency, government agencies may be reluctant to open their books. The Uganda case and a similar experience from neighboring Tanzania demonstrate the power of information in enhancing "client power" and ensuring the money will not go missing. Source: Reinikka and Svensson 2004; Dehn, Reinikka, and Svensson 2003; World Bank 2003a. bottlenecks, leakage, or lax management. Sim- Issues in Education Quality ilarly, budgeted funds are not always available to be spent. In Pakistan, for example, because In education the quality of teaching is directly of poor public expenditure management, only linked to the effectiveness of learning, but 73 percent of the national health budget for often quality is so low that the poor are 1999 was executed, whereas in Tanzania, deterred from attending school in the first spending reached 114 percent of the recurrent place. One indicator of a problem is a high stu- budget because of off-budget additions from dent-teacher ratio that reflects congestion in user-fee revenue and donor transfers. In both the classroom. It is no coincidence that the stu- cases, budget management becomes difficult, dent-teacher ratio at the primary level in South with unforeseen issues shifting the actual fund- Asia and Sub-Saharan Africa--the two regions ing of public programs. with the weakest education outcomes--is 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 4 115 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S highest, more than twice the level in East Asia rates have been estimated at about 25 percent and Europe and Central Asia.9 in India and Uganda. Within states of India, One reason for the high student-teacher a study found absenteeism rates ranging from ratios is the relatively high salaries paid to a low of 15 percent in Gujarat to a high of 39 teachers. Average annual teacher salaries in percent in Bihar.11 In Uttar Pradesh, India, Africa are 4.5 times per capita GDP, whereas surprise visits to 16 schools found a still in East Asia the ratio is 1.5 and in Europe and higher rate of absenteeism--about two-thirds Central Asia only slightly above 1. If the wage of teachers.12 bill consumes the lion's share of the recurrent Many governments provide education and budget, little is left for textbooks and other health services in a top-down manner: the cen- instructional material. Evidence from Brazil tral government (with the help of donors) pro- and India shows that dollar-for-dollar spend- vides the financing, hires the teachers and ing on instructional materials is about 15 doctors, and provides the complementary times more productive (in terms of increases materials, such as textbooks and medicines. In in test scores) than spending on teacher too many cases, this system has failed to work salaries.10 In Africa, most countries spend for poor people--in part because they have lit- more than two-thirds of their recurrent edu- tle say in it. In a few cases where poor people cation budget on salaries, with some reaching have had a say--for example, by giving them 90 percent or higher (figure 7.5). The prob- a choice of service providers, involving par- lem is not limited to Africa. ents in the running of the school, as in the El But again, money does not guarantee ser- Salvador Education with the Participation of vice. Despite the high proportion of the bud- Communities program, or simply increasing get devoted to teachers' salaries, absenteeism the availability and transparency of informa- among teachers is high. Teacher absenteeism tion--the outcomes have been better. Possibly the biggest challenge in accelerating progress toward the MDGs--and also the biggest FIGURE 7.5 Teachers' salaries absorb most recurrent education spending Percentage of recurrent education spending paid to teachers scope for reform--lies in strengthening the for selected Sub-Saharan African countries power and capacity of poor citizens to affect the delivery of services critical to their educa- tion and health.13 ayn Dem. o e 100 Ke wi Gender, Education, and Women's e Cong anzaniaT ola d'Ivoir wb Empowerment Mala asoF Ghana Ang Ethiopia oon 80 Zambia Côte Sudan zambique anda Since the success of interventions to educate Zimba inak Niger Mo Ug ascar Bur Mali Camer girls is fundamentally embedded in the socio- cultural context of households and their 60 Madag decisionmaking processes, it is particularly centreP important that family and community mem- bers be involved in the design and implemen- 40 tation of those interventions. Increasing girls' access to education facilities alone will not 20 achieve the goal of reducing gender dispari- ties in school attendance and achievement. Depending on the particular sociocultural 0 context, other factors exert significant influ- ence, such as the presence of female teaching Source: Bruns, Mingat, and Rakatomalala 2003. staff, financial support to empower female 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 4 A C C E L E R A T I N G H U M A N D E V E L O P M E N T students, school safety, gender-sensitivity of health care, income-earning opportunities, the curriculum, the availability of toilet facil- and social and political rights. It requires that ities for girls, and information on the value of women have control over the resources they girls' education. Involving households and the need, and the rights and voice to participate community in the design of services would in decisions that affect them. Promoting gen- help in making them responsive to the partic- der equality and women's empowerment calls ular needs of the female students. for a strong political commitment from gov- By strengthening the ability of the student ernments to be responsive to the different ser- or client to influence the design of the service, vice needs of men and women and to choose among service providers, and monitor eliminate all forms of discrimination. Some and discipline them, some countries have been progress has been made in this respect, but able to accelerate progress toward increasing there is much more to do. Ratification of the enrollment, improving education quality, and U.N. Convention on the Elimination of All reducing gender disparities. A good example Forms of Discrimination against Women is Bangladesh's Female Secondary School (CEDAW) and submission of regular reports Assistance Program (FSSAP), which gives on compliance is one indication of a country's schools a stipend based on the number of girls commitment to ending gender inequalities in they enroll and which has been very effective their laws and regulations and to creating is raising girls' attendance (box 7.3). institutions to protect women against dis- The empowerment of women of course crimination. As of June 2002, all but four calls for more than ensuring equal access to developing countries had ratified CEDAW, education opportunities. It also encompasses but only 71 percent had submitted at least provision of adequate and equal access to one annual report.14 BOX 7.3 The Bangladesh Female Secondary School Assistance Program Bangladesh's Female Secondary School Assistance Program (FSSAP) was launched in 1993. Its objective was to improve rural girls' enrollment and retention rates in secondary education. The program cost of $88.4 million supported a package of interventions to increase the prospects that rural girls would enroll and remain in secondary school. A central component was the provi- sion of cash stipends to girls. The stipend is transferred through the commercial banking system to individual bank accounts held in each girl's name. The program also transfers rural girls' tuition and examination fees directly to schools. Complementary efforts to increase the proportion of female teachers, provide water and sanita- tion facilities, improve community engagement, and provide occupational skills make schools more attractive to girls and their families. All unmarried girls of secondary school age who reside in rural areas were eligible to benefit from the program. Continuance in the program, however, required that girls attend school for at least 75 percent of the days in the school year, maintain their academic performance above a set minimum, and remain unmarried. The program has been very successful in increasing rural girls' enrollment and retention rates. Stipend beneficiaries increased from 187,320 in 1994 to almost 900,000 in 2000. Girls now account for 54 percent of secondary enrollments in areas covered by FSSAP. Girls' attendance rates have improved significantly and at 91 percent, are above boys' 86 percent rate. The proportion of girls achieving pass marks in school examinations, at 89 percent, is now above the boys' rate of 81 per- cent. Girls' dropout rates from the program for noncompliance are low. Source: Khandker, Pitt, and Fuwa 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 4 117 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S est 20 percent is 10 percent. Since high child Health: A More Complex Agenda mortality is more prevalent among poor peo- A multiplicity of factors that affect health ple, major progress in reducing it is unlikely outcomes, and cross-sectoral links, make the without improved access to safe water and attainment of health-related goals--reducing sanitation for the poorest households. child and maternal mortality and combating Lack of access to health services is often major diseases--a still tougher challenge. exacerbated by poor service delivery or infor- Often policies focus narrowly on spending on mation failures. It is not uncommon to find health facilities and providers, but that is only high levels of absenteeism in clinics and hos- one element of a broader and more complex pitals. Absenteeism rates of medical person- agenda. nel in primary health facilities vary from 19 Female education and economic growth percent in Papua New Guinea to 43 percent are the factors most closely correlated with in India. Within India, the rates are as high as low under-five mortality. Educated girls 53 percent in the state of Bihar. The absen- become better-informed women and mothers, teeism rate among doctors in primary health who, in turn, are healthier, are better pre- facilities in Bangladesh is 73 percent.15 pared when they have children, have fewer Lack of knowledge can be another con- children, and care for them better. Unfortu- straint. For example, in Bolivia, many poor nately, progress in female education has been babies are not delivered by a trained atten- relatively slow, especially in primary comple- dant simply because mothers are unaware tion rates and secondary and postsecondary that they are eligible for free care. In India, enrollment rates. Gender gaps in education where immunization is free, 60 percent of are largest in Sub-Saharan Africa, the Middle children have not been fully immunized. East, and South and West Asia. Efforts such Asked why they had not immunized their as the Bangladesh FSSAP are encouraging, child, 30 percent of mothers said it was but unless they are scaled up, countries will because they were not aware of the benefits find it difficult to achieve the MDG of reduc- available, while another 30 percent said it ing gender disparities in education. At the was because they did not know where to go same time, the goal of reducing child mortal- to have their child vaccinated.16 Public action ity will become more difficult to achieve. can play a significant role in disseminating The second most important determinant information. of child survival is access to safe water and Maternal survival is strongly associated sanitation. (Challenges in developing this key with the presence of a skilled attendant dur- infrastructure are discussed in chapter 6.) ing birth. In general, the trend in attended While overall access to safe water is increas- births is positive, but the levels remain dis- ing in most regions of the world, the distri- turbingly low, especially for low-income bution of safe water is quite unequal between countries in Africa and South Asia--Nepal rich and poor households. In many countries, and Pakistan especially (table 7.3). Even some almost everyone in the richest quintile of the middle-income countries, such as Morocco, population enjoys access to an improved have particularly low rates of attended births. water source, but fewer than half of house- Nonetheless, the rate of improvement in the holds in the poorest quintile do. For example, frequency of attended births is highest for the in Ethiopia, only about 10 percent of the poor, an encouraging finding. poorest households use an improved water A related measure of progress is the preva- source. Sanitation, too, is inequitably distrib- lence of contraception, which captures the uted. In Accra, Ghana, 70 percent of the possibility of birth spacing and other aspects households from the poorest quintile share of maternal health. Rates of contraception toilets with 10 or more households; the com- use are only about 27 percent on average in parable figure for households from the rich- developing countries, and the rate for the 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 4 A C C E L E R A T I N G H U M A N D E V E L O P M E N T Table 7.3 Frequency of attended births by wealth and region, various years (percent) Level Average annual change Regional average Poorest quintile Population average Poorest quintile Population average East Asia and Pacific 28.8 59.3 -- -- Europe and Central Asia 88.4 95.1 2.3 0.5 Latin America and Caribbean 44.1 68.0 8.5 2.6 Middle East and North Africa 33.6 52.5 10.6 6.4 South Asia 7.0 21.5 11.6 7.7 Sub-Saharan Africa 24.6 46.5 1.1 ­0.4 -- Not available Source: USAID, Demographic and Health Survey estimates, various years from 1995 to 2002. poorest 20 percent of the population is about First, governments need actively to mobi- 19 percent. Furthermore, especially for the lize nongovernmental organizations (NGOs) poor, the constraint may not necessarily be and community-based organizations (CBOs) the availability of contraceptives. Often, to help overcome social and political obsta- power relationships within the household cles to reaching target groups. Effective pre- determine contraceptive use. About 70 per- vention and treatment of HIV/AIDS requires cent of the women from the poorest 20 per- educating the public about the disease and cent of the population in the Central African promoting behavior change among popula- Republic, Côte d'Ivoire, Tanzania, and Uganda tion groups that are normally far beyond the reported that their husbands did not approve reach of government. of their contraceptive use. Similar findings Second, to ease the burden on limited insti- have emerged in Central America.17 tutional capacities, governments, especially In the fight against HIV/AIDS and other in severely affected countries, need to exploit major infectious diseases, financing issues are opportunities to contract out services. While being addressed with the support of the inter- some progress is evident--for instance, national community. However, attention to Kenya's National AIDS Commission has the management and implementation capac- hired a financial management agency that in ity needed to make effective use of financing turn has helped channel resources to more has lagged in many countries. Progress is than 750 local CBOs and NGOs--the time being made on the institutional front. The required to establish new ways of doing Progress Report prepared for the U.N. Gen- business often conflicts with the urgent need eral Assembly Special Session on HIV/AIDS for rapid and extensive action. noted that 90 percent of the 103 countries Third, capacity building within govern- reporting had established national AIDS ment agencies should include the strength- commissions or authorities, many of them ening of monitoring and evaluation to structured to include representation from key assess performance and impact and inform stakeholder groups.18 But in many cases such the design and implementation of public institution-building efforts are at an early stage. and private programs. Managing assistance to HIV/AIDS pro- Fourth, with respect to the health system grams as "business as usual" will not work. capacity, efforts need to focus on critical Encouraging successes in Brazil, Thailand, bottlenecks. Numerous NGOs in West Uganda, and some other countries point the Africa report that the binding constraint way: on expansion of the antiretroviral program 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 4 119 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S is a shortage of trained doctors, nurses, ways by improvements in other sectors, such and laboratory technicians. They are being as access to safe drinking water, basic sanita- forced to recruit staff from existing health tion, roads, and electricity. service delivery programs, exacerbating shortages there. Education The challenges facing individual countries Social Assistance: and the international community are well Successes and Challenges illustrated by developments relating to the Finally, social assistance programs in several primary education goal. While several analy- countries have been instrumental in improv- ses point out that this goal is attainable by ing and sustaining the access of the poor to 2015, public spending on education in low- basic education and health services. Piloted in income countries has risen slowly, constrained some Latin American countries, programs by limited resources, competing demands, and providing transfers conditional on school low institutional capacity. The allocation of attendance or regular health center visits have spending, such as the funding bias toward sec- been scaled up nationally (for example, Mex- ondary and higher education, typically bene- ico's Progresa program and Brazil's Bolsa fits the nonpoor. In contrast, the quality of Escola) and adopted in some other countries primary education is often so low (high stu- (for example, Bangladesh and Turkey). dent-teacher ratios, inadequate allocations to Nonetheless, social assistance spending in nonsalary expenditures, and frequent teacher many countries is fragmented, redundant, absenteeism) as to discourage school atten- and poorly targeted. In Paraguay, for exam- dance. The effective functioning of education ple, about 90 social assistance programs were services is underpinned by good governance-- being implemented recently by 22 agencies. In functioning civil service rules and processes, Argentina, 60 federal social protection pro- effective financial management, control of grams have overlapping objectives and target corruption, and direct participation of com- groups. Bulgaria has 34 programs. Evalua- munities. Reforms in these areas are the key to tion of these programs often is weak. A recent progress, but they have lagged. study of a sample of such programs found Community involvement in the design of that just over 20 percent had well-developed education services is particularly important to evaluation arrangements.19 Thus while there the goal of reducing gender disparities in edu- has been successful innovation in social assis- cation. Girls' attendance at school can be tance that merits scaling up, there is also influenced strongly by sociocultural factors, scope for better targeting in existing social and community involvement can help ensure assistance spending. that services respond to those factors. Effec- tive improvement in female access to educa- Agenda for Accelerating Progress tion--and indeed to other services--requires that gender concerns be fully integrated into Progress toward human development goals policy and service design. will require efforts on multiple fronts. More Overall, while there has been progress, resources are needed to scale up programs in governments have been slow to undertake the priority areas. But just as important, there is policy and institutional reforms necessary to need to accelerate policy and governance improve the coverage and quality of primary reforms to make programs more effective. schooling, reflecting in part the political diffi- The reform agenda is multidimensional, culty of some of the agenda. A stronger polit- spanning investment, policies, and gover- ical commitment is required to deepen and nance. It is also multisectoral, with human accelerate reforms if the MDGs in education development outcomes affected in important and gender are to be achieved. 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 4 A C C E L E R A T I N G H U M A N D E V E L O P M E N T Donors also need to improve the quality of Health their support. The record of the donor com- munity has been mixed as well. Traditionally, The goal of reducing child mortality is still donors have concentrated their aid on more complex and difficult to attain. First, addressing supply constraints, such as build- some of the public policies and actions that ing schools, rather than the underlying insti- can make the greatest contribution lie outside tutional impediments to effective delivery of the health sector (female education, clean primary education services. water and sanitation) and so require greater Recognizing the limitations of the past cross-sectoral coordination. Second, actions approach, in terms of both providing ade- within the health sector to improve the supply quate resources and supporting broader of services, such as access to health clinics or reforms in developing countries' education immunization, confront major challenges. systems, donors coalesced around the Educa- These include underfunding, weak institu- tion for All­Fast Track Initiative, agreeing to tional capacities and governance undermining provide additional support to primary educa- service quality, and limited availability of tion explicitly linked to countries' policy per- trained personnel (aggravated by incentive formance and increased accountability for problems reflected in high absenteeism among results. The criteria for support emphasize doctors, especially in rural areas). Third, ser- adequacy and sustainability of domestic vice provision often must also contend with financing, service delivery standards consis- challenges on the demand side, such as lack of tent with education quality and efficient use money or knowledge, that limit poor people's of resources, and transparent monitoring of effective access to or use of services. results through annual joint sector reviews. Accelerating progress on child survival, The initiative seeks to improve donor per- therefore, requires a concerted effort in formance through concrete actions to har- female education, provision of safe water monize aid. and sanitation facilities, and expansion of While the EFA-FTI has been a positive access to effective health facilities comple- force for spurring country action, donor pro- mented by incentives, governance arrange- gramming and budgeting cycles have trans- ments, and accountability for better delivery lated into slow disbursement, with only $6 of services. It also requires incentives and million of the first $170 million committed information to stimulate demand, especially actually disbursed as of January 2004. Also, for preventive services. the number of countries touched so far by the As with public actions in primary education, program has been small. At their meeting in political factors work to slow the progress of Oslo in late 2003, donors agreed to main- actions to reduce child mortality. In most coun- stream the FTI approach, and 25 more coun- tries the share of public health spending that tries are expected to join in 2004. World benefits the richest quintile exceeds that going Bank projections suggest that as the FTI to the poorest. While high child mortality is pri- scales up to all low-income countries, at least marily a problem of poor people, ill health $3.7 billion per year will be needed in ex- affects everybody. In countries without ade- ternal financing for primary education by quate health insurance markets (almost all low- 2005­06, compared with about $1 billion in income and many middle-income countries), 2002. How effectively the FTI contributes to public spending on health becomes a substitute accelerating progress toward the education for the insurance against catastrophic health MDGs will hinge on donor performance in expenditures that everybody needs. actually delivering increased and more pre- Since they have greater political power, the dictable financing in support of tangible rich are often able to capture public health country reforms and close monitoring of the expenditures to serve their needs. At the same achievement of results on the ground.20 time, the evidence is clear that if systems 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 4 121 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S set up exclusively for the poor, they tend to be the institutional health-sector issues and inter- less effective and of lower quality, because the sectoral linkages that must be addressed in poor lack the resources, clout, and voice of order to scale up impact. the middle or upper classes. Unless the power The maternal mortality goal may be even of communities to monitor and discipline ser- harder to achieve than the child mortality goal. vice providers is enhanced--including possi- In addition to the resource and institutional bly through co-payments--increasing public constraints on the delivery of related health ser- spending in health by itself is unlikely to have vices, the outcomes depend greatly on under- a significant impact on child mortality, or for lying social, cultural, and behavioral factors. that matter on maternal mortality. Progress in the longer term may hinge as much Public resources in most countries are inad- on efforts to broaden educational opportunities equate to provide free basic health or educa- and raise awareness as on specific health service tion to all citizens, and there is a clear role for interventions. With respect to the latter, the private spending. Private out-of-pocket spend- intervention that seems to be most important ing is part of health care financing every- (and most easily measured) is the presence of a where--if not formally, then through informal skilled attendant during birth. Again, improv- or illegal payments, with the poor tending to ing poor people's access to skilled attendants is bear the brunt of such payments. A more more than a matter of resource availabilities, as transparent and judicious use of fees can not it suffers from limited political support--the only help alleviate the public resource con- poor are the only segment of the population straints, but also contribute to improved qual- that relies on such paraprofessionals--and ity of service by motivating greater stakeholder poorly functioning institutions. oversight of service delivery. It would also allow scarce public subsidies to be targeted Communicable diseases. Similarly, effectively more effectively to poor people. combating the spread of major diseases--HIV/ As in primary education, the donor com- AIDS, tuberculosis, and malaria--requires munity has had a mixed record in strengthen- action across a range of sectors and actors, ing public actions to reduce child mortality. including civil society and the private sector. On the one hand, sizable amounts of aid go The target of halting and beginning to reverse toward fighting the diseases of children and the spread of HIV/AIDS by 2015 is particu- supporting health expenditures in developing larly challenging, given the long incubation countries. On the other hand, most of that aid period of this disease. Effectively combating is provided for earmarked expenditures or for this epidemic requires action at three levels vertical programs that deliver a narrow pack- (and this may also be similar for TB): age of interventions on a small scale, with insufficient attention to the incentives these Political--strong and explicit leadership create for undertaking the difficult public sec- and commitment at the highest political tor reforms that are needed to make a sub- levels to help generate and sustain the kind stantial dent in child mortality. Advocates for of exceptional responses that the epidemic increasing foreign aid in health tend to focus requires almost exclusively on per capita spending on Strategic--a national HIV/AIDS strategy health by various countries--neglecting issues to guide the evolution of a multisectoral relating to the effectiveness of that spending or response by multiple actors the fact that spending in other sectors may Implementational--translation of the strat- make a bigger difference to child-health out- egy into action at the necessary scale comes. Aid would be more effective if the through mobilization of resources, domes- modalities of its provision were more flexible tic and foreign, and building of institu- and supported broader reforms that include tional capacities. 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 4 A C C E L E R A T I N G H U M A N D E V E L O P M E N T The progress made in these respects so far Notes has been modest compared with the scale of the challenge. 1. Papers produced by these working groups are available at the project Web site: www.unmil- The GFATM has focused on raising lenniumproject.org. resources to contain the spread of HIV/AIDS, 2. UNDP 2003. TB, and malaria. While substantial commit- 3. World Bank 2003c. ments have been made to the fund, imple- 4. Data on public spending allocated to mentation has been slow, as evidenced by human development suffer from many gaps and the delays in signing grant agreements for are not available for all countries. The analysis approved projects and the limited volume of presented here draws on two sets of data: data disbursements. Out of $3.4 billion in pledges, compiled by IMF staff, on the basis of country roughly $1.1 billion had been committed and authorities' estimates, that provide information only $236 million disbursed as of January on the composition of public spending for low- 2004. In addition to slow follow-up at the and middle-income developing countries; and data assembled from various World Bank coun- donor end, implementation capacities of try Public Expenditure Reviews and joint IMF- recipient governments have been a constraint. World Bank expenditure tracking work relating Problems stem partly from the fund's opera- to PRSPs and HIPC programs. Improved data on tional model, with its insufficient appraisal the level and composition of social sector spend- of financial issues, donor coordination, and ing are a priority area in the strengthening of sta- institutional capacity prior to grant approval. tistics in developing countries. The focus of country proposal reviews has 5. Kattan 2003. tended to be on technical issues rather than 6. Indeed, fees, for those who can pay, could implementation constraints--capacity of offer incentives to providers, which can serve to responsible agencies, service delivery net- enhance service quality (such as lower teacher works, fiduciary environment. There is a need absenteeism), contribute to more flexible funding for schools and health centers, and help combat to find ways to better align programs and corruption by reducing the incidence of infor- capacity, to build capacity simultaneously mal/illegal payments. Fees could also motivate ser- with the allocation of additional resources, vice users to become more involved in monitoring and to better coordinate donor support to and disciplining service providers. For some coun- expedite implementation. try evidence, see Lewis (2000). 7. Di Tella and Savedoff 2000; Lewis 2000. Scaling up on the basis of successful models. 8. World Bank 2004. Well-designed social assistance programs tar- 9. World Bank 2003b. geted to the poor and linked to school atten- 10. Filmer and Pritchett 1999. dance and health center visits can play an 11. World Bank 2003c. important role in enhancing the poor's effec- 12. Dreze and Gazdar 1996. 13. World Bank 2003c. tive access to and use of critical human devel- 14. For more information, see the Web site of opment services, as well as cushioning the the U.N. Division for the Advancement of Women poor against major income shocks. Innovative (DAW) at http://www.un.org/women watch/daw/ conditional cash transfer programs success- cedaw. fully implemented in some Latin American 15. World Bank 2003c. countries provide models that can be consid- 16. World Bank 2003c. ered for scaling up and replication elsewhere. 17. USAID various years. At the same time, to make room for effective 18. UNAIDS 2003. interventions such as these, countries need to 19. Rubio and Subbarao 2003. review their overall social assistance frame- 20. For a fuller discussion of progress and works, which often suffer from poor target- issues relating to the EFA-FTI, see Development Committee 2004. ing, fragmentation, and fiscal unsustainability. 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 4 123 8 Promoting Environmental Sustainability I mproving environmental policies and mit- Data directly measuring specific environment igating the environmental impacts of sec- policies--pricing, regulations, institutions-- toral policies are an integral element of the on a cross-country basis are not available agenda for achieving the Millennium Devel- with any consistency. One source of infor- opment Goals. Goal 7--ensure environmental mation on policies is the World Bank's Coun- sustainability--aims to mainstream the envi- try Policy and Institutional Assessment, ronment in policy and programs, reverse the which includes an assessment of countries' loss of environmental resources, and improve overall environmental management. The access to environment-related services. The CPIA ratings show that environmental man- importance of the environment to the MDGs agement is a policy area where the bulk of is reinforced by its strong links to the rest of the agenda in developing countries is still to the goals. It is difficult to imagine reducing be addressed. The average country ratings income-poverty in rural areas where land is are relatively low (figure 8.1). The ratings are degraded. Reductions in child mortality will improving, however, although they seem to be more likely if households have access to have stalled in Asia and Latin America. The adequate water supply, sanitation facilities, improvement in the past five years is particu- and modern fuels. And climate change result- larly notable in Europe and Central Asia. The ing from unchecked environmental degrada- ratings rise with the income level; middle- tion would favor the spread of vector-borne income countries show appreciably better diseases and increase the likelihood of nat- environmental management than low-income ural disasters--disasters that, in turn, reduce countries. income and destroy the infrastructure for education and health. If environmental sus- Monitoring Policies tainability is not ensured, progress toward through Outcomes: the other MDGs may be short-lived. Evidence of Limited Progress Progress on Environmental Data are available on key environmental out- Policies comes that indicate countries' progress toward environmental objectives, including Environmental policies are more difficult to the MDG related to the environment. Infor- monitor than most because data are scarce. mation on environmental outcomes, compiled 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 4 125 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S FIGURE 8.1 Environmental policy ratings are low but improving Ratings of environmental management policies for developing countries by region and country income category, 1999 and 2003 6.0 5.0 3.94 4.0 3.83 3.64 3.43 3.41 3.57 3.14 3.28 3.37 3.06 3.12 3.06 2.99 tingaR 3.0 2.94 2.86 2.93 2.0 1.0 0.0 East Asia Europe Latin Middle East South Sub- Low- Middle- & Pacific & Central America & & North Asia Saharan income income Asia Caribbean Africa Africa countries countries 1999 2003 Note: World Bank CPIA ratings range from a low of 1 to a high of 6, with an increase denoting improvement. Source: World Bank CPIA database. from a variety of sources and published in and Central Asia and the Middle East and World Development Indicators, includes North Africa during the 1990s, large losses land use (agricultural land, forests, protected were experienced in the rest of the develop- areas), access to water and sanitation, water ing world. As a consequence of economic resources (available water resources, total and demographic growth, most developing withdrawal, agriculture withdrawal), energy regions are witnessing significant increases in (energy intensity, traditional fuel use, urban carbon dioxide emissions--the impressive air pollution), and transport (passenger cars, reductions in Europe and Central Asia are fuel prices). But coverage and quality are attributable largely to economic restructur- mixed, as are the prospects of obtaining ing. Although generally decreasing across improved data. Although satellite technology regions, the use of traditional (highly pollut- is helping in some quantitative aspects (for ing) fuels remains extremely high in Sub- example, in monitoring forest cover), infor- Saharan Africa, South Asia, and East Asia mation on environmental quality (water qual- and the Pacific. The "adjusted net saving" ity, land degradation) is hard to obtain. Even measure, a useful indicator of sustainability, monitoring of an "easy" issue (urban air qual- suggests that, based on current trends, wel- ity) has worsened since the GEMS/Air pro- fare is likely to decline over time in Sub- gram closed.1 Saharan Africa and the Middle East and Environmental outcome indicators sug- North Africa, drawing attention to the need gest that progress toward environmental sus- for improved economic, environmental, and tainability is limited (table 8.1). For example, resource policies in the countries of those despite small gains in forest cover in Europe regions. 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 4 P R O M O T I N G E N V I R O N M E N T A L S U S T A I N A B I L I T Y TABLE 8.1 Selected outcome indicators of environmental sustainability by region and country income category Adjusted net Carbon dioxide Solid biomass use savinga Deforestation emissions in householdsc Percent Forest cover lostb Metric tons Percent of total of GNI 1990­2000 per capita energy use Area Percent Percent Increase (thousands increase increase Region and country income category 2000 1990­2000d of km) Percente 2000 1990­2000 2001 1994­2001 Region East Asia and Pacific 21.3 5.8 116 2.7 2.1 8.7 71.7 ­0.9 Europe and Central Asia -- -- ­81 ­0.9 6.5 ­37.6 8.2 0.3 Latin America and Caribbean 4.4 0.5 459 4.6 2.6 19.7 37.6 ­4.8 Middle East and North Africa ­10.0 0.9 ­2 ­1.4 4.1 33.1 12.5 ­1.6 South Asia 11.3 1.6 9 1.1 0.9 31.8 84.1 ­1.5 Sub-Saharan Africa ­3.3 1.3 530 7.6 0.7 ­21.6 88.3 0.0 Income level Low 4.7 0.0 731 7.5 0.9 2.6 84.9 ­1.9 Lower middle 13.1 6.0 ­147 ­0.8 3.0 ­17.3 46.0 ­0.3 Upper middle 6.9 1.9 151 5.9 6.2 9.4 23.4 1.9 High 12.8 2.5 ­79 ­1.0 12.4 4.7 5.7 ­0.7 World 12.0 2.5 950 2.4 3.8 ­6.9 37.6 0.1 -- Not available. a. A negative number indicates dissaving. b. A negative number indicates that forest cover has increased. c. Solid biomass is defined as any plant matter used directly as fuel or converted into fuels (such as charcoal) or electricity and/or heat. Included here are wood, vegetal waste (including wood waste and crops used for energy production), and animal materials and wastes. d. Calculated as average for 1995­2000 minus average for 1985­90. e. As percentage of 1990 forest cover. Source: World Bank, World Development Indicators; World Bank staff. Ensuring Environmental improving environmental conditions also will Sustainability and be important in achieving the education and Achieving the MDGs: gender goals. In many poor communities, Need for Policy Integration women and girls spend vast amounts of time fetching water and collecting fuel wood, which A desirable development outcome in itself, prevents them from engaging in productive environmental sustainability also contributes to activities and attending school (box 8.1). other outcomes such as economic growth, Because policy choices in different sec- poverty alleviation, and better health. In par- tors--agriculture, water, energy, transport, ticular, the environmental MDG has strong trade, public finance--affect environmental links with those related to poverty and health. sustainability, better integration of sectoral For example, research in Zimbabwe shows policies may be the fastest route to environ- that environmental resources make a signifi- mental sustainability, as highlighted by the cant contribution to rural incomes, represent- United Nations Task Force on Environmental ing some 40 percent of average income for poor Sustainability (box 8.2). Effective environ- households.2 The World Health Organization mental management means going beyond estimates that 40 percent of under-five mortal- individual policy actions, such as implement- ity is traceable to diseases strongly associated ing particular regulations, and ensuring that with environmental factors--among them diar- environmental concerns are fully integrated rhea and acute respiratory infections.3 But into development policymaking more broadly. 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 4 127 P A R T I I : D E V E L O P I N G - C O U N T R Y P O L I C I E S BOX 8.1 Multisectoral interventions to achieve the MDGs: lessons from child mortality in rural India In 1999 some 10 million children under the age of five died in low-income countries--2.1 million in India alone. Using Indian health survey data, World Bank researchers have concluded that invest- ments targeted at improving environmental conditions can substantially reduce child mortality. In particular, universal access to private piped water, electricity, and separate kitchens with clean cook- ing fuels would save the lives of 10.4, 5.5, and 33.6 children per 1,000 live births, respectively, in rural India. The analysis also shows that girls face a higher mortality risk than boys after the first month of birth (suggesting a significant gender bias in household resource allocation) and that child mortality is higher among those born to mothers with no education. Universal female primary edu- cation would reduce the under-five mortality rate from 99.9 to 77.0 deaths per 1,000 live births. What does this mean? It means that environmental and human development goals are closely intertwined. In order to reduce child mortality, for example, developing countries need to mobilize contributions from multiple sectors--health, of course, but also education, energy, and water--and incorporate cross-cutting perspectives (environment, gender). Source: van der Klaauw and Wang 2003. BOX 8.2 The United Nations Task Force on Environmental Sustainability The U.N. Task Force on Environmental Sustainability is one of 10 task forces making up the U.N. Millennium Project. Its preliminary findings conclude that progress toward environmental sustain- ability has been unsatisfactory, largely because environmental and biodiversity issues have been poorly integrated into mainstream thinking and policymaking. The task force places particular emphasis on the importance of biodiversity conservation and ecosystem integrity for environmen- tal sustainability. Although a framework for action is still in progress--the final report is due in June 2005--the background paper suggests the main lines of action should be improving environmental awareness among policymakers and the general public, enhancing national capacity for ecosystem management, and consolidating international markets for global environmental services. Source: United Nations Millennium Project 2003. Priorities for Action growth--urban pollution, toxic emissions, When establishing priorities for action to and agricultural runoff. In low-income coun- achieve environmental sustainability, one size tries, the issues are closely tied to livelihoods, does not fit all. OECD standards for environ- particularly soil quality and water availabil- mental quality are not appropriate for many ity, and to health outcomes (diarrheal disease developing countries. In fact, the nature of and acute respiratory infections from dirty environmental problems varies considerably cooking fuels). by income level. Because environmental issues are location In middle-income countries, many envi- specific, different clusters of countries have ronmental problems are the byproducts of different priorities: 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 4 P R O M O T I N G E N V I R O N M E N T A L S U S T A I N A B I L I T Y In resource-rich countries, such as Indone- developing countries should therefore be sia, governance issues involving commer- adapted to income levels and particular coun- cial resources try circumstances: In rapidly urbanizing countries and coun- tries in transition, such as Thailand and Strengthening policy and institutional Poland, pollution management frameworks for environmental manage- In agriculture-dependent countries, such ment as Ethiopia, natural resource management Getting the prices right for energy, water, In arid countries, such as Mali, land and and agricultural inputs water management and adaptation to cli- Facilitating access to basic services, such as mate change improved water supply, sanitation, and In diverse countries, such as Madagascar, clean energy sources. biodiversity conservation and tapping global finance to help cover the opportu- nity costs of conservation Notes In small island states and low-lying coastal 1. The GEMS/Air program was funded and countries, such as the Maldives or Bangla- operated jointly by the United Nations Environ- desh, adaptation to climate change. ment Programme, the World Health Organization, and the U.S. Environmental Protection Agency. The following elements that broadly define 2. Cavendish 2000. the environmental policy reform agenda in 3. World Health Organization 2002. 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 4 129 III Developed-Country Policies 9 Fostering Growth and Stability Macro-financial Policies T he overall prospects for economic These challenges come at a time when many growth and poverty reduction in the developing countries, struggling to recover developing world depend critically on from the recent slowdown in world trade, are the maintenance of strong and balanced facing uncertain prospects. In the next few growth in the developed countries. Macroeco- years, the terms of trade are generally expected nomic policies that promote such growth can to disfavor most developing countries--partic- thus contribute to progress toward the Millen- ularly those exporting fuels. The outlook for nium Development Goals and related out- private capital flows to developing countries, comes in developing countries.1 Good global meanwhile, has brightened, but only the economic conditions benefit developing coun- higher-rated emerging markets are likely to tries in several ways, notably by boosting trade, benefit from the improving conditions. The foreign direct investment, and possibly official need for capital, particularly to finance infra- development assistance. Growth in developed structure, continues to be large in developing countries can also benefit the rest of the world countries as a whole, and can be partly met through its effects on labor migration and only by vigorous growth in remittances. related phenomena such as flows of remittances In addition, growth in middle-income coun- from migrating workers. tries, particularly emerging market economies, Although the prospects for world eco- is highly susceptible to the negative effects of nomic activity appear to be reasonably bright financial crises, which typically have the great- for the next few years, sustaining a strong est impact on the poorest sections of the pop- global economy will require the major coun- ulation. Improvements can be made in the tries to address some outstanding issues and international financial architecture to enhance imbalances. The challenges to be addressed prospects for stronger and more stable capital include the orderly moderation of the U.S. flows to developing countries and to reduce the current account deficit; the implementation likelihood, severity, and duration of financial of further structural reforms in several coun- crises. Rapid progress is being made in the use tries, especially in labor markets; and the fis- of collective action clauses (CACs), which cal impact of demographic changes building should make debt workouts less costly and up in many developed countries. Disorderly thus may make developing-country bonds adjustment in the largest economies could more attractive to investors, but substantial retard growth or leave global economic con- work remains to improve practices in sover- ditions vulnerable to exogenous shocks. eign debt restructuring. 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 4 133 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S Macroeconomic Policies In Japan, the economic expansion is ex- in Developed Countries: pected to continue in the near term. To sus- Trends and Prospects tain growth over the medium term, however, continued efforts will be needed to end defla- In the United States, the current very accom- tion, to address the remaining weaknesses in modative stance of macroeconomic policy-- the financial and corporate sectors, and to with a rising budget deficit that is contributing stabilize public sector debt. to a record current account imbalance--is expected to be tightened in the longer term on Risks to the global economy. Alongside this the basis of a return of economic growth to improving scenario, substantial risks remain. rates of 3 to 4 percent (table 9.1 and figure 9.1). In particular, the world economy could be hit As economic growth in the United States gath- by a worsening of political and security con- ers steam, an orderly tightening of monetary ditions, notably in the Middle East. The most and fiscal policies would help restore balance. significant risk on a global scale, however, In Europe, the substantial weakening of continues to be a possible abrupt adjustment budgetary positions in recent years leaves little in the U.S. current account position. From scope for fiscal stimulus. This adds urgency to 1998 to 2002, the current account deficit the need to improve economic performance, more than doubled to $480 billion, and in which is being hampered by difficulties and 2003 it rose further to more than $540 bil- delays in implementing needed structural lion. Such large external imbalances are diffi- reforms, especially in labor markets and social cult to sustain for a long period, and most security systems. In the coming years, such observers now anticipate an adjustment. Dif- reforms could help raise European growth to ficulties in financing the U.S. external position a sustainable range of 2 to 3 percent. could lead to a sharp decline in the dollar, TABLE 9.1 Macroeconomic indicators for advanced economies, 1993­2008 2003 2004­08 Indicator 1993­97 1998­2002 estimated projected Inflation (average, percent) United States 2.7 2.3 2.3 2.1 European Union 2.7 1.8 2.0 1.8 Japan 0.7 ­0.4 ­0.2 0.7 Advanced economies 2.5 1.7 1.8 1.8 Current account balance, percent of GDP United States ­1.5 ­3.6 ­5.0 ­4.6 European Union 0.6 0.2 0.4 0.6 Japan 2.3 2.6 3.2 3.2 Advanced economies 0.2 ­0.6 ­0.8 ­0.7 Fiscal balance, percent of GDP United States ­2.9 ­0.1 ­4.9 ­3.6 European Union ­4.8 ­0.9 ­2.6 ­1.8 Japan ­3.9 ­6.8 ­8.0 ­6.8 Advanced economies ­3.6 ­1.2 ­4.1 ­3.0 Real GDP growth, in percent United States 3.5 3.0 3.1 3.7 European Union 1.8 2.5 0.8 2.5 Japan 1.7 0.4 2.7 1.8 Advanced economies 2.8 2.6 2.1 3.1 Source: IMF World Economic Outlook database and IMF staff calculations. 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 4 F O S T E R I N G G R O W T H A N D S T A B I L I T Y : M A C R O - F I N A N C I A L P O L I C I E S FIGURE 9.1 A robust global economy requires orderly resolution of the largeexternal and fiscal imbalances Current account and fiscal balances, United States and all advanced economies, 1993­2003 Current account balance Fiscal balance 2 2 1 1 0 0 GDP ­1 ­1 Advanced of ­2 ­2 economies ­3 ­3 centreP (all) ­4 ­4 ­5 ­5 Advanced ­6 United States ­6 economies United States ­7 ­7 (all) 1993­97 1998­2002 2003 Source: IMF World Economic Outlook database. however, with possible negative repercussions into stronger and more sustained export on the relatively highly indebted U.S. house- growth for developing countries as a group hold and corporate sectors--for example, if (table 9.2). This could be helped further if the Federal Reserve were to raise interest progress is made in reducing trade barriers rates to prop up the currency. through a successful outcome to the Doha Given the size of the financing needs aris- Round (see chapter 10). Stronger growth in ing from the U.S. deficit, the moderation of its world trade is particularly relevant for devel- external imbalance could free up substantial oping countries, such as those in East Asia, financing for other countries, including devel- that trade intensively with developed coun- oping countries. The degree of substitutabil- tries. Although the terms of trade for develop- ity between finance for developing countries ing countries are expected to fall in 2004­08, and the United States is no doubt limited, but the decline should be limited mostly to fuel to the extent that some crowding out is tak- exporters; nonfuel primary commodity prices ing place, emerging market economies could are projected to remain broadly constant. benefit from lower needs for external financ- Although oil markets continue to be subject to ing in the U.S. economy. great uncertainty, prices are expected to stabi- lize once production fully resumes in Iraq. Implications for Developing Countries Private Capital Flows An improved global outlook presents an Private capital flows can be an important opportunity for higher growth in developing source of growth in developing countries, espe- countries. More robust income growth in the cially if they take the form of foreign direct developed countries is expected to stimulate investment (FDI), which can raise investment, activity in developing countries through trade, provide a vehicle for the transfer of knowledge especially higher export volumes. Developing to the host country, and enhance the human countries suffered from the slowdown in capital of the host country's work force. FDI is world trade in 2002, chiefly because of weak also desirable as a source of finance because it demand in developed countries. Over the is less volatile than debt and because it pro- medium term, however, the pickup in global vides better risk sharing between originating activity that began in 2003 should translate and recipient countries. 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 4 135 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S TABLE 9.2 Global economic environment and developing countries (annual average percentage changes, except as noted) 2003 2004­08 Indicator 1993­97 1998­2002 (estimated) (projected) World trade 7.9 5.2 4.1 6.5 Developing countries Volume of exports of goods/services 9.9 6.8 8.6 7.7 Terms of trade 0.8 0.2 0.3 ­0.4 Fuel exporters 1.7 7.8 2.8 ­2.4 Nonfuel exporters 0.8 ­0.8 ­0.2 ­0.1 Private capital inflows net (billions of dollars) 234 175 200 -- -- Not available. Source: IMF World Economic Outlook database and IMF staff calculations; private capital flows are from World Bank Global Development Finance database. FDI continues to supply the largest range of political risk through private and amount of external financing to developing official agencies could aid FDI flows to poorer countries. Although FDI drifted lower in countries in Africa and elsewhere.4 2003, it is expected to recover in 2004­05, in Although private debt flows5 represent a line with the global economic recovery.2 transfer of savings from developed to devel- While prospects for FDI flows to developing oping countries, they can be a mixed blessing. countries continue to be favorable, their des- Because private debt flows depend largely on tinations remain highly concentrated. Ten investor confidence, they are not a very reli- countries captured about 69 percent of able source of financing, as the availability North-South FDI in 2003 (down from a high and cost of financing can change suddenly of 78 percent in 2000). Nine of the 10 coun- and with little warning (figure 9.3).6 In par- tries were middle-income countries. The ticular, portfolio holdings are relatively easy share of middle-income countries in total FDI for investors to sell on secondary markets, to developing countries is about 90 percent. especially for those emerging market countries The size of FDI flows relative to GDP is twice in which secondary markets are well devel- as large in middle-income countries as in low- oped. Countries that have benefited from sub- income countries (figure 9.2). Only a small stantial portfolio inflows may therefore be hit portion of FDI--$9 billion out of $135 bil- suddenly by a sharp increase in the cost of lion in 2003--goes to Sub-Saharan Africa, capital, or a loss of access, or both. which is the region most in need of invest- The challenge is to sustain the cyclical ment if it is to achieve its development goals. recovery in private debt flows over the Half the FDI flows to this region were medium term by maintaining investor confi- received by three oil exporters. The challenge dence, while taking steps to lower the vul- is to raise the capacity of African countries to nerability of developing countries to sharp attract and to make good use of FDI, which reversals in flows and to widen the set of in turn will require improvements in educa- countries enjoying access to financing. More- tion, infrastructure, and governance. Once a over, discrimination by investors--signs of country has a strong enough business climate which have appeared in the wake of the to attract FDI, inflows can fuel a virtuous cir- recent experience with defaults and debt re- cle of growth and further investment.3 The structurings in emerging markets--can only availability of risk insurance against a broad improve the stability of private financial flows. 136 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 4 F O S T E R I N G G R O W T H A N D S T A B I L I T Y : M A C R O - F I N A N C I A L P O L I C I E S FIGURE 9.2 Low-income countries receive little foreign direct investment Distribution of FDI to developing countries, by region and income category, 2003 Regions Income groups 140 3.5 121 120 3.0 100 2.5 2.2 80 2.0 billions 60 57 1.5 centreP US$ 1.1 40 37 1.0 26 20 14 0.5 9 0.0 East Asia Latin Europe & Sub- Middle income Low income & Pacific America & Central Saharan Caribbean Asia Africa FDI inflows net FDI/GDP Source: World Bank Global Development Finance database. More and better market information, com- FIGURE 9.3 Private capital flows to developing countries are bined with greater experience with emerging recovering, led by debt flows markets, translates into more appropriate pric- Net private capital flows to developing countries, 1990­2003 ing of investment opportunities and lower risk of contagion. 350 Developing countries have substantial infra- structure gaps that must be filled if they are to 300 attain the MDGs, as discussed in chapter 6. 250 Although private sector financing is important 200 to achieving such long-term investment needs, financing for infrastructure has trended down- 150 ward--led by the financial crises of the late billions 100 1990s and a weakening of the global infra- US$ 50 structure industry. Global capital markets are potentially well suited to finance large infra- 0 1991 1993 1995 1997 1999 2001 2003 structure requirements, but considerable insti- ­50 tutional and regulatory changes in developing countries will be needed to attract these flows, ­100 including a strong institutional framework for the protection of creditors' rights. A greater FDI inflows Debt flows Total flows Portfolio equity flows availability in global markets of political risk insurance for project financing could assist infrastructure flows. Source: World Bank Global Development Finance 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 4 137 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S Workers' Remittances Latin America and the Caribbean continued to be the top recipient of remittances, absorbing In contrast to official aid and private debt nearly a third of total flows to developing coun- flows, workers' remittances have been a rel- tries.10 Remittances to South Asia rose by more atively stable and growing source of financ- than one-third in 2001­03; Pakistan accounted ing for development. Developing countries for half of the increase. At about $4 billion, received an estimated $93 billion in workers' remittances to Sub-Saharan Africa were rela- remittances in 2003, an increase of more tively flat. The region receives only a small frac- than 20 percent from 2001 and more than tion, under 5 percent, of total remittances. 200 percent from 1990 (table 9.3).7 Follow- The financial infrastructure supporting ing steady increases during the 1990s, work- remittances can impose high costs on remit- ers' remittances to developing countries now ting funds. These costs can be as large as 20 rank second after FDI as a source of exter- percent of the remitted amount. It is estimated nal finance.8 The especially sharp surge in that reducing transaction fees by 5 to 10 per- recorded remittances since 2001 in part centage points could yield an additional $5 appears to reflect three new developments. billion to $9 billion in annual remittance flows Vigorous efforts to curb money laundering to developing countries. Policies that could and thwart terrorist financing have helped have a positive impact on remittance flows divert remittance flows from informal to for- include improving competition among money mal channels. Also, increased fears of depor- transfer banks, increasing migrant workers' tation or other legal action prompted many access to banking services in source countries migrant workers to remit a larger share of and households' access to such services in their savings to their home country. In addi- recipient countries, and removing exchange tion, the growing importance of remittances restrictions on remittances. has resulted in better reporting of data in many developing countries. Strengthening the Environment Remittances share some characteristics with for Emerging Markets capital flows but are also distinguished by important differences (box 9.1). The main Since the Asian crisis of 1997­98, many steps source of remittances continues to be the have been taken to strengthen the global pol- United States, where the rise in remittances icy environment and financial architecture to coincided with the economic boom of the make financial crises less likely in emerging 1990s and the liberalization of temporary market countries--and to resolve them migration (especially in the technology sector).9 quickly when they do occur. TABLE 9.3 Remittances to developing countries, by region, 2001­03 (US$ billions) Percentage increase Region 1990 1995 2001 2002 2003 2001­03 East Asia and Pacific 3.0 9.9 13.7 17.0 17.6 28.9 Europe and Central Asia 3.2 5.6 10.2 10.3 10.4 1.9 Latin America and Caribbean 5.7 12.9 22.9 26.8 29.6 29.3 Middle East and North Africa 11.4 10.0 13.2 13.0 13.0 ­1.2 South Asia 5.6 10.0 13.1 16.9 18.2 38.7 Sub-Saharan Africa 1.5 2.7 3.9 4.1 4.1 3.5 Total 30.4 51.2 77.1 88.1 93.0 20.7 Source: IMF Balance of Payments Yearbook and World Bank staff estimates. 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 4 F O S T E R I N G G R O W T H A N D S T A B I L I T Y : M A C R O - F I N A N C I A L P O L I C I E S BOX 9.1 Differences between remittances and capital flows Remittances differ from private capital flows in several ways. Remittances are unilateral transfers that do not have to be paid back, whereas capital flows create liabilities that must result in outward flows--of income, interest, or principal. Remittances are sent by emigrants to their families; private capital flows are bound by no such ties. Because the motivation for remittances is largely altruis- tic--to help recipients pay for education, medical care, housing, food, or clothing--they tend to be stable over time and may even rise in times of economic difficulty in the recipient country. Other private capital flows, driven by expectations of financial return, tend to be more volatile, rising and falling "procyclically" with conditions in the recipient economy. Finally, remittances are made by individuals, whereas capital flows for the most part involve institutional investors, companies, and governments. Some factors affect remittances and capital flows in a similar manner. Both types of flows are positively affected by the growth cycle in the source country, although capital flows tend to be more sensitive than remittances. Both are similarly affected by the prevailing investment climate (espe- cially the exchange-rate regime) in the recipient country. During 1996­2000, average remittance receipts as a share of GDP were 0.5 percent in countries with a higher-than-median level of cor- ruption (as indicated by the International Country Risk Guide index) compared with 1.9 percent in lower-than-median corruption countries. Similarly, remittances were nearly twice as high (1.5 percent of GDP) in countries with relatively even income distribution (represented by a lower Gini index) than in other countries (0.9 percent). Countries that were more open (in terms of trade/GDP ratio) or more financially developed (in terms of M2/GDP ratio) also received larger remittances. It is useful also to distinguish remittances from official aid flows. Sometimes it is argued, for example in comparing the aid efforts of rich countries, that a smaller aid effort is compensated by a larger amount of outward remittance flows that may result from a more liberal immigration pol- icy. A significant part of official development assistance, like remittances, represents unilateral trans- fers to developing countries. But the similarity between aid and remittances ends there. Aid is financed by governments using taxpayers' money. Remittances, on the other hand, are personal flows, paid by migrants from incomes earned in exchange for providing many essential services to the host nation--legal migrants also pay taxes, and hence, indirectly also contribute to the govern- ment's aid effort. Aid is essential for meeting the MDGs in many countries. Sub-Saharan Africa receives about five times more net ODA than remittances. Even if border barriers were sharply reduced, there is no guarantee that (migrants would come from and) remittances would flow to the countries that most need financial and technical assistance. Source: Ratha 2003. Rapid progress has been made in promot- associated with the use of CACs. Collective ing the use of CACs in international sovereign action clauses also were included in bonds bond issuances.11 Following the first Mexican issued by Uruguay in the context of the coun- issue containing CACs in New York in March try's recent debt exchange. Several developed 2003, there has been a clear shift toward their countries have taken steps to introduce CACs use in international sovereign bonds. Belize, in their international sovereign bonds. Brazil, Guatemala, the Republic of Korea, the Discussions have continued on a voluntary Philippines, South Africa, and Turkey have Code of Conduct to encourage uniform followed Mexico in issuing sovereign bonds adoption of best practices in sovereign debt with CACs under New York law. Many of restructuring and so speed up resolution of these issues were heavily oversubscribed and sovereign debt crises. These discussions by showed little evidence of carrying a premium the international community on the potential 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 4 139 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S benefits of a voluntary code have highlighted ers--especially lower-rated borrowers--in a range of views on the central issues. The part by undervaluing diversification (and thus main challenge has been to achieve a balance overstating the risk of lending to developing between flexibility (to accommodate diverse countries) and by causing bank lending to country circumstances) and concreteness (to move more tightly with the business cycle. enhance predictability). International standards and codes also Notes appear to be playing an important role in strengthening the functioning of international 1. Simple regression analysis using data from markets. The goal of the standards and codes 1971 to 2000 indicates that a 1 percent change in real GDP growth in developed countries is associ- initiative launched by the IMF and the World ated with a 0.4 percent change in GDP growth in Bank is to encourage countries to adopt good developing countries. The strength of the correla- practices, identify potential weaknesses in tion, however, is much weaker for primary com- policies and institutions, and enhance trans- modity exporters (IMF 2001). parency. The initiative covers 12 areas includ- 2. The downturn in FDI flows to developing ing data dissemination, fiscal transparency, countries in 2003 largely reflects the sharp decline and monetary and financial transparency. An in investment flows in a small number of middle- IMF and World Bank report finds that major income countries that suffered a continuing weak- market participants appear to be using infor- ening in privatization and cross-border merger and mation on countries' observance of standards acquisition activities. By contrast, FDI to low- in making investment decisions.12 income countries remained stable. 3. The impact of FDI on growth has been diffi- In response to the challenges created by cult to verify empirically. Positive effects may kick financial market developments, the Basel Com- in only when the absorptive capacity of the host mittee on Banking Supervision proposed a new country is above a certain threshold, measured in capital adequacy framework. It is expected to terms of education levels, capital infrastructure, or be finalized by mid-2004 and implemented by similar indicators (Borensztein, De Gregorio, and the end of 2006.13 The Basel II accord is based Lee 1998). on three "mutually reinforcing pillars":14 4. The demand for political risk insurance has been rising. Private risk insurers comprise 50­60 Minimum capital requirements of at least percent of the market. National export agencies 8 percent of risk-weighted assets, with a and the Multilateral Investment Guarantee Agency more sensitive weighting of the riskiness of account for the rest. Most industrialized countries have investment guarantee programs, but there different assets are differences in the amount of such guarantees More stringent supervisory review of capi- provided. tal adequacy--some banks may be required 5. Debt flows display a geographical dispersion to have a capital ratio above the minimum similar to that of FDI, with the most going to Latin 8 percent level America and East Asia and the least to Sub-Saha- Public disclosure--to enable stronger mar- ran Africa. ket discipline through enhanced public dis- 6. Most of the increase in private debt flows in closure and transparency. 2003 has gone to countries in Europe and Central Asia, Latin America and the Caribbean, and East Basel II is designed to enhance the sound- Asia and Pacific. ness of the banking industry by measuring the 7. Official data underestimate the actual size of remittance flows. Officials in major fund transfer true financial risks in banks' portfolios and by agencies argue, based on the size of the funds that aligning capital requirements with those flow through their system, that unrecorded remit- risks.15 But even as it strengthens the global tances may be larger than recorded remittances. banking industry, the accord could discour- 8. World Bank 2004. For data on remittances age lending to developing countries. It may and migration flows, see also Adams 2003. In low- increase the cost of capital for some borrow- income countries, remittances exceed FDI inflows 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 4 F O S T E R I N G G R O W T H A N D S T A B I L I T Y : M A C R O - F I N A N C I A L P O L I C I E S (net). The geographical movement (temporary or 11. Collective action clauses are designed to permanent) of unskilled migrant workers from facilitate coordination among creditors and lower developing countries, where unskilled labor is the cost of debt restructuring. Early evidence sug- abundant, to developed countries, where produc- gests that the benefits of CACs in lowering the tivity is higher, is likely to benefit both sending and expected cost of restructuring outweigh the costs, receiving economies. However, immigration poli- such as weakening creditor leverage or raising the cies in developed countries favor highly skilled likelihood of a default (Eichengreen, Kletzer, and workers. The effects of this bias on the human cap- Mody 2003). While CACs address the creditor ital endowment in the home country can be signif- coordination problem for individual bond issues, icantly negative, particularly if highly skilled they do not solve the problem of cross-issue cred- workers never return (Skeldon 1997). The transfer itor coordination (the so-called aggregation prob- of knowledge from the new immigrants back to lem) or the problem of creditor coordination for the home country and the incentive effects on edu- the existing stock of debt (the so-called transition cational achievements in the home country only problem) (Chuhan and Sturzenegger 2004). partially offset the negative effects of this brain 12. Based on a survey of large, internationally drain (Faini 2003). active financial institutions, the report found that 9. Remittances from the United States exceeded 58 percent of survey respondents used Reports on $31 billion in 2002. Those from Saudi Arabia, the Observance of Standards and Codes (IMF­ which is the second largest source of remittances, World Bank 2003). were about $16 billion. 13. See also the section on the financial sector 10. In Mexico, remittances surpassed FDI in the in chapter 4. second quarter of 2003. In Ecuador, remittances 14. Basel Committee on Banking Supervision are second only to oil exports as a source of exter- 2003. nal finance. In Sri Lanka, remittances are larger 15. Claessens, Underhill, and Zhang 2003; than tea exports. Heid 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 4 141 10 Dismantling Barriers to Trade E xpanding opportunities for interna- and regional agreements, will give rise to tional trade can be a powerful engine trade diversion and discrimination and most for spurring growth and accelerating likely will exclude the more difficult areas progress toward poverty reduction and the of reform--sectors such as agriculture and other MDGs. Reducing trade protection will policies such as antidumping. There is huge produce large benefits, not only for develop- scope for reducing barriers to access to mar- ing countries but for developed countries as kets for both goods and services. A refo- well. cused effort centered on market access could While the actions needed to enhance the help realize the development promise of the ability of developing countries to use trade Doha Round. as an instrument of growth and poverty re- The effort to dismantle barriers to mar- duction are primarily their own, developed ket access should be complemented by three countries can do much to help. Estimates of principles: the overall trade restrictiveness of policies affecting merchandise trade reveal that some Enhanced transparency of trade policy. OECD countries effectively discriminate OECD countries continue to use trade pol- against low-income developing countries. icy instruments whose effects are difficult to Correcting trade-distorting agricultural sup- quantify and compare. An example is the port policies is particularly important, but use of specific tariffs (a tax per unit of quan- the agenda is broader. In manufacturing, tar- tity). These often imply very high ad val- iff peaks and escalation that hurt exports orem equivalents that are not transparent to from developing countries are a key issue. consumers. Moreover, high specific tariffs Lower barriers to services exports, both impose a heavier burden on exporters from cross-border and those requiring the tempo- developing countries because they produce rary movement of service suppliers, could lower-quality (cheaper) products. Data on also produce sizable gains. Liberalization by key trade-related policies, especially those OECD countries not only would have a relating to services trade, are limited and direct beneficial effect, but the indirect effect incomplete. may be even more important: helping gov- Increased predictability of trade policy. ernments pursue desirable domestic reforms. Uncertainty about the conditions of mar- Putting the Doha Round back on track is ket access can be reduced through stron- a critical priority. The alternatives, bilateral ger disciplines on the use of contingent 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 4 143 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S protection and simplification of regula- ther liberalization of trade can generate sub- tory requirements.1 stantial increases in real incomes, by up to International agreement on targets for $500 billion or more if account is taken of the trade policy to help ensure that trade can, likely dynamic benefits of greater trade.2 to the fullest extent possible, contribute to Insofar as such trade expansion is realized, it achieving the MDGs. Such focal points has the potential to substantially reduce could include: (a) complete elimination by poverty beyond baseline projections--140 high-income OECD countries of tariffs on million fewer poor people in 2015, a decline manufactured products by a target date; of 8 percent (figure 10.1). Such income and (b) complete elimination of agricultural poverty reduction gains are not automatic, export subsidies and complete decoupling however. Much depends on complementary of all domestic agricultural subsidies from policies and the investment response to production, and reduction of agricultural changed incentives. For Sub-Saharan Africa tariffs to, say, no more than 10 percent, by in particular, analysis suggests that trade can a target date; and (c) commitments to do much to help attain the income poverty ensure free cross-border trade in services MDG, but much more than open access to delivered through telecommunications markets will be required. The outcome will networks, complemented by actions to lib- depend greatly on improved trade capacity, a eralize the temporary movement of service function of the investment climate. Aid has an suppliers from developing countries. important supportive role to play in helping countries enhance their trade capacity. A major question confronting OECD The 2001 WTO Doha Declaration repre- countries is whether the political commitment sented the first time that the needs of devel- can be mobilized to pursue a meaningful mar- oping countries were placed at the top of the ket access­driven agenda that removes the multilateral trade agenda. In the context of existing bias against poor countries. The the Doha Development Agenda, and subse- answer depends in part on the willingness of quently in Monterrey in March 2002 at the industries in OECD countries to devote the U.N. Financing for Development Conference, required resources to support deep reforms in high-income countries reiterated their com- agricultural policies and elimination of tariff mitments to improve market access for agri- peaks and nontariff barriers that are biased cultural and industrial products, especially against low-income countries. Equally impor- for developing countries.3 tant will be credible commitments to ensure The trade policy environment through that social policies are in place to assist work- August 2003 benefited from the momentum ers and communities to adjust to a more com- generated in the run-up to the WTO's Cancún petitive environment. Ministerial Conference in September. The European Union announced a reform of its Growth, Poverty Reduction, and Common Agricultural Policy (CAP) in June, the Doha Development Agenda and agreement was reached in August on the implementation of the public health provisions The attainment of Goal 8 of the MDGs-- of the WTO's Trade-Related Intellectual Prop- a global partnership for development-- erty Rights (TRIPs) Agreement. However, the requires increased effort by the developed Cancún Ministerial failed to move the substan- countries to open up market access for goods tive agenda forward. Differences over agri- and services produced in developing coun- culture, as well as disagreements in other tries. This is particularly the case in agricul- areas--including multilateral frameworks for ture, textiles and clothing, and labor-intensive investment, competition, government procure- services--sectors where developing countries ment, and trade facilitation, the so-called Sin- typically have a comparative advantage. Fur- gapore issues--proved impossible to bridge. 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 4 D I S M A N T L I N G B A R R I E R S T O T R A D E FIGURE 10.1 Potential income gains from trade reforms are large and can help reduce poverty Increase in real income Reduction in number of poor in 2015 relative to baseline in 2015 relative to baseline 400 70 350 60 300 50 250 billions 40 200 US$ Millions30 150 1997 20 100 50 10 0 High-income Developing East Europe & Latin Middle East South Sub- countries countries Asia Central America & & North Asia Saharan & Pacific Asia Caribbean Africa Africa Static gains Dynamic gains $1 per day $2 per day Source: World Bank staff simulations. Recent proposals by the United States and the (RTAs) with the major developed countries. European Union to get the Doha Round back Also, RTAs are unlikely to achieve significant on track, which include the suggestion of aban- progress in areas such as agriculture that mat- doning negotiations on investment and compe- ter most to the poor. It is important that RTAs tition policies and seek to break the impasse on minimize discrimination against nonmembers agriculture, have improved the medium-term and not divert attention away from the multi- prospects for the Round. lateral WTO process. Several risks are associated with continu- ing delays in the multilateral talks. The per- Tariffs and Nontariff Barriers ception of failure can strengthen the hand of protectionists. High-profile trade disputes, Average most-favored-nation (MFN) tariffs held in check in order not to disturb the mul- applied by developed countries are substan- tilateral trade talks, could reemerge and dam- tially lower than those in developing coun- age the trading system, hurting smaller and tries.4 In high-income OECD countries they poorer countries the most. The Cancún out- average around 6 percent (table 10.1). On a come may add momentum to strategies for trade-weighted basis, these tariffs are lower, regional and bilateral trade integration. This averaging around 3 percent. Average col- could prove to be a growing distraction from lected tariffs, which are calculated by divid- the Doha Round and alter the balance of ing total tariff revenue by the value of total interests in the multilateral talks. A shift imports, are even lower. One explanation for toward greater discrimination in world trade, this difference is the impact of widespread while possibly beneficial for countries that membership in preferential trade agreements obtain preferred access, does not bode well and various programs offering trade prefer- for excluded nations. The majority of the ences to developing countries. The value of world's poor live in countries such as China, this "applied" average tariff is generally less India, Pakistan, and Indonesia that are not than 2 percent. However, this average masks likely to be part of regional trade agreements a significant bias against products of export 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 4 145 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S TABLE 10.1 MFN tariffs, developed countries, 1990 and 2002 (percent) Simple Simple Trade-weighted Applied Applied average average average average tariff, average tariff, Group or country 1990 2002 2002 1990a 2002a High-income OECD, of which: 7.0 5.2 2.6 2.4 1.4 Canada 8.8 4.2 3.4 2.8 0.9 European Union 8.7 4.7 3.1 2.8 1.5 Japan 6.3 4.9 2.4 2.4 1.9 United States 6.4 5.2 3.1 3.3 1.7 a. Total collected tariff revenues as a share of total value of imports. Source: WTO; IMF; European Commission budget. interest to developing countries and substan- 8 percent of the tariff lines are above 15 per- tial discrimination between different trading cent. More than 60 percent of imports subject partners for similar types of imports. Indeed, to tariff peaks originate in developing coun- a disproportionate share of total revenues is tries. While many of these countries benefit collected from low-income countries. For from tariff preferences, many others do not. example, Mongolians and Norwegians both Nontariff barrier (NTB) coverage ratios for paid the United States about $23 million in high-income countries are in the 15 percent tariffs in 2002. Mongolia exported $143 mil- range, similar to that observed for middle- lion; Norway $5.2 billion--or 40 times as income countries (table 10.2). The use of much. In effect, Mongolians pay sixteen cents NTBs has declined significantly since the late to sell the United States one dollar's worth of 1980s, due in part to WTO agreements to sweaters and suits, while the Norwegians refrain from the use of voluntary export paid half a penny to sell the United States one restrictions and to gradually phase out a dollar's worth of gourmet smoked salmon, jet regime of quantitative import restrictions engine parts, and North Sea crude oil.5 imposed on textile and apparel products pro- A universally accepted definition of a tar- duced in developing countries--the Multi- iff peak does not exist. Instead, two criteria fiber Arrangement (MFA). Under the WTO are widely used to indicate the dispersion of Agreement on Textiles and Clothing, quotas tariffs. The first is the number of tariff lines are to be phased out progressively over a 10- above a threshold of 15 percent. The second year period. The next-to-last stage in elimi- is the number of tariff lines above a threshold nating quotas was implemented on January defined as three times the national average. 2002, when a further 15 percent of restric- Developed countries have a low number of tive quotas were eliminated. On January 1, tariff lines that exceed 15 percent. Con- 2005, all remaining quotas (amounting to versely, given the dispersion of their tariff about 80 percent of originally restrictive profiles, they tend to have a higher number of quotas) are to be eliminated. lines that satisfy the second criterion. The fre- Although core NTBs have become less quency of peaks in the tariffs of developed prevalent in OECD countries, the use of tech- countries is problematic for developing coun- nical product regulations and mandatory stan- tries, since the high tariffs are typically on dards has been increasing. At least one-third of products of export interest to them, especially all imports into the European Union, Japan, more processed products, causing what is and the United States are subject to mandatory called tariff escalation (figure 10.2). product standards. In most cases the standards In the Quad countries (Canada, European involved are applied on a nondiscriminatory Union, Japan, United States), between 4 and basis, and in principle they also apply to 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 4 D I S M A N T L I N G B A R R I E R S T O T R A D E FIGURE 10.2 Escalating tariff rates discourage development All products Agricultural products 12 12 10 10 cent) 8 8 per( 6 6 tes raf rifaT 4 4 2 2 0 0 Canada European Japan United States Canada European Japan United States Union Union Raw Intermediate Processed Source: WTO. TABLE 10.2 Simple average NTB coverage ratios, 2001 (percent) Share of value of Share of value of Share of tariff lines Share of tariff imports subject to imports subject subject to technical lines subject Group technical regulations to core NTBs regulations to core NTBs High-income OECD, of which: 15a 14 12a 14 Canada 11 8 2 28 European Union 1a 15 1a 23 Japan 33 14 29 13 United States 34 19 21 14 Country-weighted average: High-income OECD 14 16 9 19 a. These numbers are a lower bound due to underreporting for the EU, reflecting the fact that regulations imposed by individual member states are not taken into account in the TRAINS database. Source: UNCTAD TRAINS database. domestic production. Thus they are not anal- kets. There are several methods for measur- ogous to core NTBs, although research sug- ing agricultural support and the distortions gests they may have a disproportionate impact produced by it. Each has shortcomings and on exporters located in developing countries. strengths. The ones most often used are mea- sures calculated by the OECD: the producer support estimate (PSE) and the total support Agriculture estimate (TSE).6 These indicators do not con- The agricultural policies of developed coun- sider the economic inefficiencies (distortions) tries affect developing countries by distorting caused by the underlying policies and thus world prices and restricting access to mar- underestimate their true cost. 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 4 147 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S The need for overall measures of agricul- pay producers directly rather than use border tural support arises because the instruments measures. Some, but not all, of this shift indi- to support agriculture in OECD countries cates progress in decoupling payments from are manifold and complex. The two major production, making support less trade distort- types of intervention are market price sup- ing. The amount of decoupled payments based port--policies that artificially raise domestic on historical entitlements is still small (only 4.6 prices--and fiscal transfers to farmers. Bor- percent of the total), but in the base period this der protection (such as tariffs) is an example category of payments was virtually zero. of price-supporting policies. Because such During the Uruguay Round, disciplines on support raises prices to both producers and agricultural trade policy were substantially consumers, it is more trade distorting than strengthened. A ban was imposed on quanti- are direct payments to farmers.7 tative restrictions, NTBs were converted into The share of the support that is provided tariffs, minimum market access commitments through border measures versus direct pay- were implemented through tariff rate quotas, ments varies substantially across OECD coun- and export subsidies and an aggregate mea- tries and commodities. During 2000­02, the sure of support (AMS) were made subject average annual TSE in all OECD countries to reduction commitments. Despite these was $315 billion, or 47 percent of the value of achievements, the PSE and TSE numbers OECD's agricultural production (table 10.3). reveal that agricultural protection remains The peak level of TSE was attained in 1999, high. Moreover, recent policy developments when it stood at $356 billion. Compared with in the United States have implied an increase the base period used in the Uruguay Round in support to farmers (the 2002 Farm Bill negotiations (1986­88), the TSE has trended increased total potential payments to farmers slightly upward in absolute amount, while the by some 70 percent, or almost $75 billion PSE has shown little change. The latter aver- over 10 years). In the European Union, efforts aged $235 billion in 2000­02, or 35 percent of to reform the Common Agricultural Policy the value of OECD's agricultural production. are moving toward less trade distortion by Market price support has fallen from 77 per- decoupling farm payments from production. cent of the PSE in 1986­88 to 63 percent in However, such decoupling was only partially 2000­02, as many countries have moved to attained, and border protection was not TABLE 10.3 Agricultural support, 1986­88 and 2000­02 United States European Union Japan OECD Type of support 1986­88 2000­02 1986­88 2000­02 1986­88 2000­02 1986­88 2000­02 Total support estimate ($ billions) 69 94 110 104 58 60 302 315 (% of agricultural production) 44 48 49 46 77 79 52 47 of which: Producer support estimate (PSE) ($ billions) 42 47 94 93 49 48 248 235 (% of agricultural production) 27 24 42 41 65 63 43 35 Share of PSE from consumers (price support, %) 46 35 86 57 90 90 77 63 Share of PSE from taxpayers (fiscal transfers, %) 54 65 14 43 10 10 23 37 Per full-time farmer ($) -- 19,000 -- 16,000 -- 23,000 -- 11,000 -- Not available Source: OECD. 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 4 D I S M A N T L I N G B A R R I E R S T O T R A D E BOX 10.1 The EU's Common Agricultural Policy reform On June 26, 2003, European agriculture ministers reached an agreement on reform of the Common Agricultural Policy, or CAP. This reform constitutes a substantially watered-down version of the initial proposals. The scope for decoupling subsidies from production is more limited in key sec- tors, cuts in intervention prices are smaller, and the reform will be implemented later than initially envisaged. The key elements of the agreement are: Partial decoupling of subsidies from production will be implemented differently by member states. In particular, member states retain the right to link up to 25 and 40 percent of subsidies to production in the case of cereals and beef, respectively, and are allowed to invoke regional exceptions if considered necessary to avoid the abandonment of production. Progress was made on market policy, although reform is limited. Plans to cut intervention prices for cereals have been abandoned, and price cuts in the dairy sector will be phased in over three to four years. Direct payments to large farms will be reduced in order to finance a new rural development pol- icy, broadly in line with the January 2003 proposals. Ministers agreed on a mechanism to enforce financial discipline to ensure that the farm budget ceiling set for the period 2007­13 is not overshot. The reform will enter into force later than originally proposed. Although most of the reforms are to be implemented in 2005, member states can request a transitional period until 2007. Other CAP reforms were not covered and are scheduled for the future. The review of Mediter- ranean Products (olive oil, tobacco, and cotton sectors) started in September 2003. Other sec- tors, in particular sugar and wine, are scheduled for review in 2004. Source: IMF staff. reduced at all (box 10.1). This illustrates the port was included in the baseline AMS, but importance of the WTO and the current was not subject to reduction commitments. Doha Round in attaining further reductions Green Box. Support measures that are non- in trade-distorting support. or minimally trade distorting and that are The Uruguay Round Agreement on Agri- not subject to reduction commitments. They culture (URAA) classified domestic support include general government services (such as into three "boxes": research, disease control, infrastructure, and food security stockholding), certain forms Amber Box. Trade-distorting support mea- of "production-decoupled" income support, sures that are subject to reduction commit- structural adjustment assistance, direct pay- ments, including market price support, as ments under environmental programs, and well as some product- and nonproduct- regional assistance programs. specific budgetary outlays. Blue Box. Payments based on fixed area Reduction commitments in the URAA were and yields, number of heads for livestock, made based on the AMS. This corresponds to and base level of production. The mecha- Amber Box measures, but with exemptions for nisms are supposed to constrain produc- de minimis support, defined as support not tion, but the real motivation was a political exceeding 5 percent (developed countries) and need to exempt some key European and 10 percent (developing countries) of the value U.S. policies. The amount of Blue Box sup- of production of individual products or, in 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 4 149 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S case of non-product-specific support, the Although the major agricultural exporting value of total agricultural production. Each economies will themselves benefit most from industrial country's total AMS was supposed global agricultural reform, the least devel- to be reduced by 20 percent (and two-thirds oped countries also stand to gain signifi- of this amount for developing countries) cantly. On average, some 18 percent of the from a 1986­88 base over a six-year period total exports of least developed countries (1995­2000). Due to the artificially inflated comprise goods that are subsidized in at least baseline levels, countries have in general been one WTO member country, compared with 3 able to exceed their reduction commitments, to 4 percent for other countries (table 10.4). with the result that most countries in recent However, a similar observation holds for years have been well below their ceiling for imports--9 percent of all least developed AMS. Deep reductions in the ceilings are country imports involve products that are required for the Doha Round to achieve sig- subsidized, compared with 3 to 4 percent for nificant reduction in trade-distorting support. other countries. Given that OECD support Trade-distorting agricultural support poli- tends to depress world prices of the affected cies in OECD countries have a significant commodities, reform could entail adjustment detrimental effect on developing countries. costs associated with possible increases in the For example, OECD protection rates for world price of key food imports. Comple- sugar are frequently above 200 percent, and mentary financial support from the develop- producers receive more than double the world ment community will be needed to assist market price.8 OECD support to sugar pro- developing countries that are negatively ducers of $6.4 billion a year roughly equals affected by an increase in world prices. the value of developing country exports. U.S. From the perspective of farmers in devel- subsidies to cotton growers totaled $3.6 bil- oping countries, the key issue is the impact of lion in 2001­02, twice the amount of U.S. for- agricultural support policies on the prices eign aid to Africa. These subsidies depress they receive (or pay) for their products. This world cotton prices by some 10 percent. In depends primarily on the extent to which out- West Africa, where cotton is a critical cash put is increased and consumption decreased crop for many small farmers, annual income by policies in other countries. Research losses for cotton growers are about $250 mil- undertaken at the OECD and World Bank lion a year.9 In the European Union, producer suggests that what matters most is market support for beef reaches 84 percent of the price support, that is, market access.11 The value of domestic production.10 research finds that the impact on world prices of reducing border barriers (tariffs) is likely to be much larger than the impact of reduc- ing domestic subsidies, by a factor of 5 to TABLE 10.4 Trade shares of products affected by agricultural subsidies 10, depending on products and countries. (1995­98 average, in percent) One reason for this difference is that tariffs are often very high for subsidized products, Domestic support Export subsidies frequently taking the form of nontranspar- ent specific duties. While minimum market Country category Exports Imports Exports Imports access commitments negotiated during the All (143) 3.6 3.7 4.4 4.4 Uruguay Round--implemented through tar- Developed countries (23) 3.1 3.3 4.0 3.9 iff rate quotas (TRQs)--ensure some access, Developing countries (90) 4.2 4.2 5.0 5.0 Least developed countries (30) 17.8 8.9 16.7 13.1 in many cases the TRQs are small, and the effect of the tariffs is to support high domes- tic price levels. Note: 1995­98 is the most recent period for which detailed data were reported to the WTO. This does not imply that domestic support Numbers in parentheses indicate the number of countries. Source: Hoekman, Ng, and Olarreaga 2004. policies should be ignored--far from it. 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 4 D I S M A N T L I N G B A R R I E R S T O T R A D E Substantial reduction in production-linked TABLE 10.5 Antidumping investigations by selected OECD members, OECD agricultural support policies is impor- 1995­2002 tant for developing countries in its own right, but is also critical from a political economy Against all economies perspective. OECD subsidy reforms are nec- Number of Initiations per dollar essary to help developing countries pursue Country/economy antidumping of imports their own liberalization, an essential step in initiating initiations (Index United States = 100) maximizing gains. Without action by OECD New Zealand 35 900 countries to decouple support from produc- Australia 142 741 tion, it is much harder for developing-country Canada 106 171 governments to pursue and sustain their own European Union 255 107 Japan 2 2 reforms. United States 279 100 Manufactures and Contingent Protection Note: Annual data on a July­June reporting basis. Source: World Bank staff calculations based on notifications to the WTO Antidumping Trade policies affecting developing-country Committee. exports of nonagricultural products are gen- erally more liberal than policies affecting agri- culture. As noted previously, in the majority of cases MFN tariffs are low. The exceptions per- ing the conditions of market access facing tain to certain labor-intensive sectors, such as exporters. Antidumping investigations have a clothing (apparel), for which import duties are chilling effect on imports (they signal much higher--particularly in Canada, Japan, importers to diversify away from targeted and the United States, where tariff peaks aver- suppliers). This has been of long-standing age 16 to 17 percent and significant tariff esca- concern to East Asian countries in particular, lation poses an impediment to poor countries especially China and Japan. China now faces trying to move their products up the value the highest incidence of investigations and the chain.12 The textiles and clothing sector has highest average level of duties in the United also been ridden with quantitative restric- States (table 10.6).13 A similar conclusion tions on trade in recent decades. The 1995 applies to the other Quad members. Thus WTO Agreement on Textiles and Clothing China is also the most often targeted country requires the abolition of all textile quotas by in EU antidumping, accounting for some 20 January 1, 2005. A challenge that will likely percent of all investigations in recent years, confront exporters after that date will be the with average duties of 40 percent and in spe- threat of contingent protection (safeguards cific cases duties above 100 percent.14 and, especially, antidumping). Antidumping is a frequently used instrument in developed Overall Trade Restrictiveness Index countries against labor-intensive manufac- tures exported by developing countries (table As noted in chapter 4 for developing-country 10.5), as well as more capital-intensive indus- policies, it is not possible to compare the vari- tries in which developing countries have built ous trade policy instruments just discussed a comparative advantage--such as chemicals across countries. Thus, an overall trade restric- and steel. These instruments are also used to tiveness index (OTRI) was estimated that manage imports of agricultural products-- incorporates MFN tariffs (both ad valorem and examples include imports of catfish and ad valorem equivalents of specific tariffs), core shrimp in the United States--but are primar- NTBs, and domestic agricultural support.15 In ily applied to manufactures. addition, in calculating the OTRI vis-à-vis low- The existence of the antidumping instru- income and least developed countries, trade ment creates substantial uncertainty regard- preferences granted to developing countries 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 4 151 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S TABLE 10.6 Average tariff imposed in final U.S. antidumping duty determinations (percent) Developing countries Developed countries Investigations Total Lower-income Upper income China Japan Other 1979­98 all cases 46 53 30 95 60 31 1989­98 cases only 58 66 36 116 74 34 Source: Bown, Hoekman, and Ozden 2003. TABLE 10.7 Overall trade restrictiveness and import shares, high-income OECD and Quad, 2001 (percent) Share of low-income OTRI toward OTRI toward Share of total countries in total low-income least-developed low-income country imports from all Country OTRI countries countries exports taken developing countries High-income OECD, 6.3 4.9 4.2 69.6 4.6 of which: Canada 5.6 7.7 0.1 1.2 4.2 European Union 6.6 3.9 0.6 21.1 3.2 Japan 3.9 1.5 1.1 11.2 10.8 United States 4.6 6.3 8.2 20.3 6.4 Source: World Bank staff estimates based on World Integrated Trade Solution and U.N. Comtrade database. (both unilaterally and through major trade than for richer countries. Indeed, the OTRI agreements) were included in the estimation. is highest against least developed countries. The simple average OTRI for high-income Reasons for this include relatively high pro- OECD members was 6.3 percent in 2001 tection of apparel and other labor-intensive (table 10.7). Of the Quad economies, the "sensitive" sectors, and the fact that some of European Union has the highest OTRI, at the countries that face the highest OTRI on 6.6 percent. As a result of trade preference exports to the United States do not have sig- programs, the OTRI against low-income nificant preferences for their main exports. countries is lower than the overall OTRI (3.9 Note, however, that U.S. imports from low- percent), and that against least developed income countries, as a share of total imports countries is lower still (0.6 percent). This from developing countries, are higher than pattern of lower OTRIs against poorer coun- for the European Union. tries does not apply uniformly. In the case of OTRI estimates for agricultural products Canada, trade barriers discriminate signifi- are generally a multiple of those for manufac- cantly against low-income countries that do tures, reflecting the higher levels of protection not fall into the least developed category, of agriculture (figure 10.3). For high-income whereas in the case of the United States, bar- OECD countries, the OTRI is 25.6 percent for riers are higher both for all low-income agriculture, compared to 3.6 percent for man- countries and for least developed countries ufacturing. Only Australia and New Zealand 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 4 D I S M A N T L I N G B A R R I E R S T O T R A D E FIGURE 10.3 Protection in agriculture is high--a multiple of that in manufacturing Ratio of agriculture OTRI to manufacturing OTRI in high-income OECD countries, 2001 26 21 16 11 6 1 Australia New USA Canada Iceland European Japan Switzerland Norway High- Zealand Union Income ­4 OECD Source: World Bank staff estimates. have a lower OTRI in agriculture than in (AVEs) of the NTBs that are included. The manufacturing. Norway has the highest agri- above numbers include the AVEs of specific culture OTRI among OECD countries (42 tariffs, core NTBs, and agricultural producer percent), 25 times greater than its manufac- subsidies. They do not include technical prod- turing OTRI. Norway is followed by Switzer- uct regulations because of incomplete report- land (35 percent) and the European Union ing of related data by countries. The exclusion (28 percent).16 The high rates for Norway of technical regulations in the estimation of and Switzerland mainly reflect high ad val- the AVEs of NTBs is likely to bias downward orem equivalents of specific tariffs on agri- the OTRI against low-income countries. If the cultural imports.17 existing, incomplete data on technical regula- Figure 10.4 plots, for high-income OECD tions are included, the OTRI estimates for all members, the difference between their OTRIs trade do not change much, but those against for trade with low-income countries and their low-income countries increase. In the case of OTRIs for trade with all countries. A positive Japan, the OTRI against low-income coun- number indicates that the importing country tries rises toward the overall level of the imposes higher trade barriers on imports OTRI. That is, the effect of any preference from low-income countries than on those programs is eliminated. In the case of the from the rest of the world. Several OECD United States, the OTRI against lower-income countries, including the United States, have a countries also rises. more restrictive trade policy vis-à-vis low- The estimates of the OTRI vis-à-vis low- income countries relative to their overall income countries are also biased downward trade policy stance.18 by the assumption made in the estimation that The OTRI estimates are in part a function major trade preference programs such as the of the estimates of the ad valorem equivalents African Growth Opportunity Act (AGOA) 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 4 153 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S FIGURE 10.4 Is overall trade policy pro development? Mixed picture Difference between OTRI applied to low-income countries and OTRI for all trade, 2001 6 4 Canada 2 USA points Iceland 0 Switzerland Australia centagereP ­2 European Union Japan Norway ­4 New Zealand ­6 Source: World Bank staff estimates. the United States and the European Union's ignore for comparability reasons. Recent Everything-but-Arms Initiative (EBA) are fully research has shown how important it is for effective (that is, are fully utilized by recipi- firms in developing countries to be able to sat- ents). Strict rules of origin may substantially isfy technical product standards.20 A con- reduce or even nullify the value of preferences certed effort by the relevant international for manufactured products. Moreover, part of agencies (WTO, United Nations Conference the rents created by preferences, if any, accrue for Trade and Development, or UNCTAD) to to importers, not the exporters. Taking these improve the coverage of data on technical factors into account will increase the estimates regulations, ad valorem equivalents of spe- of the OTRI against low-income countries. If cific tariffs (both bound and applied rates), it is assumed that utilization rates are only 50 and (bilateral) utilization of trade preferences percent, that is, only half of imports from least by developing countries is important from a developed countries enter duty free, the OTRI global monitoring perspective. The weakness against these countries is roughly the same as in both trade policy data and information on that applying to all trade: around 6 percent, services trade policies and international trans- with the United States having the highest bar- actions greatly constrains efforts both to riers (12.6 percent). The potential importance determine the overall trade policy stance and of preferences for least developed countries is to monitor changes in it over time. illustrated by the fact that without any prefer- ences, they would confront an average OTRI Trade in Services of about 10 percent in high-income OECD countries--more than two times higher than Data constraints prevent the inclusion of poli- the restrictions currently applied.19 cies affecting trade and investment in services The sensitivity of these results to assump- in the OTRI. Services are the fastest-growing tions regarding the effectiveness of prefer- component of world trade. Developing coun- ences and to the coverage of NTBs in national tries have expanded exports of services nearly trade policy databases points to the need for fourfold in the last decade (a faster rate than better data collection and reporting. This is goods exports), and increased their share of most important for technical regulations, the global marketplace for services to 18 per- which the foregoing analysis was forced to cent, up from 14 percent in the early 1990s. 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 4 D I S M A N T L I N G B A R R I E R S T O T R A D E In large part this increase reflects growth in be a multiple of the potential gains resulting business process outsourcing (BPO) services. from liberalization of trade in goods.22 This activity arises from the outsourcing (and Greater access to developed countries' mar- out-location through foreign direct invest- kets for the temporary movement of natural ment) of noncore business processes through- service providers and commitments to main- out the value chain of both manufacturing tain liberal policies toward cross-border trade and services industries. Within BPO activities, through telecommunications networks would the more advanced developing countries are both be valuable in themselves and assist moving from providing only low-end back- developing-country governments in pursuing office services (such as data entry) to more beneficial domestic reforms. Currently, Mode integrated and higher-end service bundles in 1 faces few explicit restrictions in OECD fields such as customer care, human resource countries. However, the well-publicized cre- management, and product development. For ation of jobs in developing countries' service example, Barbados is increasingly prominent industries has created concerns that may in data processing; the Philippines, India, and translate into protectionism. Although only a China are actively exporting computer soft- small fraction of the work force in the devel- ware; and South Africa is exporting telecom- oped world is employed in agriculture and munications services. textiles, two areas that have seen significant Exports of BPO services are an example of protectionist pressure, more than two-thirds one of four possible ways in which services of the work force is employed in the services can be traded: cross-border through telecom- sector and many more have services-type jobs munications networks. The other three within manufacturing enterprises. The out- "modes of supply" involve either the move- location of even a fraction of such jobs could ment of the consumer to the location of the provoke powerful protectionist pressures-- service providers (as with international signs of which are already visible. In several tourism) or the movement of the providers. U.S. states, and more recently at the federal The latter may be long term and involve for- level, legislation is pending that would restrict eign direct investment ("Mode 3" in the ter- outsourcing on government contracts. In minology of the WTO's General Agreement Europe legal norms designed to protect work- on Trade in Services, or GATS) or be tempo- ers in outsourcing deals, known as TUPE rary and involve the movement of individual (Transfer of Undertakings and Protection of service suppliers such as workers (Mode 4). Employees), as well as recent privacy direc- Of these four modes of trading services, tives, could have an inhibiting effect on trade. Mode 3 (commercial presence through FDI) Addressing the question of securing liberal is currently the largest in world trade, cross-border trade in services should be high accounting for an estimated $2 trillion, fol- on the agenda of the international community. lowed by Mode 1 (cross-border supply, $1 The same is true for temporary movement of trillion), Mode 2 (travel and tourism, $500 service suppliers (Mode 4). Many developing billion), and Mode 4 ($50 billion).21 countries export services that are "embodied" The potential gains from successful liberal- in people. Although much of the associated ization of trade in services are huge. The U.S. movement of persons is long term, a substan- banking industry alone is estimated to have tial share of cross-border movements involves saved more than $8 billion over the last four service industry workers who return to their years, and the cost savings for the world's top home countries at some point. Remittance 100 financial institutions could be as high as flows associated with migration are now a $138 billion annually. Analysis suggests that major source of external funding for develop- the real income gains associated with procom- ing countries. Remittances received by devel- petitive reforms that increase the variety and oping countries are estimated at $93 billion quality of services and lower their costs could in 2003, up more than 20 percent from 2001 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 4 155 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S and approximately three times the level of Temporary movement of service providers 1990. Latin America and the Caribbean, with potentially offers a way to realize the gains $30 billion in remittance receipts, accounts from trade while averting social and political for nearly one-third of the developing-country costs in host countries, as well as avoiding total.23 negative brain drain effects for poor home There is little doubt that despite the dra- countries. Recent research finds that if OECD matic developments in technologies for elec- countries were to allow temporary access to tronic delivery of services (Mode 1), Mode 4 foreign service providers equal to just an will remain important for a range of services. additional 3 percent of their labor force, the The movement of service-supplying person- gains to all countries would exceed $150 bil- nel remains a crucial means of delivery even lion (figure 10.5).24 for the Indian software industry. Nearly half To date, only limited progress has been of Indian exports are still supplied through made in liberalizing international services the temporary movement of programmers to transactions.25 At Cancún, trade in services the client's site overseas. Greater freedom for was not an area of disagreement. The Draft the temporary movement of service providers Ministerial Text recognized the progress would enable developing countries to provide made in the negotiations, which so far con- the labor component of construction, distrib- sists of a large number of confidential but ution, transport, and a range of other ser- reportedly ambitious requests that members vices. As their populations age and their (including several developing countries) have average levels of training and education rise, made to each other for greater market access, developed countries will face an increasing as well as reportedly disappointing offers of scarcity of moderately and less skilled labor. improved access submitted by 30 or so mem- Given that there is no substitute for human bers (including some developing countries). labor in some activities (for example, the car- Developing-country engagement in the nego- ing occupations, personal services, and a tiations has been inhibited by these countries' range of professional services), the demand perception that the "assessment" of trade in for Mode 4 is likely to increase over time. services--mandated by the GATS as a condi- Most countries impose a range of barriers tion for the new round of negotiations--has against Mode 4­based transactions. The not been adequately conducted; that their temporary movement of service providers domestic regulatory institutions are ill- invariably is affected by regulations imposed equipped to deal with the demands of a liber- by multiple authorities, including immigra- alized market; and that there is little prospect tion legislation and labor market policy. of meaningful liberalization in areas in which Visa formalities are in themselves a signifi- they have an export interest. cant obstacle, and the conditions attached For developing countries, what matters are often used to implement a range of most in terms of what developed countries restrictions. These include prohibitions and can do on trade in services--as in goods--is quotas either explicitly or through a variety improved market access. This implies that of economic needs tests. Wage-parity condi- negotiating modalities are needed that give tions tend to erode the cost advantage of hir- particular attention to the removal of barriers ing foreigners and have the same restrictive to trade on those services and modes of sup- impact as quotas. Discriminatory treatment ply in which developing countries have an is implemented through a variety of fiscal export interest. Given that the rapid spread of and regulatory means. Nonrecognition of information technology and telecommunica- professional qualifications poses a particular tions infrastructure is allowing service firms challenge because of the difficulty in distin- located in developing countries to contest guishing between legitimate and protection- markets in richer countries, binding commit- ist denial of recognition. ments to impose no restrictions on such trade 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 4 D I S M A N T L I N G B A R R I E R S T O T R A D E would be valuable. Specific commitments to FIGURE 10.5 Potential gains from liberalization of services, especially open markets through liberalization of tem- migration, are large porary movement of natural service suppliers Welfare gains from a 3 percent increase in developed countries' temporary labor quota would also be very valuable, although more difficult to achieve. 100 The Singapore Issues and Special and Differential Treatment 80 As tariffs were gradually reduced, govern- 60 ments in high-income countries increasingly sought to cooperate in disciplining the use of billions NTBs and trade-distorting domestic policies. US$ 40 They also began to use trade agreements as instruments for harmonization of domestic 20 policies that have an impact on trade. The Agreement on Trade-Related Aspects of Intel- lectual Property Rights is the major example Developed Developing countries countries in the WTO. At the 1997 WTO Ministerial in Singapore, four new issues were put forward Skilled labor Unskilled labor for negotiation: trade facilitation, competi- tion policy, investment policy, and trans- Source: Walmsley and Winters 2002. parency in government procurement. Many developing countries have come to question the development payoffs associated trading system, as reflected in preferential with regulatory harmonization enforced market access for developing countries to through the WTO.26 The Cancún Ministerial developed-country markets and greater flexi- illustrated the difficulty of expanding the cov- bility for them to use trade policies than is erage of the WTO to new regulatory areas. otherwise permitted by WTO rules. Efforts to Poor countries expressed concerns that new date to agree on ways to strengthen and oper- multilateral rules might not be in their inter- ationalize such provisions, however, have est, would do little to promote progress on been divisive and unsuccessful. key issues such as agriculture, and could give A good understanding of the costs and rise to additional implementation burdens. A benefits of specific proposals and rules basic question now confronting the interna- requires engagement by developing-country tional development community is how to stakeholders--a big challenge in many coun- build in flexibility in rules that takes into tries, given prevailing capacity constraints. account substantial differences in priorities One way of recognizing these constraints and capacity across countries. An example of would be through SDT provisions that such flexibility is the mid-2003 agreement allowed for greater differentiation among clarifying that the TRIPS agreements allow developing countries in determining the reach low-income countries without domestic phar- of WTO rules. The need for differentiation is maceutical capacity to license imports of greatest for disciplines that require significant needed drugs on a compulsory basis. complementary legal, administrative, and A fundamental challenge confronting the institutional investments or capacity to imple- WTO is ensuring that its rules support devel- ment, and for those that may give rise to large opment. Traditionally, "special and differen- net transfers from low-income developing tial treatment" (SDT) has been a means of countries (as under the TRIPS agreement). increasing the development relevance of the The basic rationale for differentiation is that 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 4 157 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S BOX 10.2 Lessons from Integrated Framework diagnostic trade integration studies Given the typically small domestic markets in the poorest countries, international trade can play a key role in achieving sustained growth and poverty reduction. The Integrated Framework for Trade- Related Technical Assistance to Least-Developed Countries (IF) is an international initiative com- bining the efforts of the IMF, ITC, UNCTAD, UNDP, World Bank, and WTO, in partnership with bilateral donors and recipient countries, to identify and respond to the trade development needs of the LDCs. The main elements of the IF process are: (a) preparation of a comprehensive diagnostic trade integration study, which documents constraints to trade in both the domestic economy and overseas and develops a plan of action to address the major constraints; (b) integration of the action plan into the country's poverty reduction strategy program; and (c) facilitation of interaction between the agencies, donors, and recipient governments in the implementation of the recommen- dations through technical assistance, capacity building, and investments. Although specific conditions vary across countries, a clear message has emerged from the 13 diagnostic studies completed as of the end of 2003 (for Burundi, Cambodia, Djibouti, Ethiopia, Guinea, Lesotho, Madagascar, Malawi, Mali, Mauritania, Nepal, Senegal, and Yemen): success in reforming formal trade policies is not sufficient to ensure that trade can play its role in stimulating growth and poverty reduction. A range of barriers at home (including weak institutions, poor gov- ernance, and deficient infrastructure) and abroad (including trade barriers in key markets and insta- bility in neighboring countries) constrain the ability of these countries to contest international markets. As long as these constraints persist, the positive impact on the poor of the trade liberal- ization that these countries have undertaken will remain muted. Improving domestic market integration is essential if the potential benefits of trade are to be extended to the poorer segments of the population. The studies of Malawi and Nepal show that reduction of domestic transportation costs would bring strong welfare gains for farming house- holds. Among these households, the poorest would benefit disproportionately because transporta- tion costs make up a larger percentage of their expenditures. Case studies in Ethiopia and Guinea certain agreements or rules simply may not be gent regulatory requirements, such as health immediate development priorities or may and safety standards, that apply in export require that other conditions be satisfied markets. Development assistance can play an before implementation can be beneficial. The important role in helping to build the capac- specifics of a new approach to SDT require ity needed to benefit from increased trade considerable further thought and discussion. and better access to markets. Commitments What matters is that such a debate be initi- for trade-related technical assistance and ated. That would help make "development capacity building have been rising and were relevance" more than a slogan. equivalent to 4.8 percent of total official development assistance in 2001­02. Despite Trade Capacity, Technology this expanding "trade-for-aid," such support Development, and Trade- needs to be substantially strengthened. Related Assistance Aid can help address trade-related policy, institutional, and investment priorities; facil- A major constraint limiting export growth in itate adjustment to a reduction in trade pref- many low-income countries is a lack of sup- erences following further nondiscriminatory ply capacity and a high-cost business envi- trade liberalization; and assist in dealing with ronment. Firms in these countries may also the potential detrimental effects of a signifi- find it difficult to deal with ever more strin- cant increase in world food prices should that 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 4 D I S M A N T L I N G B A R R I E R S T O T R A D E reveal that many of the poor would be left behind if there were overall trade reform but no improve- ments in markets within the country. Transport costs are a major component of total costs for exporters. The studies show how a mul- titude of negative factors can contribute to extremely high transportation costs. These factors include deficient infrastructure, poor conditions of the vehicle fleet, lack of security, numerous formal and informal checkpoints, absence or nonenforcement of transit agreements, and lack of competition. In poor countries, especially those that are landlocked, the conjunction of these factors poses daunting challenges to domestic producers, seriously undermining the competitiveness of their exports. In Mali transport costs represent on average 30 percent of the value of traded goods (this ratio stands at some 18 percent for other Western Africa countries; in developed countries, it is typically around 5 per- cent). In Malawi, transport infrastructure is reasonably well developed, but high prices due to lack of competition in transport services add nearly 50 percent to sugar production costs. Another major bottleneck clearly identified in the studies is inefficiency in customs clearance. Some countries have managed to reduce clearance times--for example, from an average of three to four weeks in Senegal to less than one week--but they still have a way to go to match more advanced developing countries, where customs clearance is usually achieved within a matter of hours. Customs procedures generally suffer from a lack of transparency and the prevalence of dis- cretionary measures. Although all the countries studied are eligible for trade preferences in developed-country mar- kets, the impact of these schemes has been very uneven. For example, while Lesotho has signifi- cantly expanded its garment exports under the U.S. African Growth and Opportunity Act, other countries, such as Ethiopia and some West African countries, have largely failed to do so. EU pref- erences on sugar and tobacco for exporters in Malawi have been substantial, but the wider eco- nomic impact is less apparent. For most countries trade preferences have done little to mitigate the impact of the high transportation and transaction costs that they face compared with other trading countries and to stimulate trade volumes and diversification into a wider range of products. Source: World Bank, Integrated Framework diagnostic trade integration studies. materialize. At the September 2003 WTO a program supported jointly by several bi- Ministerial meeting, the IMF and the World lateral donors and multilateral agencies, Bank announced their readiness to help coun- progress is being made in integrating trade tries benefit from better market access oppor- policy more closely into country development tunities and to undertake trade-related strategies and addressing the related "behind- reforms and complementary actions. The the-border" agenda (box 10.2). IMF will provide financial support in the con- Facilitation of technology transfer also text of new or existing IMF-supported pro- would help enhance the capacities of devel- grams to countries that may face a net oping countries to benefit from integration negative impact on their balance of payments into the world economy. Developed countries from trade-related adjustments in other coun- could promote technology transfer in several tries. The World Bank has been enhancing its ways. Examples include helping to build lending and technical assistance portfolio in capacity in intellectual property rights and the trade area and strengthening learning pro- technical regulations and standards, estab- grams and partnerships. New lending for lishing public and public-private research trade capacity building doubled from $132 facilities, facilitating technology-related ser- million in 1998­2000 to $267 million in vices trade, and supporting training programs 2001­03. Through the Integrated Frame- in the functioning of modern technology mar- work for Trade-Related Technical Assistance, kets. Many governments in high-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 4 159 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S countries offer incentives to firms to locate in tiplied by domestic production to derive the "mar- or provide technologies to lower-income ket price support" (MPS) for each product. Direct areas within their own countries. One option payments to producers--classified according to the is for governments to offer similar incentives basis on which the payments are made--are added to firms transferring technologies to low- to the MPS to derive the PSE. To derive the TSE, an estimate of expenditures on General Services income countries. They could also offer the Support (spending on collective services, such as same incentives for research and development research, agricultural education, inspection, infra- performed in poor countries as for R&D structure, marketing, and public stockholding) is conducted at home. added to the aggregate PSE, as are government transfers to consumers (such as food stamps). Notes 7. Thus, for example, a 10 percent increase in producer price support (a form of direct payment) 1. A simple rule that would move in this direc- has only the production-increasing effect, while a tion would be to forbid any WTO member from 10 percent tariff raises the producer price to the imposing tariffs at the tariff-line level that are higher same degree, which has the same production effect than three times its average tariff. Predictability but also reduces consumption. The tariff has a could also be enhanced through full binding by all "double-barrel" impact on imports. See, for exam- WTO members of their tariff lines. For example, of ple, Anderson (2003); Messerlin (2002); and the 41 African WTO members, only 9 have bound Hoekman, Ng, and Olarreaga (2004) for a all their manufacturing tariff lines, while 15 have detailed discussion. bound less than 10 percent of their tariffs. 8. Mitchell 2004. 2. These estimates correspond to the pro-poor 9. Baffes 2003. scenario analyzed in chapter 1 of Global Economic 10. Messerlin 2002. Prospects 2004 (World Bank 2003). They assume 11. Beghin, Roland-Holst, and van der Mens- the elimination of agricultural export subsidies and brugghe 2002; World Bank 2003; Hoekman, Ng, domestic support, a tariff ceiling of 10 percent for and Olarreaga 2004. agricultural products and 5 percent for manufac- 12. The European Union has no tariffs above turing in OECD countries, and a tariff ceiling of 15 15 percent for textiles and clothing. In the United percent for agricultural products and 10 percent for States and Canada, most tariff peaks affect indus- manufacturing in developing countries. trial products (over 85 percent), whereas in the EU 3. WTO 2001, paragraphs 13 and 16. and Japan most peaks affect agricultural products 4. Countries can apply a number of different (91 and 77 percent, respectively). See Hoekman, tariffs on imports, depending on the country of Ng, and Olarreaga (2002). origin of those imports. The MFN tariff is the 13. Bown, Hoekman, and Ozden (2003) note highest tariff rate that is applicable to all imports, that the number of cases against developing coun- although, as is becoming increasingly common, tries is much higher than their share in U.S. this rate can be reduced on imports originating imports. The average duty on developed countries from certain countries. Such preferential rates can (excluding Japan) was 31 percent, compared with be either reciprocal or nonreciprocal in nature. 53 percent for developing countries. Similar con- Applied tariffs, whether they are preferential or clusions hold for other major users of antidumping. MFN, also need to be distinguished from bound 14. Liu and Van den Bussche 2003. tariffs, which are negotiated ceilings on the value 15. OTRIs are computed bilaterally for every of a tariff. These ceilings, or bindings, are notified importing country and then aggregated across to the WTO and are applicable to the MFN tariff partner countries. See chapter 4 for a description of a WTO Member. of the methodology. 5. WTO 2002. 16. Note that the economic significance for 6. The PSE incorporates the effect of trade poli- low-income countries of very high trade protection cies by measuring the difference between the world in Norway or Switzerland can be smaller than that price of a product at the border of the country and of more moderate levels of protection in much the domestic producer price. This difference is mul- larger markets, such as the European Union. 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 4 D I S M A N T L I N G B A R R I E R S T O T R A D E 17. Agriculture is more highly protected in both very incomplete information reported on the ser- developed and developing countries. However, rel- vices sales by affiliates of foreign-owned firms in ative to manufactures, agricultural protection is host countries; see Karsenty 2002. Statistics on higher in richer countries. trade in services are very weak and do not allow a 18. The bilateral OTRI estimates indicate that straightforward mapping between recorded for- trade policies in the Quad are most restrictive eign exchange flows and the four modes of supply. toward lower-middle-income countries with GDP 22. Stern (2002) surveys the literature. per capita in the $1,500 to $5,000 range. 23. World Bank 2004. 19. Preference utilization by developing coun- 24. This conclusion is conditional on the model tries is generally quite low. According to a WTO used; relative orders of magnitude may differ using document (WT/COMTD/LDC/W/31, 29th Sep- an alternative global model. See Walmsley and tember 2003), the GSP (Generalized System of Pref- Winters 2002. erences) utilization rates for preferences granted by 25. Schiff and Winters 2003; Mattoo 2003. Canada, the European Union, Japan, and the 26. There has been a substantial amount of United States are 61, 31, 46, and 67 percent, respec- research on the economics of the Singapore issues. tively. In the case of Canada, duty-free access for This research generally concludes that these issues LDCs was implemented as of January 1, 2003. are important from a development perspective-- 20. Otsuki, Wilson, and Sewadeh 2001; Wilson all relate to the investment climate--but expresses and Abiola 2003. doubts regarding the appropriateness of dealing 21. These numbers are very rough estimates with them in the WTO. See, for example, World based on balance of payments statistics and the 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 4 161 11 Providing More and Better Aid W hile trade policy reform, as dis- creating conditions that are more conducive cussed in chapter 10, would ex- to the effective use of resources--domestic pand opportunities for growth in and foreign. Recent evidence supports a grow- developing countries, adequate foreign aid ing trend among donors toward aid selectiv- would be important in enhancing their capac- ity, with more aid allocated to countries with ities to exploit those opportunities. That is better policies. Yet there is considerable vari- especially so for low-income countries, for ation in the selectivity focus of donors, reflect- which aid is the largest source of external ing their multiple objectives. The largest financing. The Monterrey Consensus recog- donors are not particularly selective, and the nized the need for substantial additional scope for improving the allocation of aid is external resources if low-income countries substantial. are to achieve the MDGs, and donors have There is also much scope for increasing the committed themselves to a 7 percent annual effectiveness of aid by better aligning aid with increase in real terms up to 2006. If these recipients' development priorities--as mani- commitments are realized, official develop- fested in country-owned and -led poverty ment assistance would rise by about $18.5 reduction strategies and other development billion by 2006 from the 2002 level of about frameworks--and by harmonizing donor $58 billion. While encouraging, the indicated policies and practices. The Rome High-Level increase in aid is well short of what is needed Forum of early 2003 has given a welcome and can be productively used by developing impetus to the alignment and harmonization countries. Moreover, a much higher propor- agenda. Consistent follow-through on that tion of aid will need to be provided in the agenda will be important form of cash, and in flexible ways, so that it The Heavily Indebted Poor Countries can be deployed in accordance with country (HIPC) Initiative has contributed to lowering priorities to finance the costs of meeting the the debt burden of these countries and freeing MDGs. domestic resources for growth and poverty Equally important is the need to raise the reduction. Despite these achievements, main- quality of aid. It is widely accepted that aid is taining debt sustainability is becoming an in- most effective in countries with sound policies creasingly important issue for these and some and institutions. As reviewed in part II of this other low-income countries, given their need report, developing countries in general are for large increases in external financing to improving their policies and institutions and meet the MDGs. In some countries, 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 4 163 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S the MDGs with new concessional borrowing their Monterrey commitments. If the com- could lead to an unsustainably large debt mitments made by donors at or since the burden. Additional aid will need to have an Monterrey Conference of March 2002 are appropriate mix of grant financing and new realized, total ODA would increase by about credits. $18.5 billion over the 2002 level (32 percent in real terms), that is, from $58 billion to $77 billion (figure 11.1).2 That would raise the Aid Flows: Recent Trends, ODA-to-GNI ratio to 0.29 percent in 2006. Prospects, and Requirements The aid effort and new commitments vary widely across donors (table 11.1). Trends in Aid Volume: A Mixed Picture The increase in development assistance is After falling substantially in the second half encouraging, but there is concern that a large of the 1990s, aid volumes rose in 2002. Net part of it may not be directed to financing the ODA flows, as estimated by the OECD's incremental costs of meeting the MDGs. Of Development Assistance Committee, rose the roughly $6 billion nominal increase in net from $52.3 billion in 2001 to $58.3 billion in ODA by DAC donors in 2002 (the increase in 2002. The ratio of ODA to donors' GNI, real terms was about $4 billion), debt relief which fell from 0.34 percent in the early accounted for $2.9 billion, technical coopera- 1990s to 0.22 percent in 2001, rose to 0.23 tion $1.9 billion, and emergency and disaster percent. Preliminary OECD DAC estimates relief and food aid $0.7 billion (figure 11.2). indicate that net ODA rose to $68.5 billion in Moreover, the increase in bilateral net ODA 2003; the increase in real terms was much was concentrated in a few countries: Serbia smaller--to $60.5 billion (at 2002 prices and and Montenegro ($1.3 billion), Mozambique exchange rates).1 Aid volumes are set to rise ($0.9 billion), and Côte d'Ivoire ($0.7 billion), further as DAC members start delivering on with the additional aid mostly reflecting debt FIGURE 11.1 Aid is rising but is well short of what is needed Net ODA from DAC donors 120 110 100 Additional $50 billion 0.35 percent of donors' projected GNI in the latter half of the 2000s, roughly the same as in the early 1990s. 90 billions 80 Sept. 2003 Development US$ Committee Paper 70 > $30 billion 60 $18.6 billion 50 Monterrey commitments 40 1990 1992 1994 1996 1998 2000 2002 2004 2006 Note: The Development Committee paper estimated, on a conservative basis, that developing countries could effectively absorb at least $30 bil- lion in additional aid annually (Development Committee 2003b). Source: OECD 2004a; Development Committee 2003b. 164 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 4 P R O V I D I N G M O R E A N D B E T T E R A I D TABLE 11.1 Actual ODA and post-Monterrey commitments (DAC donors), 2002 and 2006 Net ODA ODA/GNI Net ODA ODA/GNI Real change in ODA in 2006 in 2002 in 2002 In 2006 in 2006 compared with 2002 Donor US$ billions Percent 2002 US$ billions Percent 2002 US$ billions Percent Five largest donors (by aid effort) Denmark 1.64 0.96 1.53 0.83 ­0.11 ­7 Norway 1.70 0.89 2.07 1.00 0.37 22 Sweden 1.99 0.83 2.25 0.87 0.26 13 Netherlands 3.34 0.81 3.57 0.80 0.23 7 Luxembourg 0.15 0.77 0.21 1.00 0.06 41 Five largest donors (by amount) United States 13.29 0.13 19.54 0.17 6.23 47 Japan 9.28 0.23 10.50 0.26 1.22 13 France 5.49 0.38 7.38 0.47 1.89 34 Germany 5.32 0.27 7.10 0.33 1.78 33 United Kingdom 4.92 0.31 6.91 0.40 1.98 40 Total (DAC Members) 58.27 0.23 76.85 0.29 18.58 32 Total (EU Members) 29.95 0.35 39.63 0.42 9.68 32 Note: Data for 2006 are projections based on announced commitments. Source: OECD 2004a. forgiveness; and in frontline states in the war FIGURE 11.2 The increase in ODA in 2002 was concentrated in on terror, such as Afghanistan ($0.7 billion). special-purpose grants Looking ahead, there is some concern that Breakdown of the $6 billion nominal increase in net ODA by DAC donors in 2002 additional aid flows could be significantly influenced by donors' strategic agendas, such as the war on terrorism and conflict and Total increase (2001­02) = $6 billion reconstruction in Afghanistan and Iraq.3 It 6 Multilateral: Other will be important to ensure that such strategic $0.2 billion bilateral: objectives do not crowd out development aid. 5 $0.3 billion Non-DAC donors' ODA, which has aver- Emergency and 4 disaster relief aged around 2 percent of DAC ODA in Technical and food aid: recent years, was also up in 2002. At $3.2 cooperation: 3 $0.7 billion $1.9 billion billion, these flows were at their highest level in more than 10 years. The increase was led 2 by Arab aid, especially development assis- Debt relief: tance from Saudi Arabia, which rose by more 1 $2.9 billion than 400 percent (mainly humanitarian assistance to neighboring countries and an increase in development lending). In the 1990s, Arab aid fell as oil prices fell, but it has rebounded in tandem with the recent Source: OECD DAC database. increase in oil prices. The favorable trend in non-DAC aid appears to reflect some of the The rise in ODA has occurred in an envi- same factors motivating DAC donors--a ronment of lower overall flows to developing renewed focus on development spurred by countries. Official flows to these countries the MDGs and the Monterrey Compact, as have declined sharply, mostly due to a fall in well as strategic considerations. net nonconcessional lending from multilateral 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 4 165 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S sources. Less nonconcessional borrowing from with post-Monterrey commitments (see table the IMF, repayments on past crisis financing 11.1) would leave the size of ODA relative to packages, and substantial prepayments of recipients' GNI below the level of the early loans to the World Bank are behind this 1990s.8 Recent and ongoing reforms in many decline. Concessional lending by multilaterals developing countries have improved the set- has also edged lower. As reviewed in chapter 9, ting for effective use of aid.9 A recent World private flows have begun to recover, but for- Bank study found that countries with rela- eign direct investment to developing countries tively good policies and institutions could has declined. effectively utilize a substantial increase in At about $9 billion, private grants by non- aid to boost progress toward reaching the governmental organizations (using their own MDGs.10 It estimated that a doubling of resources) are becoming an important source flows could be productively used in the of finance for ODA recipients.4 Private grants large Asian low-income countries, including have expanded rapidly, experiencing a near Bangladesh, India, Indonesia, Pakistan, and 70 percent increase during 1997­2002, and Vietnam. These countries have prospects of now account for 0.03 percent of DAC mem- continued good policies, a large gap with bers' GNI. The growth in private donor funds respect to MDG targets, and relatively low reflects the success that NGOs have had in aid dependence. Sub-Saharan African coun- influencing a broad array of development tries with relatively good policies could on issues, from reducing debt burdens of the average effectively absorb increases in aid on poorest countries to environmental, health, the order of 60 percent. Of course, differences and governance issues.5 across countries are substantial. The study concluded that, as a conservative estimate, an initial increment of at least $30 billion annu- Aid Commitments Lag Countries' ally could be effectively used by recipient Absorptive Capacity and Needs countries. As countries improve their policies While the international community generally and governance over time and upgrade their agrees on the need for substantially more capacities, the amount of aid that can be used resources if the MDGs are to be realized, there effectively would rise into the range of $50 is a concern that countries may not be able to billion plus per year, the amount that most effectively absorb large increases in resource estimates suggest is likely to be necessary to transfers. One reason is that large inflows of support adequate progress toward the MDGs aid could complicate macroeconomic man- (box 11.1). agement because of the well-known "Dutch disease" phenomenon.6Another reason is that Modalities for Mobilizing Additional Aid aid flows could undermine government insti- tutions when these institutions are weak. In Apart from efforts to increase the amount of countries with weak governance, the elite can aid, the time frame of the MDGs--to 2015-- capture resource transfers and keep the bene- has encouraged consideration of ways to fits from flowing to the poor. Large amounts "frontload" future aid commitments. The of aid could also overwhelm local capacity to most fully developed of such approaches is use funds well.7 Complex donor procedures the United Kingdom's proposal for an Inter- and practices may add to the problems of national Finance Facility (IFF). As a way to absorptive capacity. frontload significant aid flows toward achiev- While the ability of poor countries to ing the MDGs, the IFF appears technically productively absorb increases in external feasible--legally binding donor pledges could resources is crucial to aid effectiveness, it is be used to back AAA-rated market borrow- important to note that ODA increases in line ings by a treasury vehicle. Key requirements 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 4 P R O V I D I N G M O R E A N D B E T T E R A I D BOX 11.1 Estimating the cost of the MDGs The costs of achieving the MDGs are hard to estimate. There are several reasons for this. For one thing, putting a price tag on achieving these goals requires distinguishing between average and marginal cost. In education, for exam- ple, the marginal cost of enrolling a child could be higher than the average cost because children who are not in school might be harder to induce to attend school, or they may be in more scattered populations. For another thing, progress on one goal contributes to progress on other goals. Thus, safe drinking water and good sanitation promote better health. The interdependence of goals implies that costing each goal separately could result in double counting. There are multiple determinants for each goal, and they cut across many sectors. Measuring the multisectoral dimensions is difficult. The task of measuring the costs of attaining the MDGs is also complicated by the fact that the effective- ness of additional expenditure depends on appropriate changes in policies and institutions. Studies on costing the MDGs fall into two broad categories: global costing exercises and country-level estimates. Global elasticities and average costs guide the former, while the latter use country-level information to scale up to the global level. Neither type of study effectively incorporates the multisectoral dimensions of MDGs. Global costing exercises. The two well-known global studies are a report prepared for the United Nations by the High-Level Panel on Financing for Development led by Ernesto Zedillo (United Nations 2001) and a study at the World Bank by Devarajan, Miller, and Swanson (2002). Both studies assume that developing countries implement necessary reforms. The U.N. report estimated that roughly $50 billion a year in additional ODA would be required to achieve the MDGs. The cost of halving the proportion of people living in extreme poverty was estimated at $20 billion more in aid; and an additional $30 billion in ODA was estimated for the service goals. The report cautioned about the difficulties of estimation and noted that a firmer, more comprehensive estimate would need to be based on individual country estimates. Devarajan, Miller, and Swanson used two different approaches. One approach esti- mated the MDG resource needs by calculating the economic growth rate, and in turn the investment, required to achieve the goals. The second approach separately estimated the costs of achieving the individual goals. Both approaches yield comparable estimates--$40 billion to $60 billion a year in additional ODA. Another World Bank study (Development Committee 2003a) estimated that $30 billion in additional aid would be required to achieve selected targets within the service delivery MDGs. The study noted that this estimate did not include certain costs, notably that of complementary infrastructure. Country-level costing. A World Bank study prepared for the September 2003 Development Committee meeting (Development Committee 2003b) estimated how much additional aid recipient countries could productively use to accelerate progress toward the MDGs. The approach linked aid requirements to countries' initial conditions, the soundness of their policies, and their capacity to make effective use of additional resources. The study analyzed 18 low-income countries with relatively good policies. Reflecting the different country characteristics, estimates of the additional aid that countries could effectively utilize vary greatly, from a range of 20 to 100 percent or more. Based on this analysis, the study concluded that developing countries could effectively absorb at least $30 billion in addi- tional aid annually--a conservative estimate that does not fully take into account all costs, especially the costs of infrastructure investments needed to accelerate growth and improve service delivery and the costs of global public goods (such as combating infectious diseases and addressing environmental concerns). A study by the United Nations Millennium Project (2004) took a different approach. It asked what it would cost to achieve the MDGs, with the cost estimate relatively unconstrained by absorptive capacity limitations of recipient countries. The study identified the full range of inputs and actions considered necessary to reach the goals, including costing detailed interventions in 14 sectors or categories. Preliminary results for five countries--Bangladesh, Cam- bodia, Ghana, Tanzania, and Uganda--for 2005­15 show that these countries would need substantial increases in external development assistance, with their requirements estimated at $44 to $57 per capita per year, which trans- lates into a range of $7.5 billion annually for Bangladesh to about $1 billion annually for Cambodia. Scaling up from these country-level results, the study concluded the total ODA would need to rise substantially from current levels, but the total requirements would be less than the ODA target of 0.7 percent of rich countries' national 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 4 167 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S for the IFF to be feasible in practice would sultants and with absorbing local expertise in include breadth and strength of political back- projects without building sustainable local ing for the obligations being undertaken, and capacity. Although technical assistance is not resolution of issues on the treatment of pledges included in official statistics on aid tying, it from a fiscal viewpoint by national authorities. can essentially be considered as a form of tied Consideration could also be given to alterna- aid. Consequently, estimates of progress on tive structures based on the same principles. aid untying should be interpreted cautiously. Recent discussions of official financing for According to DAC estimates, the proportion development have broadened the range of of untied aid has increased from 60 to 80 per- modalities under consideration beyond tradi- cent in the past two decades (for those coun- tional aid. As a result, there is a need for more tries that report). These numbers exclude systematic analysis and comparison of a menu technical cooperation, administrative costs, of approaches that might provide additional- and ODA by members that do not report the ity, greater efficiency of aid, or both. The tying status of their aid.12 whole spectrum of concessionality needs to be Tying is costly for recipients. A recent study examined from three points of view. First is of several projects in Ghana found that 11 to the case for extending concessionality beyond 25 percent of resources could have been saved its traditional country-defined boundaries to if aid had been untied.13 An earlier study found focus on MDG investments within countries the costs to be in a similar range: 15 to 30 per- not usually eligible for concessional lending. cent.14 With DAC members agreeing in 2001 Second is the use of tailored concessionality to untie all financial aid to the least developed to make more flexible financing available to countries, more progress on untying aid is poor countries, particularly when they face likely. Efforts should also be made to evaluate debt distress or exogenous shocks. Third is the effectiveness of technical cooperation. whether added concessionality is an appropri- ate means to address global and regional Need for More Flexible Forms of Aid externalities such as public health. Work is under way on this menu of issues, from dif- More aid needs to be provided in forms that ferent perspectives, within the World Bank can finance the incremental costs of achiev- and the IMF. As this work progresses over the ing the MDGs. Of the total ODA, assistance coming months, more defined options and provided through bilateral channels accounts proposals will emerge.11 for about 70 percent. Of the total bilateral assistance, currently only about 30 percent is available for project and program expendi- The Changing Composition tures in recipient countries.15 The rest is allo- of Aid cated to special-purpose grants such as technical cooperation, debt relief, emergency Rising Share of Technical Cooperation and disaster relief, food aid, and cost of aid In addition to adequacy of amount, aid needs administration. The proportion of bilateral to be provided in forms that are responsive to ODA net of special-purpose grants has been recipients' needs. A significant feature of declining steadily. The current proportion of change in the composition of aid has been the 30 percent compares with a high of about 60 rising share of technical cooperation and percent in the early 1980s (figure 11.3). This other special-purpose assistance. Technical trend needs to be reversed. A much higher cooperation now accounts for nearly a third proportion of additional aid will need to be of gross bilateral ODA. Technical coopera- provided in more fungible resources--cash tion is of course useful, as it transfers much- transfers--that countries can deploy in line needed skills and knowledge. Often, however, with their priorities to finance the costs of it is associated with high-cost expatriate con- meeting the MDGs. 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 4 P R O V I D I N G M O R E A N D B E T T E R A I D Aid delivery needs to be more flexible, with FIGURE 11.3 The proportion of aid provided in cash and more flexible aid provided in forms that reflect recipients' forms should be rising, not falling needs and circumstances.16 As countries' pub- Total bilateral ODA minus special-purpose grants lic financial management systems improve, more aid can be provided through budget sup- 70 port or sectorwide programs. Depending on recipients' circumstances, part of the assistance provided through these means should be avail- 60 able to finance recurrent costs--much of the ODA increase in costs associated with the improve- ment of education and health programs that 50 are crucial to progress toward the MDGs is bilateral recurrent. Such flexible provision of aid would total be appropriate in countries with sound budget of 40 frameworks, for example, Uganda and Burkina Faso. Where budget frameworks are at an early Percent 30 stage of reform, as for example in Madagascar, financing for recurrent expenditures could be provided through investment projects. 20 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Quality and Effectiveness of Aid Source: OECD DAC database. The achievement of the MDGs requires both more and better aid. Issues relating to the qual- FIGURE 11.4 Institutions and policies matter for aid effectiveness ity and effectiveness of aid are receiving increas- The relationship between the quantity of aid, the quality ing attention. There is broad recognition that of policies, and GDP growth by complementing improved policies in recipi- ent countries, better donor policies and prac- 1.5 tices can contribute significantly to enhancing the impact of aid. The agenda spans several key 1 dimensions of the quality of aid: selectivity cent) 0.5 (allocation of aid across countries), alignment per( (consistency with recipients' development pri- 0 Good policy orities), and harmonization (streamlining and owthrg Medium policy ­0.5 coordination of donor procedures and prac- GDP tices and harmonizing them with those of the ­1 Bad policy recipients). Related aspects include the reduc- ­1.5 tion of aid volatility and fragmentation. Volume of aid Aid Effectiveness and Selectivity Low Medium High Aid has a greater impact on growth if it is tar- geted to countries with better policies and Source: Dollar and Levin 2004. institutions (figure 11.4). The impact depends on the interaction between aid and policy. ficiently large amounts. There is now general With bad policies, aid has little effect on acceptance that policies and institutions mat- growth; if anything, the relationship may be ter for aid effectiveness, which is reflected in negative. With good policies, the effect of aid a trend toward increased selectivity in the is positive and is stronger if aid is given in suf- allocation of aid.17 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 4 169 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S Recent research finds a significant rela- improve aid effectiveness by tying increased tionship between donor assistance and the assistance to performance. quality of recipients' policies.18 About three- The more selective donors also provide fourths of the donors exhibit a positive rela- much more aid per donor country's citizen tionship between their aid allocations and the (figure 11.5). The top providers of assistance soundness of recipients' policies and institu- per donor country citizen to low-income tions. Moreover, donors today are in general countries with better policies and institutions more selective than a decade ago. Selectivity during 1999­2002 were Denmark (providing has also increased with respect to poverty, $78 per Danish citizen a year on average dur- with more aid being allocated to poorer coun- ing this period), Luxembourg ($53), Norway tries, given the quality of policies. However, ($48), and the Netherlands ($39).19 Corre- variation among donors is wide. On average, sponding figures for some of the largest multilateral assistance is much more selective donors in absolute size are quite low (for than bilateral assistance. Among bilateral example, $4.5 for the United States), with the donors, the largest ones (in terms of the result that aid provided to low-income coun- absolute amount of aid provided) are less tries with good policies and institutions per selective (box 11.2). This means that the typ- donor country citizen averaged a relatively ical donor is more selective than the typical modest $10.3 for DAC members as a whole aid dollar. Actions being taken by some of during this period. these donors, such as the establishment by the Even as donors move to target aid better, United States of the Millennium Challenge they need to take account of the special needs Account (MCA), are expected to increase the of the conflict-affected and other low-income selectivity of their aid. The MCA aims to countries under stress (LICUS). The challenge is to balance issues of weak policies and insti- tutions with the need to maintain critical FIGURE 11.5 More selective donors provide more aid per capita to engagement. Appropriately timed and directed countries with stronger policies and institutions aid, sensitive to local efforts to rebuild and to Aid per bilateral donor country's capita to low-income institutional capacity constraints, can play a countries, average for 1999­2002 ($ per capita) very useful role. There is no set pattern of aid interventions targeted to LICUS countries. 80 They can include meeting humanitarian needs, Denmark improving basic service delivery, and prevent- 70 ing or responding to conflict. There is also wide variation among the LICUS in their capacity to 60 absorb aid: for example, postconflict countries institutions/ Luxembourg may be better able to absorb larger amounts of 50 Norway aid effectively than are other LICUS.20 Bosnia, policies 40 Netherlands Rwanda, and Timor Leste have demonstrated ong United Kingdom the potential for aid-supported recovery and str 30 Sweden progress toward the MDGs. The new DAC with Japan initiative on difficult partnerships should help 20 Germany to shape more effective ways of providing aid DAC average to help countries under stress. 21 Countries10 France Recent research shows that well-timed aid United States 0 can also be quite productive following 0 10 20 30 40 50 60 70 80 adverse exogenous shocks, helping to limit Countries with weak policies/institutions the diversion of development resources into short-term relief efforts.22 Low-income coun- Source: Dollar and Levin 2004. tries are particularly vulnerable to natural 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 4 BOX 11.2 Measuring aid selectivity Dollar and Levin (2004) develop two indexes to measure the selectivity of aid. A policy selectivity index measures the elasticity of aid with respect to the quality of recipients' policies and institutions (controlling for recipients' per capita income and population). A poverty selectivity index measures the elasticity of aid with respect to the recipients' per capita income level (controlling for their pol- icy and institutional quality and population). An overall index is computed as an average of the two--average of the policy elasticity and the (negative of) the poverty elasticity--to measure how selective donors are in terms of focusing assistance on low-income countries with better policies and institutions. The results show that in 2002, a 100 percent increase in the quality of recipients' policies was on average associated with 176 percent more aid. The relationship is much stronger for multilateral assistance (elasticity of 2.57) than for bilateral assistance (elasticity of 0.63). However, policy elas- ticity varies considerably among bilateral donors. The Nordic countries, the Netherlands, and the United Kingdom show high policy selectivity (elasticity of 2.5 or higher). Broadly similar results are obtained for poverty elasticity. Some of the largest donors in absolute amount are less selective. France and the United States do not appear to have been particularly selective along either the policy or poverty dimension. Japan appears to be selective on policy but not on poverty, reducing the overall selectivity of its aid. The authors test the robustness of their analysis to the choice of the measure for recipients' poli- cies and institutions. The results reported in the table use the World Bank CPIA as the measure. Using two other measures of institutional quality that are available for a large number of countries--the International Country Risk Guide rule-of-law index and the Freedom House democracy index--the authors find that the rankings of aid selectivity are quite similar. Thus, whichever measure of the qual- ity of policies and institutions is used, the same donors appear to be more or less selective. The authors also test the sensitivity of their analysis to different definitions of aid flows--ODA including loans and debt relief and grants only--and find that they do not significantly alter the results. It should be noted that the selectivity index captures only one, albeit important, dimension of the quality and effectiveness of aid--its allocation across countries. Other dimensions of the quality of aid discussed elsewhere in this chapter include the form and composition of aid, its predictability, and alignment and harmonization. Moreover, the policy selectivity index needs to be interpreted cautiously. Some aid can be effective in situations where policies and institutions are still weak, such as in certain post-conflict and post-shock situations. This is an area where more research would be useful. There is substantial scope for improving the allocation of aid Aid selectivity index, 2002 Indicator Policy selectivity Poverty selectivity Overall selectivity Total aid 1.76* ­0.49* 1.12 Bilateral aid 0.63 ­0.38* 0.50 Multilateral aid 2.57* ­0.83* 1.70 Five largest donors (by amount) United States 0.66 ­0.76* 0.71 Japan 1.90 0.01 0.94 France ­0.07 ­0.28 0.10 Germany 2.06* ­0.47* 1.27 United Kingdom 3.66* ­1.06* 2.36 Good practice examples Denmark (bilaterals) 4.77* ­1.11* 2.94 IDA (multilaterals) 4.23* ­4.20* 4.22 * Elasticity different from zero at 10 percent significance level. Note: The last column is an average of the first two. Emergency and disaster relief are excluded from these calculations. Source: Dollar and Levin 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 4 171 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S disasters, terms-of-trade shocks, and other reduce vulnerability to financial shocks and adverse shocks, and those with inadequate help deal with their consequences. Over time, cushions of external reserves or fiscal as income levels rise further in these countries resources are likely to suffer especially severe and their domestic resource availabilities and effects on growth and poverty. The main pol- access to private capital markets expand, icy challenges here are to accelerate the inter- their use of ODA should decline. national response to such shocks, increase the amount of assistance, and make more use of Donor Fragmentation grants rather than lending for this purpose.23 About a third of all ODA goes to middle- Bilateral aid is highly fragmented, with possi- income countries. Many of these countries ble negative implications for aid quality. The either have met or are on track to meet sev- argument against aid fragmentation is that if eral of the MDGs well before 2015. The bulk each donor has only a small share in a recip- of the resources needed to achieve the devel- ient country's total aid, then the donor's stake opment goals in these countries will have to might be more narrowly focused on the suc- come from domestic sources, and their exter- cess of the donor's own projects and less on nal financing needs will be met primarily the country's overall development. Another from private or nonconcessional flows--espe- possible consequence is that if a project's cially in the upper-middle-income countries. fixed costs are high and there are returns to Aid, however, can play an important role in scale, then too many individual projects may the middle-income countries: as a catalyst for impair efficiency. Fragmentation may also reform; as a reinforcer of domestic efforts to impose high transaction costs on recipients, tackle large pockets of poverty (middle- as more time is taken up by donor require- income countries remain home to 280 million ments. Donors such as Canada, Finland, the people who live on less than $1 a day and 870 Netherlands, and the United States (through million who live on less than $2 a day); and the Millennium Challenge Account) are as a provider of countercyclical support to proposing to reverse the trend toward dis- persion by concentrating more aid in fewer recipient countries. A donor fragmentation index constructed FIGURE 11.6 Aid fragmentation is high from the shares of individual donors in Donor fragmentation index, 1975­2002 annual aid disbursements shows that frag- mentation has been rising (figure 11.6).24 The 75 index ranges from 0 to 100, with higher val- ues implying more fragmentation. The index 70 is 0 if one donor accounts for all of a recipi- ent's aid. The degree of fragmentation rises as the number of donors rises, as their aid shares 65 become more equal, or both. The issue of donor fragmentation is of course more seri- 60 ous in some countries than others. For Tan- zania, for example, the fragmentation index in 2002 was a high 93 (compared to an aver- 55 age of 67). Egypt, in contrast, has an index value of 62. The degree of fragmentation is 50 moderately correlated with the size of ODA 1978 1982 1986 1990 1994 1998 2002 in recipients' GNI, suggesting that greater aid dependency is associated with a higher degree Source: OECD DAC database and World Bank staff estimates. of fragmentation. 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 4 P R O V I D I N G M O R E A N D B E T T E R A I D Volatility in Aid Flows FIGURE 11.7 Aid flows are typically more volatile than fiscal revenues in aid-dependent countries Volatility in aid flows can put much stress on the ability of recipient countries to plan and use resources well and thereby hurt aid effec- 100 tiveness. In many countries, aid tends to be more volatile than fiscal revenues.25 This is 80 38 countries especially a problem for countries with high of aid dependency; these countries tend to expe- 60 85 rience more volatility and possess the least options for coping with it (figure 11.7).26 40 distribution Faced with uncertain aid flows, poor coun- 62 tries have, in principle, three options. They 20 can try to apply a flexible fiscal framework in centagereP 15 which taxes and expenditures are adjusted in 0 response to aid receipts. They can try to Low aid-dependency High aid-dependency smooth out aid fluctuations by allowing the Relative volatility level of international reserves to fluctuate. And they can use domestic nonmonetary Aid > fiscal revenues Aid < fiscal revenues financing to fill the gaps in aid levels. All three options present serious difficulties for such Note: High aid-dependency refers to countries with an aid-to-revenue ratio larger than 50 countries. Aid shortfalls are mostly absorbed percent; low aid-dependency refers to countries with an aid-to-revenue ratio between 10 and 50 percent. by reductions in spending, and sometimes by Source: Bulir and Hamann 2003. increases in taxes.27 As countries build a track record of policy performance, their efforts should be supported underscore the importance of country own- with timely, more predictable, and longer-term ership and leadership of the development aid commitments. Progress toward the MDGs program for its effectiveness. There is also is necessarily a long-term process and requires recognition that the wide variety of donor sustained reform of policies and institutions. requirements and processes for delivering Commitment to sustained reforms, especially aid in the past were generating high and in countries with a higher dependence on aid, is unproductive transaction costs for partner difficult without a reasonable degree of assur- countries and drawing down their limited ance about the aid flows and the circumstances institutional capacities. under which they are likely to materialize. Donors are beginning to anchor their sup- port in country-owned and -led strategies. In low-income countries, the Poverty Reduction Alignment and Harmonization Strategy Paper (PRSP) provides the central Alongside improvements in the allocation of framework for strategic alignment of inter- aid across countries, two other factors are national aid with national development pri- key to enhancing development effectiveness: orities and for achieving better coherence (a) alignment of aid with partner country and coordination in donor support activities. development strategy and priorities, and (b) Finding effective ways of aligning aid with the harmonization of donor policies and prac- PRSP and harmonizing donor policies and tices around strengthened partner country practices around it constitute the core of the systems. Improving alignment and harmo- alignment and harmonization agenda in low- nization is now an active item on the agenda income countries. of the international community, reflecting the The strengthened focus on, and high-level development lessons of the past decade that political commitment to, the alignment 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 4 173 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S harmonization agenda was evident at the The Working Party plans to report on Rome High-Level Forum in early 2003. The progress on its work to the DAC's Senior- Forum imparted a strong impetus to this Level Meeting in late 2004 and to the Second reform agenda that is now being actively fol- High-Level Forum scheduled to be held in lowed up. A new institutional architecture March 2005 in Paris. has emerged to take this work forward. Monitoring progress on alignment and harmo- A new institutional architecture. The follow- nization. To enable systematic monitoring of up work to Rome is being coordinated by the progress on the alignment and harmonization OECD DAC Working Party on Aid Effective- agenda, a preliminary set of indicators has been ness and Donor Practices established in May drawn up that is now being field-tested. The 2003. The work, carried out in active collab- indicators cover the key dimensions of owner- oration with bilateral and multilateral donors ship, alignment, streamlining, and improve- and partner countries, aims to develop pro- ment of practices (table 11.2). A survey will be posals for action in several areas important to carried out in 14 developing countries to cap- aid effectiveness. These include alignment ture progress on alignment and harmonization and harmonization, public financial manage- at the country level. Data collected from this ment, procurement, managing for develop- exercise will be used to report to the Second ment results, and untying of aid.28 High-Level Forum in 2005. Task teams have been set up for each of these areas. The work on alignment and har- Emphasis on country-level implementation. monization is focused on facilitating the In the effort to improve alignment and har- implementation of the Rome agenda through monization, emphasis is being placed on dissemination and exchange of experience; country-level implementation, to test initiatives tracking progress on more effective aid deliv- and assess their effectiveness. This process is ery; and improving existing mechanisms for increasingly being led by recipient countries, exercising peer pressure (including using the with the support of local-level donors. A num- peer review mechanism to monitor broader ber of countries have stepped forward as par- issues of policy coherence). Work in the area ticipants in country-level efforts to advance and of public financial management is focused on mainstream harmonization.29 The experience developing a performance measurement of Vietnam, one of the frontier harmonization framework for public financial management; countries, offers some concrete examples of increasing the predictability of aid; better implementation progress (box 11.3).30 integrating aid flows in recipient country bud- Partner countries and donors are also in- gets; aligning budget support with PRSP creasingly looking to harmonize and align at processes; and developing an accounting the sector level, through the application of standard for aid. The work on procurement sectorwide approaches, or SWAps. In SWAps aims at mainstreaming good procurement donors support government programs based practices and supporting capacity building in on agreed sector strategies. Wherever possible, partner countries. The work on results aims they use the country's systems for procurement, to articulate a core set of principles of good financial management, environmental assess- practice in managing for development results, ment, and monitoring and reporting, and pool drawing on the emerging practices in differ- their funds to provide harmonized support. In ent institutions. And the work on untying aid the health sector, for example, about 20 coun- supports the 2001 DAC agreement to move tries currently receive support through SWAps. toward untying aid to all least developed In sum, an encouraging consensus has countries and to explore how to broaden emerged in the international community on their recommendation. the need to better align and harmonize aid, 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 4 P R O V I D I N G M O R E A N D B E T T E R A I D TABLE 11.2 Framework of indicators on progress on harmonization and alignment (provisional) Rome Commitments on Harmonization and Alignment Partner countries coordinate development assistance 1. Partner countries assume leadership roles in the 1. Percentage of partner countries where partners and donors coordination of development assistance (*3) have agreed on an agenda for greater harmonization. 2. Partner countries, when necessary, reform their systems 2. Percentage of partner countries that lead local and procedures and adopt international principles and coordination processes, including organizing and chairing good practices (*3) consultative groups or roundtables. 3. Donors increasingly support partner countries' capacity to 3. Comment: The Joint Venture on Public Financial ship manage development assistance effectively (*3) Management is currently elaborating a framework on public Owner financial management. A decision will be made on whether 1. this might provide the basis for an appropriate indicator. 4. Percentage of partner countries where partners and donors have agreed to an action plan and have committed resources to build institutional capacity to manage development assistance. Donors align aid with partner country priorities and systems 4. Development assistance is increasingly delivered in 5. Percentage of donors within a country whose country accordance with partner countries' priorities (*5.1) assistance strategies are consistent with PRSs or equivalent 5. Donors rely increasingly on partner country systems and national frameworks. procedures (*5) 6. Percentage of donors within a country whose development assistance is aligned with budget cycle. Alignment 7. Percentage of donors within partner country relying on 2. (a) supreme audit institution to audit donor funds and (b) partner countries' procurement systems. Donors streamline aid delivery 6. Donors implement common arrangements for planning, 8. Percentage of donors within a country that rely on a managing, and delivering aid (*6) common conditionality framework consistent with PRSs or 7. Donors reduce missions, reviews, and reports where equivalent national frameworks. appropriate (*5.2; *5.7) 9. Percentage of SWAps where funding, reporting, and 8. Donors are transparent about their activities (*6) monitoring are guided by a common framework. 10. Number of agreements on delegated cooperation. lining ma 11. Number of donor missions per partner country, of which joint donor missions. Stre 3. 12. Number of financial reports per country prepared by the Ministry of Finance and sector ministries solely for donors. 13. Percentage of donors within a partner country that disclose information on (a) planned aid flows and (b) country analytic work. Policies, procedures, practices, and incentives foster harmonization 9. Donors review key policies and procedures to support 14. Comment: These dimensions will be captured in the peer harmonization (*5.2) review reports and reports to the DAC SLM Level Forum. Practices 10. Global and regional programs increasingly promote and 4. support harmonized approaches (*5.7; *5.9) Note: Number in parentheses indicates number of the paragraph that refers to the specific commitment in the Rome Declaration. Paragraph 7 of the Rome Declaration on Harmonization called for tracking and refining indicators of progress on harmonization. This list of commitments and the accompanying list of indicators of effective partnerships address that undertaking. Source: OECD 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 4 175 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S BOX 11.3 Vietnam's comprehensive government-led harmonization program In Vietnam, a pioneer of harmonization, and a European Union harmonization pilot, donors have been supporting the implementation of the government's harmonization priorities, with progress in several areas. At the strategic level. The Vietnamese government has taken the lead to develop a clear harmo- nization program and utilized its poverty reduction strategy for ODA planning and to ensure sec- tor policy coherence. Budget alignment. The Poverty Reduction Support Credit (PRSC) and other budget support will be aligned on an interim basis starting in 2004 and regularized in 2005. Joint analytic work. The Asian Development Bank and the World Bank jointly undertook pro- curement and financial management diagnostics. The IMF, UNDP, Denmark, the Netherlands, the United Kingdom, and the World Bank jointly conducted a public expenditure review. Harmonized financial management. The AsDB, Agence Française de Developpement (AFD), Japan, Kreditanstalt fur Wiederaufbau (KfW), and the World Bank have agreed on a common reporting format for selected ongoing and new projects; common assessments of implementing agency financial management arrangements; common content, format, and frequency of reports required by the donors; and common auditor acceptability criteria, with a shared list of acceptable firms, common audit terms of reference, and an agreed follow-up approach to audit findings includ- ing sanctions. Harmonized procurement. Agreement has been reached among the AsDB, AFD, Japan, KfW, and the World Bank on common bidding documents, common upper-limit thresholds for Interna- tional Competitive Bidding/National Competitive Bidding, common assessment of thresholds for prior/post reviews, and eligibility of dependent state-owned enterprises. Environmental assessment. Harmonization efforts among the AsDB, AFD, Japan, KfW, and the World Bank are moving toward agreement on environmental assessment (EA) coverage, consulta- tion through sharing of EA documentation, mitigation measures, management plans, and EA dis- closure and timing. Joint portfolio reviews. This is an ongoing collaborative effort by AsDB, Japan Bank for Inter- national Cooperation, and the World Bank, which has more recently been joined by AFD and KfW. Capacity building. The Like-Minded Donor Group, constituting seven to nine bilateral donors, has teamed up with the government and other donors in a $10 million multidonor trust fund to strengthen government capacity related to procurement, project management, financial manage- ment, and budget support. Source: World Bank, Operations Policy and Country Services Vice Presidency. and the main elements of the agenda have mote growth and reduce poverty. Overall, crystallized in the past year. What is needed substantial progress has been made in the now is consistent implementation of these implementation of the HIPC Initiative. As of efforts and concerted monitoring to keep April 2004, 27 HIPCs--or more than two- track of progress and ensure learning and thirds of the 38 countries that potentially cross-fertilization. qualify for assistance under the initiative-- have reached the decision point and are Progress on the HIPC Initiative receiving debt relief. In net present value (NPV) terms, these 27 countries account for For the heavily indebted poor countries, debt 85 percent of the total expected relief for the relief is crucial to create the fiscal space for 34 HIPCs for which data are available. Thir- much-needed increases in spending to pro- teen HIPCs have also reached the completion 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 4 P R O V I D I N G M O R E A N D B E T T E R A I D point--when creditors provide the full debt track record leading to the decision point relief committed at the decision point on an before the end of 2004, when the sunset irrevocable basis. clause of the HIPC Initiative will take effect. The process of reaching the completion Staffs of the Bank and Fund will present point has generally taken longer than earlier options for extension of the sunset clause to envisaged. The delay is attributable to the their respective Boards by September 2004. challenges of achieving and maintaining HIPC relief is projected to substantially macroeconomic stability and preparing and lower debt stocks and debt service ratios for implementing poverty reduction strategies. most HIPCs that have reached the decision Most of the countries in this situation, point. NPV debt stocks in the 27 HIPCs that however, either have adopted the necessary reached the decision point by July 2003 are macroeconomic policy changes or are making projected to decline by about two-thirds once efforts to do so. Similarly, while the preparation they reach their respective completion points. of PRSPs has taken longer than expected, most HIPCs in the interim period have benefited countries that are in the interim period have from Paris Club debt relief as well as from finalized their strategies and are not expected to relief from several multilateral creditors under be constrained by the requirement for one-year the HIPC Initiative. The ratio of debt service satisfactory implementation. Progress has also to exports for the 27 decision-point countries been made in most cases on social and struc- declined from 16.9 percent in 1998 to an esti- tural completion point triggers. mated 9.8 percent in 2003 and is projected to Challenges remain for countries that have fall to 7.9 percent by 2006 (table 11.3).31 not yet reached the decision point. Domestic Poverty-reducing expenditures have risen conflict, unsettled postconflict situations, and in the countries that have reached the decision protracted arrears continue to impede coun- point. For these 27 countries, such expendi- tries from reaching the decision point. The tures in 2003 were estimated to be about three issue thus arises as to whether a number of and a half times the amount of debt-service countries could be left behind when the HIPC payments.32 Annual debt service is projected Initiative expires. The initiative is open to all to be about 24 percent lower during 2001­06 eligible countries that establish a performance than it was in 1998­99, a reduction averaging TABLE 11.3 Debt service and poverty-reducing expenditure by the 27 HIPCs that have reached the decision point (in US$ millions, unless otherwise indicated) Actual Estimate Projected Expenditure 1998 1999 2000 2001 2002 2003 2004 2005 2006 Debt service 3,696 3,179 3,131 2,451 2,419 2,729 2,711 2,534 2,794 Debt service/exports (%)a 16.9 14.5 13.9 10.4 10.0 9.8 8.7 7.6 7.9 Debt service/government revenue (%)a 25.2 21.8 21.8 16.5 14.9 14.6 12.8 10.9 11.0 Debt service/GDP (%)a 3.9 3.4 3.4 2.5 2.4 2.4 2.2 1.9 1.9 Poverty-reducing expenditure 6,067 5,934 6,712 7,581 9,104 10,832 11,521 12,465 Poverty-reducing expenditure/ government revenue (%)a 40.9 41.4 45.2 46.8 48.6 51.0 49.7 49.0 Poverty-reducing expenditure/GDP (%)a 6.4 6.4 7.0 7.5 8.0 8.7 8.6 8.7 Note: Debt service figures for 1998 and 1999 reflect debt relief already provided to Bolivia, Guyana, Mozambique, and Uganda under the original framework. Debt service figures do not include the impact of the "topping off" granted to Ethiopia and Niger in April 2004. Data on poverty-reducing expenditures are not available for all coun- tries, particularly for 2003­06. In aggregate, the last available period was used for future years, thus understating the likely level of poverty-reducing spending. a. Weighted averages. Source: HIPC country documents and IMF staff estimates. 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 4 177 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S about $830 million a year. Poverty-reducing Although creditor participation has im- spending, meanwhile, increased from about proved under the Initiative, some non­Paris $6.1 billion in 1999 to $9.1 billion in 2003 Club bilateral and commercial creditors have and is projected to increase to about $12.5 bil- persisted in not committing to provide HIPC lion in 2006 (see table 11.3).33 relief. Most of the costs attributable to bilat- Debt relief to HIPCs provided by tradi- eral creditors continue to be borne by mem- tional mechanisms, through the HIPC Ini- bers of the Paris Club. Commercial creditors tiative, and on a voluntary basis together represent less than 5 percent of the NPV cost generally reduces the ratio of HIPC net pre- of relief, in part because of measures by the sent value debt to exports to the average Debt Reduction Facility for IDA-only coun- level of other low-income countries. Contin- tries, which has reduced the stock of com- ued measures are needed by HIPCs and by mercial debt in HIPCs. Moral suasion, creditors to ensure that debt sustainability is however, remains the principal measure for maintained after the completion point, just encouraging participation and discouraging as similar measures are needed for other litigation by remaining commercial creditors. low-income countries. Bank and Fund staff With respect to multilateral debt, 23 of the 31 have therefore proposed a debt sustainabil- multilateral creditors have indicated their ity framework for low-income countries to intent to participate in the Initiative, repre- address this issue. The Executive Boards senting more than 99 percent of the total debt have endorsed the key elements of the relief required. framework, and work is continuing toward A key premise of the HIPC Initiative is that making the framework fully operational.34 debt relief should be additional to other This framework is intended to provide forms of external financing assistance. An guidance on several issues related to the important issue is whether countries receiving financing strategies for low-income coun- debt relief are also receiving additional tries, including the range of indicators for resources or whether debt relief crowds out assessing debt sustainability, the role of poli- other aid flows. Merely observing the size of cies in determining appropriate debt thresh- flows does not provide conclusive evidence of olds, the importance of including domestic additionality, because the amount of aid these debt in such assessments, and the appropri- countries would have received without the ate mix of grants and new credits. These HIPC Initiative is not known. There are also issues are becoming increasingly important substantial difficulties in measurement in light of the need for large increases in because different donors account for debt external financing to meet the MDGs. In relief in different ways. Debt relief is some- some countries, financing the MDGs with times explicit, such as through grants for debt new concessional borrowing could lead to relief, or implicit, such as through debt ser- an unsustainably large debt burden. In April vice reductions. 2004, Ethiopia and Niger were granted The September 2003 HIPC Status of Imple- additional "topping up" assistance under mentation Report found, based on a review of the HIPC Initiative, on an exceptional basis balance of payments data, that gross and net on account of exogenous factors that had flows of official external resources to the 27 adversely affected their debt sustainability. It countries that have reached the decision point needs to be stressed, however, that debt sus- increased substantially during 1999­2002.35 tainability is not only a resource-flow issue. Net flows (that is, the difference between gross It also depends on increasing growth, diver- resource inflows and debt service payments) sifying exports, increasing access to global increased from $4.5 billion in 1999, before markets, and adequately mitigating the provision of debt relief under the enhanced effects of exogenous shocks. initiative in 2000, to $7.3 billion in 2002 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 4 P R O V I D I N G M O R E A N D B E T T E R A I D once the enhanced initiative got under way. year, the ODA-to-GNI ratio would rise from Although it is difficult to determine what around 2.7 percent to more than 3 percent. Aid resource flows would have been without dependence varies widely across low-income coun- HIPC in 1999­2002, the data do suggest that tries: for example, aid in 2001 was 0.4 percent of debt relief has been additional to other forms income in India and 28 percent in Mozambique. 9. See Goldin, Rogers, and Stern (2002) for a of external financing. The September report review of evidence on the increased productivity of noted, however, that official external financ- aid. ing flows to the 27 decision-point countries 10. Development Committee 2003b. The declined substantially in the mid-1990s (as results are based on an analysis of 18 low-income they did to other low-income countries). countries with relatively good policies. 11. Development Committee 2004. Notes 12. DAC members' reporting of tying status is uneven. For example, the United States does not 1. OECD 2004b. report tying data. Tying statistics cover only about 2. OECD 2004a. Amounts are at 2002 prices 40 percent of total bilateral ODA. and exchange rates. 13. Aryeetey, Osei, and Quartey 2003. 3. At the October 2003 International Donors 14. Jepma 1991. Conference for the Reconstruction of Iraq, donors 15. About 30 percent of total ODA takes the pledged more than $33 billion in assistance-- form of contributions to multilateral institutions. Of loans, grants, and export credits--over four years. the total aid provided in turn by the multilateral There is uncertainty as to when these pledges will institutions, close to 30 percent also is in the form of be realized and whether over time they will repre- special-purpose grants (mainly from U.N. agencies). sent an increase in total aid, as most of the initial 16. Also see Development Committee 2003b. announcements indicate, or a reallocation of aid 17. Dollar and Levin 2004. Figure 11.4 draws from other countries. on this paper and plots the unexplained (residual) 4. The contribution of NGOs to development is component of growth, aid, and policies. The paper difficult to quantify in dollars, for a number of rea- also refers to studies that find different results on sons. First, many of their staff work on a voluntary the relationship between the quality of policies and basis and so the value of their labor is never quan- institutions and the effectiveness of aid and pro- tified in money terms. Second, even when they are vides an assessment. paid, as for example volunteers working as teach- 18. Dollar and Levin 2004. Other recent stud- ers or community workers in developing countries, ies of aid selectivity include Birdsall, Claessens, the value of this compensation may be considerably and Diwan (2003) and Roodman (2003). less than the market value of their services. Third, 19. For this calculation, low-income recipient many of the activities undertaken by NGOs are not countries are divided into those with strong poli- strictly developmental in aim, but may promote cies and institutions and those with weak policies cultural or recreational activities. and institutions, where the latter is the bottom half 5. While NGOs have been successful in raising of low-income countries on the CPIA ranking. their own funds and in channeling official flows This binary distribution has its limitations of (about 7 percent of ODA supports NGO activity), course as it does not capture the relative position they do face the challenge of continuing to be of recipients in terms of the CPIA score within the effective as they grow in size. two categories. In the figure, the selectivity of a 6. A recent study by Prati, Sahay, and Tressel given donor is indicated by the angle of the line (2003) suggests that the adverse trade effect may not connecting the dot point to the origin relative to be very large, and even a doubling of aid flows from the 45-degree line. 10 to 20 percent of recipients' GDP is estimated to 20. Collier and Hoeffler 2002. lead to a real appreciation of only 6 percent. 21. Development Committee 2003b; OECD 7. Knack and Rahman 2004. 2004a. 8. With a 7 percent annual increase in real 22. Collier and Dehn 2001. terms for ODA and projected medium-term real 23. In this regard, the IMF is examining growth for low-income countries of 4.8 percent a whether responses to shock-induced 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 4 179 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S needs can be made more consistent in the context Cambodia, Ethiopia, Honduras, Jamaica, Kenya, of programs supported by the Poverty Reduction Kyrgyz Republic, Morocco, Nicaragua, Niger, the and Growth Facility (PRGF), and whether the Pacific Island group, the Philippines, Senegal, Viet- terms of the Fund's instruments targeted to shock nam, and Zambia. financing can be made more appropriate for low- 30. Other examples of harmonization activities income countries. at the country level are listed in the Country Imple- 24. The methodology for computing the donor mentation Tracking Tool, at http://www.aidhar- fragmentation index is from Knack and Rahman monization.org. 2004. 31. See IMF­World Bank 2004b. 25. Bulir and Hamann 2001, 2003. 32. The definition of poverty-reducing expen- 26. Bulir and Lane (2002) find that aid flows on ditures varies across countries. Commonly average are procyclical, so that countries receive included are primary education, basic health ser- more aid when economic activity is stronger. vices, and rural development. 27. Gemmell and McGillivray 1998. 33. Country authorities are putting in place 28. See OECD 2004a for a detailed discussion public expenditure management systems that of the work of the Working Party. would ensure the efficiency of poverty-reducing 29. Sixteen countries or country groups stepped expenditures. See IMF­World Bank 2003b. forward before or in Rome to expand or main- 34. IMF­World Bank 2004a. Also see IMF stream country-level efforts to streamline donor 2004. procedures and practices: Bangladesh, Bolivia, 35. IMF­World Bank 2003a. 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 4 12 Fulfilling Responsibilities for Global Public Goods D eveloped countries need to step up of the ozone layer, prevention of global action in support of key global public warming, safety of the oceans (including pol- goods and areas for global collective lution control), and sustainable use of natural action related to the millennium goals. Given resources such as fisheries. their weight in the global system, developed Effective delivery of global public goods countries bear a special responsibility with raises important institutional and financing respect to the global public goods agenda. issues. Institutional approaches could take the Developing countries, of course, also need to form of using existing institutions to assume play their part in this effort. responsibility for a specific global public good Six areas surface in most discussions of program, usually with a governance frame- global public goods: health, environment, work that ensures involvement and oversight financial stability, peace, trade, and knowl- by donors and other affected countries. Exam- edge.1 Of course not all issues in these areas ples are the Consultative Group on Inter- are of a public good nature. Only those that national Agricultural Research (CGIAR) and transcend national boundaries and are either the River Blindness Control Program within regional or global in nature are relevant in this the World Bank, and peacekeeping programs context. So the relevant actions include those of the United Nations. At the other extreme, aimed at preventing adverse health and envi- some programs have involved setting up new ronmental spillovers, preserving international institutional delivery mechanisms. An exam- financial stability and peace, and promoting ple is the Global Fund to Fight AIDS, Tuber- the gains from international trade and the culosis, and Malaria (GFATM). Some critics spread of knowledge. Together, these actions have voiced concern about the proliferation constitute an important contribution to the of such funds and institutions. Between these attainment and sustainability of development. poles lie some innovative arrangements, such Some global public goods have been deliv- as the Global Environment Facility (GEF), ered more successfully than others, reflecting which has an independent governance frame- the special circumstances of each good and work but relies fully on existing institutions the mechanism chosen for its delivery. for implementation. Networks and coali- Ranked from relative success to relative fail- tions are increasingly common, particularly ure, the following examples are often men- in the areas of standard setting for commu- tioned: aviation safety, postal systems, the nication, commerce, and trade. Important Internet, eradication of smallpox, protection lessons can be learned from networks with 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 4 181 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S long and successful experience, such as those the creation and delivery of key global public for civil aviation, traffic safety, and postal goods. Global public goods dealing with activ- services. ities that fall predominantly in the commercial Appropriate models for financing global sphere--financial sector, telecommunications, public goods have received considerable air transportation--are financed largely on a scrutiny recently. In addition to questions of private basis through appropriate industry externalities, free riders, and scarcity of funds, cooperative arrangements and fees. the need to finance complementary programs Global public goods recently have received at the national level must be taken into much greater attention, a reflection of the account. Official development assistance is a trend toward globalization and the associated large source of public funding for global pub- shrinking of the world. One manifestation of lic goods. Many multilateral and bilateral pro- the increased attention is the International grams directly finance global public goods or Task Force on Global Public Goods, estab- channel resources to trust funds and special- lished last year by France and Sweden to look ized institutions. Each year approximately $5 into recent work and initiatives on the topic billion in official development assistance is and to identify priorities for action (box devoted to global public goods.2 In recent 12.1). Another manifestation is the increased years, private sources--foundations, compa- attention to global public goods and related nies, individuals--have become important in programs at multilateral institutions, as set financing global public goods, usually in part- out in chapter 13. nership with official sources. CGIAR and the Economic theory suggests that global pub- River Blindness Control Program were early lic goods typically will be undersupplied, as examples of mixed private-public funding. The countries fail to adequately take into account Global Alliance for Vaccines and Immuniza- the implications of their policies and actions tion (GAVI), GFATM, and the Prototype Car- for people living in other countries;3 hence, bon Fund are prominent recent examples. the importance of monitoring country per- Some of these partnerships are designed to cre- formance in meeting commitments under ate markets by providing up-front support and international agreements and in signing onto incentives for private companies to invest in such agreements in the first place. BOX 12.1 International Task Force on Global Public Goods The mandate of the International Task Force on Global Public Goods, chaired by Ernesto Zedillo (former president of Mexico) and Tidjane Thiam (former Minister of Planning, Development, and Coordination, Côte d'Ivoire), is to encourage the provision of international public goods, global and regional, that are of critical importance for eliminating poverty and achieving the MDGs. The task force is to systematically assess and clarify the notion of global and regional public goods, to identify those public goods that contribute most directly to reducing poverty and meet- ing the other MDGs, and to make recommendations to policymakers and other stakeholders on how to provide and finance those goods. The task force is also to propose responsibility for follow- up, including monitoring of effectiveness and results. Meeting for the first time in September 2003 at Yale University in New Haven, Connecticut, the task force agreed on areas for further work, to be discussed at its next meeting in Istanbul in early March. The task force's final report is due in 2005. Before then, a wide consultation is planned, to promote broad understanding of and consensus around the report's recommendations for action. Note: For more information on the task force, visit http://www.gpgtaskforce.org/bazment.aspx. 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 4 F U L F I L L I N G R E S P O N S I B I L I T I E S F O R G L O B A L P U B L I C G O O D S For developed countries, it is worthwhile larger contributions to global environmental to organize the assessment of their policies degradation and their greater financial and and actions with respect to global public technological resources for prevention and goods into three blocks: their participation in mitigation. international agreements and institutions that Policies aimed at improving environmen- commits them to act in a certain way; their tal performance in and by the developed support for capacity building and other pro- countries can be divided between those that grams (bilateral, multilateral, philanthropic) will improve local environmental conditions that help developing countries take critical and those aimed at reducing negative im- actions; and their voluntary actions (if any) pacts on the global commons. An analysis of taken solo or in networks with like-minded developed-country policies affecting their partners. local environment is beyond the scope of this This framework is used below to analyze report, but the experience of the OECD with certain issues relating to environmental sus- environmental performance reviews offers tainability--a key global public good. Future valuable lessons for developing countries global monitoring reports will address other (box 12.2). global public goods as well. In the meantime, The environmental performance of devel- financial stability, trade (including some oped countries in relation to the state of the issues relating to knowledge and technology global commons is mixed. The ratification of transfers), and health are treated in the con- international environmental conventions-- text of other chapters of this report. with some notable exceptions--indicates a high degree of commitment to global environ- Developed-Country Impact mental issues (box 12.3). The process of global on the Global Commons: environmental governance has witnessed some Limited Progress resounding successes, most prominently the Montreal Protocol, an international agreement Developed countries shoulder the predomi- to protect the ozone layer. The success of the nant responsibility for preserving the global protocol was facilitated by the existence of environmental commons and helping devel- cost-effective alternatives to ozone-depleting oping countries pursue environmentally sus- substances, the availability of adequate fund- tainable development, both because of their ing for developing countries,4 and the fact that BOX 12.2 Progress toward environmental sustainability through performance review and peer pressure Since 1991, the OECD has carried out environmental performance reviews (EPRs) of its member countries. Each EPR report is peer reviewed and approved by the OECD Working Party on Envi- ronmental Performance. Progress is assessed by establishing baseline conditions and examining pol- icy commitments, institutional arrangements, and routine capabilities for carrying out national evaluations. Along with the traditional benefits of country analytic work, the peer review process promotes environmental improvement and continuous dialogue through benchmarking (the shar- ing of information on the policies, approaches, and experiences of the reviewed countries) and peer pressure. The EPR process can be successfully replicated in developing countries. Indeed, since 1993 the United Nations Economic Commission for Europe (UNECE) has been carrying out EPRs on coun- tries in Europe and Central Asia that are not members of the OECD. Source: OECD and UNECE Web sites; 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 4 183 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S BOX 12.3 International environmental agreements: toward global cooperation, with some notable exceptions The last 20 years have seen the birth of six major international environmental agreements, the rat- ification of which reflects a solid consensus on the importance of multilateral efforts to tackle global environmental problems. Between 150 and 190 countries have ratified the Montreal Protocol to the Vienna Convention for the Protection of the Ozone Layer (1987), the Basel Convention on the Transboundary Movement of Hazardous Wastes and Their Disposal (1989), the Convention on Biological Diversity (1992), the Framework Convention on Climate Change (1992), and the Con- vention to Combat Desertification (1994). Of the 151 signatories to the most recent agreement, the Stockholm Convention on Persistent Organic Pollutants (2001), 41 have already ratified it. (It will enter into force with the 50th ratification.) A notable exception to these positive results is the Kyoto Protocol to the Framework Conven- tion on Climate Change (1997). To enter into force, the protocol must be ratified by 55 parties that together account for at least 55 percent of global greenhouse gas emissions, but the 120 parties that have ratified represent only 44.2 percent of emissions. Six so-called Annex I parties (developed and transition economies) have not yet ratified the protocol: Australia, Croatia, Liechtenstein, Monaco, Russia, and the United States (though Russia has recently indicated that it will). The United States has announced that it will not ratify the Kyoto protocol. It has not ratified the Basel or the Bio- diversity conventions. Source: Convention Web sites; World Bank staff. inaction would exact high costs in the near home to just 16 percent of the world's popu- future. But most global environmental prob- lation but the source of more than half such lems do not share those characteristics, result- emissions. Kyoto calls on developed countries ing in slower progress to resolve them. as a group to reduce carbon dioxide emis- Sectoral policies in developed countries sions by at least 5 percent of 1990 levels by make or break progress toward global envi- 2008­12. Overall, progress to date has been ronmental sustainability. The maintenance of disappointing (figure 12.1). Within the Euro- high subsidies to fisheries and the failure of pean Union only two countries, Sweden and energy policies to forcefully reduce green- the United Kingdom, are on track to meet house emissions are just two vivid illustra- their targets. The overall EU target is to cut tions of the lack of rapid overall progress. greenhouse gas emissions by 8 percent before More than a quarter of the world's fisheries 2010, but with existing policies only a 0.5 are overexploited or depleted, as overfishing percent cut will be achieved. The United by local communities is aggravated by fishing States, which produces 25 percent of global fleets from developed countries. Global sub- greenhouse gas emissions, has explicitly sidies for fishing, meanwhile, conservatively declined to ratify the protocol and con- estimated at $10 billion to 15 billion a year tributes growing emissions. (about a quarter of the annual $56 billion trade in fish), are driving unrestricted and Aid for the Environment: highly advanced fish harvesting. Long Stagnant The MDGs call for a reduction of green- house gas emissions. The 1997 Kyoto Proto- Official development finance for environ- col places most of the burden for reducing mental concerns has followed the stagnant greenhouse gas emissions on rich countries, path of overall development financing in 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 4 F U L F I L L I N G R E S P O N S I B I L I T I E S F O R G L O B A L P U B L I C G O O D S 1990­2000. A slight increase in official bilat- FIGURE 12.1 MDGs and Kyoto Protocol call for reduction of greenhouse eral aid for environmental purposes followed emissions, but results tell a different story the 1992 Rio Convention, but commitments Carbon dioxide emissions, 1990 and 2000 peaked in 1996 and the increase was reversed by the end of the decade. A slightly different 14 pattern emerges in multilateral commitments. tons After declining sharply in 1993, with total aid 12 commitments, they rebounded in 1994 only metric 10 to resume a declining trend. Commitments to of environmental concerns averaged 3 percent 8 of total bilateral aid and 5 percent of total billions 6 in multilateral aid, bringing total environmental aid to $2 billion per year--far from the com- 4 mitments made at Rio (table 12.1). emissions 2 Commitments to environmental funds set 2 CO up to confront global issues are no exception. European Japan United Other high- All high- The Global Environment Facility was estab- Union States income income lished in 1991 to help developing countries countries countries fund projects and programs that protect the 1990 2000 global environment, initially in the fields of bio- diversity, climate change, ozone depletion, and international waters. Since the 1994 restruc- Note: Carbon dioxide emissions are the most important component of greenhouse gas emissions. Source: World Bank, World Development Indicators. turing, new funding for the GEF has remained stagnant. The first replenishment, covering 1994­98, saw pledges of $2.02 billion. New in their quest to halt and reverse environmental commitments were $1.99 billion for 1998­02 degradation. Sweden and Switzerland emerge and $2.2 billion for 2002­06. Despite expan- as exemplary global citizens, whereas Australia sion to cover new environmental issues, such as and the United States tail the group of devel- land degradation and persistent organic pollu- oped countries (table 12.2). tants, GEF funding has actually declined by The contributions of developed countries almost 10 percent as a share of the combined to carbon dioxide emissions and climate GDP of the 38 contributing nations. change vary widely. In per capita terms, Aus- tralia, Luxembourg, and the United States Developed Countries and Global emit more than three times the amount of Environmental Sustainability: Sweden and Switzerland. Nor is the participa- Widely Varying Performance tion of developed countries in environmental agreements homogeneous. While 15 countries The performance of developed countries on have ratified the Kyoto Protocol, the Beijing global environmental sustainability is far from Amendment, and the Biodiversity Conven- homogeneous. MDG 7 aims to "reverse the tion, Australia and the United States have loss of environmental resources." Table 12.2 each ratified just one. And developed coun- assesses developed country efforts to this end tries commit remarkably different amounts of on three dimensions: depletion of the global aid for environmental sustainability. Den- commons through carbon dioxide (CO2) emis- mark, the Netherlands, Norway, Sweden, and sions (an MDG indicator); provision of global Switzerland commit around 0.02 percent of public goods through participation in multilat- their GDP to environmental aid. Ireland and eral environmental agreements; and assistance, Italy give less than 0.001 percent--more than through environmental aid, to poor countries a 20-fold difference. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 4 185 P A R T I I I : D E V E L O P E D - C O U N T R Y P O L I C I E S TABLE 12.1 Aid for the environment, 1990­2000 (US$ millions) Aid 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Bilateral 1,033 652 921 737 806 1,083 1,822 1,526 1,012 1,394 984 Multilateral 657 604 1,683 368 1,942 822 744 812 1,439 590 962 Total 1,690 1,256 2,604 1,105 2,748 1,905 2,566 2,338 2,451 1,984 1,946 Total (% of bilateral donors' combined GDP) 0.010 0.007 0.014 0.006 0.013 0.008 0.011 0.011 0.011 0.008 0.008 Note: The table uses the World Bank definition of environmental aid, as applied in Pagiola and others (2002). Alternative definitions generate different levels of aid for environment but similar trends. Source: Adapted from Pagiola and others 2002. Table 12.2 Performance of developed countries on global environmental sustainability Depletion of the Ratification of multilateral Aid for global commons environmental agreementsa environment Carbon dioxide emissions Beijing Amendment Biodiversity Bilateral aid for Country (metric tons per capita, 2000) Kyoto Protocol to Montreal Protocol Convention environment (% of GDP)b,c Australia 18.0 No No Yes 0.0054 Austria 7.5 Yes No Yes 0.0078 Belgium 10.0 Yes Yes Yes 0.0012 Canada 14.2 Yes Yes Yes 0.0031 Denmark 8.4 Yes Yes Yes 0.0193 Finland 10.3 Yes Yes Yes 0.0060 France 6.2 Yes Yes Yes 0.0025 Germany 9.6 Yes Yes Yes 0.0070 Greece 8.5 Yes No Yes ·· Iceland 7.7 Yes No Yes ·· Ireland 11.1 Yes No Yes 0.0007 Italy 7.4 Yes No Yes 0.0004 Japan 9.3 Yes Yes Yes 0.0070 Luxembourg 19.4 Yes Yes Yes ·· Netherlands 8.7 Yes Yes Yes 0.0222 New Zealand 8.4 Yes Yes Yes ·· Norway 11.1 Yes Yes Yes 0.0230 Portugal 6.0 Yes No Yes 0.0003 Spain 7.0 Yes Yes Yes 0.0041 Sweden 5.3 Yes Yes Yes 0.0145 Switzerland 5.4 Yes Yes Yes 0.0216 United Kingdom 9.7 Yes Yes Yes 0.0064 United States 19.8 No Yes No 0.0021 ·· Negligible or not available. a. "Yes" indicates ratification or equivalent (acceptance, accession, approval). b. Calculated using the World Bank definition of environmental aid; see Pagiola and others (2002) for details. c. Average of 1998, 1999, and 2000; except Ireland (2000) and Portugal (1999 and 2000). Source: World Bank, World Development Indicators; convention Web sites; World Bank staff. 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 4 F U L F I L L I N G R E S P O N S I B I L I T I E S F O R G L O B A L P U B L I C G O O D S Priorities for Action Buying offsets or reductions in greenhouse gas emissions from developing countries. The case for greater efforts by developed Assisting developing countries to adapt countries in supporting and financing global to climate change and increased climatic public environmental goods is a strong one. variability. Rich nations bear a special responsibility for the environmental commons. Conservation, particularly the protection of biodiversity, is Notes another important responsibility. That 1. Ferroni and Mody 2002; Kaul, le Goulven, responsibility is partly a question of ability to and Mendoza 2003. See also Development Com- pay. But it is also a question of willingness to mittee 2000, 2001 and African Development Bank pay--many citizens of developed countries 2002. are highly motivated to conserve nature 2. World Bank 2001. where it is most at risk in developing coun- 3. This conclusion follows from the growing lit- tries. Tapping that willingness to finance con- erature on global public goods, whose origins servation in poor nations will be essential in most observers trace back to the seminal work by Paul Samuelson (1954) on the pure theory of pub- preserving resources at risk. lic goods. That work formalized earlier thinking Without diminishing the importance of on the provision of public goods and for many other needed policy changes, such as reducing years was used as the starting point for discussions fisheries subsidies, priorities for action in rich of local public goods and public finance. With the countries include: more recent focus on global public goods, it has been used to understand those issues as well. Increasing aid for environmental sustain- Under the theory, a pure public good has two ability to help developing countries establish attributes: "nonrivalry" (that is, my consumption adequate frameworks for environmental of the good in no way reduces your ability to con- management. This includes financing biodi- sume it) and "nonexcludability" (that is, no one in versity conservation through mechanisms the immediate vicinity can be prevented from con- suming the good). Also under the theory, pure such as the GEF and actions aimed at public goods are chronically undersupplied improving natural resource management because those who pay for them do not reap the and reducing the burden of environment- full gains they generate. related diseases in developing countries. 4. Since 1994 some $150 million a year has Controlling greenhouse gas emissions in been made available through the multilateral fund developed countries. associated with the protocol. 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 4 187 IV Role of International Financial Institutions 13 Monitoring the IFIs' Contribution H ow well are the international finan- tribution is larger (or smaller) than the sum of cial institutions contributing to the the IFI parts. Going forward, greater avail- achievement of the MDGs and related ability and comparability of independent and development outcomes? This chapter takes a self-evaluation data from all IFIs should help modest first step toward answering that ques- improve comparative monitoring exercises tion, focusing on the International Monetary such as this one and, in turn, reporting to the Fund, the World Bank, and the major regional taxpaying public in all countries. The joint development banks--the African Develop- work program on results endorsed by the ment Bank, the Asian Development Bank, the multilateral development banks at the European Bank for Reconstruction and Devel- Roundtable on Managing for Development opment, and the Inter-American Development Results held in Marrakech in February 2004 Bank--and drawing primarily on the self- and should provide a vehicle for progress on this independent evaluations carried out by the key issue.2 international financial institutions themselves. The chapter is structured as follows. It first Future efforts will extend and deepen the summarizes the framework used for consider- framework developed herein, including by ing the contribution of the IFIs individually bringing in the findings of external evaluations and in the aggregate. It then applies the frame- and surveys more explicitly,1 and by broaden- work in turn to the IMF, the World Bank, and ing the framework to include the issue of the major regional development banks. Next it developing-country voice in institutional gov- looks at the trends in systemic coherence and ernance, where the different ownership struc- whether the contribution of the IFIs is larger or tures of the various IFIs can provide a useful smaller than the sum of the individual contri- platform for comparative analysis. butions. The last section draws out conclu- In this context, the chapter finds evidence sions and implications for action. that the IFIs are generally becoming more country focused, more collaborative, and Framework for Monitoring more results oriented, while respecting their IFI Contribution distinctive mandates and modalities for pro- viding support for country, regional, and IFIs do not achieve development outcomes global programs. But it is inconclusive on the directly through their individual actions, critical questions of comparative perfor- but they can contribute to those outcomes. mance and whether the whole of the IFI con- For IFIs and other agencies, success depends 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 4 191 P A R T I V : R O L E O F 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 on effectively deploying assistance in high- be the largest. Significant IFI impact may quality ways in countries and programs that come just as easily through a partnership on deliver, and on influencing country policies a global program, the policy dialogue on a and programs--often at a distance. This piece of analytic work, or support to complicates the job of assessing the IFI con- strengthen country capacity to design a fully tribution to the achievement of the MDGs owned reform program, as through a tradi- and related outcomes, but no more than it tional lending operation. In such a setting, the complicates the job of designing IFI pro- measurement challenge is to discern the IFI grams to maximize that impact. An under- influence on the global and regional context lying theme of the chapter is the need for and the country policies and actions in the coherence between ex ante program appraisal critical areas identified in the preceding chap- and ex post evaluation. Assessing an institu- ters. Meeting this challenge is best pursued tion's contribution after the fact is complex, through a thoughtful and transparent results- but it is rendered more so if it is not antici- chain analysis that links final outcomes to the pated before the fact, and incorporated into specific inputs (including the level and distri- operational design. bution of IFI financing across countries) and What are the channels of influence through outputs needed to produce them, and that which the IFIs affect the attainment of the can be evaluated upon program completion. MDGs and related development goals, and The framework for considering the IFI how can they be measured? Simply counting contribution is structured around four the number of projects or volume of lending themes: country programs, global programs, for MDGs is clearly not the answer, although partnership, and results. These themes are numbers on IFI inputs may constitute part of used to examine the IFIs individually and the evidentiary picture. Rather, it is the IFIs' then collectively (box 13.1). The first two catalytic role that matters the most in the themes reflect the fact that increasingly the achievement of development outcomes-- IFIs have two major product lines that are rel- both by supporting policy and institutional evant to the achievement of the MDGs and development and by directing that support to related outcomes: their country programs those countries and sectors where the payoff and their global programs. Of course, the bal- to growth and poverty reduction is likely to ance between the two--as well as the corre- BOX 13.1 Framework for assessing IFI contributions Country programs Alignment with countries' priorities for poverty reduction and other MDGs Relevance and selectivity in program design Global programs Support for capacity building for regional and global public goods Anchor in international system for global public goods Partnership Harmonization of institutional policies and practices Coordination of country support programs Quality and results Results orientation, including monitoring, evaluation, and reporting systems Findings on quality and results of strategies and operations 192 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 4 M O N I T O R I N G T H E I F I S ' C O N T R I B U T I O N sponding instruments of support--varies action will also help to ensure that the whole across the individual IFIs, in line with their of IFI and donor support adds up to more distinctive mandates and comparative advan- than the sum of the individual parts. tages, as elaborated in the sections below. For Finally, the critical bottom line is results. example, the IMF's country program focus is Here the chapter zeroes in on two topics: (a) on macroeconomic and fiscal sustainability, the systems the IFIs have in place for assess- which is essential for sustainable growth and ing their results, and (b) the emerging picture poverty reduction. Its global program focus is of what those systems suggest about the IFI on international financial stability, in line contribution. As the main tool for demon- with its role as the institutional anchor of the strating results, evaluation is fundamental to international financial system. The World this work--both self-evaluation undertaken Bank's country program focus is broader, by the management of programs and inde- covering the full range of social and structural pendent evaluations undertaken on behalf of issues important for the achievement of governance bodies that oversee management, poverty reduction and the MDGs. Its global such as the board of directors.3 focus is on partnership and capacity-building programs designed to benefit developing Activities of Individual IFIs countries. Focusing on countries in their respective regions, the regional banks also This section looks in turn at the activities of have broad development mandates. The the IMF, the World Bank, and the regional exception is the European Bank for Recon- development banks, using the organizing struction and Development, whose mandate structure outlined above. is more narrowly focused on transition. All the regional banks have substantial programs International Monetary Fund for regional public goods. Partnership has been singled out in the The IMF contributes to the achievement of the analysis for special attention, given its central MDGs through several important, if indirect, importance to the IFIs' joint and individual channels primarily related to the macroeco- effectiveness in helping countries achieve nomic policy environment. These channels their development goals. The lessons of expe- include the Fund's work on the global eco- rience (and common sense) suggest that nomic and financial system and industrial where many donors are involved in a country country surveillance; its financing to member or global program, it is essential that they countries; and its policy advice and technical harmonize their rules and reporting require- assistance to developing countries. Given the ments to avoid overtaxing scarce country nature of these contributions and the fact that capacity. In addition, where there is a Poverty they draw on many aspects of the IMF's work, Reduction Strategy Paper, donors should syn- there is no simple yardstick for assessing effec- chronize the timing of their own country tiveness. Information from a variety of sources business strategies with it, so that the country must thus be brought to bear in making such can know the resources it is likely to have an assessment. available when it is doing its programming and budgeting. But maximizing the gains C O U N T R Y P R O G R A M S from partnership requires going beyond har- A key responsibility of the IMF is to provide monization and synchronization. It also financing to member countries so that they requires strategic alignment, with agencies can address external imbalances without being coordinated and strategically selective resorting to measures destructive of national in their support programs in line with coun- or international prosperity. This financing is try priorities and their distinctive compara- provided on the strength of a program of tive advantage vis-à-vis other agencies. Such policies designed to address the underlying 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 4 193 P A R T I V : R O L E O F 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 imbalances that necessitated the financing. members, particularly low-income countries. For low-income countries facing temporary It found that, while clear progress has been shocks and for middle-income countries fac- made, attention still needs to be given to ing capital account crises, the IMF's financing these areas and to developing a clear strate- alleviates the burden of immediate adjust- gic direction for TA in the future.5 ment that could otherwise set back those Country ownership is an element that has countries' efforts to achieve the MDGs. been examined in connection with the IMF's Beyond the direct benefits of its financing, conditionality review during 2000­02.6 The the Fund provides advice to its member coun- focus on ownership reflects concerns that in tries, in the context of financial arrangements many cases IMF-supported programs may not (where its advice is linked to program condi- be adequately aligned with member countries' tionality) and of its regular surveillance of all own priorities and that this gap may be member countries. From the perspective of reflected in weak implementation. Research achieving the MDGs and related develop- suggests that program implementation depends ment objectives, the IMF's role in providing mainly on domestic factors rather than the advice is particularly important. The primary efforts of IMF staff. The conditionality guide- orientation of the IMF's advice is toward the lines approved in September 2002 stress that achievement and maintenance of macroeco- ownership is an essential foundation of an nomic stability over the medium term, given IMF-supported program. The implementation its importance for growth and poverty reduc- of these guidelines will be reviewed periodi- tion. Moreover, country experience is replete cally, beginning in mid-2004.7 with episodes in which macroeconomic dis- In low-income countries, the PRSP is a turbances have derailed progress toward vital tool for building ownership and orient- growth and prosperity. In emerging-market ing policies toward the MDGs. The PRSP countries, crisis prevention and management provides a framework in which a country can are a central focus of the IMF's work, which formulate its strategy for poverty reduction takes stock of lessons from crises in Asia, on the basis of a domestic consultative Latin America, and elsewhere.4 process. It also therefore provides a basis for A major challenge for the IMF's policy donors and IFIs to align the conditions for advice is to ensure not just that the advice is their financial support with the country's own correct--itself a major area of controversy-- strategy. A review of the PRSP process under- but that members are helped to implement taken jointly by the World Bank and the IMF appropriate policies. This challenge involves in 2002 found that the PRSP was widely seen issues of capacity and ownership. Capacity as useful, but that the consultative processes issues should be taken into account in used to prepare the PRSP needed to be designing programs. Capacity can also be strengthened.8 A key issue is the alignment of strengthened through technical assistance the PRSP and a program supported by a (TA), which the IMF provides in a range of Poverty Reducation and Growth Facility areas related to its responsibilities, including (PRGF) financial arrangement. The former fiscal issues, the monetary and financial sec- should provide a road map to the MDGs, tor, and statistics. The IMF recently stepped while the latter must be based on realistic up its provision of TA through the establish- projections of macroeconomic developments ment of two African technical assistance cen- and external financing, even if those projec- ters (AFRITACs). There are also plans to tions fall short of what is needed. The main establish a center in the Middle East. The challenge is to use the tension between the most recent review of the IMF's TA, under- country's needs on the one hand and its avail- taken in 2004, focused on strengthening able resources and capacity on the other to effectiveness and management with a view to elicit more action from donors to provide the addressing the institution-building needs of financing and from the country authorities to 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 4 M O N I T O R I N G T H E I F I S ' C O N T R I B U T I O N undertake the reforms needed to bring reality G L O B A L P R O G R A M S into line with aspirations.9 As a related issue, Within the international system, the IMF is extensive evidence suggests that the growth tasked with promoting a stable and open projections underlying IMF-supported pro- global economic and financial environment, grams have tended to be biased toward over- which is essential for the achievement of the optimism. This points to a need to strengthen MDGs and related development outcomes. the analytical framework in which IMF- The Fund contributes to such an environment supported programs are designed. first of all through the surveillance of system- The IMF's financial arrangements have ically important countries. The Fund's Article come to play a longer-term role in low-income IV consultations with industrial countries are countries, typically providing financing on a vehicle for promoting appropriate policies, concessional terms through successive PRGF such as curbing domestic imbalances that arrangements. A long-term engagement with may pose risks for the global economy. Mul- low-income countries helps to ensure that the tilateral surveillance, in the context of the Fund's financing and policy advice are appro- World Economic Outlook and the Global priately directed at helping these countries Financial Stability Report, can highlight both achieve their development goals. The nature of global macroeconomic and financial risks the Fund's engagement, however, may change and urge changes in policies by the major as the country's situation changes. Some low- countries. In these and other contexts, the income countries have episodic financing Fund is an advocate for increased foreign aid needs associated primarily with temporary to achieve the MDGs and for increased mar- macroeconomic imbalances to be addressed ket access for developing countries' exports. through policy corrections; providing such The effectiveness of the IMF's surveillance financing is a natural role for the Fund. In con- will next be reviewed later in 2004.11 trast, for others, financing is required on a more continuous basis to facilitate the institu- P A R T N E R S H I P tional reforms and investments in human cap- In carrying out its mission and mandate in con- ital and infrastructure needed to achieve tributing to the achievement of the MDGs, the development goals.10 In the latter context, the IMF works with partner agencies, especially Fund has tended to remain engaged and to the World Bank but also with other multilateral continue to provide financing, but typically as and bilateral providers of aid and financing. a relatively small part of overall financing The IMF's engagement in low-income coun- flows from other international financial insti- tries puts it in a position to facilitate and possi- tutions and donors. In such cases, a financial bly to catalyze other financing. In many cases, arrangement is, to a considerable extent, a the approval or successful review of an IMF vehicle for policy advice and monitoring, and arrangement is itself a signal to other interna- the IMF's involvement is a signal of the coun- tional institutions and donors that policies are try's macroeconomic management to other sufficiently sound that it is prudent to provide providers of official financing. Associated with their financing. The IMF recently took steps to this signaling role is the risk that the IMF could address concerns that these signals were not as be drawn into prolonged program relation- clear as they should be. Notably, it clarified the ships that may not be justified on the basis of use of assessment letters to convey the institu- financing need and the quality of policies-- tion's views for both on- and off-track pro- pointing to the need to consider alternative, grams. The IMF also plays a more direct role in nonprogram, modes of IMF engagement. The facilitating other official financing through its policy on assessment letters enables the IMF to participation in donor meetings. provide a more authoritative assessment of It is increasingly recognized that macro- policies, either in or outside the context of a economic stability and growth depend heav- program relationship. ily on structural and institutional factors.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 4 195 P A R T I V : R O L E O F 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 Providing advice on many of these issues is longed use of Fund resources, documenting primarily the responsibility of the World Bank the number of member countries with long and other development agencies. Coordina- periods of program engagement and examin- tion with the World Bank is therefore critical. ing case studies.17 The report raised concerns Due in part to concerns that weaknesses in that long-term engagement could undermine coordination had contributed to an expansion the revolving nature of the IMF's financial of IMF policy conditionality, new guidelines resources for balance of payments adjust- for Bank-Fund coordination in program ment; that in some cases, prolonged engage- design and conditionality were approved in ment reflects persistent weaknesses in May 2002.13 The most recent review of Bank- program design and implementation; that the Fund collaboration in relation to these guide- use of an IMF financial arrangement as a sig- lines indicates that collaboration appears to nal to donors may distort decisions on IMF be improving, but that there is room for fur- financing; and that the presence of the IMF ther improvement. At the same time, collabo- may inhibit the development of domestic ration has some natural limits, due to the decisionmaking processes. In discussing this different mandates and time frames of the two report, the Executive Board noted that in institutions and their different organizational many instances--particularly in low-income structures. The review highlights efforts that countries--prolonged program engagement have been made to strengthen collaboration in may play a constructive role in tackling deep particular areas, such as in the work on low- structural problems whose solution requires income countries and in public expenditure protracted effort. The Board initiated proce- management issues.14 dures for ex post assessments of members with longer-term program engagement and Q U A L I T Y A N D R E S U L T S for semiannual factual reports on the inci- The IMF has long had internal systems for dence of such engagements. The report also ensuring the quality of its advice and pro- gave added impetus to work assessing pro- grams, in the form of management controls gram design and strengthening surveillance in and oversight by the Executive Board. Also, program countries. periodic reviews by staff have taken stock of The IEO's second report examined the role emerging results and lessons learned, feeding of the IMF in three recent capital account this information back into the design of new crises: Indonesia in 1997­98, Korea in programs and instructions to staff. Notably, 1997­98, and Brazil in 1998­99.18 It noted the review of conditionality that will be under- that IMF surveillance was more successful in taken in 2004 will examine the objectives and identifying macroeconomic vulnerabilities outcomes of Fund-supported programs and than in recognizing and analyzing the risks the design of the policy framework, in addi- arising from financial sector and corporate tion to reviewing the application of the 2002 balance-sheet weaknesses. Insufficient candor conditionality guidelines. These reviews have and transparency also limited the effective- been supplemented by independent external ness of surveillance on policies. With regard reviews on key topics, such as the external to the design and implementation of IMF- evaluation of the Enhanced Structural Adjust- supported programs in response to these ment Facility (ESAF) in 1998.15 crises, the report noted that macroeconomic The creation in 2002 of the Independent outcomes turned out to be very different from Evaluation Office (IEO)--which reports program projections and that in a number of directly to the IMF's Executive Board, not respects the policies incorporated in the pro- through management--complements these grams could, with the benefit of hindsight, efforts.16 To date, three reports have been have been improved. The report noted that, prepared, discussed by the Board, and then in response to these crises, reforms have been published. The first report examined the pro- undertaken to strengthen the IMF's capacity 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 4 M O N I T O R I N G T H E I F I S ' C O N T R I B U T I O N to anticipate and help avert crises as well as uations carried out by the Bank's Operations to better manage the crises that do occur. Evaluation Department (OED). These docu- The third IEO report examined the experi- ments are prepared periodically, providing a ence with fiscal adjustment in IMF-supported series of snapshots on the Bank's contribution programs.19 This report found that the Fund and institutional performance in critical does not follow a one-size-fits-all approach in areas. For the most part, they show an insti- its programs, as claimed by some critics. But tution whose performance has been improv- it found that Fund staff could improve the ing in recent years, but with a number of presentation in staff reports of the rationale specific areas still needing further work. for their fiscal policy advice. The report also This picture is broadly consistent with made recommendations for anchoring fiscal recent survey evidence. In the global poll of adjustment and reforms in a medium-term world opinion leaders in late 2002 to early framework, both in the context of IMF- 2003 that the Bank commissioned,20 most supported programs and surveillance. Steps respondents reported a generally positive are now under way to implement a number view of the Bank, with many saying that the of these recommendations. Bank has been doing a better job in the past During 2004 the IEO will undertake few years in a number of areas, especially assessments of the PRSP process and the poverty reduction. But a number of criticisms PRGF (jointly with the World Bank's Opera- also were expressed, especially with respect to tions Evaluation Department), the IMF's how respondents saw the Bank's effectiveness technical assistance activities, and the IMF's in fighting corruption, the social impact of the role in Argentina. policy reforms it supports, and the arrogance and bureaucracy with which it is perceived to operate. Similarly, in the survey of country World Bank authorities carried out for the recent review The World Bank contributes to the achieve- of Bank-Fund collaboration, reform pro- ment of the MDGs and related development grams supported by the Bank were reported outcomes in a number of ways. Its most tan- to be largely or fully owned by the country in gible contribution is the support it provides to 88 percent of cases, and a similar majority development programs in low- and middle- pointed to Bank participation widening own- income countries. Closely related is the sup- ership of the authorities' development strat- port the Bank provides for global and egy. 21 But 11 percent of the respondents regional programs, where considerable ex- reported only partial ownership. pansion has taken place in recent years. The Bank's country and global program work is C O U N T R Y P R O G R A M S carried out with developing- and developed- The World Bank's approach to country pro- country partners--as well as with partners in grams recognizes that one size does not fit all, other international institutions--and is and that the Bank's support must be tailored increasingly focused on results. to country conditions and grounded in Against this background, this section national strategies setting out countries' looks at the evidence on what the Bank is development vision, objectives, and priori- doing in its country and global programs, ties.22 As the Bank's central operational doc- how it behaves as a partner, and by what ument for each country program, the yardsticks it measures its contribution to Country Assistance Strategy (CAS) is a key development results. The analysis draws on place to start in assessing the Bank's contri- the extensive assessment and evaluation bution. The CAS summarizes the diagnosis of material available on World Bank activities, country conditions, the lessons learned from both self-assessments carried out by central previous external support, and the forward units within the Bank and independent eval- program. It is prepared by the country team 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 4 197 P A R T I V : R O L E O F 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 in cooperation with the authorities and part- In part, this expectation is based on paral- ners, approved by senior management, and lel developments with respect to PRSPs, which discussed by the Executive Board. In present- had been prepared for 37 countries as of the ing the Bank's prospective program, the CAS end of March 2004. Only two CASs in the ret- is meant to explain what is proposed as well rospective review cohort were based on full as why, in terms of the particular value added PRSPs (Burkina Faso and Uganda), and the and additionality that the Bank can bring to treatment of the national strategy was strong the table. For most low-income countries, the in both. Also, the CASs for Albania, Guyana, PRSP is the vehicle setting out the national Mauritania, Vietnam, and Yemen, which were strategy that the Bank helps countries to for- prepared on the basis of full PRSPs (albeit mulate and that serves as the foundation for after the closure of the cohort for the last ret- the CAS. For middle-income countries, there rospective), were similarly strong, with analy- is not an agreed format like the PRSP for set- sis clearly linked to the PRSP, providing a firm ting out the national strategy, and the Bank basis for consideration of the CAS diagnostic relies on a wide variety of country-specific and programming options. CASs also will vehicles as a basis for the CAS. benefit from ongoing improvements in the PRSPs themselves. A recent Bank-Fund staff Alignment with Country Priorities. In prac- review of PRSPs reports evidence of progress tice, how well do Bank CASs align with as more recent PRSPs build on the experience country priorities? According to a series of of earlier ones, and countries more advanced retrospectives prepared by Bank manage- in the process gain implementation experi- ment and OED reviews, most CASs do pro- ence.24 But the review also identified a num- vide fairly full coverage of the country's ber of challenges that affect the PRSP's development program, describing the gov- usefulness in underpinning the CAS. These ernment's development objectives and the include the importance of (a) bringing in the key elements of the development strategy-- MDGs and articulating expected outcomes highlighting strengths and weaknesses.23 The more explicitly; (b) striking the right balance most recent CAS retrospective judged the between ambition and realism in setting PRSP treatment of the national development pro- targets; (c) identifying reliable indicators of gram and priorities to be substantial in 86 progress and outcomes; and (d) ensuring percent of the 39 CASs and CAS Progress appropriate prioritization across PRSP tar- Reports in its review cohort. This represents gets. Going forward, Bank management has a significant increase from the levels reported suggested--and clients appear receptive to the in the previous retrospectives (60 percent in proposal--that it is important for countries to the first and 80 percent in the second). How- strengthen the results focus of PRSPs and ever, it must be noted that the CASs in the highlight the links with the longer-term MDG review cohort were discussed by the Board targets and the associated policy and institu- before the end of 2000. As the period since tional reforms and domestic and foreign then has seen enhanced focus on country financing requirements. ownership and national strategies, through These findings are broadly in line with the PRSP in the case of low-income countries OED's conclusions, which are drawn from its and country-specific processes in the case of Country Assistance Evaluations (CAEs) and middle-income countries, these trends are other evaluations, such as the multidonor likely to have intensified. Informal reviews of review of the Comprehensive Development more recent CASs do point to a further step- Framework (CDF)25 and the ongoing PRSP up in country focus, and the expectation is assessment that OED is conducting in part- that this finding will be validated in the next nership with the IMF's IEO. OED has consis- CAS retrospective. tently stressed the importance of more realistic 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 4 M O N I T O R I N G T H E I F I S ' C O N T R I B U T I O N targets in PRSPs--cautioning that many policy development and systems for fiduciary countries and regions will not achieve the and environmental safeguards, proactively MDGs by 2015--as well as greater attention engaging in value-adding operations in infra- to monitoring and evaluation, which it noted structure and service delivery, and promoting is particularly important given the different the use of IBRD risk-management instru- time frames for PRSPs (typically 3 years) and ments--all grounded in high-quality eco- the MDGs (typically 10­15 years).26 Relat- nomic and sector work (ESW). The approach edly, OED has urged the Bank to identify the is designed to reinvigorate the Bank's engage- objectives and targets of its CASs with ment with this critical set of clients and help greater specificity and to implement internal them promote sustainable, equitable, job- changes to foster the design and implemen- creating growth; raise living standards; and tation of the multisectoral strategies and reduce poverty. operations that will be essential for achieving the MDGs. Also highly relevant for the Relevance and Strategic Selectivity. Strategic PRSP-CAS nexus, OED finds evidence of the selectivity involves systematically examining PRSP process contributing to the develop- the tradeoffs among possible Bank Group ment of country ownership, especially when activities, assessing their relative impact, and a highly inclusive participatory process is establishing priorities while taking resource conducted through the country's normal constraints into account. It requires looking at political processes and institutions; OED fur- the potential magnitude of impact, the likeli- ther points to the need to lessen the tension hood of successful country action--including, between the PRSP's role as a process for importantly, through policy reforms--and the building domestic consensus and ownership possible availability of alternative sources of and the role that it plays with regard to debt support as a way to assess the expected value- relief and access to aid resources.27 added of the Bank's contribution. Getting this The CAS model applies equally to the part of the CAS right is essential for maximiz- middle-income countries (MICs), for which ing the Bank's impact. It goes to the heart of Bank management has just completed a ensuring that the Bank is doing the right major review of its program and strategy.28 things--in addition to doing them right. A key finding of this review is that despite Ensuring the relevance of Bank support is a many examples of successful Bank engage- key objective of the Bank's agenda on manag- ment in individual MICs--for example, ing for results and is the driving force in the Brazil, China, Mexico, and Turkey--trends development of the results-based CAS, cur- in Bank lending are not in line with the rently being piloted (box 13.2). objective of scaling up support to MICs, The last CAS retrospective found an given the vast numbers of poor people living improvement in selectivity, with more than there. In large part, the disconnect reflects a 70 percent of CASs rated satisfactory or bet- secular decline in Bank infrastructure lending ter, compared with only 50 percent in the pre- to MICs, as well as reduced lending to coun- vious retrospective. However, when the tries that have gained access to financial retrospective raised the bar on selectivity to markets. However, some other multilateral include discussion of tradeoffs and the ratio- development banks have maintained or even nale for instrument choice, fewer than 60 per- increased their lending over the same time cent of the cohort CASs were rated period, suggesting that internal Bank factors satisfactory or better. Clearly, as Bank man- related to the cost of doing business may be agement has stressed, there is ample scope for partly to blame. Going forward, the Bank is improvement in this important area, espe- adopting a back-to-basics approach, cutting cially along three dimensions: (a) the specific red tape by relying more on MICs' stronger channels through which the proposed 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 4 199 P A R T I V : R O L E O F 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 13.2 Results-based CAS The results-based Country Assistance Strategy is designed to improve the strategic relevance and selectivity of Bank country programs and provide greater support for strengthening country capac- ity to manage for results, thereby increasing the Bank's contribution to country outcomes. The con- cept of a results-based CAS was first elaborated in 2002 as a central element of the Bank's action plan on managing for results. The results-based methodology involves a change in mindset and approach to formulating the CAS--from starting with programming inputs and then analyzing their likely impacts, to starting with desired outcomes and then identifying what inputs and actions (by the Bank and others) are needed to achieve them. Supporting and complementing this change in mindset, the results-based CAS introduces a framework for articulating expected outcomes and identifying indicators for tracking implementation progress and evaluating outcomes at program completion. Strengthened monitoring and evaluation at the CAS level is critical to success, including introduction of a CAS Completion Report, or self-assessment, of progress under the previous CAS and review of this report by OED. Interim guidelines on results-based CASs have been issued,a and a pilot phase of preparing results-based CASs is under way. Five results-based CASs were presented to the Board in 2003-- Brazil, Cameroon, Mozambique, Sri Lanka, and Ukraine. More pilots are being completed in fiscal 2004, and other country teams are beginning to apply the results-based methodology to CAS design. Further work includes implementing regional plans to support country teams in preparing results- based CASs, evaluating the pilot phase for results-based CASs in late fiscal 2004, issuing a revised operational policy and a good-practice note for results-based CASs, and mainstreaming the results- based CAS in fiscal 2005. a. See (http://opcs/CAS/cs-g.html). Source: World Bank 2004d. program was expected to work--in other CAS objectives."30 In several country evalua- words "the results chain"; (b) the analysis of tions, OED has rated overall country pro- the Bank's comparative advantage vis-à-vis its gram outcomes as unsatisfactory even though partners to explain the CAS's strategic selec- the large majority of the individual project tivity; and (c) the specific implications of the outcomes earned a satisfactory rating. In lessons learned from past country and Bank other words, the Bank did things right at the implementation experience for the design of project level but did not necessarily do the the strategy. right things to achieve stated CAS objectives. Strategic relevance and selectivity are also central themes of OED's CAEs and other G L O B A L P R O G R A M S country program evaluations, which have A critical part of the World Bank effort to been carried out in more than 60 countries support country development is the analytic since the first such evaluations, for the and advocacy work it does in the global Argentina and Ghana programs, in fiscal arena, especially with respect to the policies 1995.29 As OED notes: "While each project and actions of developed countries on trade, proposed in the CAS may individually be aid, and debt relief, given their importance in consistent with CAS objectives, it is not achieving the MDGs, as discussed in earlier always clear that the summation of Bank chapters. In addition, as noted there, the lending in the CAS is the best way to achieve Bank is monitoring international scaling-up 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 4 M O N I T O R I N G T H E I F I S ' C O N T R I B U T I O N efforts in four priority areas for the service dent evaluation, OED has recently completed delivery MDGs--Education for All, HIV/ its Phase I review of the Bank's global pro- AIDS, health, and water and sanitation. It is grams and is in the final stages of the analysis also directly providing support in these and of Phase II. As a general matter, OED con- other areas through its country and global cluded that the Bank has played a useful role programs. One example is its support for the in these programs by providing a platform for Global Fund to Fight AIDS, Tuberculosis, learning, advocacy, and collaborative action to and Malaria, for which the Bank is trustee. address key global challenges. With notable Bank support for global programs began exceptions, including large and high-profile three decades ago, with the establishment of programs such as the Global Environment the Consultative Group on International Facility (GEF) and CGIAR, for the most part Agricultural Research (CGIAR), for which OED found the programs to be underman- the Bank is a convener and donor to the sys- aged, especially relative to country programs, tem, as well as a lender to developing coun- with too little attention to formal appraisal tries for complementary activities.31 New and evaluation criteria, too little policy con- global programs were gradually added over tent, and unclear accountabilities.34 time, with a major step-up in global partner- Building on the work of a high-level inter- ships and associated program support activi- nal review team, Bank management has gen- ties commencing in the late 1990s, reflecting erally endorsed OED's recommendations and the rapid pace of globalization, the sharply is paying increased attention to strategic increased attention to global policy issues in focus, country alignment (with any imple- the development community, and the Bank's mentation at the country level included in the increased partnership orientation. In Septem- CAS program), developing country voice, ber 2000 the Development Committee en- business planning and resource management, dorsed the Bank's priorities in supporting and risk management and quality assurance in global public goods, focusing on five areas-- the Bank's global programs.35 Its enhanced public health, protection of global commons, efforts in these areas aim to build on a series financial stability, trade, and knowledge.32 of measures adopted in recent years to Global programs are now reflected in improve the governance and oversight of the Bank corporate strategy papers and opera- Bank's global programs and partnerships tional activities, with about 50 programs through new processes for screening proposed (managed by either the Bank or external programs and ensuring their strategic focus, recipients) receiving grants from the Devel- better systems for tracking implementation, opment Grant Facility. In these programs, the and enhanced attention to independent and Bank is working in capacity-building and self-evaluation on program completion. support programs with countries, to help them meet their requirements under interna- P A R T N E R S H I P tional agreements, and in partnership pro- The World Bank's policy is to operate jointly grams focused on the delivery of global and with partners when addressing major devel- regional public goods, including by providing opment issues. This policy applies equally to seed money for new such programs.33 Bank country and global program activities, The assessment framework for global pro- broadly as follows. First, the Bank works grams--both within the Bank and in other closely with the IMF, the MDBs, the United agencies--is at a much earlier stage of develop- Nations and U.N. agencies, OECD-DAC, ment than it is for country programs, reflecting the European Union and bilateral donors, the more recent vintage of most global pro- WTO, and other partners in its country and grams. Within the Bank, the self-assessment global work. Second, as a global develop- framework is still being developed--as is the ex ment institution with broad coverage across ante appraisal framework--while on indepen- countries and issues, the Bank often plays 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 4 201 P A R T I V : R O L E O F 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 strategic role in providing what smaller and CASs and lending operations, to proactively more specialized agencies cannot because of identify opportunities for further country- their size or narrower mandate--a role that level harmonization. The World Bank is also underpins the way strategic selectivity mani- playing leadership and supportive roles in the fests itself in Bank CASs, as discussed earlier, context of the DAC Working Party on Aid and that shapes the particular Bank contri- Effectiveness, which was established after the bution to global and regional partnerships Rome forum to support and facilitate harmo- and programs. Third, in carrying out its part- nization efforts.39 nership activities, the Bank wears different Supporting and complementing these coun- hats as befits the occasion--leader, follower, try-level efforts, the Bank has taken several adviser, helper, and so on. It need not and important steps in recent years to modernize does not play the lead role in every instance. the fiduciary framework governing its lending This point warrants emphasis both internally operations. These steps have helped to set the in guiding staff behavior and externally, stage for Bank participation in harmonization especially in light of the findings of the with country and partner systems. New finan- Bank's global poll with respect to percep- cial management guidelines allow borrowers tions of institutional and staff arrogance.36 to submit project reports based on their own Underpinning the Bank's partnership pol- financial reporting systems.40 New fiduciary icy is its extensive work on harmonization-- processes permit the Bank to participate in designed to better align its processes and pooled financing arrangements in sectorwide procedures with those of clients and with approaches (commonly known as SWAps) those of other agencies. In turn, such align- characterized by common arrangements for ment reduces the transaction costs of devel- financial reporting, auditing, procurement, opment assistance. To this end, the Bank is and disbursement. The Bank's audit policies intensifying its collaboration with interested have been aligned with international auditing clients and partners to extend and deepen the standards and good practice, allowing for increasing number of country-level harmo- adaptations of audit scope to assessed project nization activities. Many of these were begun risk.41 A new loan administration platform is before the Rome Harmonization Forum in being designed to facilitate harmonization of February 2003 and several have been initi- disbursement procedures with country proce- ated over the past year.37 The Bank is cur- dures and those of other lenders. Finally, major rently pursuing the harmonization agenda in investments have been made in the Bank's a number of countries, playing either leader- financial management diagnostic work, espe- ship or supportive roles as the occasion and cially on the country financial accountability circumstances warrant. These countries assessment, to upgrade quality, work jointly include the seven associated with the Rome with MDB and other partners, and inform the Declaration, as well as a growing number of country policy dialogue on financial manage- others in which harmonization programs and ment systems. These investments complement activities have just started or are being broad- joint work with the IMF, the European Com- ened or deepened.38 This work, of course, mission, and bilateral donors on the Public relates closely to the Bank's ongoing support Expenditure and Financial Accountability for country-led partnerships for the imple- (PEFA) initiative and the OECD-DAC harmo- mentation of national development strate- nization process to help clients strengthen their gies, whether in the context of PRSPs for public financial management systems. low-income countries or of country-specific The Bank has taken complementary steps vehicles in the case of middle-income coun- on procurement procedures to improve the tries. And, for all countries, Bank manage- scope for harmonization with country sys- ment is using internal review processes tems and with MDB (and other) partners and (including the Operations Committee) for to upgrade their capacity building and learn- 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 4 M O N I T O R I N G T H E I F I S ' C O N T R I B U T I O N ing content. To these ends, the Bank has the creation of the Quality Assurance Group introduced higher prior-review thresholds (QAG), with a major program and the full when client capacity warrants and clarified support of top management--the Bank's per- when local procurement laws and practices-- formance on quality improved substantially. including for e-procurement--can be used in Adding results as a third indicator was a log- Bank-financed (and cofinanced) projects. As ical next step, taken in 2002 to further with financial management, the Bank has also improve the Bank's effectiveness by subject- taken steps to transform the country pro- ing this important measure to more system- curement assessment into a diagnostic tool atic management scrutiny. In the context of for the policy dialogue, with country pro- this decision, the Bank adopted an ambitious curement assessments now carried out jointly plan to better measure, monitor, and manage with clients and MDB and other partners. for results; the Development Committee The Bank is also working with the OECD- endorsed this plan in September 2002.43 DAC on an initiative for helping countries Since then, there has been significant strengthen their procurement systems, which progress in designing and piloting the neces- also will lead to stronger in-country systems sary changes in Bank systems to implement around which donors can harmonize their the results agenda. Central to the agenda are support. Finally, based on the master docu- effective monitoring and evaluation systems. ments produced and agreed by the MDB Pro- This is true not only for investment lending, curement Harmonization Group, the Bank for which there is a long tradition of monitor- has issued new documents on the procure- ing and evaluation, although implementation ment of civil works and goods. In November performance needs to be improved, but also 2003, the Board approved adjustments to the for the CAS, adjustment lending, and non- Bank's Procurement Guidelines that reflected lending services, for which monitoring and these and other changes. evaluation is a more recent development. In all these areas, work is under way to see how Q U A L I T Y A N D R E S U L T S best to apply, adapt, and improve existing The bottom-line measures of the Bank's con- approaches, building on the lessons learned tribution are the quality and results of its from recent monitoring and evaluation pilots operational products and services. This sec- and OED reviews. As noted earlier (see box tion looks at Bank systems for measuring and 13.2), country teams are piloting results-based monitoring quality and results and then sum- CASs that identify country outcomes (from marizes what those systems suggest about the the PRSP or other national strategy) to which Bank's contribution to development out- the Bank will contribute, along with interme- comes and its institutional performance. diate indicators linked to the particular prod- ucts and services that the Bank will provide. Monitoring Systems. Historically, the Bank With respect to the Bank's lending and non- measured its operational performance pri- lending products and services, operational marily by lending commitments--both dol- policies and processes are being reviewed with lars lent and projects approved. Building on the aim of expediting implementation and the the findings of and the follow-up to the achievement of results, while documentation Wapenhans Task Force Report,42 the quality requirements are being reviewed with the aim dimension was added in 1996 as a second pri- of increased transparency in the reporting of mary indicator of operational performance. results objectives and achievements. Adding the quality of lending and analytic Consistent with the above, OED's most and advisory services as an indicator served recent assessment of Bank systems concluded to focus Bank management attention on that that the framework for self-evaluation by dimension, and, after the investment of much Bank management, and independent evalua- time, resources, and commitment-- including tion by OED, is strongest at the project 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 4 203 P A R T I V : R O L E O F 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 level.44 At the country level, OED found that Effectiveness and Results. Looking beyond the framework for independent evaluation, the systems to the actual outcomes of the comprising OED CAEs, was well established, Bank's assistance, what does the evidence and it welcomed the recent introduction of show? Here the real issue is how to demon- CAS Completion Reports, which it saw as strate Bank impact. OED considers that the responding to its long-standing recommen- Bank's country strategies have been on the dation and closing an important gap in self- whole fairly successful, based on what it sees evaluation at the country level. But OED also as relatively high CAE outcome ratings-- stressed the importance of the remaining with 65 percent of all years assessed and 75 weaknesses in independent evaluation of sec- percent of the post-1998 years rated moder- tor strategies and global programs and of ately satisfactory or better. Once the results- gaps in self-evaluation of sector strategies, based CAS has been mainstreamed, the nonlending operations, trust funds, and self-assessment framework for such judg- knowledge initiatives, while also acknowl- ments also would be available. CASs would edging that new initiatives are under way on be capable of being evaluated to start with, self-evaluation of global programs. On the providing a basis for judging and comparing latter, the first annual Sector Strategy Imple- scores in achieving CAS outcomes. But in mentation Update will provide a basis for view of the considerable lead time required to improved monitoring and self-assessment of have a large enough cohort for meaningful sector strategy implementation, including assessment, the leading indicators of CAS through the development of strengthened impact will need to be relied on until fiscal monitoring indicators. 2006 or fiscal 2007. Meanwhile, in response to a request from Overall, these indicators--OED and QAG the IDA Deputies, a two-tiered Results Mea- scores--point to consistently improving port- surement System has been developed to mea- folio quality from fiscal 1997 up to fiscal 2002, sure progress on selected country outcomes as the major steps that management was tak- across IDA countries and to measure IDA's ing were being reflected in a step-up in quality. performance at the institutional level in OED evaluations of projects exiting the port- contributing to development outcomes (box folio each year confirm the positive trend. Fis- 13.3).45 The results-based CAS framework is cal 2002 marks the third consecutive year of expected to provide the necessary inputs in the project performance exceeding the Bank's medium term, but in the meantime, Bank man- Strategic Compact target of 75 percent satis- agement expects to use IDA portfolio indica- factory or better outcomes.47 By number of tors derived from OED ratings for project projects, the score was 79 percent; weighted by outcomes and QAG quality assessments, value, it was 85 percent. More dramatic is the which are leading indicators of success in continued upward climb in sustainability rat- achieving CAS outcomes. Although OED does ings to similarly high levels from much lower not routinely conduct impact evaluations, starting points. However, for fiscal 2003 exits, some increase in such activities may be war- early OED ratings point to a decline in out- ranted, in view of their relevance to the results come scores. Pending the completion of OED's agenda, and to the overall framework for analysis of the full cohort of projects com- assessing the Bank's contribution. For exam- pleted in fiscal 2003, QAG has launched a spe- ple, a recent impact evaluation of the Bank's cial analysis of possible issues that may need to support to education in Ghana found--on the be addressed by management in ensuring the basis of a careful analysis of the results chain continued improvement in portfolio manage- and examination of data collected specifically ment and quality. for the study--a very substantial positive Both QAG and OED have emphasized the impact on education outcomes.46 role of economic and sector work in the Bank's 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 4 M O N I T O R I N G T H E I F I S ' C O N T R I B U T I O N effectiveness. QAG findings point to the lending programs. Their independent evalua- importance of ESW, and its increasing quality, tion departments assess their strategies on as leading indicators of positive outcomes in program completion, thus affording oppor- Bank operations and country programs. tunities to test and validate results and take Assessments by QAG confirm the continuing stock of the lessons learned. improvement in the quality of the Bank's coun- Work is under way in each of the four try analytic work, reflecting the increased regional banks to adapt and improve existing attention to it by senior Bank management in approaches to country strategies, in line with recent years. OED's findings are that in coun- the results agenda. The AfDB has aligned its tries where recent outcomes of Bank assistance country strategy papers more closely with were evaluated as satisfactory, high quality, rel- PRSPs, deepening the analysis, based on evant, and timely, ESW generally made a sub- poverty diagnostics, sectoral priorities, and stantial contribution. Where outcomes were outcome indicators articulated in country- not satisfactory, deficiencies of ESW in one or owned PRSPs, and spelling out in the country more of these dimensions were a contributing strategy paper how the proposed AfDB lend- factor. CAEs report favorable outcomes when ing and nonlending activities will contribute high-quality ESW was timed to precede Bank to poverty reduction. In the AsDB, there also operations and country programs, and unfa- has been progress in linking country strategy vorable outcomes when ESW was not timed in papers to PRSPs, and work is under way to this way. Even when ESW was timely and of design a results-based country strategy paper. high quality, the relevance of Bank strategies In the EBRD, individual country strategies was reduced when its findings were not used or are results based as they are evaluated against used only selectively in programs and lending the performance of the country portfolio of operations. ESW was found to be particularly projects and against the sector reform and important for first-time or renewed borrowers transition challenges tracked by the Transi- and for stop-go reformers. tion Report and sector strategies. The IDB introduced new guidelines for its country strategies last year, requiring, inter alia: an Regional Development Banks explicit focus on results, with a "strategy This section looks at the role and contribu- matrix" articulating the link between the tion of the four major regional development country's own development objectives and banks--African Development Bank, Asian strategy and the development objectives and Development Bank, European Bank for strategies of all donors, including the IDB; Reconstruction and Development, and Inter- identification of the proposed IDB-assisted American Development Bank--also using the interventions together with performance indi- organizational structure of box 13.1. 48 cators and targets of expected results; and reflection of the findings of the country pro- C O U N T R Y P R O G R A M S gram evaluations prepared by the IDB's inde- Notwithstanding differences in mandates and pendent evaluation office. instruments, each of the regional banks is focused on country issues. All have country G L O B A L P R O G R A M S strategy papers and are increasingly involved The regional banks are involved in global and in the PRSP process, in line with the agreed regional programs covering financial stability, MDB/IMF Protocol on Collaboration on the trade, environment, post-conflict assistance, PRSP. The regional banks are increasingly and knowledge, with all but EBRD also focused on the MDGs, with the EBRD involved in the control of infectious diseases.49 focused on transition impact. Their strategies In many cases the banks are focused on in turn drive their country lending and non- regional public goods (RPGs), or on regional 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 4 205 P A R T I V : R O L E O F 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 13.3 Proposed IDA14 results-measurement system The proposed IDA14 results-measurement system is designed to reflect the priorities and processes of national poverty reduction strategies, be linked to the MDG framework, show aggregated results across IDA countries, and assess IDA's contribution to development results. It measures results on two levels: Aggregate country outcomes. The first tier includes 17 possible indicators to measure the progress of IDA-eligible countries on core development outcomes (see table). The majority of these indicators were chosen to be consistent with country priorities articulated in national poverty reduc- tion strategies, aligned with MDG indicators, and relevant to IDA's mandate and activities in bor- rowing countries. Indeed, most of the indicators are considered in PRSPs, either as specific targets or as subjects for discussion in the text. Ten are MDG indicators. The others are complementary, relating to growth for poverty reduction, and reflecting IDA's support for the economic growth, pri- vate sector development, and public sector management that are necessary to reduce poverty. IDA's contribution to country outcomes. The second tier involves introducing a stronger focus on results and a self-assessment system in World Bank Country Assistance Strategies in IDA-eligi- ble countries, and assessing the quality and outcomes of projects in the IDA portfolio, drawing on data from the Operations Evaluation Department and the Quality Assurance Group. The follow- ing indicators have been put forward to monitor progress in this tier: the number of countries that use a results-based CAS; CAS final outcome ratings as validated by OED through the CAS Com- pletion Report review; project outcome ratings as validated by OED through the Implementation Completion Report review; and quality-at-entry indicators for IDA projects as assessed by QAG. In April 2003 IDA Deputies reviewed this architecture and found it to be a sound basis for mov- ing forward. At their first meeting of the IDA14 replenishment in February 2004, Deputies reem- phasized the importance of measuring development effectiveness and results at the country level and identified this area as a key theme for further discussion and work during the replenishment. Over the coming months, IDA Deputies will face important decisions about the monitoring of aggregate country outcomes within the results-measurement system. They will need to reach con- sensus on a set of country outcome indicators, each with different merits. The 17 indicators pro- posed for consideration are those that--at this time--best meet the three criteria of relevance to key development outcomes, sensitivity to policy actions, and measurability in a sufficient number of IDA countries. However, to varying degrees, the ability to monitor these indicators on a regular basis--and the quality of the resulting information--are dependent on expanded coverage, increased periodicity, and standardization of questions within household surveys and other data- gathering mechanisms. The existence of reliable and relevant indicators to measure development progress will also depend on the inclusion of the issue of statistics and evidence-based policymak- ing in the policy dialogue with countries. The implications for the international community are twofold. First, a greater financial and technical commitment will be needed to strengthen statistical capacity and monitoring and evaluation systems in low-income countries and to reinforce inter- national reporting systems. Second, expectations must remain realistic for improvements across a aspects of global public goods, looking to the particular focus on those issues where there World Bank on the global aspects. They also are spillover effects within the region, or are involved in helping their regional clients within the AsDB's subregional coverage. For build country capacity to meet requirements the EBRD, nuclear safety is an area of special under global agreements. For the AfDB, criti- focus, where the Bank has the international cal issues are post-conflict assistance and lead in supporting transition countries in the health, especially in the face of the HIV/AIDS decommissioning of capacity, along with the epidemic. For the AsDB, key issues are the resolution of other environmental liabilities of environment, health, and knowledge, with a the earlier era. Another is financial stability, 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 4 M O N I T O R I N G T H E I F I S ' C O N T R I B U T I O N Outcome indicators under consideration for IDA14 results-measurement system PRSPs that PRSPs Availability Agency include covering in WDI Typical responsible indicator subject database frequency for data Indicator % % % of reporting compilation 1. Proportion of population below 13 100 72 Every 3­5 years World Bank $1/day poverty line 2. Prevalence of underweight children 44 63 97 3 years UNICEF, WHO under five years of age 3. Under-five mortality 72 97 100 3 years UNICEF, WHO 4. Proportion of year-old children 9 72 100 Annual UNICEF, WHO immunized against measles 5. HIV prevalence rate of pregnant 3 69 91 Only 1999 UNAIDS, UNICEF women 15­24 6. Proportion of births attended by 59 72 84 3­5 years UNICEF, WHO skilled health personnel 7. Ratio of girls to boys in primary, 69 78 94 Annual UNESCO secondary, and tertiary education 8. Primary school completion rate 31 100 100 Annual UNESCO 9. Proportion of population with 94 94 100 3 years UNICEF, WHO sustainable access to an improved water source 10. Fixed lines and mobile telephones 25 34 97 Annual ITU, World Bank per 1,000 inhabitants 11. Formal cost of business registration 3 13 72 Annual World Bank 12. Time for business registration 6 13 75 Annual World Bank 13. Public expenditure management 0 100 -- TBD World Bank 14. Agricultural value added 22 66 94 Annual UNSD, World Bank 15. GDP per capita 41 100 94 Annual UNSD, World Bank 16. Access of rural population to an 16 44 -- TBD World Bank all-season road 17. Household electrification rate 34 59 -- 3 years World Bank -- Not available. Note: TBD = to be determined. range of indicators in countries with limited capacity. Thus, it is especially important to reach con- sensus on a small number of indicators that countries identify as highly relevant for managing their development processes. Source: World Bank, Concessional Finance and Global Partnerships Vice Presidency. especially the adoption of the standards and support for RPGs, including a financing facil- codes underpinning market economies. The ity geared to providing grant financing for IDB has five priority areas in the provision of what it calls "early stage RPGs," where dia- regional and global public goods--financial logue among countries is needed; "later stage sector assessments, regional integration, curb- RPGs," where larger institutional resources to ing of infectious diseases, promotion of envi- manage the emerging program are needed; ronmental services, and support for research and the initial stages of "club RPGs," which in agriculture and regional policy dialogue. It will likely be financially self-sustaining once has prepared a new policy framework for its they are up and running.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 4 207 P A R T I V : R O L E O F 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 P A R T N E R S H I P benchmarking exercise, and put joint country For the regional banks, the partnership topic evaluations on its agenda. The MDB Gender has two interrelated aspects. One, at the insti- Group, operating in cooperation with U.N. tutional level, is their role and participation and OECD-DAC gender groups, has recently in the harmonization effort; the other, at the co-sponsored a workshop on Gender and the country level, is their performance as part- MDGs. ners. Reflecting their growing interest in both, For country-level activities, the partner- the regional development banks are active ship issue is typically less about partnerships participants in the DAC Working Party on between individual regional banks, because Aid Effectiveness. there is little overlap among them. Rather the Working in partnership with the World issue is more often about partnerships with Bank and others, the regional development the World Bank, IMF, U.N. agencies, and banks are continuing their work on the unfin- bilateral agencies, with which the regional ished institutional harmonization agenda and banks are linking up, together with govern- thematic areas of common concern. Central ments interested in harmonization efforts at to the agenda is the focus on the harmoniza- the country level. To a large extent, the issue tion of results reporting emerging from the here is one of country strategy and the selec- Marrakech Roundtable. As noted there, tion of operational support vehicles taking developing countries have made significant into account what other partners are provid- progress on country ownership, strategic ing. But it may also involve harmonization in vision, and donor alignment through the a specific lending context, especially where poverty reduction strategy process, but many new sectorwide approaches are challenging countries continue to struggle with the diver- previous methods of support for country sity of donor reporting requirements, espe- development and co-financing arrangements. cially with respect to project monitoring and Concrete cases, such as the Bangladesh evaluation--hence the urgency of action. example (box 13.4), put the focus on where Legal documentation and disbursement pro- the really tough work on harmonization cedures are examples of issues that have lies--reconciling differences in institutional recently become subjects of discussion and guidelines for procurement and financial will be taken forward. Meanwhile, existing management within a particular country working groups have continued their work context in a real-time situation. on institutional harmonization in tandem with their country-level work. The Financial Q U A L I T Y A N D R E S U L T S Management Group, for example, has com- The recent Marrakech Roundtable, spon- pleted good-practice papers and continues to sored by the MDBs in collaboration with the work with relevant professional bodies on an OECD-DAC, provided an important oppor- international accounting standard for devel- tunity for the banks to take stock of where opment operations. In addition to its work on they are in their application of results-based country-level capacity building, the Procure- approaches and the progress made since the ment Group has completed harmonized bid- first Roundtable in June 2002.51 ding documents for prequalification for civil works and civil works contracts and for Systems and Processes. The regional develop- selection of consultants. The Environmental ment banks have all been actively pursuing Group has completed a common framework the results agenda in the context of their for environmental impact assessments, while country assistance strategies, as discussed focusing most of their efforts on country-level above, and in their business processes for work. And the Evaluation Group has fol- assuring the quality and development effec- lowed up on good-practice papers on public tiveness of their operations. To this end, all and private sector evaluations, through a the banks are giving greater attention to the 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 4 M O N I T O R I N G T H E I F I S ' C O N T R I B U T I O N BOX 13.4 Sectorwide approach to primary education development The Bangladesh Second Primary Education Development Project is a concrete example of how the harmonization and alignment agenda can be implemented at the country level to improve aid effec- tiveness and support the MDGs. Investment in primary education is a key to reducing poverty, enhancing opportunity, and improving the quality of life. Bangladesh has made progress in primary education in the last two decades. Nonetheless, significant problems remain: in the quality divide between the rich and poor, and in access of the poor, especially of girls. Donors have responded to requests to assist--indeed so much so that 11 donors were funding 27 separate projects in primary education, all with their own separate donor-specific operating requirements. To try to achieve greater coordination, the government made a bold move. Supported by the local donor community, the government adopted and endorsed a Macro-Plan, and a sector strategy, which outlines the objec- tives for primary education over the next six years and sets out the policy framework and imple- mentation plan for improving education quality, enhancing access to schooling, and ameliorating overall management and oversight of primary education. Rather than a series of projects, the gov- ernment worked with donors, led by the Asian Development Bank, to develop the Second Primary Education Development Project as a coherent program (a sectorwide approach, or SWAp) in sup- port of the strategy, which covers all public primary schools in the country. While the program approach may stretch government capacity, the government and develop- ment partners have achieved a satisfactory congruence of goals and aspirations through the col- laborative and participatory process, including agreement on results that can be monitored and quantified. The multidonor-supported program approach aims to reduce transaction costs for the government. Key aspects of the SWAp are to replace 27 different project structures with 1 overar- ching structure, with cofinanced funds from the AsDB, IDA, and six other partners disbursed through a pooled account, on which AsDB reports to other donors, and with 90 percent of pro- curement carried out by the government under a newly enacted law. Source: World Bank, Operations Policy and Country Services Vice Presidency. quality and impact of their operations lytical content of AsDB's economic, technical, through enhanced monitoring and evaluation and sector work, as a basis for the policy dia- and portfolio management. In previous years, logue with clients. Last year, the EBRD intro- the AfDB had taken a number of measures to duced a new Transition Impact Monitoring improve project quality at entry, supervision, System, with periodic monitoring and report- monitoring and evaluation, and portfolio ing on project performance. The new system management. These measures are now being is designed to facilitate a portfolio approach extended and deepened in line with the results to project monitoring. Progress reporting is agenda, where the focus is on "higher level" done both on a project and on a portfolio interventions and evaluations at the country, basis to allow a comparison of the transition sectoral, and regional levels. AsDB has signif- impact potential of the portfolio against other icantly improved its portfolio management sources of project risks and returns, and other and monitoring of project implementation to sector and country dimensions. The IDB has make it more results focused. Project docu- taken a number of important steps to upgrade mentation throughout the project cycle has project quality and management. Building on been refocused on development objectives, a pilot quality-at-entry assessment, improve- with lessons learned highlighted in project ments are being made to project design and completion and audit reports. Special atten- evaluation, including the introduction of a tion is also being paid to the quality and ana- structured self-evaluation system for use 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 4 209 P A R T I V : R O L E O F 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 during project supervision, where reporting is efforts to date, and a Medium-Term Action being strengthened, and also on project com- Plan for enhancing IDB's development effec- pletion, where the coverage by the indepen- tiveness and results orientation is currently dent evaluation unit is being expanded. under preparation. The regional banks also are using corpo- rate reporting for informing shareholders and Effectiveness and Results. The independent stakeholders about progress on the results evaluation departments of the four regional and quality agenda, recognizing the critical banks fill broadly similar roles within their role such reporting plays in sustaining man- organizations, contributing to institutional agement attention to the agenda and in turn learning and accountability. To some extent institutional follow-through. The AfDB they also provide a basis for comparing perfor- reports on results through three main chan- mance across the institutions--although there nels. First, much operational reporting on are limits to comparability, as the measures quality, results, and evaluation takes place used in the different banks are not exactly the through the Board Committee on Develop- same. Going forward, harmonization of evalu- ment Effectiveness. Second, AfDB is piloting ation criteria, both for individual operations the Results Measurement Framework, which and for aggregate institutional scores, would be it provides to the African Development Fund worthwhile, building on the earlier effort by the Deputies, as part of the latter's oversight Evaluation Cooperation Group to assess the function. Finally, AfDB is beginning to imple- differences across the MDBs and to produce a ment a Corporate Balanced Scorecard in good-practice standard.52 reporting to its Executive Board on strategic In the meantime, the following profiles are planning and budgeting. illustrative of the situation across the regional The AsDB is reporting through the dia- development banks, based on publicly avail- logue on results with the recently created able material. The AfDB reports in its annual Board Committee on Development Effective- report that in general the latest annual evalu- ness and with the Asian Development Fund ation review found that the overall perfor- Deputies, including in the context of the mance rating for outcomes was satisfactory or design and implementation of the Asian better for more than two-thirds of projects; Development Fund Results Measurement the percentage scores for institutional devel- System. In addition to project-based results opment and sustainability were appreciably management, the EBRD uses results-based lower.53 According to AsDB's annual evalua- management for its own institutional perfor- tion reports, 40 percent of completed projects mance and budgeting, with a focus on transi- and 100 percent of programs are selected for tion impact and financial indicators in its evaluation each year. In 2001, of the 17 proj- institutional scorecard, which it shares with ects and 3 programs evaluated, none were its Executive Board. Both the transition found to be unsuccessful, with 14 percent impact and financial performance objectives highly successful, 41 percent successful, and are reviewed annually by the Board in the 45 percent partly successful. In 2002, of the context of EBRD's Medium-Term Strategy 27 projects and 6 programs, none were unsuc- Update and Strategic Portfolio Review; these cessful, while 12 percent were highly success- reviews inform the EBRD's annual dialogue ful and 18 percent only partly successful. with its Board on the budgeting process. The In the EBRD, which provides extensive IDB is also strengthening its corporate report- and transparent information on its evalua- ing, including to its Board Committee on Pol- tion activities and findings, the focus is on icy and Evaluation. At the 2004 Annual transition impact, covering privatization, Meetings in Lima, Peru, the Committee of the competition, and corporate governance, and Board of Governors discussed progress on on overall performance, which includes IDB's development effectiveness reform financial and environmental performance in 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 4 M O N I T O R I N G T H E I F I S ' C O N T R I B U T I O N addition to transition impact. 54 On overall In middle-income countries, there is no performance, 52 percent of operations eval- explicit framework for country-led coordina- uated during 1996­2002 were given success- tion as in the case of countries with PRSPs. ful or highly successful ratings, while 74 The wide variety of development needs percent were rated successful or highly suc- among MICs and difficult-to-predict shifts in cessful on transition impact (the differences country needs for balance-of-payments sup- were largely attributable to low scores on port lead to differences in the timing and financial performance). For IDB, 67 percent nature of Bank and Fund support and in the of operations reviewed in 2001 were found content and scope of conditionality, making to have adequately defined output indicators, the implementation of collaboration more according to a report of the independent challenging.57 Nevertheless, the principles for evaluation office, a finding that contributed effective collaboration are similar, including to the adoption of some of the reforms men- early consultation on program design and tioned earlier.55 conditionality, and division of responsibilities based on respective mandates and compara- tive advantage. Meanwhile, a key priority for Systemic Issues many MICs, especially those with access to There is evidence that the Bank, the Fund, and financial markets, relates to joint Bank-Fund the MDBs are working better together, as well work on the prevention and resolution of as with other partners, including the U.N. crises and the strengthening of member coun- agencies, WTO, OECD-DAC, and EU and tries' financial and fiduciary systems. bilateral donors. This brings benefits to clients Staff coordination is supported by two and partners alike, through the improved effi- institutional coordination mechanisms: the ciency and effectiveness of the IFI system. But Joint Implementation Committee (JIC) for further progress is possible, which calls for cooperation on HIPC/PRSP countries, and the continued attention to the issue. Financial Sector Liaison Committee (FSLC) for cooperation in financial sector work. The JIC, established in 2000, has provided a use- Bank-Fund Collaboration ful framework for institutional coordination There has been progress on Bank-Fund col- on the work on low-income countries. Going laboration in operational work in recent forward, the JIC's role is being expanded to years, reflecting major investments by both anchor monitoring of progress on overall institutions toward that end, involving staff, Bank-Fund collaboration in an institutional management, and the Executive Boards of the framework. The mandate of the JIC is to two institutions. 56 address cross-cutting issues on Bank-Fund The PRSP process provides a basis for collaboration; monitor progress on imple- coherent and consistent work of the Bank mentation of the framework of collaboration and the Fund, fully aligned with the country's on country programs and conditionality; and, development strategy. The Joint Staff Assess- when needed, provide an additional instru- ments (JSAs), which evaluate the soundness ment to help country teams in the two institu- of the PRSPs, have proved instrumental in tions to reach agreement on priorities, thus enabling staffs to develop common views. ensuring coherence of policy advice and pro- Reinforcing upstream engagement and coor- gram design. This covers issues that arise in dination of the two institutions, using in par- both the low- and middle-income country ticular the opportunity offered by the JSA contexts. As such, the JIC will provide the in- process, would further efforts to promote stitutional framework for monitoring progress synergies, better delineate responsibilities in on overall Bank-Fund collaboration. support of the PRSPs, and reduce gaps and The FSLC, established in 1998 for cooper- overlaps. ation on financial sector work, continues 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 4 211 P A R T I V : R O L E O F 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 be useful as a forum through which staff reflects the response to the signals emanating exchange information, coordinate work pro- from top management and from sharehold- grams, undertake joint missions, and provide ers. The presidents of the MDBs meet at least consistent policy advice to country authori- twice a year to review substantive and strate- ties, including for financial sector conditions gic issues, including collaboration among in lending operations. These staff interactions their respective agencies. They also have are supported and complemented by broad- issued joint statements on a number of com- based and well-developed mechanisms of mon themes, and cosponsored important institutional coordination. Regular meetings international events, the Marrakech Round- between the Managing Director of the Fund table on Managing for Development Results and the President of the Bank, as well as being only the most recent. At their last meet- between the Managing Directors of the Bank ing, the presidents also agreed to strengthen and the Deputy Managing Directors of the MDB cooperation on capacity building and Fund, provide the foundations for a regular infrastructure. dialogue at the most senior level of both insti- Operational vice presidents and their man- tutions. Area Department management in the agement teams from the World Bank and the Fund and Regional Vice-Presidencies in the respective regional development banks also Bank are also in close and regular contact; meet regularly. These meetings include peri- and so are respective central units on key pol- odic consultations on Memoranda of Under- icy issues of mutual interest, with a growing standing (MoU), which have become strategic number of joint activities. tools for setting out the division of labor in Finally, the Executive Boards of both insti- specific countries and sectors. These MoUs are tutions are engaged in monitoring Bank- now reviewed and updated regularly. A Fund collaboration, with periodic reports on review of the MoU between the AfDB and the progress in key areas. Meanwhile, regular World Bank was completed in July 2002. In and transparent reporting in board docu- December 2003 a meeting was held in which ments of the views of each institution on an agreement was reached on a corresponding reform priorities, program conditionality, action plan for country, sector, and regional and progress in implementation of the agreed thematic cooperation under the MoU. A program constitutes a crucial element for review of the MoU between the AsDB and the ensuring consistency of views, transparency, World Bank is scheduled for later this calen- and staff accountability.58 One mechanism, dar year. The EBRD and the World Bank are introduced in 2002,59 for improved collabo- cosignatories to three country- and issues- ration and communication with the respec- specific MoUs, each of which is reviewed on tive Executive Boards, is the enhanced its own time line. The MoU between the IDB annexes on IMF and World Bank relations in and the World Bank is currently under review. program documents. Aside from keeping the The quality of MDB cooperation in their Boards abreast of developments, these country work is the critical test for determin- annexes are intended to help ensure up- ing the benefits this partnership can bring to stream engagement between the staff of the the clients. Notwithstanding occasional staff two institutions, delineate the division of tensions on individual operational issues, responsibilities, and provide an assessment there is evidence of an improved relationship of the country's reform efforts. in operations, and better strategic and the- matic coherence is gradually showing up in specific operations. All MDBs are committed Multilateral Development Banks to supporting countries in preparing PRSPs, Among the MDBs, cooperation also has con- basing their assistance strategy on the PRSPs tinued to grow. As with the evolution of or other such country-owned strategies, and Bank-Fund collaboration, the progress coordinating the strategy with the other 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 4 M O N I T O R I N G T H E I F I S ' C O N T R I B U T I O N MDB(s) also involved with the country. last year and discussed with World Bank Cooperation in support of the PRSP process Executive Directors.61 is progressing, but there is recurring friction That paper sets out a three-tiered architec- over the different roles of the World Bank ture, governing the coherence, coordination, (and IMF) and the regional banks, not least in and cooperation among the various agencies, relation to the preparation of the Joint Staff around which the detailing and assessment of Assessments. After an uncertain start, coor- specific actions will be structured. dination of World Bank and regional devel- opment bank country strategies is now The first tier--where development actually becoming more accepted, with recent good takes place, and the MDGs will be met, or examples from Honduras and Nicaragua. not--is at the country level. Here the con- Discussions have taken place on closer coor- sensus both in rhetoric and increasingly in dination or even joint country strategies in reality is the centrality of national owner- Cambodia, Papua New Guinea, Mongolia, ship, national policies, national systems, Sri Lanka, the Pacific Islands, and Uganda. and national leadership for successful The viability and relevance of such coordina- development. This principle is at the core tion, particularly in larger middle-income of the CDF, the PRSP process, the World countries, are not uniformly accepted and Bank's strategy for assisting middle-income will continue to be discussed. That said, gov- countries, the United Nations Development ernment leadership is accepted as the norm to Assistance Framework, the MDBs' country aim for in MDB support for country devel- strategies and country strategy papers, and opment in both low- and middle-income the various strategy documents of bilateral countries. Meanwhile, MDBs have continued and other donor agencies. It was central to to strengthen cooperation (with each other the discussions at Monterrey, Rome, and and other partners) on individual operational Marrakech, and as indicated in the paper, products, at times doing such work jointly there has been much progress across agen- and in other cases dividing the work between cies--the IFIs, U.N. agencies, the EU, and them. Joint portfolio reviews, public expen- bilaterals--taking it forward. diture reviews, fiduciary assessments, and In the second tier are all the multilateral procurement assessments are examples of this and bilateral support agencies, charged type of cooperation, as are activities in sup- with helping countries achieve their devel- port of PRSP preparation. Similarly, there is a opment outcomes. Clearly these agencies growing number of examples of joint or coor- must coordinate with each other in their dinated lending or grant operations, in edu- country work. Increasingly they are doing cation, health, infrastructure, environment, so, under the leadership of the country and other areas. itself, with each agency supporting coun- try priorities according to their respective mandates and comparative advantage. But IFIs and Beyond agency headquarters also need to coordi- Until now, this chapter has focused on IFI nate to establish the scope (and policies) activities, both individually and collectively. for their country representatives to sup- But also of interest to the Development Com- port national activities; shape the strategic mittee and others is the question of how these directions and future staffing profiles and activities fit into the evolving landscape for skills mix of their respective agencies to country and global development, including ensure that, taken as a whole, the interna- the activities of other multilateral agencies. A tional capacity needed to support country companion paper has been prepared on that development is in place; and share infor- topic,60 building on the analysis developed in mation and data for monitoring, to inform collaboration with staff in partner agencies developing countries of how they 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 4 213 P A R T I V : R O L E O F 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 doing vis-à-vis comparators and to tell that end the Fund is adapting its instru- global taxpayers how the development sys- ments of financial and technical support to tem is performing. An example of such the needs of its low-income members, with cooperation is the inputs to the current particular attention to how such support Global Monitoring Report provided by can be used to catalyze other donor assis- OECD-DAC, U.N., and WTO staff and the tance, deal with post-conflict situations, inputs provided by Bank and Fund staff to assist members in responding to exoge- the annual reports of the Secretary General nous shocks, and establish institutions that to the General Assembly on the implemen- will enable low-income countries to gain tation of the Millennium Declaration. increasing access to private sector financ- The third tier is in the realm of ideas and ing. The Fund's work agenda also aims at objectives, with the convergence of inter- strengthening the design of Fund-supported national thinking of recent years on the economic programs in low-income coun- ends and means of development--capped tries, while enhancing alignment with the by the MDGs and the Monterrey Consen- PRSP. A third element of the Fund's ongo- sus. As discussed in earlier chapters, there ing work, together with the World Bank, is is broad agreement on the MDGs and to develop an effective and flexible frame- related outcomes as the goals of develop- work for assessing debt sustainability in ment and on the responsibilities of devel- low-income countries. oping and developed countries in terms of The World Bank's country support priori- policies and actions for achieving them, ties are to continue to work with partner with the focus increasingly on the imple- agencies to support country efforts to mentation of those policies and actions deepen the PRSP process as a basis for the and on specific measures for monitoring design of its assistance strategies in low- progress. In turn, this growing consensus income countries; to adapt its approaches, and coherence on objectives have opened instruments, and institutional processes to the way for greater specialization in agen- the evolving needs of middle-income coun- cies, grounded in their respective man- tries; and to complete the major agenda dates, and complemented by increased the Bank has set out on managing for cooperation with partner agencies to fill results, harmonization, and simplification. gaps in international support for country Supporting and complementing the deep- development. ening of country-led approaches in the Bank's assistance strategies is the strength- Conclusions ening of its analytic, knowledge, and advocacy work. A key priority for Bank- Where does this leave us? First, the evidence supported global and sectoral programs is presented above points to progress in indi- the implementation of an effective frame- vidual IFIs on transparency, country focus, work for appraisal, monitoring, and eval- and results orientation. However, there uation that is every bit as strong as the clearly is no room for complacency; a key framework for country programs. challenge will be to extend and deepen the The regional development banks also have progress that has been made so far. Important large agendas before them--in their coun- areas for further improvement include: try programs and their support for regional public goods. All need to complete their For the IMF, the priority is to continue to ongoing reforms associated with the results refine its role in assisting low-income agenda, as they set out at the Marrakech countries to confront the macroeconomic Roundtable. In addition, like the World challenges of achieving sustained high lev- Bank, greater efforts are needed on the els of growth and poverty reduction. To overall governance and accountability 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 4 M O N I T O R I N G T H E I F I S ' C O N T R I B U T I O N framework for their regional and sectoral 5. IMF 2004b. programs. 6. IMF 2001; Boughton and Mourmouras 2004. Second, looking across the IFIs, there also 7. IMF 2002b. has been progress--both institutionally and in 8. IMF 2002c; IMF­World Bank 2002b. 9. IMF 2003a. The forthcoming PRSP Progress day-to-day work at the country level. Bank- Report will examine a related set of questions. Fund collaboration and coordination among 10. IMF 2003e. the MDBs are smoother and more productive 11. For the most recent review, see IMF 2003b. than they were as recently as five years ago. In 12. IMF 2003f, chapter III. tandem with the increase in partnership and 13. IMF-World Bank 2002c. coordination, there is a healthy trend toward 14. IMF-World Bank 2004. greater specialization in line with institutional 15. IMF 1998. comparative advantage. This reverses the 16. For external assessments, see IMF 2004a, trend of the early 1990s when overlaps in pp. 41-51. agencies' capacities increased, as the consen- 17. IMF 2002a. sus on the comprehensiveness of the develop- 18. IMF 2003c. 19. IMF 2003d. ment paradigm was beginning to grow. But 20. World Bank 2003d. the "gains from trade" between and among 21. IMF­World Bank 2004. IFIs have not all been harvested yet. Opportu- 22. Development Committee 2000b. nities include increased selectivity of agency 23. The latest retrospective report, issued in programs in line with comparative advantage, March 2003, examined the 28 CASs and 11 CAS harmonization of agency practices around Progress Reports discussed by the Executive Board national poverty reduction strategies and sys- in fiscal 2000 and the first half of fiscal 2001. It tems, and joint evaluations of their support. assessed the progress made in improving the qual- Finally, it is none too early to begin think- ity of the different dimensions of the CAS since the ing beyond the above agenda to the next previous retrospective, issued in May 2000. See phase of IFI reform, focused on dynamic World Bank 2000, 2003b. 24. Development Committee 2003. comparative advantage. Small steps in that 25. OED 2003e. direction include proactive encouragement 26. OED 2003a. of cross-IFI secondments, the broadening of 27. OED 2004a. the professional networks from individual 28. World Bank 2004b. institutional networks into IFI networks, and 29. OED 2003c. the explicit consideration of the IFI dimen- 30. OED 2003a. sion in sector strategy papers. Beyond these 31. OED 2003d. measures, it will be necessary for the IFIs to 32. Development Committee 2000a. tackle strategic issues more directly and to 33. World Bank 2003c. take advantage of the enhanced partnerships 34. OED 2002. across IFIs, so that they can organize and 35. World Bank 2003f. 36. World Bank 2003d. staff themselves effectively to support coun- 37. World Bank 2003e. try, regional, and global development. 38. Including Bangladesh, Bolivia, Brazil, Cam- bodia, Colombia, Dominican Republic, Egypt, Notes Ethiopia, Fiji, Ghana, Honduras, India, Jamaica, Kenya, Kyrgyz Republic, Mexico, Mongolia, 1. See, for example, Scott 2004 and World Morocco, Mozambique, Nicaragua, Niger, Pacific Bank 2003d. Islands, Rwanda, Senegal, Serbia, Sri Lanka, Tajik- 2. Joint Marrakech Memorandum 2004. istan, Tanzania, Uganda, Vietnam, and Zambia. 3. OED 2003b. 39. See chapter 11. 4. Ghosh and others 2002; Collyns and Kincaid 40. This flexibility is being implemented in all 2003. new Bank-financed projects; Bank staff are working 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 4 215 P A R T I V : R O L E O F 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 with country authorities and other donors to agree 52. MDB Evaluation Cooperation Group 2002. on reporting formats. 53. AfDB 2002, p. 56. 41. The associated guidelines for staff and 54. EBRD 2003. annual financial reporting and auditing for Bank- 55. IDB 2003. financed activities were issued in June 2003. The 56. This section is based on IMF­World Bank new policy applies to all projects appraised from 2004. July 1, 2003. 57. The considerations affecting Bank-Fund 42. Wapenhans Task Force 1992. collaboration in MICs are discussed in IMF­World 43. Development Committee 2002. Bank 2001. 44. OED 2003b. 58. As indicated earlier in the chapter, in addi- 45. IDA 2003. tion to reporting on country matters, Bank and 46. OED 2004b. Fund staff have been reporting jointly to their 47. OED 2003a. Executive Boards on a wide range of thematic and 48. This section is based on the progress reports policy issues of joint relevance to the two institu- the regional development banks prepared for Mar- tions, such as public expenditure management, rakech, as well as other sources as specifically noted. trade, FSAPs, and ROSCs. See www.managingfordevelopmentresults.org. 59. IMF­World Bank 2002a. 49. MDB Joint Liaison Group 2002. 60. World Bank 2004a. 50. IDB 2004. 61. World Bank 2003a. 51. World Bank 2004c. 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 4 References The word processed describes informally reproduced works that may not be commonly available. Chapter 1 Monitoring Framework ------. 2003e. "Supporting Sound Policies with Adequate and Appropriate Financing." Asrey, Steven. 1996. "Water, Waste and Well- DC2003-0016. Washington, D.C. 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Washington, D.C. 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 4 T he turn of the century was marked by significant and promising events for world development. The Millennium Development Declaration--signed by 189 countries in September 2000--led to the adoption of the Millennium Development Goals (MDGs), which set clear targets for reducing poverty and other sources of human deprivation and promoting sustainable development. A meeting of world leaders in Monterrey, Mexico, in March 2002 established a shared understanding of the broad development strategy and policies needed to achieve the MDGs. The Monterrey Consensus ushered in a new compact between developing and developed countries that stressed their mutual responsibilities in the quest for the development goals. With broad agreement on development goals and the means to achieve them, the key task now is implementation--to translate vision into action. Is implementation happening? What progress has been made? Are the various parties delivering on their parts of the compact? What are the priorities in the agenda? Global Monitoring Report 2004 addresses these questions. Publication of this book launches a series of annual reports that will assess how the world is doing in implementing the policies and actions for achieving the MDGs and related outcomes. Produced jointly by the World Bank and the International Monetary Fund, in collaboration with partner agencies, this report provides a uniquely comprehensive review of the global development policy agenda. It covers the whole spectrum of policies and institutions that form part of the development effort. And it covers all key actors in this effort-- developing and developed countries as well as international agencies. The report is organized into four sections: framework, developing-country policies, developed-country policies, and the role of international financial institutions. Part I describes the analytic framework for monitoring progress in reaching the MDGs and assesses the prospects for attaining those goals. That assessment overarches the subsequent three sections, detailing the urgent need to scale up policies and actions. Part II evaluates policies in developing countries, focusing on low- income countries, where the challenge to achieve the development goals is greatest, but also covering issues important to middle-income countries. Part III assesses policies of developed countries and suggests actions required if they are to fulfill their commitments in support of the development goals. Part IV looks at how multilateral agencies are playing their parts, both individually and collectively, in supporting countries' progress toward the development goals. Global Monitoring Report 2004 is essential reading for development practitioners and those with an interest in international affairs and global development. 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