DEV3 I .DEVELOPMENT I 44COMMITTEE NUMBER THIRTY-FOUR Development Issues Presentations to the 49th Meeting of the Development Committee Madrid-October3, 1994 Development Issues Presentations to the 49th Meeting of the Development Committee Adrid-October 3, 1994 Joint Ministerial Committee of the Boards of Govemors of the World Bank and the ntenational Monetary Fund on the Transfer of Real Resources to Developing Couris (Development Committee) Washington, D.C Copyright 0 1994 The World Bank 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing November 1994 Established in October 1974, the Development Committee is known formally as the Joint Ministerial Committee of the Boards of Govemors of the World Bark and the Intenational Monetarn Fund on the Transfer of Real Resources to Developing Countries. The Committee's members, usually Minister., of Fnance, are appointed in turn for successive periods of two years by one of the countries or groups of countries represented on the Bank's or the Fund's Board of Executive Directors The Committee is required to advise and report to the Boards of Governors of the Bank and the Fund on all aspects of the broad questions of the transfer of real resources to developing countries, and to make suggestions for consideration by those concerned regarding the implementation of its conclusions. The Intermational Bank for Reconstruction and Development (IBRD) and its affiliate, the International Development Association (IDA), together constitute the World Bank. The International Fiance Corporation (EFC) and the Multilateral Investment Guarantee Agency (MIGA) are other affiliates of the IDRD. ISBN 0-8213-3136-1 ISSN 025548807 CONTENTS Foreword .................................................. v 1. Paper by the Chairman of the Development Committee, Mourad Cherif, Minister of Finance and Investments, Nlorocco. 1 2. Report by Lewis T. Preston, President of the World Bank. 4 3. Statement by Michel Carndessus, Managing Director, International Monetary Fund ................... 16 4. Statement by the Chairman of the G-24, Willy W. Zapata S., President of the Bank of Guatemala .25 5. Issues Paper: Aid Effectiveness .27 6. Joint Issues Paper: The Impact of Uruguay Round on the Developing and Transition Economies ........................... 59 7. Paper by James Michel, Chairman of the DACIOECD on "Improving Aid Effectiveness" .................... 69 8. Paper by the GATT Secretariat on the "Outcome of the Uruguay Round for Developing Countries" .76 9. Development Committee Conmnunique, October 3, 1994 .104 orendix A Agenda for the 49th Meeting of the Development Committee .108 Appendix B Members of the Development Committee .109 (List of Countries represented by them and their Executive Directors at the World Bank and the IMF: September 1994) Avpendix C Observers of the Development Committee .113 iii FOREWORD The Development Committee held its 49th meeting in Madrid, Spain on October 3, 1994. There were two main items on the agenda: first, "Aid Effectiveness"; second, "The Impact of the Uruguay Round on the Developing and Transitior Economies". The Committee based its discussiononjoint issues paper and reports prepared by the World Bank and the IMF as well as supplementry papers provided by international organizations. The first item gave the Committee an opportunity to concentrate on the issue of aid effectiveness in terms of achieving the ultimnate objective of development; that is to reduce poverty and to improve living standards through enviromnentally sustainable growth and investment in people. The issues paper highlights the importance not only of the quantity, but also the quality of aid. Ministers recognized that improving the effectiveness with which aid resources are spent was essential, and that this would require partnership and closer collaboration betveen recipient countries, international organizations and donors. The goal for each partner should be to obtain results on the ground in each activity it undertkes. On the second item, Ministers reviewed the results of the recently-completed Uruguay Round multilateral trade negotiations and their impact on the developing countries as well as on the future work of the World Bank and the IMF. The Committee noted that it was only possible to make a preliminary assessment of the likely effects. Ministrs recognized that on the basis of the evidence available so far, it seemed likely that the existing instruments of the World Bank and the IMF would be adequate to deal with the negative effects of the Uruguay Round on some countries during the transitional period. They also requested the Bretton Woods institutions to assist developing countries to maximize new market opportunities through the provision of financing and of technical assistance. Ministers also took note of the progress made on several other issues which were outlined in the reports of the Managing Director of the IMF and the President of the World Bank, such as the impact on developing countries of recent trends in the world economy; Resource Transfers; Global Environment Facility; Special Program of Assistance for Africa; Debt Strategy; and responding to challenges in Eastern Europe and the former Soviet Union. In view of the broad interest in these subjects, the presentation made to this meeting of the Committee is now made available in this pamphlet in three languages - English, French, and Spanish for a wider audience. Peter Mountfield Executive Secretary October, 1994 v PAPER BY THE CHAIRMAN OF THE DEVELOPMENT COMMINTEE, MOURAD CHERIF, MINTER OF FINANCE AND INVESTMENTS, MOROCCO It will be a great pleasure for me to take the Chair of the Develpment Committee for the first time when we meet in Madrid on October 3, in the fiftieth anniversary year of the World Bank and the International Monetary Fund. Economic Background Mr. Preston's report, and Mr. Camdessus' expected presentation of the World Economic Outlook, will establish the context of this meeting. The prospects for the developing countries are a little brighter than they were when the Development Comnitnee met in April. In particular it is encouraging to note the recovery in commodity prices. But none of us can be sure that this recovery will be sustained; and we would do well to be cautious before building our economic programs and budget plans on the basis of prices which may not last. On the other hand, world growth, and the prospect for the exports of developing countries, continues to look promising, although recent increases in interest rates in some industrial countries will raise the cost of borrowing. Transfer of Resources to Developing Countries Successful development is the responsibility of developing countries themselves. However, it is important to maintain the flow of funds into developing countries, to supplement domestic savings and make possible a higher level of investment and growth than we can achieve from our own resources. Total flows continued to break past records in 1993. In the last few years, the majority of these flows have come from the private sector; and despite recent setbacks, this is expected to continae. But such private flows are heavily-concentrated in a small number of recipient countries. More work is needed on ways of removing artificial barriers and improving these flows, perhaps on the lines discussed during the Committee's meeting in May 1993. We can also welcome the greatly increased role of MIGA during the last fiscal year, and the continued support of the IFC. Some of the proposals recently discussed within the World Bank Group on "Mainstreaning Guarantees" also deserve our support. But many developing countries, particularly the poorer ones, continue to be dependent on official development assistance and on lending from the International financial institutions (including the multilateral banks). It is therefore disappointing thatthe level of Official Development Assistance (ODA) as measured by the World Bank remained almost unchanged in 1993. Indeed the Development Assistance Committee (DAC) of the OECD figures (which measure ODA going to the traditional developing countries excluding countries in transition) record a sharp fall in 1993. While recognizing the budgetary constraints on many donor countries, we rmust hope that these trends can be reversed next year; and in particular, that the negotiations on IDA-1l can be speedily and successfully completed, and that flows under the third Special Program of Assistance for Africa continue at their present level. Action is also needed to relieve the problems of severely indebted low-income countries. Aid Effectiveness However generous the donors may be, it is essential to improve the effectiveness with which aid resources are spent. The test will be success at ground level. This requires a partnership between donors and recipients. The valuable paper presented to us by the World Bank emphasizes the critical role of the recipient government and of conditions in recipient countries. There are three key factors: -1- Chairman's Paper strong ownership, governance and participation; effective administrative and institutional capacity; and sound domestic policies and resource management. The paper by the Chairman of the DAC reaches very similar conclusions. There are lessons here for all three sets of players: the industrial donor countries, the international institutions, and the developing countries themselves. I speak as the representative of a group of developing countries, and I am clear that we have a major responsibility here ourselves. But donors also have an important role to play. I hope we can discuss, ways in which they can foster these favorable conditions for lusing aid effectively and improve their own aid practices. We might aim to reach agreernent on some or all of the following points and record them in our Communique: - Participation by relevant stakeholders can improve the design of projects and ensure that they are properly implemented and operated. It is especially imnportant to find ways to ivolve the poor and other groups, including women, who might otherwise be left out of the decision-making process. - Conditionality cannot substitute for strong ownership, govemance and participation. More attention should be paid to these issues before lending. If a consensus cannot be reached, both parties may be better to postpone lending, while working together to build the prerequisites for effective aid. - Technical assistance (TA) is unlikely to be effective unless it responds to the needs of the recipient and takes place within - rather than substitutes for - an effective institutional enviomnment. Progress on reforming TA modalities, along the lines discussed at the recent DAC/UNDP/World Bank Seminar, requires urgent attention. - Multilateral agencies, including the IMM and the World Bank, normally take the lead in helping countries put in place a sound policy framework for private sector development and public sector management. Aid programs should be designed to be consistent with this framework and the country's development priorities. Innovative approaches to achieve this objective, such as the integrated sector approach, are to be encouraged. - Wherever possible, aid procedures and practices should be harmonized and simplified. Donors should avoid setting up mechanisms which are inconsistent with the recipient's own efforts to manage aid. Recent progress on reducing the use of tied aid and mixed credits, in line with the DAC Principles, needs to be extended. - DAC's Principles provide an appropriate framework for improving aid coordination. Consultative Groups and Roundtable Meetings are more effective when they draw on local participation as much as possible and form a useful part of the country's aid stategy. The agenda for Consultative Groups should cover issues of development strategy and aid utilization, as well as mobilization of financial resources. - Recent efforts to improve the effectiveness of aid agencies, focussing on results inthe field, need to be sustained and extended. Particular attention should be given to: shifting the focus from projects to country programs; improving the 'quality at entry" of projects; -2 - Chairman's Paper strengthening monitoring and evaluation; streamlining procedures; and changing incentives to focus on development impact. Some aspects of these questions can be pursued in greater depth by the Task Force, which the Committee established in April, to review the development role of the multilateral development banks. Trade After the Uruguay Round But fer almost all developing countries, trade is far more important than aid. We must therefore welcome the progress being made in implementing the results of the meetng which I attended in Marrakesh in April. This is the first meeting at which the Development Committee has had the benefit of a preliminary assessment of the results of that agreement. Clearly we must support the call for speedy ratification of the agreement, so that the new World Trade Organization can come into existence as planned on January 1, 1995. More important, so far as this Committee is concerned, we must insist on close collaboration between the two Washington institutions and the World Trade Organization. It seems to me that the main messages are these: Developing and transition economies have made great progress in unilaterally liberalizing their trade system.s improving their ability to compete in international markets, and integrafing tiemselves into the multilateral system; The successful conclusion of the Uruguay Round will support these measures through increased market access, the integration of new and sensitive areas such as services into the system, and through strengthened rules and institutions; The impact of the Uruguay Round on developing countries seems likely to carry substantial benefits, particularly to those countries which make the necessary macroeconomic and stuctural policy changes; Some developing countries have considerable reservations about certain aspects of the Round, notably in agriculture, textiles and safeguards; Others are concerned about the dangers of higher food import prices and the erosion of tariff preferences. Although on the evidence available so far, the World Bank and the IMF believe these dangers are likely to be fairly small, other studies now in hand will help to refine this analysis. The World Bank and the IMF must be ready to address these problems on a country-by- country basis in the course of normal business; the institutions believe that their existing instruments are adequate to deal with these problems. Other recent developments The Development Committee will wish to congratulate all concerned on the successful transformation of the Global Environmental Facility into a permanent institution. It will also want to take stock of the outcome of the Cairo Conference on Population and Development, which will tale place just before we meet; the World Bank made an important contnbution to this conference which the Committee discussed at its meeting in April. We may also wish to look forward to the UN Social Summit in Copenhagen in March 1995. -3 - REPORT BY LEWIS T. PRESTON, PRESIDENT OF IRE WORLD BANK October 3, 1994 I. Introduction 1. This year we are commemorating the fiftieth anniversary of the Bretton Woods institutions. This milestone was an opporunity to take stock of development progress over the past 50 years, to reflect on the institution's past, to draw lessons, and to set out broad directions for its agenda and for the way it conducts its business. The outcome is set out in the paper entitled: The World Bank Group: Learning from the Past, Embracing the Fre. 2. Progress in the developing world has been substantial: Compared to 1944, people in developing countries live 20 years longer, incomes have doubled, and one and one-half times as many children attend school. The Bank has contributed to this improvement in the quality of life through its support for over 6,000 operations in about 140 countries with more than $300 billion in financing. Yet enormous challenges remain. More than a billion people struggle to survive on about a dollar a day. Two out of five people in developing countries do not have basic sanitation or clean water. About half the people of Sub-Saharan Africa are trapped in poverty, and the challenges associated with the economic transformation of Eastern Europe and the former Soviet Union are much more complex than originally thought. Finally, there are new challenges, such as those presented by South Africa and by the West Bank and Gaza. 3. To assist developing countries in meeting these challenges, the Bank will continue to build upon its two main roles, fnancial assistance and technical advice. But the scale and complexity of the development agenda, the diversity and near-universality of our membership, and the more competitive envimnment that we face mean that we must carry out our activities in a sigmficantly different context. To avoid spreading ourselves too thin, we will follow six guiding principles: increase the selectivity of our activities; strngthen our partnership with others; emphasize client orientation; increase our results orientation; ensure cost-effectiveness; and marintain strong commitments to financial integrity. Important changes are already occurring in the institution's culture and business practices, but the consistent application of these principles will require concerted efforts. I know that I can rely on your support in this process and I will be addressing these issues more fully during the Madrid Conference and at the Annual Meeings. 4. During the 1994 Spring meeting, the Development Committee discussed population and migration issues and also the key items on the agenda of the 1994 Cairo International Conference on Population and Development. When I address the Committee, I expect to present the main conclusions of the Cairo Conference. The agenda for this fall meeting focuses on the effectiveness of aid and on the impact of the Uruguay Round on developing countries-two important issues confronting the international community. I would like to draw your attention to a few salient points from the reports on these two issues. 5. One of the main conclusions of the paper on aid effectiveness is that aid is most effective in countries that (a) are committed to reducing povert through sustainable economic development; (b) have strong institutions; and (c) have policies and procedures that lead to economywide efficient use of resources, and in particular have a sound budgetary process. The paper discusses what donors should be doing differently and better. Donors must help strengthen country commitment, for example, by supporting more participatory approaches to development. The donor community must help recipient countries develop critical policies and institutional capacity to use their resources efficiently. Donors also - 4 - President's Report to the Development Committee can ensure that their own practices and procedures, including approaches to coordination, make the most of the arailable resources and do not undenrine efforts of recipient countries. 6. The report on the Uruguay RoLmd assesses selected aspects of the agreement that concern developing countries, and discusses the role of the Bank and the Fund in helping member countries make an orderly transitionto the post-Uruguay Round trading system. Preliminary estimates indicate that most developing countries will gain from the Agreement and that in the aggregate the gains will be considerable. Net food importers may incur terms-of-trade losses from higher food prices, but costs are likely to be small and would be spread over at least six years. Appropriate policies to stimulate farm output can reduce these losses. The Bank and the Fund stand ready to address adverse effects on individual countries in ongoing policy dialogue and broad-based adjustment programs. Present analysis suggests that existing facilities n the Bank and the Fund appear adequate to meet any policy adjustment and resulting financing needs. However, should developments indicate the need for additional support, we wull take up the matter promptly with the Executive Directors. 7. Before turning to aid effectiveness and the impact of the Uruguay Round, I want to discuss briefly key developments that have taken place since the Committee's last meeting, including the main messages from the Bank's 1994 World Development Report (WDR) on infrucure. I also review developmens in Eastern Europe and the Former Soviet Union (FSU). IL. Recent Develouments -in the Global Economv: ImUlications for Deveouinf Countries 8. When we last met six months ago, global cnomic prospects were broadly favorable. Economic recovery in the U.S. was expected to spread to the rest of the G-7; the successful conclusion of the Uruguay Round and NAFTA was projected to boost world trade, and commodity prices were projected to stabilize. 9. 1 am pleased to report that this forecast sands and in fact the recovery now appears to be somewhat stronger than anticpated. In particular, stronger-than-aicipated growth in both the U.S. and Germany in the early part of this year improves the growth prospects for the other industrial countries. Trade volumes are also rising more rapidly than predicted, currendy at an annual rate of over 6 percent. Buoyed by strong demand, non-oil commodity prices-led by coffee prices-were up 24 percent in June from a year ago. On the other hand, capital markets have tightened somewhat, causing long-term interest rates to rise in most industrial countries. Private capital flows to developing countries slowed in the second quarter of 1994, especialy to Latin America. 10. Generally, however, the overall situation has benefitted the developing countries. East Asia, Latin America, and the coffee exporters of Sub-Saharan Africa have been especially favored. In East Asia, stronger growth in world trade, the appreciation of the yen and consequent greater exports to Japan, and a continuaton of rapid growth in China all boost growth esfimates. Strong terms-of-trade gains in Latin America have more than offset the effects of higher interest rates and the slowing of prw ate capital inflows. Despite recent policy slippage in some large countries, strong terms-of-trade gains are expected to boost GDP per capita sligy in Sub-Saharan Africa in 1994-96, compared to an average decline of almost 2 percent annually over 1991-93. 11. Of course, there are always downside risks. Rising inflion due to strong U.S. growth, a soft dollar against the yen and the deutsdae mark, and strong commodity prices could lead to a sharp rise in interest rates through end-1995, causing i ri country growth to stall in 1996. This slowdown could seriously affect developing counies, especially the more indebted Latin American countries. In this scenario, commodiy pnces would dedie and export growth would stall. Erosion of creditworthiness - 5- President's Report to the Development Committee would lead to a sharp drop in private capital flows. Many countries in Latin America would undergo a hard landing, with rapid exchange rate depreciation, high inflation and interest rates, little capital inflow, and lower per capita growth. The impact on the Middle East and North Africa would be driven by lower demand for oil in the OECD. With exports strongly conce.itrated in Europe, Sub-Saharan Africa would suffer both from lower demand for exports and declining terms of trade. Europe and Central Asia would suffer from slower demand in the European Union, but with roughly constant t!nrms of trade. East Asia would suffer the least owing to (a) reliance on its own savings; (b) the competitive position of its exports; and (c) continued strength of intraregional trde that helps to isolate it from developments in the G-7. m. Recent Trends in Resource Transfers to Developng Countries 12. Preliminary estimates indicate that net total resource flows (including development assistance, other official flows, and private sector flows) to the developing countries from the developed world increased 35 percent in 0993, reaching an unprecedented $215 billion (at 1993 prices aid exchange rates). 13. The big story in developing country finance is the spectacular surge in private capital. Portfolio equity investment (at 1993 prices and exchange rates) tripled in 1993 and total private capital flows reached an all-time high of about $155 billion in 1993 (See Annex Table 1). Foreign direct investment (FDI) has now become the single most important source of financing for developing countries, surpassing official flows. The overall increase in private fiows is in large measure a response to the successful reforms and sound economic policies of a limited number of mriddle-income countries in East Asia, the Pacific, and Latin America. Investors perceive that these countries, with improved economic management and creditworthiness, offer good opportunmities for high returns and portfolio diversification. The hligh volume of private capital flows raises the concern that they may be reversed and thus precipitate another financial crisis similar to that of the 1980s. 14. Bank analysis suggests that a sudden reversal of private flows is unlikely. Nearly half the flows are accounted for by FDI and about one-third by bonds. Private investors are responding to the market potental offered by rising developing country incomes, to the more welcoming trade and investment regimes in these countries, and to dramatic changes in telecommications technology. These are structural, not cyclical, factors and are likely to be reinforced by implementation of provisions of the Uruguay Round. Underlying the renewed interest in bond issues from developing countries is the fundamental reform in economic and financial policies that some 15 developing countries, perceived by investors to be the more creditworthy, have undertaken over the 1980s. As long as the economic performance of these countries remains strong, a reversal is unlikely. 15. In addition, the combination of high interest rates, high inflation, and recession that precipitated the crisis of the early 1980s is unliely to recur. Although international interest rates may rise in 1995, they are not expected to rise substntially and any increase is expected to be short-lived. The probability of a large and prolonged increase that would jeopardize continued growth in these flows is small in the medium term. 16. Although a dramatic reversal of private flows and an attendant financial crisis are unlikely, individual counties will find private capital to be volatile. Private investors have a low tolerance for poor policies or deteriorating prospects. Factors completely outside the control of recipient countries can also make a big difference, as illustrated by the slowdown in private capital flows so far this year in response to rising interest rates in the U.S. In recent months, some major recipient countries have experienced large swings in portfolio flows. Reflecting on these events, countries that receive large amounts of private capital flows need to take this volatility into account in their macroeconomic and financial sector policies. More than ever before, developing countries will find that events in the - 6- President's Report to the Development Committee international economy have a direct and often imediate impact on their own performance. 17. Bank estimates indicate that while private capital flows to developing countries increased by about $50 billion, official flows rose by about $5 billion in the past year. Measured at 1993 prices and er -h=ane rates, this increase in official flows merely represents a return to a level attained in 1990. Bank estimates show that official development assistance (ODA), which accounted for 85 percent of all net official flows, increased by less than $3 billion. 18. Recent Development Assistance Committee (DAC) estimates point to a more Fober picture of ODA flows. As of June 1994, a preliminary DAC report showed total ODA from the OECDIDAC member countries to devel-ming countries and multilateram . stitutions at $54.8 billion in 1993 compared to $60.8 billion in 1992. While the short-term trends reflected in Bank and DAC figures are different,' the longer term implications are similar. the outlook for ODA continues to be unfavorable. Although the higher growth projected for the industrialized countries is a positive development, efforts to cut overall budget deficits in those countries still point to a slow growth in aid. As I pointed out in my last report to you, it is extrenely important to fund fully both ongoing reform programs and new needs (especially those related to the environment, new recipients, and countries starting reform programs). With most of the private resources going to a handful of countries whose economic performance is already outstanding, aid is essential to slow the further polarization of growth. In view of the encouraging growth prospects, I entreat members to resist efforts to reduce the volume of aid and also to ensure that existing aid is directed toward the most urgent needs. Global Environment Facilty 19. The Global Environment Facility (GEF) is a concessional funding mechanism of great importance for protecting the world's environment. Its purpose is to help developing countries meet the incremental costs of projects designed to protect the global environment. The GEF was launched in 1991 as a pilot program-implemented jointly by the United Nations Development Progamnme (UNDP), the United Nations Environment Program (UNEP), and the World Bank-to provide graits to developing countries for projects and programs that address climate change, loss of biological diversity, pollution of international waters, and depletion of the ozone layer. In FY94 the Bank's GEF investment portfolio of approved projects increased by 17 projects, involving commitmenits of $137.8 million-a .73 percent increase over FY93. As of June 1994, 31 projects, entailing commitrnents of about $290 million were under implementation. 20. As I mentioned to you at the last Development Committee meeting, Participants agreed to replenish and restructure the GEF, pledging over $2 billion to be committed over a three-year period to a new GEF Trust Fund. The instrument establishing the restructured Facility has now been adopted by the governing bodies of the three implementing agencies. In addition to the original four areas of concern, land degradation-primarily decertification and deforestation-will also be eligible insofar as it relates to one or more of the main focal areas. 21. I wish to thank donors for their support of the GEF. The restructured GEF will make an important contribution toward helping countries achieve environmentally sustainable development 1 Several facts account for the diffaence between Bank and OECD ststics: Bank estmates iclude all of Eastem Europe and the FSU as recipients4 and also flows to developing counties from non-DAC members These two factors tend to make Bank esimates larger than OECD estmate OECD estmats, however, are on balance higher in 1993 because they iclude flows to highbmcome countries and thnical coopenaon grat -7 - President's Report to the Deve;opment Committee Specia! rogram of Assistance 22. As you well know, Sub-Saharan Africa continues to be a particular source of concem for the donor community. The region has experienced two decades of stagnant or falling per capita incomes, and a third of the African countries are poorer today than at independence. In previous reports I have mentioned that only a small part of the explanation for Africa's poor economic performance can be ascribed to extemal events, such as the sharp decline in Africa's terms of trade. Many other developing countries also suffered such declines, but they managed to compensate for lower prices with higher volumes. The conclusion that most analysts have come to is that Africa's performance has been the result of deficient domestic economic policies and weak institutional capacity in the majority of Afiican countries. 23. Towards the mid-1980s many African countries began to reform exchange rate and trade polices, domestic pricing policies, and other key areas of economic management. The pace of structural reforms has accelerated in the past two years. In more than a dozen African countries exchange rates and other prices are market-determined, and prudent fiscal and monetary policies have brought inflation and interest rates under control. The recent devaluation in the CFA area adds to this trend. In many of the African countries, a rethinking of the role of the state has resulted in curtailing and restructuring the plethora of public enterprises and bloated civil services, and has raised general awareness of the importance of competition in achieving efficient resource use. The environment for the private sector has improved and government budgets have been restructured to develop human resources and reduce poverty. Last but not least, emerging economic leaders are more aggressively confronting the problems facing Africa, and emphasizing that most of the elements of the solution to their problems must be found at home. 24. Donors have responded to these initiatives with substantial increases in net transfers of resources, largoly on concessional terms. Since 1987, under World Bank leadership, 17 donors have been supporting the Special Program of Assistance for low-income debt-distressed Sub-Saharan countries implemernting adjustment programs (SPA). For the past six years, SPA has succeeded in helping to mobilize additional resources despite the difficult environment for aid: real net ODA to SPA recipients rose from an ainual average of $5.3 billion during 1981-86 to $9.1 billion during 1987-92. 25. I am pleased to report that the third phase of SPA got off to a strong start in 1994. The devaluation of the CFA and other policy changes made Cote d'lvoire and Cameroon eligible for SPA assistance, with a concomitant increase in SPA financing requirements. The SPA donors pledged $1.1 billion in additional assistance over the $5.5 billion initially pledged for SPA-3. Resources, however, remain tight It will be important to ensure that adequate resources are available to support reforms as well as to monitor recipient country adherence to agreed reforms. 26. Concerning our efforts to support development in Africa, total approved credits and loans in FY94 amounted to about $2.8 billion, nearly the same as in FY93. Implementation improved in the particularly difficult areas of agriculture and adjustment lending. There was also an increasing focus on using funds more effectively by developing institutional and technical capacities. - 8 - President's Report to the Development Comunittee Progress in Reduction of Debt and Debt Service 27. The Bank's Debt Reduction Facility for IDA-only countries has provided grants to low-income countries for the reduction of commercial debt at an average buyback price of about 14 percent of face value. The most recent Debt Reduction Facility operation, for Zambia, was approved in May 1994. Preparations for an operation for Sao Tome and Principe were finalized in late FY94, with the approval of the operation expected in FY95. Additional operations are under preparation in Albania, Ethiopia, Guinea, Mauritania, Nicaragua, Sierra Leone, and Tanzania. 28. The Fifh Dimension Program provides supplemental IDA allocations to IDA-only countries that have outstanding IBRD debt and are implementing adjustment programs. The allocations are provided in proportion to their IBRD interest payments. In FY94, Fifth Dimension supplemental allocations totaled $265 million to 16 countries and were equivalent to 96 percent of the countries' IBRD interest payments. The substantially higher FY94 allocation (the FY93 level was $168 million) reflects the addition of Cote d'Ivoire and Cameroon to the list of eligible countries. 29. Activity in the Paris Club has been brisker in 1994 than in the second half of 1993. The increase is aue principally to the reschedulings that became necessary following the devaluation of the CFA franc and the adoption of the comprehensive adjustments programs supported by arrangements with the IMF. In addition, the first Paris Club rescheduling agreement for Algeria took place in May, after Algeria entered into a broad-based reform program with the IMF. Russia's 1994 obligations to bilateral creditors were also rescheduled in June, on terms that approximate the 1993 agreement. Following the G-7 summit in Naples in July, the Paris Club discussed ways to give effect to the summit declaration on reducing the stock of debt, where appropriate, for those severely indebted low-income countries facing special circumstances. IV. Aid Effectiveness 30. Recent changes in the global scene have forced a reexamination of the role of aid. Changes in Eastern Europe, the Middle East, and South Africa have increased global demand for development assistance. Greater peacekeeping and humanitarian needs have also led to a rise in the demand for resources. At the same time, donor countries have experienced growing constraints on the level of aid that they can provide, and also face increased public concern about the impact of aid. Thus the issue of enhancing the development impact of aid is receiving greater attention. The end of the Cold War opens a real opportunity to refocus attention on the development objectives of aid. There is also growing recognition that in addition to development, it is important to tackle global issues-AIDS, migration, the environment-and strengthen the global economy. All countries stand to benefit from progress in these areas. 31. A large amount of research suggests that the following elements are the most significant in determining the effectiveness of aid and should therefore be of particular concern to donors: Commitment, Ownership, and Good Governance. Commitment to a development strategy and to specific programs and projects is a key ingredient in making aid effective. Commitment, in tum, is heavily influenced by the extent to which the recipient country 'owns" the strategy and the programs. Good govemance is also important in making aid more effective. * Institutional Development. Strong institutions are an important detenninant of aid effectiveness. We need to be concerned not only with establishing and enforcing the - 9 - President's Report to the Development Committee rules that make markets (and the private sector) work more efficiently, but also with the rules and incentives that affect performance in the public sector. Sound Domestic Policies and Effective Resource Use. Economy-wide efficient use of resources also contributes to the effectiveness of aid. The core elements of sound policy are macroeconomic stability, an open and competitive economy, a govenmment that complements private sector activity, and investment in infrastructure and people including targeted measures for poverty reduction when necessary. While sound domestic policies help to set priorities for the use of resources, better public sector management helps ensure that these priorities are reflected in the allocation and efficient use of resources. The budgetary process, in particular, is a key element. The Role of Donors 32. Donors have an important role to play in making aid more effective: * By working with recipients to strengthen ownership, governance, and participation, donors can help build commitment and increase aid effectiveness. * By workling with recipients to strengthen administrative and institutional capacity through technical assistance, donors can help remove one of the main barriers to the effective use of aid. * By encouraging recipients to address the balance between investment and recurrent spending within a medium-term expenditure framework that highlights the issue of affordability, and by improving aid coordination, donors can contribute to improving the budgetary process * By bringing their aid programs in line with country and sectoral strategies, donors can avoid undermining sound in-country systems and procedures. * By reviewing their own practices and procedures, donors can improve the efficiency and effectiveness of the aid they deliver. * By untying aid, donors can reduce costs for recipient countries and improve the allocation of resources. 33. I urge donors to take steps in all of these areas. At the World Bank, the theme of 'getting results in the field" is driving our work program, as we follow up on the findings of the Portfolio Management Task Force. At the same time, I urge recipient countries to improve governance and strengthen the policies that increase the effectiveness of aid. 34. I do not want to leave you with the impression that we have all the answers. We do not. The report on aid effectiveness identifies a number of areas that require further work. - 10 - President's Report to the Development Committee V. Uruguav Round 35. The staffs of the Bank and the Fund have made a preliminary assessment of the impact of the Uruguay Round Agreement on developing and transition countries and have evaluated the capacity of the Bank and the Fund assist the countries that may be adversely affected. The report concludes that in the aggregate, the gains for developing countries will be considerable. The countries that stand to gain the most are those that position themselves to take advantage of the new opportunities through adroit economic management. A small number of countries may lose as a result of the agreement, but any losses are likely to be small. There are widespread concems about the impact of rising food prices and the erosion of tariff preferences. Net food importers may face terms-of-trade losses from higher food prices, but costs are likely to be only modestly higher and to be incurred gradually, as the increase in food prices would be spread over at least six years. Moreover, appropriate policies to stimulate farm output can help reduce these costs. Finally, food aid recipients are not likely to suffer significantly because food aid is exempt from reductions in export subsidies. 36. The net aggregate loss from preference erosion is likely to be small, although for countries whose industrial exports are heavily dependent on preferential access and that need to improve their competitiveness-certain Mediterranean and North African states, especially-the erosion of tariff preferences could be significant. Together, the impact of higher food import prices and the loss of preferences is likely to be small and for most developing countries will likely be offset by the effects of the reduction in MFN tariffs. Present assessment indicates that the array of investment and policy- based lending in the Bank and the Fund are adequate to help countries reap the potential benefits of the post-Uruguay Round world. Existing financing facilities also appear adequate to meet financing needs that may arise in individual countries from the negative impact of the Uruguay Round. 37. One post-Uruguay Round issue of interest concerns environmental and labor standards. There is broad recognition that it is desirable to improve standards on both fronts. However, using trade restrictions for raising the standards is not an optimal strategy. In the interest of global efficiency, I urge your govermnents to resist increased protectionism under any guise and to move quickly to ratify the Agreement. VI. Infrastructure 38. This year's World Development Report concludes that infiastructure has improved dramatically in recent years-for example, the share of households with access to clean water has increased by half and per capita provision of power production and telephone lines has doubled during the past 15 years- but inefficiency and waste are staggering. On average, 40 percent of power-generating capacity in developing countries is unavailable for production, twice the rate in the best-performing power sectors around the world. Half the labor in African and Latin American railways is estimated to be redundant. And in many countries, costly investments in road construction have been wasted for lack of maintenance. 39. In view of the sector's importance and poor performance-developing countries invest some $200 billion a year in new infrastructure-I would like to take this opportunity to share with you some of the main messages from the WDR. * Service is the goal and the maiw measure of development in infrastructure. Major investments have been made in infrastucture stocks, but in too many developing countries these assets are not generating the quantity or the quality of services demanded. Ihe cost of this waste-in forgone economic growth and lost opportunities for poverty reduction and - 11 - President's Report to the Development Committee environmental improvement-is unacceptably high. * The incentives facing providers can determine whether performance is good or bad To ensure efficient, responsive delivery of infrastructure services, incentives need to be changed through t1 application ofthree instruments-commercial management, competition, and stakeholder involvement. * Manage infrastructure like a business, not a bureaucracy The provision of infrastructure needs to be perceived and run.as a service industry that responds to customer demand. Poor performers typically have little autonomy or financial discipline. Private sector involvement is needed in most cases to ensure a commercial orientation. * Introduce competition-directly iffeasible, indirectly if nol. Competition gives consumers choices for better meeting their demands and puts pressure on suppliers to be efficient and accountable to users. * Give users and other stakeholders a strong voice and real responsibility Where infrastructure activities involve important extemal effects or where market discipline does not ensure accountability, users and stakeholders should be represented in the planning, regulation, design, operation, and financing of infrastructure. * Public-private partnerships in financing have promise. Private sector involvement in the financing of new capacity is growing, but investors' return should be linked to project performance and government guarantees carefully scrutinized. * Governments will have a contiuing, if changed, role in infrastructure. Govermments still have important roles to play as direct pro-iders, regulators, and legislators. As direct providers of services, governments are responisible for improving the perfonnance of infastructure under their control. As regulators govemments have a duty to safeguard the interests of the poor, improve environmental conditions, and coordinate cross-sectoral interactions. As legislators, governments are responsible for develoDing the legal and regulatory friameworks to support private involvement in the provision of infrastructure services. VIL Recent Developments in Eastern Europe and the Former Soviet Union 40. The performance of the transition econownes in Eastern Europe and the FSU continue to elicit strong interest around the world. Bank efforts to help these economies make a successful transition are also the subject of great interest 41. I am pleased to report that the emerging data for 1993 show some important positive trends, although there is still a large variability in economic performance across the region. Aggregate output has finally stabilized in Eastern Europe, with several countries experiencing growth. In these countries, the private sector is starting to more than compensate for the output declines in the state industrial sector. The rate of output decline has sharply slowed in the Baltic countries, although it has accelerated in Belarus and the Ukraine. Across countries there is evidence that the statistical underreporting of private sector activity-particularly in the services sector-has exaggerated the output decline and understated the output recovery. In addition, many countries, including the Russian Federation, have succeeded in making inroads against inflation. Whether such progress can be sustained will depend on further actions to address structural factors underlying fiscal deficits, banking sector reforms, and - 12 - President's Report to the Development Committee pension systems. 42. During FY94, the Bank expanded its operations in these countries. Total approved operations amounted to $3.6 billion, a $0.3 billion increase over FY93. Even more significant was the greater diversity and coverage of the lending operations. The number of operations approved went from 26 in FY93 to 41 in FY94, while country coverage increased from 13 to 21. First operations were approved for Belarus, Croatia, Czech Republic, Kazakhstan. the Former Yugoslav Republic of Macedonia, Slovakia, Slovenia, and Uzbekistan. 43. Projects approved for the Russian Federation amounted to $1.5 billion and focused on agriculture, highway rehabilitation, energy, and financial/enterprise reform. In the latter area, two projtcts simultaneously provided technical assistance to the emerging commercial banking sector and provided a line of credit to be intermediated by these banks to the private sector. Equity capital and technical assistance cofinanced by IFC, EBRD, the European Community, and other donor countries supplemented the Bank's credit line and helped broaden the support to the private sector. 44. In support of privatization, the Bank focused its operations on provision of credit to the private sector, financial sector reform, and enterprise governance in the Kyrgyz Republic, Romania, the Russian Federation, Slovakia, and Slovenia. To prevent key infrastructure from becoming a bottleneck to economic recovery, the Bank has remained active in the area of transport, highway maintenance, and telecommunications. As trade in energy moves toward world prices, energy conservation and institutional and incentive reforms in the sector become increasingly important. Projects in these areas were approved for Estonia, Hungary, Lithuania, Romania, and the Russian Federation, and project preparation is nearing completion in other countries. Agriculture lending also rose: six operations were approved in five countries, supporting policy reforms, technical assistance, and forestry management. 45. The Bank further intensified its environmental work. By the end of FY94, national environmental strategies were completed in all Central and Eastern European countries, and new initiatives were launched in the Kyrgyz Republic and Moldova. In collaboration with other agencies and nongovemmental organizations, the Strategic Action Plan was completed for the Danube. With other donors, the Bank has identified a portfolio of urgent investment for the seven riparian states of the Black Sea and is carrying out preinvestment studies. A donor meeting-organized in association with UNDP/UNEP-marked the launching of the Aral Sea program, which includes approximately 20 national projects in irrigation, water and sanitation, and health. In response to a request by countries around the Caspian Sea, the Bank has agreed to develop an environmental program with other agencies and the private sector. 46. In collaboration with OECD, The Bank issued a major analytical work, the Environmental Action Programme for Central and Eastern Europe, which was endorsed by the 50 countries participating in the Lucerne Conference on the Environment in April 1993 (the main report has been edited and transiated into 20 Eastern European languages). This work formed the basis for reaching a consensus on priorities and instruments: an emphasis in the near term on human health and preventing irreversible darnage to ecosystems, and in the long term on the integration of envirommental objectives into economic restructuring, to achieve the greatest environmental improvements with the scarce resources available. The Lucerne process has resulted in a range of follow-up activities involving donor coordination, institutional development, and policy support. 47. Work is also being accelerated in areas critical for women in transition, especially with respect to unemployment, child care, maternal health, education, and training. Finally, the Bank continues to mobilize and coordinate external assistance to the region. Since May, it has organized Consultative - 13 - President's Report to the Development Committee Group Meetings for Bulgaria, Kazakhstan, Kyrgyz Republic, the FYR of Macedonia, and Romania. Furthermore, the Bank hosted donor meetings on public investment priorities in Estonia, Latvia, and Lithuania, and a meeting for prospective private sector investors in energy for Turkmenistan. VIII. Conclusion 48. The global economic outlook for developing countries is more favorable now than at the time of our last meeting. For countries in need of adjustment, these circumstances provide a window of opportunity to correct their domestic policies and partake in accelerated global growth. The central message of this report is that domestic policies are crucial in enabling countries to take advantage of the opportunities opened by the successful conclusion of the Uruguay Round Agreement, the increase in private flows to the developing countries, and other developments. Changes in domestic policies are likely to be less disruptive while the external circumstances are favorable than when a crisis is at hand. It is important to take the appropriate measures now and thus avoid more painful adjustment in the future. For developed countries, it is important to provide aid in a way that fosters rather than hinders development. I am confident that we can work with our borrowers to help them adopt the policies and procedures that will accelerate their growth and reduce poverty. This report was drafted by Pedro Belli, Economic Advisor (OPRPG), in consultation with staff members of other departments of The World Bank. - 14 - Annex Table 1. Long-Term Agregate Net Flows of Resoures to Deedoping Countries (S billion, 1993 prkes) Type or Fiow 1984 198S 1986 1987 1983 1989 1990 1991 1m I9932 Ofricial Developmenl Finance 43.3 51.9 55.7 51.2 44.7 44.4 60.7 64.4 55.2 60.0 ODA 27.7 34.9 35.3 37.4 34.6 36.5 44.9 47.9 48.8 S.4 Of licl Grarwts314 16.2 20.4 20.3 19.4 20.0 20.5 29.2 33.7 34.8 35.5 Officlal Conceulonal Loans 11.5 14.5 15.0 18.0 14.6 16.0 15.7 14.2 14.0 15.9 Offkilal Nonconcesslonal Loans 15.6 17.0 20.4 13.7 10.1 7.9 15.8 16.5 6.4 8.6 Private Flows 47.5 41.9 25.3 27.8 36.4 41.5 44.0 59.7 104.0 155.0 PrivaktLoans 35.3 27.0 11.7 10.0 12.0 11.0 13.2 14.1 42.1 43.3 Foreign lDirect Invcstment6 12.1 14.8 12.8 16.9 23.2 26.7 26.9 37.8 47.7 65.0 Portfolio Equity 1nvesumnenl 0.1 0.1 0.8 0.9 1.2 3.8 3.9 7.8 14.2 46.2 AGGREOATB NET FLOWS 90.8 93.8 81.0 78.9 81.1 85.9 104.7 124.1 IS9.2 215.0 Megmorndum Items: Interest Paymns 72.3 77.7 73.0 67.8 72.4 65.1 60.6 61.1 57.6 61.5 Pmrits on Poceign Direct Investment 16.0 35.5 14.4 14.4 14.7 18.4 17.9 17.5 20.1 23.6 Privte Gunta3 3.4 3.8 4.2 4.7 4.7 4.3 5.0 5.3 5.5 5.9 Related Data: IMF - Net Flows' 5.8 .0.3 .3.7 -7.3 -6.0 -2.5 0.1 3.3 1.2 0.4 TccbnaliCooperairOnGnns 9.5 11.5 11.5 12.8 13.4 13.2 14.5 15.8 16.3 16.7 Wodd Bank - et Flows9 7.7 6.9 7.1 5.6 3.2 3.1 5.2 2.6 0.1 4.2 IDA - Nlet Flows9 3.2 3.7 3.9 4.4 4.13 3.7 4.2 4.4 4.8 4.1 Ai efAwIY 1994 I. One hundre ud htny.elght (148) d evepifln coutwris tar which dats are reportd In tlhe 1993-94 edion of tie Woild Det Tabls. 2. Intermational Econmks Depauneol, Debt akd Finance UnIt (IECDF) preUmkhuy estimates, excepe de IMF, Woild Ba* ad IDA nd flows, wt'kh cilet acl Deb4 Raportiu Syssan workloi be dau. 3. OECD diat (lihtougt 1992). 4. clku wihcal eoopeublon ginsu. S. Inebda boads. 6. IMF ahae of paymets data vdkh hKbcde teinveged profhs, upplmerved by Woid Da eshates mm OECD dat. 7. Wortd Bauk maff ubwtu, Mulkh ue daived fom reomated maiket tUamaleand aWt aien available oly on a emss flow basis. *. Ioekda IMPF Tri Ftud, SAF an FAP. 9, Mb Would Ba d IDA noc flows daw ase en a caular year basis. Mm hlwoukll dat differ from more widely reported fnt data only bece of deiferwat egregittco pettd. THE WORLD ECONOMIC SITUATION AND ECONOMIC TRENDS IN DEVELOPING COUNTRIES STATEM4ENT BY MICHIEL CAMDESSUS MANAGING DIRECTOR OF TE INTERNATIONAL MONETARY FUND September 26, 1994 Growth in the developing countries as a group is projected to remain robust this year and next (see table). This continued strong performance masks considerable diversity, however; growth remains weak and standards of living continue to stagnate or decline in many countries; while others are among the most dynamic economies in the world, with rapid increases in per capita incomes. To an important extent, the divergences in economic performance are related to the varying degrees of success that countries have had in implementing appropriate macroeconomic and structural reform policies. With economic expansions now firmly established in almost all of the industrial countries, the external economic environment facing the developing countries has improved. World Economic Outlook The external environment facing developing countries has varied considerably in recent years. During the recession in the industrial countries, export markets for the developing countries remained weak and for much of the recent period commodity prices were depressed, although world interest rates were at relatively low levels. The external environment has been particularly unfavorable for many countries that are heavily dependant on commodity exports and have relatively undiversified export bases. In contrast, many other countries that have undertaken reforms and established or maintained macroeconomic stability have prospered despite the weakness in the external environment, as the slowdown in the industrial countries was offset by large capital inflows, increased trade with other developing countries, and lower interest rates. W-ith the strengthening and broadening of recovery among the industial countries in 1994-95, the external environment for the developing countries is generally expected to improve. Higher commodity prices will also boost export earings for commodity producing countries, and progress on trade negotiations has improved corfidence and removed an important source of uncertainty in the near term. There are, however, offsetting factors. Long-term interest rates have risen since the end of 1993, and capital inflows have moderated somewhat during 1994, in part because of the rise in world interest rates, although they are still expected to be sustained at relatively high levels in 1994-95. Looldng further ahead, the planned entry into force of the Uruguay Round trade agreements on January 1, 1995 will help to extend and reinforce the dynamic relationship between the growth of trade and output that has characterized international economic relations since the setting up of the Bretton Woods institutions fifty years ago. The nmltilateral trade liberalization efforts will be complemented by the growing trend toward regional integration, including the planned enlargement of the European Union. At the same time, the creation of the World Trade Organization will promote a more predictable, rules-based global trading environment. The benefits for developing countries include increased efficiency in the use of domestic resources as tariffs and nontariff barriers are reduced or removed, economies of scale in production are realized, and technology transfers resulting from increased openness and global cooperation are increased. Some developing countries may be adversely affected by the erosion of some trade preferences, increased intellectual property rights, and adverse terms of trade effects, particularly for net food importers. These negative effects are likely to be - 16 - (AUeA PerCUnt chang. eXCePC spc e noCed 1991 1992 1993 1994 1995 World Real CD? growth 0.9 1.7 2.3 3.1 3.6 Trade Valie 2.6 4.7 4.0 7.2 5.9 Trade Prices Fuel -17.0 -0.5 -11.5 -4.0 -0.0 Nonauel primary ca.moditiel -4.4 -0.1 -3.8 13.6 6.5 lanufactures -0.7 3.7 -5.1 4.5 *.1 Six-mnth dollar LIZ tparceL) 6.1 3.9 3.4 5.o f.o Zadustriel tre Real GOP groUt 0.5 1.5 1.3 2.7 Z-7 flation .S 3.3 2.9 3.4 Z.6 Import volum growth 2.2 4.3 1.8 7.3 Z .5 Dewaloping comnras Real 6D? growth 4.5 3.9 6.1 5.6 5.6 Per captia GOP growth 2.5 3.3 4.1 3.6 3.5 T"flation 36.0 38.7 442 47.5 13.2 TInation (Cedla) 11.9 9.4 7.6 9.3 5.7 Current account (in billio of U.S. dolla ) -56.7 -77.4 -106.4 -104.7 -101.1 Current accout (in percent of )oc) -5.1 -6.6 -8.5 -7.6 1. Export vnluae-W 7-. 7.8 869 9.1 8.7 Import volme growth 10.1 11.2 9.3 7.3 7.9 Texas of trade -3.0 0.0 -1.5 -1.7 -0.4 Export unit value -2.2 1.S -2.1 1.3 3.3 Import unit value 0.8 1.4 -0.5 3.0 3.8 Debt (in billions of U.S. dollars) 1375 1440 1545 1575 1749 Debt (in percent of exports) f7.7 lZZ.2 233.6 Z1.4 1123.6 Debt servLce Cim percest of exports) 15.0 14.5 15.4 15.3 13.6 Bry region Africa Real GDP growth 1. 0.2 1.0 3.3 4.5 Per capei. GDP growth -1-3 -2.3 -1.6 0.6 1.7 Inflation 32.6 . 40.5 33.6 39.3 14.3 Current accoumt (in percent of exprt -)4.4 4.9 -8.2 -10.7 1.;3 Export voLum growth 3.0 -0.5 3.6 3.9 2.2 Imort v wn srowth 1.2 4.0 -0.9 1.3 3.7 Terms of trade -2.6 -3.7 -3.7 -5.6 2.7 Debt C(i percent of exports) 231.1 226.1 335.9 247.0 229.0 Asia 1aL @D? grewth 6.2 8.2 5.5 5.0 7.3 Per captia GDP growth 4.5 6.5 6.8 E.Z 5.6 EIflatio 5.7 7.3 9.7 10.3 7.4 Curretr accomt (il perent of eorts) -0.2 -0.4 -3.3 -3.6 -1.7 Export vain growth 10.9 9.4 10.1 11.0 11.1 Iport vawal gowh 11.9 12.0 1 2.9 10.4 9.9 remn of trade 0.6 .6 - 0.3 -0.1 -0.5 Debt (in percent of exports) 68. 66.0 67.7 66.9 62.3 tMLeL mast and zepo" Rea GDP growth 1.9 7.0 4.6 1.4 2.5 Per ceptia GDP growth 0.0 -0.3 1.9 -1.3 -0.2 Inflation 24.7 24.2 24.7 27.0 15.0 Current acont (la percent of expors) -29.6 -13.5 -13.4 -11.5 -U.S1 Export volume growth 1.7 7.3 7.9 6.1 2.1 mport vo*mel growth 3.9 6.6 1.5 -3.1 2.6 Terms of trade -10.9 -3.2 -7.Z -7.2 -0.8 Debt Cin percent of exports) L38.5 137.1 1S0.2 153.7 146.9 Peal GDP growth 3.4 3.5 3.4 3.5 3.3 Per captia GDP growth 1.4 0.5 1.5 0.5 0.6 nflation 136.2 153.8 236.4 244.8 25.5 Curret aecount Cin percent of experl) -1Z.3 -20.7 -24.3 -23.0 -22.4 zxport volze sgroth 4.9 7.1 7.9 6.0 5.0 IMport volme growth .Z 18.1 6.9 7.4 6.2 Tens of trade -5.2 -3.9 -2.2 0.2 -1.1 Debt (n percnt or spot) 255.0 262.2 260.7 255.1 240.3 in U.s. dollars. Averages weightSd bi 1979-51 emoitty shares In expert of developing countries or groups of cautries. - 17 - Managing Director's Statement outweighted in the medium to longer run as access to industrial country markets increases and efficiency gains are r alized. World economic activity is projected to expand by 3 percent in 1994 and by over 3½h percent in 1995. close to the trend rate of growth over the past two decades. The broadening and strengthening of the recovery marks the end of a protracted slowdown that at various times affected virtually all industrial countries. The economic expansions in the United States, the United Kingdom, and Canada remain on track. In continental western Europe, output is projected to expand by 2'A percent in 1994 and 23A percent in 1995. Conditions for a gradual turnaround in Japan now appear to be in place and growth is projected to pick up from just under 1 percent in 1994 to 2'h percent in 1995. Continued strong performance in many developing countries, particularly in many Asian and some Latin American countries, is expected to sustain aggregate growth close to the high levels experienced in recent years. The decline in output during the early part of the transition process in central Europe and the Baltic countries has bottomed out and economic growth has resumed in some of these countries. In Russia, Ukraine, Belarus, and the Transcaucasian and central Asian countries in transition, however, the economic situation continues to be difficult. Although a number of these countries have made some progress toward stabilization and reforms, most have yet to reduce government budget deficits sufficiently or to bring inflation under control. Substantial progress in the implementation of policies consistent with the strategy for sustained global expansion adopted by the Interim Committee in April 1993 has helped to strengthen conditions for a revival of world activity. In the industrial countries economic policy has played an important role in alleviating recessionary tendencies and in stimulating the natural forces of recovery. Further efforts will be necessary, however, to promote financial stability and economic prosperity over the medium term. A critical policy requirement in many countries is the need to deal with large fiscal imbalances to reduce the absorptions of private sectcr saving and alleviate pressures on real interest rates. Further structural reforms would also help to increase economic flexibility and promote high levels of employment. Policymakers will also need to ensure that price stability is maintained-the success during the past decade in reducing inflation to only 2 ' percent for the industrial countries overall has re-established a key precondition for sustained growth. Among the developing countries, structural reforms to enhance the role of market forces and increase efficiency in resource allocation will help to promote stronger growth and attract foreign investment; such reforms will also help to increase the resilience of developing countries to adverse external disturbances. The recovery of world trade became more firmly established during the first half of 1994 and world trade is expected to rise by over 7 percent this year and by almost 6 percent in 1995. This is well above the 5 percent average rate of increase during the past two decades. The pickup in world trade reflects increased activity in the industrial countries, stronger import demand in countries in transition, and continued rapid growth in developing countries. Trade among the developing countries is also expanding strongly; exports of developing countries in the Western Hemisphere to others in the region have risen from 14 percent of total exports in 1986 to over 21 percent in 1993. Intra-regional trade will be given added impetus by further trade liberalization and increased foreign direct investment, particularly in Asia and Lain America. The aggregate terms of trade of developing countries fell by 1lh percent in 1993, reflecting significant declines in the prices of primary commodities and also the decline in oil prices. Lower oil prices led to a substantal decline in the terms of trade-over 7 percent-of the Middle East and Europe - 18 - Managing Director's Statement region, while countries in Africa continued to be adversely affected by weaker commodity prices. The pick up of growth in the world economy and higher commodity prices are expected to broadly stabilize the terms of trade of developing countries in 1995. Stronger commodity prices in 1994-95 will improve the terms of trade of economies heavily dependent on commodity exports, especially for several countries in Africa. The IMF's world export weighted index of nonfuel commodity prices at mid-year was up 17 percent in SDR terms from a year earlier. Even more striking is the 32 percent increase in the twelve months up to July 1994 of The Economist's widely-cited cormmodity price index, which weights prices by the value of imports into industrial countries. Although temporary influences may account for some of these increases, the broadening of recovery among industrial countries seems to have been the most important factor. For oil-exporting countries of the Middle East, the recent increase in oil prices will improve their short-term prospects. The sharp rise in long-term interest rates in many industrial countries since the end of 1993 may be attributed, in part, to the general strengthening of growth and the firming of expectations that the recovery is broadening and becoming self sustainable. In view of the strength of the expansions in many countries, such a rise in world interest rates is not of immediate concern, except in countries where recoveries are still fragile. That real long-term interest rates are now close to levels prevailing throughout most of the 1980s, however, points to a renewed intensification of cornpetition for financial resources, both among private investors and between private and government borrowers. This underscores the need for govermments to reduce progressively their absorption of private sector saving in order to lower the path of real interest rates, promote greater private investments, and permit an adequate flow of financial resources to the developing world and to the transition countries. Economic Trends in the Developing Countries Growth in the developing countries is expected to average 5½h percent in 1994-95, close to the rate of expansion in 1992-93. The favorable oudook for growth in the developing countries as a group continue. to mask considerable divergence within and across regions, although the expected pickup of growth in Africa and a slowdown in other regions imply a slight narrowing of the substantial growth disparities among developing country regions in the early 1990s (see chart). T'he short-term outlook for many African countries is beginning to improve-a welcome development following a decade in which growth has averaged just 2 percent. The recent pickup of commodity prices will raise export earnings and broad moves toward exchange market liberalization in many African countries are expected to improve resource allocation and economic performance. The countries of the CFA franc zone continue to adjust to the devaluation in January, with support from multilateral and bilateral donors. In these countries, improved export and investnent opportunities should support stronger growth, and signs of a rebound in the tradable goods sector are already emerging. There are also signs of stronger growth in the African countries that had arrangements at end-1993 under the IMF's structural adjustment facility (SAF) or enhanced structural adjustment facility (ESAF). Notwithstanding these positive developments, the projected moderate firming of growth in the period ahead rests on the crucial assumption that policy reform programs remain on track. Moreover, the projected improvements in growth will only result in a modest rise in living st=dards, and almost certainly will not be shared by all countries. The growth of output in Asia is projected to decline slightly in 1994, primarily because of an expected moderation of growth to a more sustainable pace in China. Renewed efforts since late 1993 - 19 - a ~ fJ A -J a S i. I I . . , ...i. . a.. I. . . .. , i _ ....i ... . ._C,B .' ' ' t. ....................... *t < -'' .-...'....,. .C , h ' ° ~ " " * vb o s " e ; I *.**~~~~~ 1115,ea ea * .4 Managing Director's Statement to reduce overheating in China are expected to limit the rise in inflation while growth for the year is projected to slow to 11 percent from 13 percent in 1992-93. The challenge for the authorities is to ensure the achievement and maintenance of macroeconomic stability while continuing with structural reforms needed to transform the Chinese economy to a market-based system. In India, where capital inflows have remained significant, there are signs of some modest recovery in domestic investment, compensating for a moderate slowdown in export growth. In the Philippines and Thailand, strong export performance and some strengthening of domestic demand are projected to boost output growth in 1994. Average growth in the developing countries of the Western Hemisphere is projected to slow to 2:% percent in 1994, mainly reflecting a slowdown of growth in Brazil and Chile and a further, sharper contraction of output in Venezuela, which more than offsets stronger projected growth in Argentina, Mexico, and Peru. In Argentina, growth is expected to be 6 percent in 1994, with domestic demand- mainly investment-expanding strongly. In Brazil, where growth for the year is projected at 3 percent, policymakers will need to ensure the continued implementation of the stabilization plan together with further structural reform to achieve sustained growth. Growth for the Middle East and Europe region as a whole is projected to decline further in 1994, to 1 ½h percent, but then to recover to 2½S percent in 1995. For the oil-exporting countries in the region, the improvement in their terms of trade as a result of the rise in oil prices was moderated somewhat by the depreciation of the U.S. dollar and the rise in non-oil commodity prices. In Turkey, economic and financial conditions deteriorated sharply in the first half of 1994, in part due to a large fiscal deficit, but the adoption of a stabilization program in mid-1994 should allow growth to resume in 1995-96. Average inflation in developing countries is expected to rise marginally in 1994, following the relatively sharp jump in 1993 due to large price increases in a small number of countries. However, both average and median inflation is projected to fall significantly in 1995. Inflation in the Western Hemisphere is expected to decline markedly in 1995 based on the assumption that the stabilization plan in Brazil is sustained and that other countries in the region make further progress in reducing inflation. Inflation in Asia is projected to rise slightly in 1994, reflecting continuing demand pressures in China and India; in 1995, inflation should return to single digit levels providing financial policies are further tightened in China and the relatively large fiscal slippages in 1993-94 in India are reversed. Although inflation has remnained relatively high in the Middle East, in part because of the adverse effect of lower oil prices on government revenues in the oil-producing countries, it is expected to fall markedly in 1995. In Africa, inflation is projected to decline substantially in 1995 owing to sustained reform programs in a number of countries, including the countries of the CFA franc zone. The renewed confidence of international investors in the outlook for many developing countries has been reflected in the dramatic rise of private capital flows in recent years (see Chart). The surge in capital inflows mainly reflects the successful adjustment and stabilization efforts of a large number of developing countries, although the inflows may also have been boosted by the sluggishness of activity in the industrial countries in 1991-93 and the associated decline in interest rates. The moderation of such flows in the first half of 1994 seems mainly to reflect the rise in interest rates worldwide, although concern about the emergence of financial imbalances in some developing countries may also have contributed. In a few cases, the rise in capital flows appears to have reflected the general enthusiasm for emerging financial markets, rather than well founded confidence in the economic - 21 - Developing Countries: Not Capital Flows (in b(Eun of us. &dar) H uo III 110 gas H 70 70 a1 V Ie aa ft s so _ _sos :11 I III c-L -U~ IWt I60 11 45 40 20 2 131 -to 73 74 75 7- 71 70 19 S U U . 8 U St 21 82 a2 730 ~~~~farfv rdee .- - .......... \ --- 2/a 73 *4 =S 79 TY 78 79 80 91 W 54 85 M V 0 W 10 ' * r Io s ' . I 30 _t * _ ,, f---o, ^'r, ;;, _s~~~~~~~~~* ~ 4 . .^Ut aste-. : ^_~~~~~~~~* .. _l~~~~ ~ ~ ~ .~ , .40.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~4 M n 73 n n t M |. n a 0 a a go gr a go It oz a - 22 - Managing Director's Statement prospects of specific countries receiving the flows. In a number of other countries, capital flows have been attracted by high short-term interest rates resulting from an inappropriate mix of loose fiscal policies and tight monetary policies. For these countries, the risk of sudden changes in narket sentiment is particularly serious. The surges in capital inflows have important implications for policies in many of the recipient countries. The inflows have often complicated economic policy management because of possible risks of overheating and real exchange rate appreciation. However, most countries have managed the inflows much better than in the 1970s, when capital inflows took the form of increasing foreign indebtedness, in contrast to today's largely nondebt-creating flows. In addition to substantial flows into emerging equity markets, many countries-which are often near to, or are potentially themselves, large markets- have benefited from large inflows of foreign direct investment, which are contributing directly to strengthen longer-term growth prospects and are less vulnerable to changes in market sentiment. For the developing countries, the key lesson from earlier episodes of capital inflows is that foreign capital can complement domestic resources but cannot substitute for sustained efforts at mobilizing and efficiently investing domestic savings. The counterpart to the surges in capital flows to developing countries in recent years has been a sharp increase in current account deficits in most regions, although many countries have also seen a substantial build up of foreign exchange reserves. Foreign direct investmnent and a competitive exchange rate have raised export growth in China, and the current account deficit is expected to decline to just over 1 'A percent of GDP in 1994-95. India's current account deficit has narrowed considerably in the past several years, and it is projected to remain relatively small as a ratio to GDP in 1994-95. Significant foreign investnent in Latin America has eased financial constraints on imports and has contributed to a widening of current account deficits-particularly in Mexico where the deficit as a percent of GDP was 7'h percent in 1992 and is expected to be about 6%h percent in 1994. In a number of countries in the region, external positions have deteriorated, in part because capital inflows have contributed to appreciations of real exchange rates. African countries, which have attracted very little private capital recently, continue to rely on official transfers and net external borrowing. Recent increases in commodity prices should, however, contribute to some improvement in their export earnings. Relatively large current account deficits are expected in Cameroon and in C6te d'Ivoire in 1994, but these are projected to narrow considerably by 1995. In the Middle East, Kuwait's current account balance is projected to move into surplus in 1994-95, from a small deficit in 1993. The large surpluses prevailing in Egypt in the early 1990s are expected to decline considerably in 1994-95, reflecting in part a real appreciation of the currency. Aggregate measures of developing country debt burdens and debt-service-to-export ratios are projected to show fruther improvement in the period ahead, although the increase in long-term interest rates since early in 1994 poses a risk for those developing countries that have substantial debt burdens. The consequences for individual indebted countries will vary, depending on the speed with which changes in long-term interest rates are passed through to debt-service payments. Debt and debt-service ratios for developing countries in the Western Hemisphere remain well above the developing country average, although these ratios have declined considerably from the peak reached in the mid-1980s. Debt ratios in Asia and in the Middle East and Europe region, which are considerably lower than elsewhere, have changed little during the last four years. Average debt ratios in Africa have remained at the very high levels of the 1980s-by 1993 the debt-export ratio in sub-Saharan Africa was three times the developing country average-and only modest improvements are projected for 1994-95; debt- - 23 - Managing Director's Statement service ratios in sub-Saharan Africa are projected to continue to rise through 1995. Prospects for realistic debt relief for the poorest and most indebted countries have improved as the major industrial countries now appear willing to consider reducing, where appropriate, the stock of debt to official creditors and to increase concessionality for those countries facing special difficulties. Over the past few months, a number of important commercial bank debt restructuring agreements have been concluded. In April this year, Brazil completed an agreement with commercial bank creditors on a debt reduction package, and in May Ecuador concluded negotiations with conunercial bank creditors on a debt-service reduction package. Zambia recently concluded a debt buy back agreement under the aegis of a World Bank program to clear the bank debt of the world's poorest countries. Bolivia completed a US$31 million debt-for-aid swap organized by the Debt for Development Coalition. In August, Iran rescheduled $8 billion of short-term commercial bank debt, Saudi Arabia obtained partial agreement on a two-year deferral of repayment on conunercial bank balance of payments loans, and the Dorminican Republic completed final arrangements on a plan that reduces by half the existing $1 billion external debt of public sector borrowers. Commercial bank debt negotiations on behalf of Vietnarn, C6te d'Ivoire, Panama, and Peru are continuing or are planned. Arrangements are under way to distribute the conmnercial bank debt of the former Yugoslavia, and London Club agreements with regard to Croatia and Slovenia are pending. The recent strong perfornance of mnany developing countries in the face of adverse external conditions underscores the importance of persevering with sound macroeconomic and structural policies. Experience indicates that the successful countries are those that have created a stable macroeconomic environment, encouraged domestic saving, and implemented structural reforms that increase efficiency. With the expected improvement in the external environment, conditions are now ripe for stronger reform efforts in those countries that have thus far lagged behind. The international conmnunity can support these efforts through technical assistance and tinely financial assistance on appropriate terms, and through realistic debt relief for the poorest countries facing special difficulties. - 24 - STATEMENT BY THE CHAIRMAN OF THE INTERGOVERNMENTAL GROUP OF TWENTY-FOUR ON INTERNATIONAL MONETARY AFFAIRS WILLY WALDEMAR ZAPATA Sagastume PRESIDENT, BANK de GUATEMALA Madrid - October 3, 1994 At the outset, I should like to refer to some of the issues of governance of the international monetary and financial system, which have been addressed by the Group of Twenty-Four as a component of the discussions which have taken place in connection with the commemoration of the 50th Anniversary of the Bretton Woods institutions. The Group of Twenty-Four considers that the mandate of the Bretton Woods institutions remains valid. Nonetheless, the Group pointed out that both the International Monetary Fund and the World Bank should evolve in order to adapt to changes in the international economic environment. The Group of Twenty-Four also laid stress on the limited representation of the developing countries in the decision-maldng process of the Bretton Woods institutions, notwithstanding their sizable involvement in the global economy in recent years. In addition, the Group of Twenty-Four considers that the IMF and the World Bank should make greater use of local capabilities and contemplated establishing regional research and advisory offices. This, inter alia, would allow the developing countries to benefit from strengthened research and economic policymaking mechanisms, while reducing operating costs for the Bretton Woods institutions themselves. Turning now to the transfer of resources to the developing countries, we are concerned over the decline which has been observed in Official Development Assistance (ODA) flows, not only in real terms but also as a percentage of the GNP of industrial countries, which is particularly unfortunate at a time when the number of countries seeking such resources has been on the rise. And it is for this reason that we reaffim our appeal to the industial countries to assign priority in their budgets to the channeling of aid resources to the developing countries, in particular those with the lowest income levels. We are aware that aid must supplement the domestic efforts of the recipient countries in order to achieve sustinable growth and to eliminate poverty. This notwithstanding, in order to achieve aid effectiveness, such aid must be geared to the real needs of the recipient countries. The Ministers of the Group of Twenty-Four pointed out that the effectiveness of aid necessitates better coordination between the donor countries and the aid agencies in respect of that aid. - 25 - Statement by the Chairman of the G-24 Concerning the post-Uruguay Round trade issues, the Ministers of the Group of Twenty- Four reaffirmed their commitment to promote the establishment of the World Trade Organization as agreed in Marrakesh (Morocco) while expressing their optimism at the determination of the G-7 countries to accelerate the ratification of the Uruguay Round agreements by January of 1995. Furthermore, the G-24 noted its concern over the danger of industrial countries seeking to link up trade issues with those environmental sustainability and labor and social issues in the developing countries so as to use these as a pretext to impose protectionist barriers. The G-24 considers that the World Bank and the IMF should provide adequate and timely financial assistance to developing countries facing difficulties in the implementation of the Uruguay Round agreements, as they will have to make adjustments in their economies in order to achieve appropriate integration and inclusion in the global environment. They felt that the existing financial facilities in those institutions could provide assistance to the developing countries during the transition period. Nonetheless, the Ministers of the G-24 also pointed out that the timely and adequate availability of resources from both institutions requires a speedy adaptation of the existing facilities, and that there might also be a need to expand such facilities. - 26 - ISSUES PAPER: AID EFFECTIVENESS (Prepared by the staff of the World Bank in collaboration with staff of the Intemational Monetary Fund) The attached paper, prepared by the staff of the World Bank, in collaboration with the staff of the International Monetary Fund, considers how aid can be mnade more effective in ternis of achieving the ultimate objectives of development. The paper notes the critical importance of the comnitment to development and the policy and institutional environment within the recipient country. A broad consensus has now been reached on the importance of a sound macroeconomic and structural policy framework for the effective use of both domestic and external resources. The paper focusses on how the World Bank, the IMF and aid agencies can work with recipient countries to develop these favorable conditions for using aid effectively. It also looks at ways that aid agencies-including the World Bank-can improve their own efficiency and effectiveness. The main conclusions are sunmnarized in the following issues for discussion. Issues for Discussion (i) Research carried out in the World Bank and elsewhere lends support to idea that aid is most effective when it supports programs and projects that are "owned" by the recipient country. Experience shows that conditionality cannot substitute for local ownership and commitment. Careful attention needs to be paid to these issues before lending. If a consensus cannot be reached, both parties may be better to wait, while worldng together to build the prerequisites for the effective use of aid resources. Participation by relevant stakeholders can also improve the design of projects and ensure that they are properly implemented and operated. The World Bank has recently completed progress reports on both governance and participation, with the objective of achieving a more systematic treatment of these issues in Bank operations. Ministers may wish to discuss ways in which donors can work with reciRients to strengthen ownership, governance and participation. and the implications for the approach to these issues in the World Bank and other donor agencies. (ii) Weak administrative and institutional capacity acts as a major barrier to the effective use of aid. Donors have devoted considerable resources to building capacity through technical assistance (TA). However the results, especially in Africa, have often been disappointing. In 1991, DAC elaborated Principles for a New Orientation in Technical Cooperation and a recent DAC/UNDP/World Bank High- Level Seminar discussed measures to improve the effectiveness of TA. Proposals included: making TA more demand driven; proper country programming of TA; and strengthening the local management of TA, including budgeting and accountability. In addition, proposals were made to shift the focus away from specific efforts to improve the effectiveness of TA packages toward improving the institutional constraints that pose obstacles to effective TA. There are still differences of views among donors and recipients on the merits of these proposals. However, a DAC process has been put in place for further analysis and discussion of the issues. Ministers may wish to exchange views on the effectiveness of their own TA programs and proposals for making TA work better. (iii) There has been much discussion of measures to improve aid coordination. While recipient countries are ultimately responsible for the management of the aid resources they recei-e, there are actions that donors may take that would contribute to better coordination and to the more effective use of aid. DAC's Principles provide an appropriate framework for improving aid coordination. The World Bank plays a lead role through Consultative Groups (CGs). Experience suggests that CGs are more effective when preparations involve the active participation of the recipient government and consultations - 27 - with other donors. The agenda for CGs should cover issues of development strategy and aid utilization, as well as mobilization of financial resources. Donors should ensure that their aid programs are consistent with the budget processes and public expenditure priorities of the recipient country. Recent progress on reducing the use of tied aid and mixed credits, in line with the DAC Principles, needs to be extended. Ministers may wish to discuss the issues they face in bringing their aid programs in line with country and sectoral strategies. and steps that can be taken to improve the effectiveness of existing mechanisms for aid coordination. (iv) Many aid agencies have embarked upon efforts to improve their own efficiency and effectiveness. The World Bank is currently implementing a program to follow up on the recommendations of the "Wapenhans Report". Actions are being taken to strengthen the country focus of portfolio management, improve the quality of projects entering the portfolio, simplify procedures, focus staff incentives on results in the field, and strengthen evaluation and disclosure policies. While progress has been made in each of these areas, more remains to be done and it is still too early to assess the impact on resultq. Regional development banks have undertaken similar reviews aid are at various stages of implementation. Ministers may Wish to comment on the World Bank's follow-up to the ")Vavenhans Report" and progress on similar initiatives in their own aid aoencde. * **** * * This paper was prepared by Mark Baird and Deborah Wetzel (DECVP) with contributions from Roberto Mosse (OPRPG) and Graeme Hunter (consultant) (The World Bank); and in consultation with Matthew Fisher (PDRD-IMF). - 28 - 1. INTRODUCTION 1. The ultimate objective of development is to reduce poverty and improve living standards through sustainable growth and investment in people. This paper looks at the effectiveness of aid in terms of achieving these objectives. While the emphasis of the paper is on aid, which is traditionally defined as concessional financing, most of the findings are relevant to non-concessional official financing as well. The focus is on what donorsl can do to support the effectiveness of aid, though the efforts of recipient countries to improve the effectiveness of aid are also critical. Donors can help recipient countries to develop the programs, policies and institutional environment necessary for getting the most out of the available resources. Donors also need to ensure that their internal business practices and procedures support the effective use of resources and do not impede efforts in this direction by the recipient countries. Table 1. Official Canital Flows to Developine Countries 1980 1985 1990 1991 1992 1993 /a Net Official Capital (Sb at 93 prices) 42.2 51.9 60.7 64.4 55.2 60.0 of which: ODA lb 28.8 34.9 44.9 47.9 48.8 51.4 Net Official Capital as Percent of: /c Recipient Country GNP 1.4 1.3 1.4 1.5 1.2 1.3 Total Resource Flows 40.7 55.3 57.9 51.9 34.6 27.4 /a Estimates. lb As recorded by the World Bank. Differences with DAC data are explained in the President's Report to the Development Committee. kc Based on current price data. Source: World Bank. 2. Although on average aid is only a small portion of GNP, it does play an important role in many developing countries. On average, net official capital flows are equivalent to only 1-2 percent of recipient country GNP (see Table 1). Moreover, since 1990, with the sharp increase in private capital flows to China and many middle-income countries, there has been a decline in the share of resource flows to developing countries from official sources. However, many low-income ccuntries have not yet benefitted from the resurgence in private capital flows. Indeed, in Sub-Saharan Africa (excluding South Africa), the importance of official capital flows has been rising and exceeded 10 percent of GNP and more than 90 percent of net resource flows in 1993. Yet, for many African countries, high aid dependency has gone hand in hand with mixed results. While in the long term there is no inherent trade-off between the quantity and quality of aid, in the short term two tensions may arise. First, donor desires to speed up 1 In the interest of simplicity, the term 'donors" in this paper covers officiai agencies providing both grant and loan assistance, and is sometimes used to encompass the role of the IMF in providing policy advice, and financial and technical assistance. - 29 - implementation and disbursement may often conflict with ownership, institutional development and capacity building goals. Second, while the immediate resource needs of countries may be large, the conditions for effective absorption of such resources may not be in place. 3. There has been increasing focus on the development effectiveness of aid in recent years. Yet the policies and actions oi donor govermnents have rot always been consistent with this concern. Political and commercial interests continue to influence the levels and allocation of aid budgets. And other donor policies-designed to promote their own exports or restrict imports from developing countries-often undermine the recipient country's ability to use aid resources effectively. Substantial progress in improving aid effectiveness will require that these basic issues are addressed. With the end of the Cold War, there is now a real opportunity to refocus attention on the development objectives of aid. There is also growing recognition that development, per se, is important to taclde global issues-such as AIDS, migration and the enviromnent-and to strengthen the global economy. All countries stand to benefit from progress in these areas. 4. Global changes have also placed new demands on aid resources. Historic developments in the Former Soviet Union, Eastern Europe, the Middle East and South Africa have generated substantial resource requirements for reconstruction. Peacekeeping and humanitarian needs are also on the rise. At the same time, major development challenges remain in many low-income countries which have limited access to private capital flows. Coming at a tine when many donors are facing fiscal constraints on their aid budgets, these competing demands have reinforced the importance of ensuring that available resources are used effectively. Demonstrated progress on improving aid effectiveness will also be essential to support the case that continued spending on aid programs is indeed justified. 5. Ultimately, the effective use of aid comes down to a partnership between recipient country governments, those affected by aid and aid agencies. The recipient country is responsible for establishing a commitment to and the momentum for development, using both its domestic and external resources to best advantage, and establishing a participatory approach to development. Those affected by aid-financed projects have an important role to play in providing information that can assist project design, helping with project implernentation and operation, and in providing feedback on the success of aid programs. Donors help by providing finance and advice. - 30- II. AID AND THE COUNTRY CONTEXT 6. There is a substantial body of research on aid effectiveness2 and, while not conclusive, it suggests that the commitment to development, strong administrative and institutional capacity, sound domestic policies, and systems for the effective management of resources have a particularly important influence on the effectiveness of aid. While these factors will hold to varying degrees in developing countries, their combination makes for the most effective use of aid. Donor efforts at helping countries move towards these broad conditions will thus improve the effectiveness of aid. Commitment to Development 7. The commitment of the recipient country to poverty reduction through sustainable development is an important indicator of how effectively aid will be used. Donors look to three concepts for assessing recipient country commitment: ownership, good governance, and participation. 'Ownership' reflects the extent to which a given program or project has emanated from the recipient country as opposed to having been imposed from abroad. Recent studies have found a very high correlation between borrower ownership and the success of adjustment programs.3 Programs and projects that are "home grown' are generally more effective in incorporating institutional constraints and in addressing the needs of domestic constituencies. Good governance, which reflects efficient public sector management, a sound legal framework, accourtability and transparency, is also an important indicator of the effectiveness with which aid resources will be used. It also assists in consensus building and developing greater ownership of development initiatives. Corruption, on the other hand, not only reduces aid effectiveness but also undermines support for aid in donor countries. Finally, there is increasing evidence that extending the level of participation to relevant stakeholders can contribute to more sustainable programs and broaden ownership and conmmitmnent. It is especially important to find ways to involve the poor and other groups, including women, who might otherwise be left out of the decision-making process. While further research is needed to establish the direct link between participatory approaches and the poor, it is clear that participation can make a large contribution to getting good projects implemented, operated, maintained and evaluated. Box 1 presents some suggestions on how participation can be promoted. Institutional Development and Capacity Building 8. Weak institutional development and limited capacity pose a nmior bottleneck to the effective use of aid in many countries. Traditionally, technical assistance (TA) has been used to address these bottlenecks. However, the results, especially in Africa, have often been disappointing. Much of the discussion of TA (see Annex I for further elaboration of the points made here) has focused on the specifics of technical assistance. In many cases TA is donor driven and on a scale that is beyond what 2 See Overseas Development lnstitute (forthcoming). 3 See Johnson and Wasty (1993). Tbe study constructed an independent ex poste measure of ownrship based on four criteria. First, the extent to which the initiative for formulating and implementing the assistance prgram comes from the recipient country is an important indicator of ownership. Second, the degree of consensus among key decision makers conceming the assistance program gives an important indication of the extent to which the government 'owns" it. Third, the willingness of the Govermnent to show public support and take up-front action on behalf of the assistance program also reflects the extent to which it internalizes an assistance program. Finally, involvement of political and social groups beyond a small core of high-level government officials is also an important indicator of a broader base of support and ownership. - 31 - Box I Promoting Pardiciation The Bank's Learning Group on Participatory Development (see World Bank 1994i) suggests a number of measures that could be put in place in the shortrun in order to promote participation: * Support govemmentefforts to promote a more enabling enviromnent for participatory development within client countries, by addressing participation in policy dialogue, capacity-building programs, and public sector management activities. * Establish procedures and allocate resources for sharing responsibility for econonic and sector work (ESW) with government and a wider range of stakeholders. * Encourage review processes that ensure that lending operations and ESW inlude a process for identifying (i) who the relevant stakeholders are; and (i) how they wilE be involved in the activity. Documentation of projects and ESW would include brief descriptions of the participatory process. * Strengthen the Bank's capacity to support participation by providing participation-related training programs for Bank staff. * Maintain innovation, learning and mainstreaming of participation by appropriate use of the Fund for Innovative Approaches in Human and Social Development and expansion of funding for such purposes; and providing incentives and recognition for staff who undertake participatory initiatives. e Provide institutional arrangements to oversee and support the Bank's adoption of partpati by reaffirning the roles of the Human Resources Development & Operations Policy Department, the Environment Department and the Bank-wide Learning Group to continue providing leadership and promoting participatory initiatives; and supporting the establishmnt of an inter-organizational coiaborative Ieaniing group on partcipation. recipient countries can accommodate effectively. Some secondary factors that pose difficulties include problems with design, implementation, monitoring and evaluation; incentives faced by the individual providing TA to produce reports rather than to train; and incentives for those trained through TA to pursue more lucrative positions after training. The Development Assistance CoImmittee (DAC) has set otit a series of Principles for New Orientations in Technical Cooperation in order to address these issues4 and a recent High Level DACIUNDP/World Barnk Seminar discussed measures to improve the effectiveness of TA, including: making TA more demand driven, improving the delivery of TA, proper country programming, and strengthening local management of TA. 4 See OECD (1991). These principles include: sening long-term capacity building as the objective of capacity building rather than short-term improvements in performance; placing greater emphasis on the central role of recipient counties in planning, design and management of technical cooperation; stressing the use of a program approach (rather than project-by-project); encouraging the responsibility and control of technical cooperation programs and projects at all stages by the intended beneficiaries through participatory appmaches, including local NGO participation; taking into account the new recognition of private sector needs for technical cooperation; encouraging greater use of local expertise; defining objectives in terms of outcomes to be achieved rather than inputs to be provided; and, stressing the need to pay greater attention to the costs and cost effectiveness of technical cooperation activities. - 32 - 9. However, much of the reason for the poor impact of many technical assistance programs is due to institutional environments in which the minimum conditions of good governance do not prevail.5 The incentives for improving public sector capacity may not exist and efforts to improve capacity through technical assistance are unlikely to be effective without: transparent rules and their fair enforcement; the proper incentives; the basic systems for decision making, resource allocation, and accountability; and the free flow of information. Establishing such an institutional environment is likely to entail civil service and other reforms and is a long-term process. While some consensus has been reached on reforming the specific modalities of technical assistance programs (Annex I), a recent UNDP paper recommended a four pillar approach to institutional development and capacity building incorporating the overall institutional environment (see Box 2). Box 2 UNDP's Four PiLlars for Capacity Building Positive experiences with technical assistance (TA) tend to be in countries where the overall institutional environment has not deteriorated and may not be replicable in situations where the minimum conditions of good governance do not prevail. Improving the effectiveness of TA may require improvements in the institutional environment. The UNDP Regional Bureau for Africa suggests a four pillar approach to capacity building: * Empowerment of people and ownership of the people primarily concerned should be a key goal for capacity building strategy. - Good governance should be promoted through measures such as support to the judiciary, mass media, democratic institutions, etc. * Do not equate capacity building with training, education and technology transfer. We should shift our attention to the environment in which people apply their skills. An environment conducive to mobilizing social groups and motivating individuals are basic requirements for promoting capacity utilization and retention. The focus should also particularly be on strengthening management systems for imprved capacity utilization. * Capacity building for sustainable human development includes not only public sector management but strengthening of civil institutions and investments in social capital. See: UNDP Regional Bureau for Africa (1994). Sound Domestic Policies 10. It has been well-established that domestic policies have an important impact on economic growth, development and the effective use of aid. Over the past decade there has been an increasing consensus on the conditions necessary (but not always sufficient) for obtaining the objectives of reducing poverty and improving living standards. The key elements to a sound policy framework include: macroeconomic stability; an open and competitive economy; goverrnent roles that focus on activities that complement the private sector, such as provision of public goods and addressing market failures; and investment in 5 See UNDP Regional Bureau for Africa (1994), p. 4. - 33 - basic infrastructure and in people, including targeted measures for poverty reduction where necessary.6 The World Bank and the International Monetary Fund support improved domestic policies through research on country policy experience, dissemination of lessons through country dialogue and by financial support for structural adjustment lending. Reviews of adjustment lending have found that the results with respect to inflation, the resource balance, the fiscal deficit, removal of price distortions, liberalizing trade and growth have generally been favorable.7 However, savings and investment responses have been relatively disappointing and progress in public enterprise, financial sector and regulatory reform has been slower than anticipated. There also may be short-term declines in the welfare of some groups that need to be specifically addressed as part of the adjustment program. 11. Recent studies have showvn that good domestic policies not only contribute to poverty reduction and improved living standards, they also are associated with higher rates of return on project finance. One study found that an undistorted policy environment is associated with economic rates of return (ERRs) at least five percentage points higher than in a distorted policy environment. Reductions in the parallel premium and opening up of the trade regime can translate into an improvement of nine percentage points in the ERRs.8 Later work focused on the social sectors found similar conclusions. Efforts to improve the domestic policy framework through policy advice and program lending therefore help to contribute to more effective project assistance. The Effective Use of Resources 12. Aid effectiveness requires that aid resources should be placed within the context of an overall expenditure framework that is clearly tied to the development objectives of the recipient country and that it is fully consistent with the macroeconomic framework and an integrated budgetary process (see Box 3).10 Once overall allocative decisions have been made, efficient execution of the budget is also required. 13. Among the many considerations that arise in allocating expenditure, two are particularly important: the functional composition of expenditure and addressing the sustainability of expenditure. Govermnents sometimes do not make the most effective use of their resources because they are spread too thin. Unproductive expenditures, including for military purposes, and expenditures in areas best left to the private sector often crowd out priority areas for public involvement. In prioritizing public expenditure there are two areas that stand out in terms of their impact on developmernt and their contribution to the effective use of aid. The frst is the provision of basic social services (primary education and health) and the second is in the provision of basic infrastructure. Research has found that 6 See Bruno (1994), Lindauer and Roemer (1993), World Bank (1991e), World Bank (1993e), World Bank f1994a). 7 See International Monetary Fund (1993), Mosley et al (1991), World Bank (1992a), World Bank (1992d), World Bank (1994a) and references within. 8 See Kaufman (1991) and Pohl and Mihaljek (1992). 9 See Kafmam and Wang (1992). 10 One complication in assessing the effectiveness of aid financing is the issue of fimgibility, i.e. the aid financed project may not be the marginal project. It is therefore important to look at the impact of aid on overall investment levels and patterns. Further research on this complex issue is warranted. - 34 - Box 3 Lessonsfrom SuccessfulAid Managers A review of aid coordination and mnanagement (see Lister and Stevens (1992)) found that countries that have built up reputations as successful managers of external assistance have some common factors. These include: * Governmentconsensuson national objectives, clear policies and well-orderedexpenditurepriorities. * A well-staffed and centrally located aid coordination unit, in regular contact with sector departments and aid agencies. * Deliberate aid strategies, for the magnitude of assistance, for the type of external resources sought and the terns and conditions deemed acceptable. Strategies also cover the targeting of donors and the allocation of projects. Clear procedures for handling missions and a firm resolve to control the process. * Expertise in depth, the product of training strategies to build up a technocratic cadre. * Planning, budgeting, and external resource management in most cases in the same institution. Close links between the core economic management agencies, and effective high level machinery for policy coordination. * Regular production of realistic plans or roling PIPs. as a means to coordinate and make Inown government policies, and to provide a medium-term framework for programming expenditure priorities. X The inclusion of all aid-finded investment projects in the annual budget. separate development and recurrent budgets, and well fimctioning govemment fiancial management systems. • Close attention paid to project screening and monitoring. * Competency in external debt nanagernent, based on good record keeping and cash flow forecasting. Location within the core group and coordination with other management functions. the return to basic education (particularly of girls) and to expenditure on basic health are high.1 1 One study found that if Korea had the low school enrollment rate of Pakistan in 1960 its GDP per capita by 1985 would have been 40 percent lower than that actually attained.12 The 1993 World D1'elopment Report (WDR) focused on health issues and argued that goverrunents in developing countries should spend about 50 percent less than they do now on less cost-effective interventions and instead should double or triple spending on basic public health programs such as inimunization and AIDS prevention and on essential clinical services. Investment in basic economic infrastructure also delivers ma~. r benefits by helping countries to diversify production, expand trade and cope with population growth. Infrastructure such as clean water and sanitation systems contribute to improved standards of i ving and environmental sustainability. However, as highlighted in the 1994 WDR, major infrastructure investments in many developing countries are not generating the quantity or quality of services demanded. Managing infrastructure like a business-with attention to costs and service-can help to reduce I1 See Psacharopoulos (1993) and Summers (1992). 12 See Birdsall et al (1994). - 35 - inefficiencies which are a burden on public resources. In many cases, private sector participation can help encourage a comnercial orientation. By introducing competition, pressure will be placed on suppliers to be efficient and accountable to users. As institutions and capital markets develop, governments can also look to the private sector to finance infrastructure projects. 14. While sectoral allocations are being determined, governments also need to consider the sustainability of their choices. Experience has shown that both governments and donors often over- estimate the sustainability of projects. The primary reason that investment programs are found to be unsustainable is due to miscalculation of incremental recurrent costs and poor integration of recurrent costs into the budget. In addition, the financing for recurrent costs such as operations and maintenance (O&M) is often squeezed by increasing wage costs and interest payments. However, such expenditure has high returns. For exanple, the expected return to efficient non-wage O&M in the Indonesian irrigation sector in the mid-1980s is estimated at 117 percent in Java and 90 percent off Java. A Bank report found that in the Indonesian transport sector, the return to specific road improvements was 13 times the amount spent.13 Another reason that projects are often found to be unsustainable is that project appraisals fail to incorporate into their sensitivity analyses the potential for foreign shocks and their impact. The lessons of the commodity booms of the seventies and their impact into the eighties indicates that in choosing, designing and implementing projects, the sensitivity of project success to external shocks should be wr.ighed as much as possible. 15. Improved public sector management systems and processes are also required for improving the effectiveness of aid. Once budgetary priorities and allocations have been set, efficient systems and processes fc-: implementing the budget are important for translating those priorities into results on the ground. In some countries actual budgetary releases may have little to do with budgetary allocations. Budgetary processes may also be fragmented and suffer from a lack of complete information. In some cases, systems and procedures need to be reformed. In others, the systems and processes exist, but need to be properly implemented. Creation of an institutional environment that provides incentives for efficient implemnentation and execution of the budget can help to improve the effectiveness of resource use. 13 See World Bank (1992a), p. 57. A4 See Little et al (1993). - 36- M. AID AND THE DONORS 16. Donors can increase the effectiveness of aid through the promotion of commitment, institutional development, good policies and the effective use of resources. However, donor practices and procedures also have a real impact on the effectiveness of aid. Efforts to improve aid coordination and to refocus business practices within aid institutions have made some progress but more should be done. Aid Coordination 17. Ultimately the recipient country is responsible for coordinating its aid flows, but donors can ease their task, particularly in countries where capacity is weak (see Annex II for a more detailed review of aid coordination). Donors play different roles in recipient countries: the multilateral agencies normally take the lead on policy discussions, while the bilateral agencies focus more on project and program issues. Coordination of these activities can make aid more effective. At the country level, a country's ability to coordinate its aid will be related to its public sector management capabilities. Clear lines of responsibility for decisions concerning aid are required, and while no blueprint can be applied to all countries, most countries where aid is significant create an aid coordination unit that has an overview of aid resources and ensures that they are effectively integrated into the budget. However, many donor agencies over the years have created mechanisms-such as dedicated project implementation units and the earnarking of counterpart funds from import support-for working around government institutions. Both mechanisms can be helpful in the short run to speed up project implementation. However, if they become widespread, they can also complicate aid management within the recipient country and undermine longer-term efforts to strengthen the civil service and budget processes. The tying of aid to specific conmmodities or services or to the country or region where procuremnent has to take place, may also undermine government's efforts to manage its aid. Estimates of the excess costs of tied aid to recipients range between 10 and 30 percent.15 Standard procurement procedures have to be suspended, cost estimates changed and budgets revised upwards. If the equipment is non-starnard, special arrangements for maintenance will have to be made. 18. At the level of interaction between donors and recipients, Consultative Groups and Roundtable Meetings ("CGs") are the most prevalent form of coordination. Such meetings have helped to increase conmmitments, improve information flow and build consensus. Some i.- :'.rovements could be made by assuring that documentation requirements are at a level that the recipient country can meet and that such documentation will contribute to the government's own programming. Many CGs benefit from special sessions on aid coordination and on technical assistance. Adherence to priorities set out in the CGs can also make a contribution to the more effective use of aid. Earlier consultation between the multilateral and bilateral agencies could also improve the effectiveness of these meetings and coordination in general. Recent experiences of coordination using an integrated sector approach have been very promising (Annex Box 11.2). 19. Donors have agreed on Guiding Principles for Aid Coordination set out by DAC (see Box 4) and greater attention should be paid to their implementation and evaluation. 15 See Jepma (1991). - 37 - Box 4 DAC's Guiding Principles for Aid Coordination with Developing Countries While there are some discussions of improving coordination and standardization among donors at CGs and regional meetings. the center of efforts to coordinate donor aid policies and actions is the Development Assistance Committee (DAC). whose members have agreed to secure an expansion in the aggregate volume of resources made available to developing countries and to improve their effectiveness. Through consultation with the multilateral institutions and bilateral members DAC has established 'Principles for the Effective Use of Aid'. Aid coordination is an important part of DAC's mandate and in 1986 DAC members agreed on the fbllowing principles concerning coordination: * Central responsibility for aid coordination lies with each recipient. * Developing countries need well designed policies and carefully appraised investment and expenditure programs for effective and coordinated use of both their national and external resources. - There is a need for aid agencies to help developing countries strengthen their analytical and management capacity to design and implement effective policies and programs. * There is a need for continuing discipline by both recipients and donors in adhering to carefully appraised and productive investment programs. = There is a need fbr close cooperation between recipient governments and the multilateral lead agencies, but the processes of consultation and coordination should provide an opportunity for bilateral donors tO express their views during the formnative stages of policy and program consultations. F Full and frani exchanges of pertinent information on on-going and planned activities among donors, and between donors and recipients are essential for effective coordination and the effective use of aid. - There is a need to strengthen aid coordination at the local level and to establish greater links between central and local coordination arrangements. Central coordination arrangements should give the lead to local and sectoral coordination. Recipient governments should be at the center cf the process. e Efrective participation both in the policy dialogue and in aid programming at the local level wiU be facilitated by the presence of policy-oriented staff stationed in individual countries. See: OECD (1992). - 38 - Improving Donor Efficiency'6 20. Attention has recently been focused on the measures that donor institutions can take to improve their effectiveness through changing their internal business practices and processes. Task forces have carried out reviews at the World Bank,17 each of the regional banks and in many of the bilateral agencies (see Annex III for a more detailed discussion). The conclusions of the different task forces focused on many of the same themes and, while implementation of recommendations has begun, there is still work to be done to ensure that the changes required are fully implemented. A theme of many of the reviews was reorienting the institutions from a focus on measures of success based on inputs, such as the number of loans newly approved, to measures based on progress as measured in the field. This requires a shift in focus from individual projects to the overall country portfolio and measures that might irnprove its implementation. Many of the reviews also called for increasing emphasis on the quality of projects through better project appraisal, greater participation of stakeholders where appropriate, and devoting sufficient time to project or program preparation. Improvements were also called for in the management of projects including increased accountability on the part of project managers, better project supervision, and streamlining and simplifying of procurement procedures. The reviews also recommended better monitoring and evaluation and measures to assure that evaluation results are fed back into current operations. Measures have also been recommended to assess how institutional factors, such as levels of bureaucracy, systems of institutional directives, etc, affect how the institutions deal with recipient countries. In some instanccs, recommendations have focused on better implementation of the existing institutional system, in others they have focused on streamlining and simplifying current institutional procedures. At the most fundamental level, the task forces called for changes in the incentive system which influences how staff of the institutions carry out their jobs. 16 The Development Committee agreed in April 1994 to appoint a Task Force to review the development role being played by the Multilateral Development Banks. That Task Force will be able to build on the work described in this section. 17 For a broader discussion of how the World Bank is responding to the changing world and the challenges of development see World Bank (1994h). - 39 - IV. IMPLICATIONS FOR DONORS 21. Improving the effectiveness of aid requires the efforts of all parties involved in the development pro-,ess. In the recipient country, improving aid requires building up a commitment to development, creating the right policy environment and the effective use of all resources-domestic and external. Donors have a role to play both through fostering those conditions and by ensuring that their own processes are efficient. Experience gives us some guidance as to the basic requirements for improving aid effectiveness, but further research in many areas is needed to clarify how individual factors promote the effective use of aid. The basic messages that come out of the analysis, which apply to aid agencies generally and to the World Bank in particular, are as follows: * Ownership by the recipient government and participation by affected people are essential. 22. In the first instance, donors can place a premium on ownership by being selective and financing those programs with strong ownership. From experience it is clear that providing financing when there is weak ownership usually leads to poor utilization of resources. But in cases where ownership is weak, donors should not play a passive role. Rather, through the use of analysis, dissemination of information and by responding to concerns, donors can help to build ownership. 23. Donors can also contribute to the ownership of projects in a number of ways. Recipient countries should be in the "driver's seat," taking the lead. Where capacity is weak donors should guide and assist countries without dominath:g them. This may require donor agencies to extend their timetables, but will in the end allow for greater capacity building and a more sustainable development impact. Donors can also improve the effectiveness of their aid by promoting participatory approaches to development. This involves: directly addressing participation issues in policy dialogue, capacity building programs and public sector management activities; collaborative economic and sector work; including a process for helping the government identify the relevant stakeholders and how they will be involved in an activity; strengthening the agencies' capacity to support participation by providing training programs and adjusting sdll mnixes; establishing the incentives and funding to allow staff to pursue a participatory approach; and encouraging borrowers to evaluate their experience.18 With recipient countries taking the lead, increased ownership and participation, the nature of "conditionality' will change. If there is substantial disagreement over a government-owned program, then a consensus needs to be reached through dialogue. If a consensus cannot be reached, donors should reconsider whether it is appropriate to lend. 18 See World Bank (1994b). -40 - * Weak administrative and institutional capacity is a major barrier to the effective use of aid. 24. Recipients and donors are well aware of the bottlenecks that weak administrative and institutional capacity can create. Many donors already spend significant resources on technical assistance trying to address these problems, with mixed results. While there is no single blueprint for improving aid aimed at capacity building and institutional development, a number of measures could be taken to improve the effectiveness of these efforts. 25. First, the focus of work on institutional development needs to shift toward a consideration of the environment within which institutional development and capacity building are supposed to occur. If the institutional environment is one in which the rules are either unclear or do not provide incentives for building public sector capacity, then piecemeal measures to improve capacity are unlikely to have a sustainable impact. A minimum level of efficient public sector management and "good governance" is required for targeted efforts to be sustainable. While further work is needed to fully understand the processes of institutional development, donors can consider measures to strengthen the judiciary, information and communications, processes for decision-making, budgeting, personnel management and accountability. 26. Second, with regard to traditional TA activities, the most important measure for improving effectiveness is to avoid supply-driven programs. This implies adopting an approach in which technical assistance needs are determined by the local stakeholder. This could be carried out in the context of a country program approach to technical assistance. Other measures include: delivering existing technical assistance packages more effectively, giving more time to project preparation, seeking greater local participation, avoiding overambitious projects, carefully selecting both advisors and counterparts and establishing better supervision of TA projects. In addition, donors need to carefuly consider the method of delivery of technical assistance. Donors can also improve the effectiveness of technical assistance by unbundling the traditional packages of personnel, equipment and training; untying technical assistance; and improving transparency. 27. Finally, donors can also promote more effective technical assistance by agreeing on a time frame for full implementation of DAC's Principles for New Orientations in Technical Cooperation. * Sound policies and good public sector management are essential for the effective use of resources. 28. Donors can contribute to improved domestic policies through the dissemiination of their research and lessons from country policy experiences and through their policy-based lending. Because focussed programs are more effective than overambitious ones, donors can help to make policy lending more effective by: maling sure that there is thorough preparation and well-directed economic sector work in setting out and designing an adjustment program; and ensuring that policy conditions are clear and prioritized and have been fully discussed and agreed upon with the government. Donors can help to ease the costs of adjustment by ensuring that their support for adjustnent programs recognizes the need to address short-term costs, particularly of the poor. 29. Donors can continue to assist recipient countries in improving resource allocation. The Intemational Monetary Fund assists countries in setting expenditure envelopes and the World Bank helps - 41 - governments to establish expenditure priorities through public expenditure reviews. These analyze public expenditure programs to provide recommendations to govermments on the size and composition of their expenditure programs. 19 Frequently they provide advice on where expenditure cuts might be focussed. Bilateral donors often advise on sectoral expenditure issues. In turn, there is a need for governments, the Fund and the Bank to be fully informed of donors' aid programs in formulating expenditure envelopes and expenditure priorities. 30. Donors can also assist countries in strengthening their ability to appraise projects. While governments need to assure that adequate recurrent funds are available for aid-financed projects by either appropriate cost recovery measures or by improved resource mobilization, donors can assist sustainability by assuring that project appraisals realistically assess the recurrent cost components and that the balance between investment and recurrent spending is addressed in a medium-term framework. Donors can also incorporate transitional measures for covering recurrent expenditures on a temporary basis, until the recipient country builds a strong enough revenue base to cover these costs. 31. Donors should also place more emphasis on helping recipient countries to improve their budgetary systems and processes. In part this calls for promoting the elements of good governance as discussed above. It also calls for advising on the specifics of a particular budgetary system and how its operation might be improved. * Lack of coordination in donor activities reduces the potential impact of aid. 32. At the country level, donors can help to alleviate the administrative burden imposed on governments by specializing in a limited number of sectors, by encouraging cofinancing in which one donor takes the lead, and by harmonizing and simplifying procedures as much as possible. The integrated sector investment programs (Annex Box 11.2) provide a good example of how such measures can be implemented. Donors can support and help to implement processes which help recipients manage their aid, such as aid coordination units, and they can pay particular attention to public sector mnanagement issues. Donors can support aid coordination simply by assuring that the aid coordination machinery in a recipient country is fully informed and by beginning and ending missions with meetings with the aid coordination unit and the ministry of finance. Donors should also work with recipient countries to establish methods for implementing their own projects which are consistent with broader efforts to strengthen the civil service and budget processes. Finally, while the donors have made progress in reducing the tying of aid, greater efforts should be made to reduce this practice. In particular, the use of mixed credits-which combine tied ODA with export credits and nonconcessional official loans-should be strictly limited in accordance with the DAC Principles for Effective Aid.20 33. At the level of CGs, multilateral agencies can contribute to improved coordination by including bilateral agencies in preparatory meetings and also by improving consultation with bilateral agencies at an early stage in the development of a program. These meetings can also contribute to greater aid effectiveness by assuring that the documentation prepared for the meetings draws on local participation as much as possible and will form a useful part of the country's aid strategy. The agenda of CGs should 19 See de Melo (1988). 20 See OECD (1992), pp. 121-125. - 42 - allow discussion of strategy issues in addition to the mobilization of financial resources. It should often also include a session on aid coordination, which could focus on cormmon problems of aid utilization and how they might be resolved, and a session on technical assistance. Donors also need to be disciplined in adhering to the investment priorities set out in the public investment program. * Aid agencies need to continue to improve their own business practices in order to obtain better results in the field. 34. Many agencies have embarked upon efforts to improve their practices with the ultimate goal of improving the development impact of their operations and making aid more effective. Most agencies are: intensifying their country focus; taking measures to improve the quality of projects and programs from the outset; and placing more emphasis on monitoring and evaluation, and on the quality of their loans as opposed to quantity. Although the World Bank has made much progress in implementing the specific tasks recommended by the Portfolio Management Task Force, the Bank will not know for some time whether in practice the actions taken will yield more expeditious implementation and improvements to the health of the portfolio, and to eventual improvements in results on the ground. The Bank is determined to maintain its current momentum and commitment to carrying out the actions required as the surest means to achieve the desired success. All aid institutions should build upon efforts to assure that they are making the most of their development resources. 35. Among donors, there has been much talk and discussion of the measures necessary to improve the effectiveness of aid. DAC has enumerated a whole series of principles for effective aid and indebtedness. The challenge for donors is to tum these words into actions. - 43 - Aid Effectiveness - Anne-x I ANNEX I IMPROVING THE EFFECTIVENESS OF CAPACITY BUILDING AND INSTITIONAL DEVELOP1UENT 1. Weak institutional capacity presents one of the greatest bottlenecks to the effective use of aid. On one level, institutional development concerns the establishment of transparent rules and their enforcement. Such rules provide the incentive framework within which both public and private agents operate. When they are not clear or enforceable, institutional development may be impeded. On a second level, institutional development and capacity building focuses on organizations and providing specific assistance to address a capacity constraint. Donors most frequently promote institutional development at the second level, through the supply of technical assistance (TA).1 Examples of such activities include implementing better accounting, budgeting or evaluation procedures; training and developing staff; and strengthening organizational structures and inter-organizational relationships. When effective, technical assistance may lead to more efficient delivery of services by government agencies, better policy analysis and formulation, more sustainable and effective public sector projects, and better coordination between the public and private sector. 2. In recent years, efforts to promote institutional development through the use of technical assistance have undergone considerable evaluation. A review of 1,170 World Bank projects with institutional development objectives found that only 29 percent of these projects were considered to have had substantial institutional development achievements, while the remaining 71 percent of projects had only partial or negligible achievements.2 3. Until recently, much of the discussion on the effectiveness of TA has focused on issues related to the implementation of TA activities. Explanations for why TA has been less effective than anticipated include: the supply-driven nature of TA; the difficulty of institutional development project design, implementation and supervision; a lack of indicators to measure progress; difficulties with the "expert- counterpart" approach to TA; and difficulties in retaining counterparts.3 Those receiving technical 1 Technical assistance (TA) accounts for about 25 percent of total net official development assistance (see OECD. Geographical Distribution of Financial Flows. various years). The World Bank provides TA through three broad avenues: loans and credits; the administrative budget (including ESW and EDI); and trust funds administered by the Bank. Total TA provided by the Bank grew by 45% in FY93 to $3.1 billion (see World Bank (1994g) p.1). About 70 percent of all TA lending by the Bank is used for institutional development (see Buyck (1991) p. 11). The Fund has responded to the increased demand for TA in recent years by raising its own resources devoted to this task; stepping up efforts to secure extemal financing of this work; and enhancing cooperation and coordination with other multilateral and bilateral providers of TA. Fund TA has increasingly encompassed various forms of capacity building: strengthening of legal frameworks; modemization and reform of key institutions (such as central banks, tax and customs administrations, treasuries and social security administrations); foreign exchange and financial markets; improvements in statistical systems; and training of government officials involved in macroeconomic policy and management. 2 See World Bank. (1993b). p. 90. 3 Cohen (1992) notes that it is primarily the donors who poach economists whose skill levels have been raised dtrough training funded by TA. For example, of the 26 economists seconded by Kenya's Ministry of Planning and National Development's Scheme of Service and trained to MA level, 15 have left the Government to work for the donors and international aid agencies (p. 500). - 44 - Aid Effectiveness - Annex I assistance frequently have an incentive to move positions once skills are improved and higher wages nay be obtained elsewhere. There are also instances when resentment builds, as in cases where an expatriate is not perceived to add much value although he or she may be paid significantly greater amounts than the local counterpart. 4. In 1991, a DAC High-Level meeting agreed on a number of principles for improved technical cooperation (see footnote 4 in main text). In a recent DAC/UNDP/World Bank High-Level Seminar measures to improve the effectiveness of technical assistance were again discussed. Proposals included:4 * Deliver the package more effectively by addressing the deficiencies of project design and implementation. Give more time to project preparation, seek greater local participation, avoid overambitious projects, and define the terms of reference with greater care. Improve implementation through more careful recruitment of personnel, more systematic search of counterparts and better supervision and evaluation. * Change the mode of delivery by reducing the reliance on long-term resident advisors and increasing reliance on short-term advisors and "coaching methods", making greater use of local consultants, making greater use of institutional twinning, and gap-filling of empty posts where necessary by long-term personnel. * Adopt a program approach in which technical assistance needs (most often by sector) are determined by the local stakeholder, comprise all donor activities, have common implementation arrangements and involve minimal resort to long-term assistance. * Strengthen the local management of technical assistance resources by transferring responsibility and authority at the project level, strengthening the units responsible for management of TA, and introducing technical assistance programming as a way of simplifying administrative demands. D "Marketize" technical cooDeration by unbundling the traditional packages of personnel, equipment and training, untying technical cooperation and improving transparency. Here issues arise concerning administrative feasibility, synunetry in treatment of aid flows and equity. 5. There are still differences of views among donors and recipients on the merits of these proposals. However, a DAC process has been put in place for fiurther analysis and discussion of these issues. Recent discussions have also reoriented the debate to consider the institutional enviromnent necessary for TA to be effective. Box 2 in the main text sets out UNDP's approach to addressing some of these broader institutional issues. 4 See Berg (1994a) and Berg (1993), UNDP Regional Bureau for Africa (1994). - 45 - Aid Effectiveness *- Annex ff ANNEX I IMPROVING AID COORDINATION 1. Ultimately the recipient country is responsible for the coordination of donor activities but donors can ease their task, particularly in countries where institutions are weak. Aid needs to be coordinated at three levels: among institutions within the recipient country, between donors and recipients, and among donors. Due to different objectives and incentives the coordination of aid is extremely difficult. However, efforts to coordinate have taken many forms including: Consultative Group meetings organized by the World Bank and Roundtable meetings organized by UNDP (hereafter referred to as CGs), co- financing arrangements, ad hoc meetings between donors and recipient governments, as well as special initiatives such as the Special Program of Assistance for Africa and guidelines set out by DAC. While these efforts have been useful, problems have still arisen and there are some steps that the donors might take to increase the effectiveness of aid by improving coordination. 2. In the 1986 study of aid effectiveness, Cassen et al argue, "...[T]he role of the recipient is crucial. Unless the recipient has a firm grasp of the aid process, coordination will not take place or will at best reflect only the donors priorities. The recipient's ability to coordinate aid is closely tied to the effectiveness of its public sector management (see Box 3 in main text). In particular, the development of an aid strategy and strengthening of the institutional capacity for aid management are important. Within countries there may be many different institutions involved in the aid process and it needs to be clear who has responsibility for overall aid policy, where the authority resides within govermnent to make day-to-day decisions, and what the channels of communication between aid agencies and the government should be. While no single institutional configuration can serve as a blueprint for all countries, most countries where aid is significant create an aid coordination unit that has an overview of all aid activities and can assist both in the implementation of projects and in assuring that aid is effectively integrated into the government budget.2 3. An important part of the difficulty that developing countries face in managing aid, however, comes from the heterogeneity of aid and the institutional and administrative processes that go along with it. Each of the donor agencies has developed its procedures over many years to meet its particular needs, and while the rationale for these different procedures may continue to exist, harmonization, and simplification of the procedures for utilizing aid and for reporting on it could contribute to more effective coordination and use 3f aid. A number of measures on the part of donors could facilitate aid coordination within countries. The first is the reduction of tied aid. Aid tying poses particular costs for developing countries (see para. 17 in the main text). Special disciplines for the use of tied aid have been set out by DAC and some efforts to untie aid have been successfiul under the Special Program of Assistance for Africa, but greater progress in this area could enhance aid effectiveness.3 Second, donors can help to alleviate the administrative burden imposed on governments by: specializing in a limited number of sectors; encouraging cofmancing in which one donor acts as a lead agency; and by harmonizing and simplifying procedures as much as possible. In addition, informal contacts among donors working in an individual country can go along way to assist governments in their coordination efforts. Finally, donor I Cassen and Associates (1986) p. 227. 2 For further detail on the creation of effective aid coordination units see Lister and Stevens (1992). p. 62- 63. 3 See OECD (1992), pp. 121-125. - 46 - Aid Effectiveness - Annex II agencies should support the aid coordination machinery by keeping it fully informed on discussions with sector ministries, and by beginning and ending missions with joint meetings with the aid coordination unit and finance ministry. 4. In countries with weak institutional capacity, donors often undertake measures to protect and support their own programs. For example, some donors create dedicated units, outside the normal civil service structure, to implement their projects while others earmark the counterpart funds from import support to finance the local costs of their projects. Both mechanisms can be helpful in the short run to speed up project implementation. However, if they become widespread, they can also complicate aid management within the recipient country and undermine longer-term efforts to strengthen the civil service and budget processes. Therefore, such "short cuts" should normally be avoided. 5. Concerning coordination between donors and recipients and among donors, the most prevalent of arrangemnents have been the Consultative Groups and Roundtable Meetings ("CGs"). In 1988 it was estimated that there were CGs for at least 70 countries worldwide.4 In FY94 there were 25 country meetings and at least 12 sector strategy meetings chaired or co-chaired by the World Bank and at least 6 other formal coordination meetings chaired by other donors.5 CG meetings were organized to attract specific indications of additional aid by discussing a recipient govemment's overall economic policies and programs. A special effort for coordinating resource mobilization and procedures for Africa has been established through the Special Program of Assistance for Africa (see Annex Box 11.1). 6. CGs have been effective in increasing information flow, both between the governments and respective donors and between the donors themselves. The result has usually been an increase in the level of commitments. Between 1985-87, 20 of 23 countries in Sub-Saharan Africa which conducted CGs had increased aid in the next year.6 The informational flow also seems to have assisted in reducing donor repetition in project selection. While donor assistance indications are not binding, as these meetings have become more prevalent and established, they have been more successful in convincing donors to meet the goals set by Bank or the UNDP. Some recent CGs, such as the India Development Forum, have also incorporated discussions with the private sector. This has led to a greater consensus on country strategies for economic reform. 7. While these meetings have been very effective, four points concerning the process need to be made.7 The first concerns documentation. A great deal of time is spent preparing documentation. In countries with limited capacity, consultants are frequently employed to help countries prepare, but with tight deadlines local staff may not be included in every stage of preparation, which reduces ownership and limits the transfer of skills. A special effort should be made to ensure that CG documentation is prepared by the recipient country, even if this means less comprehensive coverage. In addition, documentation for CGs should serve as an input into the government's own programming. Second, it would be useful at many CG meetings to have a special session on aid coordination, which would focus 4 Barry (1988), p. 32. 5 From World Bank, FRMRO. 6 See Killick (1991), p. 52. 7 See Lister and Stevens (1992), p. 42. - 47 - Aid Effectiveness - Annex I1 Annex BOx II.] Tze Special Program Of Assistance for Africa In December 1987. the World Bank launched the Special Program of Assistance for Africa (SPA) in order to mobilize extra resources for the low-income, heavily-indebted countries of Africa so that these countries could adjust and grow while restoring and maintaining normal debtor-creditor relationships. It provides for substantially increased, highly concessional. quick-disbursing financing and for debt relief on softer terms to expand import capacities in eligible countries. In addition to mobilizing extra fnancial support, the SPA has also developed several procedures to strengthen aid coordination and donor support for policy reform. These include: (i) designating working level contacts; (ii) identifying donors' particular geographicand operational priorities; (iii) exchanging documentation on eligible countries and on proposed adjustment operations; (iv) having donors take part in selected appraisal negotiation and supervision missions; (v) holding regular biannual multi-donor meetings to discuss aggregate process in implementing the SPA, as well as special meetings on individual countries or issues; (vi) recommending standard procurement and disbursement procedures; and (vii) monitoring donors' commitmnents and disbursements earlier and more completely. The results of the SPA on this front have been encouraging: Untying. To speed disbursements and increase the efficiency of aid, pooling arrangements require each donor participating in the arrangement to untie at least 50 percent of its SPA pledge. By the end of 1988 eight SPA donors (Finland, France, Germany, Japan, Norway, Sweden, Switzerland and the United States) had indicated that they would untie at least 50 percent of their pledges for worldwide procurement. Spain and the U`.K agreed to untie at least 50 percent for procurement for pool members and Part II countries. Approximately 90 percent of the balance of payments assistance provided under SPA-2 has been reported as untied. Standardizing Procedures. The SPA has reconunended and encouraged standardization of procedures among donors. Donors have agreed on a standardized termns of reference for the audit of import support programs in orderto ease the administrative burden for die recipient country. Donors have also standardized procedures for depositing and allocating counterpart funds and have in principle agreed to end the earmarking of counterpart finds. Jointracuiviies. Joint evaluation missions of import support programs carried out under the SPA have proven to be a very effective mechanism for donors to have open and frank discussions with recipient countries on how to liberalize their foreign exchange allocation and trade regimes and also how to liberalize donor import financing in supportof hese reforms. SPA is also extending its efforts to coordinating donor support for sector investment programs (see Annex Box U.2). See: World Bank (1994f). on common problems of aid utilization and how they could be solved by both govermnent and donor actions. Third, a basic assumption of the discussion of assistance priorities at CGs is that only public investment program projects will be financed by donors and implemented by goverments. The experience in many countries, however, is that due to conmnercial or political pressures, donors frequently do not adhere to the priorities set out at the CG. Such activities defeat the central purpose of CGs and undermine the position of government counterparts who have put together a careful program of priority requirements. Finally, while CGs are useful to most countries, they shift the balance of power in favor of the donors and may make governments feel that they are in a subordinate position and no longer in the 'driver's seat" concerning their own aid program. Some countries experienced in aid coordination and in the presentation of their policies have been able to avoid this. Others have - 48 - Aid Effectiveness - Annex H deliberately eschewed large-scale donor meetings and have conducted all aid discussions on a strictly bilateral basis. 8. A slightly different arrangement is a regional aid group meeting, which operates similarly to a consultative group meeting but for a group of recipient countries rather than a single country. The most notable example is the Caribbean Group for Economic Development. There are regional, country and program level consultations. The arrangement helps to facilitate the identification and implementation of development assistance projects, as well as assisting in co-financing arrangements. This group has also instituted 'work sharing" among donors, which divides up labor for some development efforts. For instance, the Caribbean Development Bank will coordinate energy sector programs, the UNDP will coordinate TA, the World Bank will take care of country reports, etc. This saves resources, lets the most appropriate agency (the one with comparative advantage) do certain work, and helps to ensure that work is not duplicated. Other regional groupings such as the Club du Sahel and the Southern Africa Development Coordination Conference have also assisted in coordination activities but to a lesser degree. 9. At the level of coordination among donors, the DAC has elaborated guidelines for improving aid coordination (see Box 4 in the main text). Specific measures to meet these principles include: participation of bilateral donors in the consultations preceding CGs, revising the fonnat of CG meetings to facilitate more frank and substantive exchanges of views on key policy issues and more careful review of recipient investment plans; greater use of co-financing; exploring the prospects for more sector grouping of aid to improve its efficiency (see Annex Box II.2); and more focus on identification and programming of technical assistance needs and priorities with greater participation of UNDP. While acknowledging that effective action to streamline the administration of aid will not be easy, DAC members agreed to seek opportunities to harmonize and simplify the requirements they exact from recipient countries. Part of such efforts includes improving transparency and accountability in donor country procedures. 10. The implementation of measures to improve aid coordination has been hindered by obstacles on the side of both recipients and donors. Recipients might be wary of improved coordination and the potential for donors to "gang up" on them. They also may have developed skills at playing one donor off another. In addition, internal coordination in recipient countries could be hindered by the differences between parts of the recipient governments: finance ministers focus on financial control whereas sectoral ministers have an interest in enlarging the flow of resources to their sectors. Internal coordination may be difficult to achieve both administratively and politically. For the doinors, improved coordination may reduce their ability to pursue commercial and political interests through their aid programs. There may also be difficulties in reconciling different views on the correct approach to development assistance. In addition, coordination is administratively difficult and time consuming to achieve. While these obstacles make aid coordination difficult, the chalhenge of improving aid effectiveness can at least partly be met by fostering the changes in culture and practices of the donor agencies. - 49 - Aid Effectiveness - Annex II Annex Box L.2 The Integrated Sector Approach: A Promising Avenuefor Improvuzg Aid Effectiveness One approach to avoid the sometimes fragmented or piecemeal narure of development assistance is the integrated sector approach . Such an approach is intended to make project arsistance more coherent, more intelligible, and ultimately more manageable. The approach consists of five major characteristics: (1) It should be sector-wide in scope, i.e. parts of a country facing identical circumstances should not be implementing different -- and sometimes conflicting - policies or strategies for development. (2) Sectoral policies and programs should be prepared by local stzkeholders. Local ownership must be built in from the beginning, with the active participation of local government officials and benefciaries in project preparation. (3) The approach should comprise all donors active in the sector. Donors which requir- conflicting conditions, disrupt sector coherence. (4) The approach should involve common implementation arrangements. While each set of donor requirements can be jusEified on their own grounds, the resulting myriad of requirements facing the recipient government usually can not. (5) Development assistance should involve minimal use of '.ong-term foreign technical assistance, to avoid the stifling of imrilementation capacity. These conditions may seem a tall order for donors- but progress has been made on these fronts, especially in the Tanzania Integrated Roads Program, and more recently in the Mozambique Roads Program and the Zambia Agriculture Sector Investment Program. However, none of this will be possible unless cerai conditions and attitudes in the donor community prevail. First and foremost, for all donors, ensunrng results in the field must take precedenwe over all other objectives: not central to achieving development. Also, the recipient government must be put back in the driver's seat. Donors are driven by good intentions but the resulting efforts can often suppress existing local capacity. The integrated sector approach is one of genuine empowerment which, when set in motion, can unleash the latent talents and capacities in the govermment, as is evidenced by the Tanzania Roads Program. In the end this requires donors to stand back, providing only those resources that are needed and allowing the govenment to think through its own priorities and policies for development. -See Denning (1994) and Berg (1994b). -50 - Aid Effeciveness - Annex ril ANNEX III IMPROVING DONOR EFFICIENCY 1 In the past few years, a great deal of attention has focused on the measures that the donor institutions can take to improve their effectiveness through changing their internal business practices and processes. Ensurins that the donors themselves are efficient and effective is fundamental to improving aid's effectivenew,s. The World Barnk and the regional development banks have all launched programs to improve theil business procedures and the quality of their work. Many bilateral agencies have also evaluated their practices in order to improve the results of their development work. In most institutions the efforts being made are wide ranging and by their very nature are cumulative and on-going. 2. At the World Bank a program of action; put into place to follow up on the Portfolio Management Task Force Repolt.1 The work under this program aims at rebalancing internal priorities, processes and incentives to emphasize improved implementation of lending operations and thereby increasing the development impact oL Bank operations. Seven major areas that affect portfolio performance were identified under the "Next Steps" program. There has been action taken under each area and progress has been achieved, although it is still too early to assess the impact on results. The activities being implemented are as follows:2 3. Link country Rortfolio Rerformance to the Bank's core business practices. The Bank is tying borrower portfolio performance to the development of operational strategies through two new mechanisms: the Country Portfolio Performance Reviews (CPPRs) and an Annual Review of Portfolio Performance (ARPP). The CPPR assesses the condition of program activities, looling at commitment and implementation problems. The results of these reviews are incorporated into comprehensive country assistance strategies, departmental business plans, and budgeting processes. Broad-based participation in the CPPR and the development of the Country Assistance Strategy ensure that the strategy and work program are suited to the borrower's needs and imnplementation capacity. The ARPP will evaluate the Bank-wide portfolio, including assessments of progress in poverty reduction and the environment. Both the CPPR and ARPP help the bank to recognize systemnatic problems in project implementation at the country, regional and institutional levels. 4. Provide for more active Proiect and prtfolio restructuring. The Bank has put formal instruments in place at the Regional Vice President level for identifying projects that may benefit from restructuring. Problem projects are reviewed at this level twice yearly. 5. Improve the cuality of projects entering the portfolio. The Bank has been pursuing several steps to ensure that projects which enter the portfolio are of high quality from the start. The first of these is ensuring the level of country commitnent and enhancing the degree of stakeholder participation at all stages of project work. The Bank has instituted a participation fund to finance innovative approaches and joint work with non-govermmental organizations (NGOs) and community representatives. A participation learning group has also been established to examine participation issues in project implementation and design (see Box 1 in the main text). In addition regional efforts to promote participation have increased. 1 See World Bank (1992b) and World Bank (1993d). 2 See World Bank (1994d) for fiuher detail on progress in implementing the "Next Steps" program of actions. - 51 - Aid Effectiveness - Annex III The Southern Africa Department has produced a guidebook on conducting beneficiary assessments and carries out participatory assessments in all its operations. The Europe and Central Asia Region holds information workshops with stakeholders and government representatives, discussing project objectives and design options in advance of project preparation. The Latin America and Caribbean Region has experimented with joint preparation of project appraisal reports. Finally, in order to assist participation the Bank has approved a new information disclosure policy that makes project-related information more widely available. 6. Other efforts to ensure quality at entry include: improved efforts to assess project risks and incorporate sensitivity analysis; emphasis on implementation plans at the design stage; incorporation of implementation plans in loan documents to emphasize their importance; strengthening cofinancing arrangements; and improved evaluation of the Bank's use of financial covenants in loan agreements. 7. Define the Bank's role in. and improve its management of. project perfornance. Efforts are underway by both staff and management to improve accountability in project management and to adopt more client-oriente1 processes. This again involves considering the role of borrowers, project implementation agencies, beneficiaries, NGOs, the broader donor community, and others in project design and management. In addition, the Bank is improving the methodology with which it monitors and rates project performance in order to enhance project supervision. This includes the introduction of performance indicators that become increasingly necessary as the Bank finances more projects that do not lend themselves to an economic rate of return analysis. Resources provided for project supervision have been increased as have the number of mid-term reviews in order to set out corrections for problem projects. Many country departments are also expanding the role of field offices in the management and supervision of projects. 8. Considerable attention is also being paid to improvement of procurement procedures and guidelines. With the objective of reducing the time spent on review of bidding documents, and improving the quality of such documents, use of Bank-issued Standard Bidding and Contract Documents by all borrowers has been made mandatory for international competitive bidding since May 1993. Bank procurement guidelines have also been reviewed to address concerns expressed by the business comnmunity, and to address procurement issues related to social sector lending, adjustment lending, and private sector procurement. Advantage has been taken of this review to simplify some procedures and to enhance procurement transparency. Revised guidelines are expected to be in place by the end of 1994. 9. Enhance OED's role as an instrument of independent accountability and give greater emphasis to ex-post evaluation. The Bank has remade the Project Completion Report into the Imnplementation Completion Report. The new report is more forward looking and focuses on the borrower's plans for maintaining and operating the project. The Bank is also increasingly relying on OED Country Assistance Reviews, which look at the design and implementation of country strategies, and Impact Evaluation Reports, which look at a project five to ten years after it has been completed in order to evaluate the long-term impact and effectiveness of the project (see Annex Box I1. 1). 10. Create an internal environmnent that is supportive of better portfolio management. The Bank has begun to emphasize on-the-ground success of projects rather than the number or size of projects approved in creating incentives for Bank staff. The reward and incentive system has been refocused towards client- orientation, staff rontinuity, better leadership and improved teamwork. Bank managers are being held more accountable for project success and the Bank is putting more effort into recruitment and training - 52 - Aid Effectiveness - Annex Ifl Annex Bafx HI. Assessing the Development Impact of Projects One tool the World Bank's Operations and Evaluation Department uses to assess the development impact of Bank projects is the Impact Evaluation Review (IER), which considers the impact of a project some five to ten years after a loan has been closed. The Bank has been undertaking these reviews since 1979 and is increasing the number of ERs undertaken (there were 9 issued in 1994, 22 scheduled for 1995, and 28 scheduled for 1996). IERs address some of the same issues as the Project Completion Reports (PCR) and the Project Performance Audit Reports (PPAR) in reviewing and drawing lessons from implementation experience. However, the IER is better able to address questions of sustainability and replicability. This is because issues of sustainability as well as the economic rate of return and institutional impact will often change between the close of the loan and full project maturity. The [ER is also valuable in its ability to examine the longer-termn impact of projects on beneficiaries, poverty and the environment. Most [ERs approach the social impact of a project on beneficiaries (an impossibility under the short time frame of the other review mecbanisms) by undertaking surveys. This allows for measurement of both the impact on beneficiaries and a survey of the constraints to development as perceived by beneficiaries. New efforts are also being made to integrate impact evaluation techniques into project design at an early stage. A recent Bank research project, 'Impact Evaluation of Education Projects: Decentralization and Privatization Issues," aims to develop a link between research and project operations and to develop in-country capacity for carrying out their own impact evaluations. This approach is being applied to Bank education projects in Tanzania, Peru, Colombia and Pakistan. Each project couples strong monitoring and process evaluation components with rigorous impact evaluation methods (such as using control group or before-after approaches). The monitoring and process evaluations allow for the progress of the education reform to be tracked during the course of its implementation, while the impact evaluation wiU study final outcome measures as indicators of the development impact of each project. activities. The Bank has taken efforts to fill gaps in staffing and in training existing staff. Regular training has included enhanced orientation periods for new staff and workshops which draw on successful practices around the Bank. 11. Give attention to generic and institutional factors that affect Rortfolio performance. The Bank has begun to evaluate systematically its general operating procedures and review their effects on project performance. The Bank is also taking steps to simplify the operational directives systemn; reassess the use of field offices; improve the Bank's use of technical assistance, creating a grant facility for institutional development objectives; introduce an independent inspection panel to evaluate claims that Bank policy has not been followed; and assess budgetary implications of the "Next Steps" program and maintain a high level of support for "Next Step' activities. 12. As the Bank is taking actions to become more client- and results-oriented, increase its effectiveness on the ground, and become more efficient in delivering development assistance, other multilateral agencies have also embarked on similar actions. 13. The Asian Development Bank (ADB) issued a report in January 1994 entitled Improing Projec Quality. The report reflects the findings, conclusions and recommendations of the ADB task force whose objectives were similar to those of the World Bank's Task Force on Portfolio Management. The ADB Report generally follows the same framework and themes as the World Bank's report and the - 53 - Aid Effectiveness - Annex III recommendations are simnilar to those made for the World Bank. The ADB's task force report incorporates a program of action to be taken within the twelve months beginning in March 1994. The principal thrust if the ADB report is on improving the ADB's development impact through the way that it does business. The efforts are summarized under three major objectives: • To improve the quality of projects entering the portfolio, beginning with clarity and "implementability" of project design. Like the Bank, the ADB considers that good project design rests on a high level of borrower/beneficiary ownership and commitment, rigorous analysis of project sensitivity to various factors, and a comprehensive understanding of, and attention to, macroeconomic and sectoral issues as well as borrower absorptive capacity. * To improve the management of project performance to obtain better results on-the-ground. ADB intends to achieve this objective by adopting more efficient and client-oriented business practices, addressing key internal accountability issues, and gaining a more precise understanding of how to measure developmernt impact. * To create an internal environment that is supportive of better portfolio management by facilitating a change from what is perceived as an "approval" culture (a key variable affecting project quality) to a "results-oriented" culture. This change will involve strengthening ADB's own institutional capacity and reorienting incentives and resources to moderate the present emphasis on achieving annual levels of programmed lending. 14. The Inter-American Development Bank (IDB) issued a report in October of 1993 entitled Managing for Effective Development. This report, which puts into a broader perspective the World Bank's work on "Next Steps," reflects the findings, conclusions and recormmendations of an IDB task force. This task force has identified three areas of broad concem. First is the control mentality that runs through much of IDB's operations and discourages innovation and risk-taking. It omits from the rewards system any initiatives that are aimed at results rather than rigid adherence to the rules and regulations, and thus has an adverse impact (,n project implementation and execution. Second, IDB's board and management need to rethink and agree upon their respective roles. Management must be allowed to manage. Staff need to be given direct responsibility, and performance should be judged on results, that is, on meeting development needs. Third, IDB's present organizational structure and personnel policies, and the lack of clear lines of authority, responsibility and accountability for decision making stand in the way of improving both the quality of the portfolio, and systems established for its management. 15. The recommendations of the IDB task force will not only improve portfolio management, but also should help create an environment that will enable all those with a stake in IDB to reorient it toward a newly emerging development mandate. To successfully meet the future development needs of its client, IDB is directing itself toward: * focusing much more broadly on quality and impact of lending in managing its portfolio; * instilling in staff greater concern and support for implementation activities; * reexamining its original arrangements to provide for a greater country focus with clearly defined responsibility and accountability; * delegating increased authority to management and the country offices; and * strengthening reporting and evaluation. 16. As of March 1994, IDB had comnpleted 10 of the 27 distinct operational, institutional, management and personnel tasks identified by the task force. The 17 remaining tasks are at vaxying degrees of completion. - 54 - Aid Effectiveness - Annex III 17. A review of the African Development Bank (AfDB) entitled The Quest for Quality was issued in April of this year. The task force identified three main issues to be addressed. First, it found that the that the AfDB is pulled in different directions by differing perceptions of the mandate for the AfDB. This means that the AfDB spreads itself too thin over too many activities and hinders effective allocation of human and financial resources. Second, the task force found that there is a gap between the AfDB's lending policies and its practices. Policies and procedures are basically sound, but they are not applied consistently. Third, the AfDB needs to play a greater role on the ground, in helping member countries to design policies, in identifying and implementing sound projects, in supervising them and in providing feedback on progress. 18. To address these issues the task force recommended actions on three fronts: * Allocation of more budgetary resources to the AfDB's operational departments in order to provide the staff and resources necessary for implementing policy. This also entails using resources more efficiently. * Steps to change the AfDB's culture from one based on the quantity of lending to one based on the quality of lending. A comprehensive reporting system to monitor projects and to assess the status of the portfolio should be put into place to strengthen both portfolio management and board oversight of policy and results. This includes implementing current policies on operational reporting, initiating a program of country portfolio reviews, strengthening the internal audit of projects and expanding ex post evaluation of projects. * Resolving weaknesses that make it difficult for both the Board of directors and the president to discharge their responsibilities effectively. 19. The task force recormended the development and implementation of an action plan to address these issues. 20. Most of the bilateral development agencies have also recently undertaken exercises (in some cases very extensive ones) to reassess their priorities and to evaluate the performance and effectiveness of their aid as well as the effectiveness of their institutional arrangements. As part of these exercises, many agencies are narrowing their focus, either to a smaller range of countries or to a smaller number of sectors. They are also placing greater emphasis on monitoring and evaluation. In addition, the bilaterals are assessing their business practices. Some have made a commitment to reduce their operating budgets and many are assessing current staffing needs. Some bilateral donors have also made substantial progress in incorporating social, enviromnental and gender issues into their institutional procedures. Almost all bilateral agencies see inproved coordination, with the multilateral institutions taking the lead on policy issues, as a means to improving the effectiveness of aid. This being said, the bilaterals are also clearly subject to a diversity of objectives. Among all institutions the guiding theme has been to improve the quality of service as well as accountability and transparency in order to achieve an improved development impact. - 55 - Aid Effectiveness REFERENCES Barry, A. J. 1988. Aid Co-ordination and Aid Effectiveness, a Review of Country and Regional Experience. OECD Development Centre Papers. Paris. Berg, Elliot. 1994a. "Improving Technical Cooperation: Some Key Issues." Paper prepared for DAC/UNDP/World Bank High Level Seminar on Improving the Effectiveness of Technical Cooperation in the 1990s. Held in Paris, June 20, 1994. 1994b. "How Can Programmes be Made More Effective?" Development Alternatives Incorporated. From the Workshop on New Forms of Programme Aid. Harare, Zimbabwe, January, 1994. 1993. Rethinking Technical Cooperation: Reforms for Capacity Building in Africa. New York: UNDPtDAI Inc. 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Oxford: Oxford University Press. Martin, Denis-Constant. 1991. "The Cultural Dimensions of Governance." Proceedings of the World Bank Annual Conference on Development Economics 1991. World Bank, Washington, D.C. Mosley, Paul, Jane Harrigan and John Toye. 1991. Aid and Power: T7he World Bank & Policy Based Lending. London: Routledge. Obeng, P.V.. 1994. "Stakeholder Participation in the Design of a Structural Adjustment Prograrn: Ghana Case Study." World Bank Workshop on Participatory Development. May 17-29, 1994. OECD. 1991. DAC Principlesfor New Orientations in Technical Cooperation. Paris. OECD. 1992. DAC Principles for Effective Aid: Development Assistance Manual. Paris. OECD. various years. Geographical Distribution of Financial Flows to Developing Countries. Paris. Overseas Development Institute. forthcoming. "Aid Effectiveness. Part A: Review of the Literature. Part B: Abstracts." Report for the World Bank. Pohl, Gerhard and Dubrvko Mihaljek. 1992. "Project Evaluation and Uncertainty in Practice: A Statistical Analysis of Rate-of-Return Divergences of 1,015 World Bank Projects." World Bank Economic Review. 6 (2): 255-277. Psacharopoulos, George. 1993. "Return to Investment in Education-a Global Update." Policy and Research Working Paper Series No. 1067. World Bank, Washington, D.C. Raphaeli, Nimrod, Jacques Roumani and A.C. MacKellar. 1984. "Public Sector Management Issues in Botswana, Lessons in Pragmatism." Policy and Research Working Paper Series No. 709. World Bank, Washington, D.C. Sumuners, Lawrence. 1992. "Investing in All the People." Policy and Research Working Paper Series No. 905. World Bank, Washington, D.C. UNDP Regional Bureau for Africa. 1994. "Beyond Rethinkdng Technical Cooperation: New International Cooperation for Capacity Building In Africa." Paper presented to the June 1994 DAC/World Bank/UNDP seminar on technical cooperation. (Room Document No. 24). Whittington, Dale and Craig Calhoun. 1988. 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Operations Policy Departnent. Washington, D.C. 1993e. The East Asian Miracle: Economic Growth and Public Policy. Oxford University Press. 1993f. World Development Report 1993. Oxford: Oxford University Press. 1994a. Adjustment in Africa: Reforms, Results and the Road Ahead. Oxford University Press. 1994b. "Evaluation Capacity Development, Report of the Task Force." July 5th 1994. JAC94-61. 1994c. Governance, The World Bank's Experience. World Bank Development Practice Series. Washington, D.C. - 1994d. "Progress Report on the Implementation of 'Portfolio Management Next Steps: A Program of Actions."' Operations Policy Department. Washington, D.C. -. 1994e. "Progress Report on Improving Quality of Import Support Programs." Presented at the SPA Donor's Meeting, Washington D.C., April, 1994. 1994f. "Special Program of Assistance: Launching the Third Phase." The World Bank Africa Region, Washington, D.C. 1994g. "Technical Assistance Report, Fiscal Year 1993." Operations Policy Department. January 28, 1994. Washington, D.C. -. 1994h. The World Bank Group: Learing From the Past, Embracing the Future. Washington, DC. 1994i. "The World Bank and Participation: Report of the Leaning Group on Participatory Development." Operations Policy Department. July 21, 1994. Washington, D.C. 1994j. World Development Report 1994. Oxford: Oxford University Press. World Bank and IMF. 1990. "Progress of Initiatives to Benefit Suo-Saharan Africa." Development Committee Paper No. 21. World Bank, Washington, D.C. - 58 - JOINT ISSUES PAPER: THE IMPACT OF THE URUGUAY ROUND ON THE DEVELOPING AND TRANSITION ECONOMIES (Prepared jointly by the staffs of the International Monetary Fund and the World Bank) 1. Issues for Discussion and Summary 1. Issues for discussion a. The preliminary assessment of the economic impact of the Uruguay Round (UR) agreement points to significant benefits for developing countries especially if appropriate policies are adopted; but there could also be transitional costs stemming from higher food import prices and the erosion of preferences. Ministers may wish to comment on the net benefits of the agreement for developing countries. b. Existing facilities in the World Bank and the IMF appear adequate to address the policy adjustment and financing needs which may arise in the transitional phase. This would be supplemented by policy advice and technical assistance aimed at helping countries adapt to the post-UR enviromnent. Ministers may wish to explore ways in which the World Bank and the IMF in cooperation with the WTO can assist develoRing countries to adjust to the effects of the agreement and alig,n their policies to benefit from the opportunities it offers. C. On post-Uruguay Round issues of importance for developing countries, the paper cautions that concerns about the environment and labor standards should not become a pretext for increased protectionism. Other key areas in which negotiations may be taken up or continued include trade in services, investment issues, competition policy, and regionalism. Ministers may wish to give their assessment of the main post-Uruguay Round concerns for developingm countries, and the ways in which these concerns might be addressed. 2. SuMnr This paper makes a preliminary, qualitative assessment of selected aspects of the UR agreement of particular interest to developing economies and economies in transition. 1/ It also considers the roles of the Worla Bank and the IMF in assisting these countries to manage the transition to the post- UR trading system. Major features of recent trade policy developments in developing and transition economies have been these countries' unilateral liberalizations of their trade systems, and the extent to which they have taken other steps to improve their ability to compete in international markets and to integrate themselves more fully in the multilateral trading system. The successful conclusion of the UR will support these measures through increased market access, the integration of new and sensitive areas into the multilateral system, and strengthened rules and institutiorns. 1/ Issues raised by accession of new members to GATTlWTO which are especially important for transition economies desiring to become members are not dealt with in this paper. - 59 - Existing estimates of the impact of the UR on developing countries point to substantial potential benefits, particularly to those countries which make the macroeconomic and structural policy changes that would position them to exFloit the new opportunities. However, developing countries have expressed a number of concems about certain aspects of the UR; for example, what they perceive to be inadequate market access in the agricultural sector, too slow liberalization in the textiles sector, and insufficient tightening of rules on safeguards. They have also raised the possibility that b'gher food import prices and the erosion of tariff preferences could adversely affect certain countries. Pre'liminary estimates suggest that the impact of higher food import prices and the loss of preferences is lii-ely to be small, and for the great majority of developing countries, would be offset by the positive effects of the reduction in most-favored-nation (MFN) tariffs. It cannot be ruled out, howvever, that a number of countries could suffer mild adverse consequences as a result of the UR. This prospect will be addressed by the Bank and the Fund on a case-by-case basis in the context of ongoing policy dialogue and comprehensive adjustment programs. At this juncture, existing facilities in the Bank and Fund appear appropriate to address external financing and policy adjustment needs arising from the implementation of the UR. Collaboration with the GATT is undertaken on both formal and infcrmal levels. For example, the Fund participates formally in the consultations of the GATT Committee on Balance of Payments Restrictions. Infornal staff-level collaboration has worked well in the past and is likely to intensify in the future. Formal mechanisms of collaboration with the WTO will evolve as that organization becomes established, and should build oni existing forms of cooperation. II. Recent Trade Developments In 1990-93, the annual average rate of growth in export volumes of developing countries was lower than in the preceding four-year period (7.8 percent, compared with 9.7 percent in 1986-89) partly because of slower growth in industrial countries; nevertheless, it outpaced by far the rate of export growth in industrial countries (3.2 percent). Most of this growth reflected the performance of the manufacturing sector, and the regions experiencing the fastest rates of export growth were Asia and the Western Hemisphere. Trade among the developing countries in these regions increased particularly rapidly. Overall export growth in sub-Saharan Africa was negligible, although export performance imnroved for some countries undertaking wide-ranging economic reforms. Reflecting this strong growth in the aggregate, the share of exports from developing countries in total world exports rose from 26 percent in 1990 to 31 percent in 1993. The strong growth in trade was importantly associated with autonomous trade liberalization, often as part of comprehensive Bank/Fund supported programs of macroeconomic and structural reform. 1/ These reforms were associated with increased capital flows, particularly to Asia and Latin America, and helped boost productivity, exports, and growth. Net direct investment flows to developing countries more than doubled between 1990 and 1993.2/ Unilateral trade reforms were also a feature 1/ For a review of experiences of trade reform under trade sector adjustment loans by the World Bank see V. Thomas, 3. Nash, and others: Best Practices in Trade Policy Reform, Oxford, Oxford University Press, 1991; and M. Michaely, D. Papageourgiou, and A. Choksi (eds): Economic Liberalization in Developing Countries, Oxford, Basil Blackwell, 1991. Trade reform in the context of Fund-supported adjustment programs in 1990-93 was reviewed in Comprehensive Trade Paper, Sup. 2, SM/941192, July 20, 1994. 2/ See IMF: World Economic Outlook, May 1994. - 60 - in many transition economies in Central and Eastem Europe, the former Soviet Union, and Asia following the breakup of the Council for Mutual Economic Assistance in 1990-91. A key feature of all these reformns was the very significant progress in removing quantitative restrictions (QRs), including quotas, licensing and foreign exchange allocation schemes. Progress in liberalizing tariff regimes has been less consistent, but still substantial. Despite episodes of slowdown and reversal of trade liberalization, stemming from fiscal and protectionist pressures and appreciation of real exchange rates, the overall direction and achievements of reform have been maintained in developing and transition economies, establishing, within these reforming countries, a good foundation for continued trade liberalization. During 1990-93 exports from developing countries continued to face tariff and nontariff barriers in industrial country markets. Tariff escalation and tariff peaks 1/ adversely affected "sensitive' sectors such as agriculture, textiles and clothing, and steel. Regarding nontariff barriers, UNCTAD Secretariat estimates indicate that these had adverse effects on exports of agricultural products (including sugar), seafood, textiles and clothing, steel, footwear, and consumer electronics. Also, the use of antidumping and countervailing measures initiated by industrial and developing countries against developing countries' exports intensified, with the number of these actions initiated rising from 67 in 1988/89 to 136 in 1991/92. 2/ III Overall Assessment of the Urueuav Round Results Developing and transition economies would gain from the UR agreement through increased access to export markets, strengthened rules providing greater security of market access, and more efficient use of resources. To date there have been several preliminary assessments of the qualitative and quantitative impact of the UR on global incomes, and those of developing countries. 3/ These estimates point to a permanent increase in global income (in constant 1992 dollars) from full implementation of the agreement of between $212-S274 billion (equivalent to about 1 percent of world GDP in 1992) of which $80 billion a year would accrue to developing countries (about 1.7 percent of their GDP in 1992). 4/ Taking into account the dynamic effects, the total gains are likely to be substantially higher. 1/ Tariff escalation occurs when more processed products face higher tariffs than do raw materials. Tariff peaks are defined as tariffs in excess of 15 percent. 2/ See UNCTAD, Trade and Development Report, 1993. 3/ For a partial list of these studies see IMF: World Economic Outlook, May 1994. In addition, a paper titled The Uruguay Round: A Preliminary Assessment was presented by the World Bank as background information to the Development Commiittee meeting held in Washington D.C on April 26, 1994; and a report, Conclusion of the Uruguam Round - An Agreed Final Act (SM194/56) was issued for the information of the Executive Board of the Fund on March 1, 1994. This subject was discussed by the Fund's Executive Board on August 24, 1994, based on the Comprehensive Trade Paper (SM/94/192 and Supplements 1, 2, and 3). 4/ See Ian Goldin, Odin Knudsen and Dominique van der Mensbrugghe: Trade Liberalization: Global Economic Implications, OECD Development Center, Paris; and World Bank, Washington D.C, 1993. This estimate might have overstated the static benefits of the Round because of optimistic assumptions (compared with the final results) about the extent of liberalization in the agricultural sector. -61- Over the coming months, studies by a number of international institutions of the Round's economic impact, based on details on the final outcome, should become available. These institutions include the GATT Secretariat; 1/ the World Bank, in connection with its conference on the UR scheduled for January 1995, and, together with the OECD Development Center, an update of their earlier (1993) study on the global economic implications nf the UR; the OECD, which will examine the impact of the UR on the agricultural sector; the UNCTAD Secretariat, for the fall 1994 meetings of the Trade and Development Board; the Arab League; and the OAU. The discussion below presents a largely qualitative assessment of the UR agreement which should be considered preliminary, pending release of the more detailed data. It focuses on those aspects of the agreement which are likely to be most significant for developing and transition economies. Liberalization of market access for most manufactured goods will be achieved within a five-year period. It is estimated by the GATT Secretariat that the import-weighted average bound industrial country tariff will decline from 6 percent to 3.6 percent; 2I the proportion of goods entering industrial country markets at zero duty is expected to rise from 20 to 43 percent; and increased tariff bindings have been undertaken, particularly by developing and East European countries. 3/ In addition, tariff escalation will generally be reduced, and "grey area" measures such as voluntary export restraints (VERs) and orderly marketing arrangements eliminated. 4/ The largest cuts in industrial country tariffs on manufactured goods (ranging from 40-70 percent) were made on those products on which tariff rates were already modest (notably tropical industrial, and natural resource-based products, including wood, paper, furniture, metals, and mineral products). More limited cuts were agreed for "sensitive" products (such as textiles and clothing, transport equipment, leather goods, footwear); these products also remained subject to tariff peaks and (albeit reduced) tariff escalation. The inclusion of agriculture and textiles in the UR will initiate a process of reducing distortions caused by domestic market supports, export subsidies and quotas. 5/ The agreed reforms in aculture are expected to benefit developing countries as a group through increased market access and higher export prices for such conmmodities as cereals, meat and dairy products, and sugar. In the textiles and clothing sector, quantitative restrictions such as those imposed under the Multifibre Agreement (MFA) are to be progressively liberalized over a ten-year period. However, liberalization 11 The GATT Secretariat is expected to present a paper to the October meeting of the Development Committee. 2/ To bind a tariff in the GAIT is to make a commitment not to raise the rate above the bound level without consulting and compensating trading partners. The decline in actual tariffs will be less than that in bound tariffs because some tariffs are levied at less than their bound rate. 31 Some developing countries (for example, Argentina, Brazil, Colombia, Jamaica, Uruguay) and many east European countries have raised the proportion of tariffs that are bound from relatively low levels to 100 percent. 4/ In 1992, nearly one-tenth of developing countries' exports to industrial countries was covered by grey area measures. Sectors most affected were fish and fish products, footwear, iron and steel, textiles and clothing, and agriculture. P. Low and A. Yeats: Nontariff Measures and Dweloping Countries, The World Bank, 1994, estimate that the average coverage ratio of all NTMs (mainly price controls, quotas, grey area measures) against developing country manufactred exports to industrial countries will fall from 19.5 percent to 5.1 percent after full implementation of the UR. 5/ Developing country concerns related to the impact of the UR in these two sectors are discussed in Section IV. - 62 - is heavily bacldoaded. With some lightly restricted products being integrated into the GATT first, the 49 percent of trade being liberalized in the tenth year may include most of the seriously restrictive quotas. The UR agreement also includes a framework for opening up the services sector to multilateral rules based on nondiscrimination and transparency, and also new rules on trade-related intellecual property rights (TRIPS) and on trade-related investment measures (TRIMs). In services developing countries increased their share of world trade from 11 percent to 15 percent between 1970 and 1992, and stand to benefit from further liberalization in this area. 1/ A significant number of developing countries (77) have already made specific commitments to open certain services sectors to access by other countries, while transition economies who are members of GATT have made commitments in almost all services sectors. Although in most cases these commitments bind existing access rather than provide increased access, th; agreement extends the scope of multilateral rules to the services sector and provides for continuing negotiations for liberalizatior if trade in services. Areas which will be of most interest to developing and transition economies will likely be maritime transport, financial services, and the movement of people. As regards intellectual propertv (IP), increased protection of IP rights in developing countries may induce larger inflows of foreign investment because, by reducing the risk of piracy, it increases the expected return on such flows. Concems that patent protection would result in higher prices for pharmaceutical products in developing countries should be alleviated by the fact that the fill impact of the TRIPS agreement will not be felt until 2015. Also, affected countries will retain the right to remedial measures in the event that the patent owner charges very high prices. The agreement on trade-related investment measures (TRIMS) limits the use of local content and trade balancing requirements on foreign investment and should help encourage foreign direct investment flows to developing countries. For developing and transition economies, the clarification and strengthening of rules on safeguards, antidumping, subsidies and countervailing measures, and dispute settlement are among the most significant achievements of the UR agreement. The most important are probably (a) on safeguards. the elimination of grey area measures such as voluntary export restraints in industria countries within four years, (b) greater clarity in defining subsidies that are prohibited or against which countervailing or other action can be taken, and (c) strengthened dispute settlement arrangements, including through removing the ability of parties to a dispute to veto the adoption of the conclusions of a panel. However, despite these improvements, GATTJWTO rules still permit latitude on the part of contracting parties in the application of safeguard measures, antidumping, and certain subsidies. On safeguards, for example, in certain circumstances (such as in the Textiles Agreement) measures may be taken against specific exporting countries in cases where exports increase disproportionately. To avoid undermining the benefits of the Round, countries will need to exercise restraint in the use of these measures. 1/ Some developing countries are major exporters of services. This covers not only the trditional sectors of tourism and labor services, but also financial, constuction, film and other video, and consulting and professional services. - 63 - IV. Selected Areas of the Uruguav Round AgrMement of Particular Interest to Developing Countries 1. Agriculture As noted above, reforms to reduce agricultural protection would reduce world market distortions and improve market access. They could also lead to increases in world prices of previously subsidized agricultural products, including cereals, meat and dairy products, and sugar. These changes would benefit developing and transition econornies which are important exporters of these products-such as members of the Cairns Group, .1/ Bulgaria, and Poland. Some studies have concluded that prices of some previously subsidized products could rise by 4 to 10 percent in total when the full effects of the Round are felt. 2/ However, this could be an overestimate because these calculations were based on the text of the Draft Final Act of the UR, or other, more general assumptions, which imply a higher degree of liberalization in industrial countries than was finally agreed. A number of developing countries which are net imnporters of food, including some African and Mediterranean countries, have expressed concern about possible higher food prices. Provided that higher prices are passed on to farmers, any such effect will be mitigated by the stimulus to agricultural production, both in the net importers' domestic agricultural sectors and in developing countries which are net exporters of previously protected commodities. Nevertheless, if world food prices do rise. overall individual countries that remain net importers of commercial food will face increased costs. 3/ Such terms of trade losses, however, are most likely to be offset by gains in other areas of the Round such as from increased market access for manufactured goods, including textiles and clothing. Moreover, to the extent that higher food prices occur as a result of the UR, they will be distributed over a six-year implementation period, allowing time for adjustment. 2. Textiles and clothing The UR agreement provisions to eliminate quotas both under the MFA and similar arrangements will provide significant benefits for those countries whose textile and clothing sectors are internationally competitive. According to preliminary GATT estimates, 4/ developing country exports to major OECD countries could increase by 82 percent for textiles and 93 percent for clothing over the 10-year imnplementation period. Another study estimates that the elimination of protection in Canada, the U.S and the EU could result in a gain of about $8 billion (in 1986 prices) for the 34 developing counitries included in the study. 5/ Most of the benefits will likely accrue to the more efficient producers, while those less efficient exporters whose exports depend on MFA quotas based on historical shares or who have preferential access to specific markets will need to restructure their industries, reduce costs, and improve quality in order to maintain sales in the post-UR period. The gradual phasing-in of the agreement over ten years will allow the less efficient producers time for needed 1/ Developing country members of the Cairns Group are Argentina, Brazil, Chile, Colombia, Fiji, Indonesia, Malaysia, the Philippines, Thailand, and Uruguay. Z/ See, for example, A. Brandio and W. Martin: Implications of Agricultural Trade Liberalization for the Developing Countries, Agricultural Economics, Vol. 8, 1993. 31 The quantitative impact of the UR agreement on the terms of trade will be assessed in the forthcoming analyses by various institutions, noted above. 41 See GATT Secretariat, An Analysis of the Proposed Umguay Round Agreement. with Particular Enphasis on Aspects of Interest to Develping Countries, 1993. 5/ See I. Trela and J. Whalley: Global Effects of Developed County Trade Restrictions on Textiles and Apparel, The Economic Joumal, December 1990. -64- restructuring. Developing countries' concerns with the liberalization in this sector relate mainly to (a) the heavily-backloaded schedule for eliminating all MFA quotas--with 49 percent of textile trade remaining under the MFA until the final year of the phaseout period, 2005, (b) the continuation of high tariffs and tariff peaks, and (c) that under "transitional safeguards", exports of products not currently subject to quotas could be restricted, and quotas applied selectively to particular exporters. 3. Preferences Some developing countries are concerned that reductions in MFN tariffs will erode the margins of preference that they receive in industrial countries through schemes such as the Generalized System of Preferences, the Lome Convention and the Mediterranean agreements. Any resulting losses of rents or exports to these countries will need to be addressed on a country-by-country basis. For those countries whose industrial exports are heavily dependent on preferential access (including certain Mediterranean and North African states) the impact of an erosion of preferences (for example, under the Mediterranean Agreements) could be significant. 1l For other developing countries, preliminary analysis suggests that net losses from preference erosion are likely to be modest. The largest beneficiaries from the General System of Preferences (GSP) schemes have generally been the group of more advanced developing countries in Asia and Latin America for whom reduced preferences are expected to be offset by MFN tariff cuts, and liberalization in other areas of the UR agreement, including textiles and clothing. In any event, a number of these more advanced developing countries face the prospects of being graduated out of GSP schemes because of their rising income levels. For most preference receiving developing countries in Africa, the Caribbean and the Pacific, initial estimates indicate that the impact of preference erosion is unlikely to be large. This is because their margins of preference are relatively small which, in turn, is because their exports, comprising mainly tropical agricultural and other primary goods, typically face low MFN tariffs. 2/ It should also be noted that for all groups of countries, the full impact of the erosion of preferences will be spread over a considerable period of time, five years for industrial products, and six years for agricultural products. 3/ Donor assistance and support from the Bank and Fund, in the form of sectoral and comprehensive structural adjustment programs, will be helpful in reducing countries' dependence on preferences, and placing them on a path to more sustainable strategies. 1/ The Mediterranean Agreements are currently being renegotiated. Agricultural preferences are generally less significant. 2/ See A. Yeats: What are the OECD Preferences Worth to Sub-Saharan Africa, mnimeo, OECD, Paris, 1993. 3/ Furthermore, levels of access in agriculture can continue to be preserved under the {JR. The requirement in the lR agreement on agriculture to guarantee a certain amount of imports as a share of domestic consumption can be met by providing market access to preference-receiving countries in line with their current market shares. It appears that this option will be adopted by many preference-giving countries. -65 - 4. Integration into the multilateral trade system The UR negotiations provided the opportunity for additional steps by developing countries toward greater integration into the multilateral trading system. This was evidenced by the higher degree of participation by developing countries in the UR compared with earlier Rounds, and in the fmnal agreement these countries greatly increased the extent to which their domestic protection will be subject to the discipline of tariff bindings. Developing countries agreed to raise the proportion of industrial product lines subject to bindings from 22 percent to 72 percent, while for agricultural products, the proportion was raised from 18 percent to 100 percent. 1/ This acceptance of GATT discipline by developing countries reinforces their extensive unilateral liberalization even though many bindings are above currently applied rates. The greater participation has enabled developing countries to more effectively influence the negotiations in order to increase their benefits. The process of fuller integration will be further strengthened through the forthcoming accession of several developing and transition economies to the GATT/WTO. 2/ 5. Post-Uruguav Round Issues The list of post-UR issues of interest to developing countries is extensive. It includes further liberalization in agriculture and the reduction of tariff peaks on textiles and clothing products. Further, negotiations are expected on liberalization in the services sectors (including maritime transport and financial services, and the movement of people). The interfaces between trade and the enviromnent and social/labor standards have imnplications for developing countries. While acknowledging the desirability of improving global standards, many developing and developed countries consider the speed and extent with which these standards can be improved to depend to a large extent on progress in achieving sustainable development. In discussions on these two areas in the post-UR period, 3/ key issues for developing countries would be to stress that the use of trade restrictions for achieving environmental and labor standards is not an optimal strategy (because trade restrictions do not directly address the issues at stake), and to ensure that concerns about these standards do not become a pretext 'or increased protectionism. V. Imlications for the World Bank and the IMF A key role for the World Bank and the IMF in the post-UR period will be to assist developing countries to take advantage of new market opportunities, particularly through encouraging the macroeconomic and complementary structural policy reforms needed to maximize these benefits. In I/ The extent to which developing countries chose to use bindings to effect and lock in a significant degree of liberalization varied considerably. Some countries (for example, Bangladesh, Brazil, and Colombia) have introduced "ceiling" tariff bindings at levels far above the levels of protection prevailing during the 1986-88 benchmark period for tariffication. A few others (such as Chile) by contrast, have offered bindings at or below the rates of protection applying in the base period, and committed to further reductions in protection on some commodities. In this way, countries like Chile have used the GATT process to consolidate and to lock-in unilateral liberalization. 2/ As at July 1994, the process of accession to the GATT had been initiated for eleven developing countries together with Bulgaria, and nine FSU countries, including Russia. 3/ A new Committee on Trade and the Environment will be established under the WTO, with a mandate to examine a wide range of issues and to report to the first biennial meeting of the WTO. - 66 - addition, the Bank and Fund may be called on to provide financial support to affected individual countries to help them manage the transition to the post-UR period in an orderly maimer, or, in the case of the Bank, to help countries strengthen particular sectors, such as agriculture or textiles, so that market opportunities presented by the UR agreement could be fully realized. At this juncture, existing facilities in the Bank and the Fund appear adequate to address policy adjustments and financing needs which might be associated with the implementatiun of the UR agreement. Further analysis of the implications of the Round for developing countries is being undertaken in both the Bank and the Fund, with a number of studies being presented at a Bank conference in January 1995. 1. The World Bank The World Bank can assist developing countries to adjust to the post-UR environment through lending and policy advice. Investment lending might be used to support infrastructure and human resource development and technical assistance to respond to the post-Uruguay Round enviromnent. Together with policy lending and IFC investments in the private sector this would assist developing countries to take advantage of the opportunities created by the UR agreement. Policy advice to assist countries in reformulating development strategies in the post-UR environment may be more important than Bank lending. Adjustment lending can assist countries in dealing with possible transitional strains resulting from the implementation of the Uruguay Round. General structural adjustment lending might be used to allow the economy to undertake a wide range of policy reforms needed to adapt to the post-Uruguay Round environment. If the adjustment pressures, or opportunities, are concentrated in a particular sector, a Sector Adjustment Loan (SECAL) might be an appropriate instrument; for example, to increase agricultural output in response to new market opportunities. Hybrid loans involving a mixture of investment and adjustment lending seem likely to be appropriate to the needs of countries wishing to implement more efficient policies in a particular sector, and to provide improved infrastructure to support its expansion. 2. The International Monetary Fund In its surveillance in the context of Article IV consultations, and in its financial assistance, the lMF provides policy advice to member countries on macroeconomic policies conducive to strengthening external positions and achieving sustainable growth. Where appropriate, and often in collaboration with World Bank, the IMF staff identify structural imnpediments to growth in developing countries, including trade policy impediments, and assist the authorities to design policies to remove these barriers. Regarding financial assistance, the IMF can provide support through its existing facilities to countries which encounter balance of payments difficulties and transitional costs as-'eiated with the implemnentation of the UR. Since the implementation periods for the UR agreements are long (with, for example, liberalization in the agricultural sector in industrial countries to be phased over six years) and the type of adjustment required in adversely affected countries likely to be of a structural nature, the Fund's Extended Fund Facility (EFF) or Enhanced Structural Adjustment Facility (ESAF) would seem to be particularly appropriate mechanisms for addressing such balance of payments difficulties. Both facilities have as a primary objective the removal of structural impediments to balance of payments viability and growth. The Fund's Compensatory and Contingency Financing Facility (CCFF) is designed to deal with the short run balance of payments difficulties associated with commodity market instabilities. The CCFF can play a role in dealing with instability during the transition phase but would not be - 67 - appropriate to tackle the structural changes in relative prices resulting from the phased reduction in agricultural subsidies under the UR agreement. 3. Collaboration with the GATT/WTO In their work in the area of trade policy, the IMF and the World Bank staff collaborate closely with the staff of the GATT in order to exchange views and information, aimed at ensuring that trade policy advice to member countries is consistent with their GATT obligations. This close informal collaboration supplements more formal mechanisms, such as the Fund's participation in the consultations of the GATT's Committee on Balance of Payments Restrictions. 1/ The UR agreement provides for cooperation between the WTO and the IMF and retains the primary role of the IMF in exchange rate matters. A Ministerial Declaration in the Final Act of the UR calls for the Director-General of the WTO "to review with the Managing Director of the International Monetary Fund and the President of the World Bank, the implications of the WTO's responsibilities for its cooperation with the Bretton Woods institutions, as well as the forms such cooperation might take, with a view to achieving greater coherence in global economic policy making." Consideration of the formns of future cooperation is still at a very preliminary stage, and will evolve as the WTO takes shape, aided by regular contact botl at staff and head of institution level. The agreement establishing the WTO itself does not specify any formal mechanism for collaboration. Future collaboration should build on existing mechanisms. Informal collaboration has worked well in the past, and is likely to intensify in future in view of the broader range of international transactions (including services and certain aspects of direct investment) to be monitored by the WTO. These topics are also of considerable interest to the Bank and the Fund, and will require consistency of policy, while avoiding duplication of effort. Intensified staff contacts could be facilitated through greater frequency of visits among the heads and the staff of the three institutions, more systematic sharing of information and views, and participation in joint studies on problems of common interest. This Joint Issues Paper was prepared by Naheed Kirmani, Michael A. Da Costa (Policy Development and Review Departmeint-IMF); L. Alan Winters, William J. Martin and Patrick Low (Intemational Trade Division of the International Economics Department-The World Bank) with the contributions of several staff members in the Fund and the Bank. 1/ The Fund's input helps this latter Committee to form a view on the appropriateness of trade restrictions for balance of payments purposes. - 68 - IMPROVING AID EFFECTIVENESS NOTE PREPARED FOR THE DEVELOPMENT COMMITTEE BY JAMES H. MICHEL, CHAIR, DEVELOPMENT ASSISTANCE COMMITTEE, ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT October 3, 1994 Introduction This brief note addresses the question of what constitutes effective aid, considers what might be done to make aid more effective, and describes some current efforts toward that end. Intended to complement the Secretariat's comprehensive paper on the same subject, it reflects the author's individual perspective as Chair of the OECD Development Assistance Committee and his observations and experience in managing and co-ordinating programmes of development co-operation. Aid is one of many instruments available to influence the evolution of human society toward sustainable development. It is focused on the poor countries where most people live in poverty, without access to adequate income to satisfy their basic needs. It is in these countries where a billion people go hungry every day. It is in these countries where the vast majority of almost 100 million new inhabitants are added to the world's population each year. It is in these countries where most of the world's biodiversity is to be -found, and is under intense pressure from burgeoning populations. And it is in these countries where frustration over a lack of opportunity and vulnerability to human and natural disasters is producing a growing volume of alienation, conflict, epidemic disease and migration. Sustainable economic and social development is not just an aspiration of people who live in poor countries. It is equally important to the inhabitants of the industrialised counties. The consequences of the growing disparity in living conditions and the absolute pressure on the earth's regenerative capacity threaten the quality of life in all countries. On the other hand, sustainable development opens up enormous new opportunities for international co-operation, including economic co-operation, that is mutually beneficial to developing and industrialised countries.. Effective Aid and Effective Development When we speak of effective aid we should be thinking of aid that is effective in contributing to sustainable development. If development does not occur it makes no difference how well the projects are designed or managed or how impressive the statistics of roads paved, civil servants trained or institutions reformed. The test by which we measure the effectiveness of aid should be whether development was facilitated because of it. - 69 - If the standard for evaluating the effectiveness of aid is whether it has a positive impact on *sustainable development", it is important to explain what is meant by that term. There are as many definitions of sustainable development as there are authors on the subject. In this note, the concept envisions a continued process of both growth and increased participation that can be maintained even after the aid has come to an end. Capacity to continue such a process embraces considerations of social, economic and political as well as environmental sustainability. At the national level that means a society that is capable of continuing along a path in which there is -- (1) diminished poverty and increased access by people to the means to satisfy their basic needs and improve their standard of living, including access to quality health, family planning, education and other social services that will help enable them to realise their full potential; and (2) greater opportunity by people to participate in the political and economic processes and decisions that affect them and to pursue their interests with confidence that their rights will be respected and protected. At a global level, sustainable development should be characterised by increased integration of developing countries into the global economy. It should contribute to an expanded range of shared interests and values that will diminish risks of conflict and facilitate co-operation among developing and industrialised countries in addressing global issues of common concern, including the interrelated issues of environmental degradation, high rates of population growth, epidemic disease, conflict, and international migration. There is a broad international consensus that sustainable development is most likely to occur in an environment of political and economic stability that is sustained by good governance, popular participation, investing in people, reliance on market forces, concern for the environment and a vigorous private sector. This consensus can be described in various ways, and there is room for debate about the relative importance of various elements in particular cases. But the consensus is genuine. There is also broad agreement that nations embark on a path toward sustainable development primarily for internal reasons. Development tends to occur when the elements within a society come to support agreed strategies that are reinforced by dynamic interaction at all levels among a committed political leadership, competent public and private institutions, and a public who demand performance and have the power to hold their government leaders and institutions accountable. In these circumstances external actors can help to strengthen capacity, augment resources, cushion the shocks of transition, and accelerate the realisation of benefits. No amount of external political will, determination or resources can serve as a substitute for local initiative to produce sustainable development. A third consideration on which there is broad agreement is that sustainable development takes a long time. The process is characterised by - lags between the taking of policy decisions, the implementation of those - 70 - decisions and the appearance of results. These lags often lead to confusion and debate about cause and effect relationships between policies, actions and consequences. Moreover, truly sustainable development means human development and broad participation, including learning from experience. Wnile dramatic changes have become evident in many developing countries in a few decades, comparable to evolutions that required much longer in Europe and North America, we are still dealing with periods that exceed the normal political attention span. Sustaining momentum for development co-operation efforts over several decades is a major challenge. Effective aid must take into account these three factors: -- the importance of stability and a sound policy environment; -- the need for local ownership, reinforced by dynamic interaction among committed political leaders, competent institutions and informed public opinion; and -- the long-term nature of the development process. This creates something of a paradox for the external donor. In many poor aid-dependent countries political and economic instability perpetuate uncertainty and inhibit initiative. Often, weak or corrupt institutions are incapable of maintaining a sound policy environment. In a vicious circle, the people don't expect much of those weak institutions and, therefore, don't demand reform and improvement. Political leaders, not being under strong public pressure for institutional reform, give this low priority. Without attention and the investment of resources from political leaders, the country's institutions remain incapable of performing well. If the donor does nothing while waiting for a propitious environment and local demand to manifest themselves, the result may be continuing deterioration which will further complicate later development efforts. On the other hand, if the donor attempts to be prescriptive in advancing projects and activities for which there is insufficient local demand or capacity the results will probably be equally futile. Moreover, the limited prospects for successful donor-driven development efforts mean that those efforts are unlikely to produce credible evidence of progress that would help to maintain long-term support in the donor country. Breakizg Out of the Vicious Circle All of this suggests that development co-operation should begin with supportive activities that foster the degree of trust, sense of shared interests and confidence within the developing country that are necessary to the design and implementation of locally-owned development strategies. The specific activities, of course, would vary considerably from country to country and from region to region, but would concentrate on building local capacity and demand. Priority areas for concentration of efforts and resources should be chosen with due regard for those factors mentioned above as important for success -- stability, good governance, popular participation, investing in people, reliance on market forces, concern for the environment and a vigorous . private sector. The programme should evolve as the parties gain confidence and - 71 - as the recipients (both governmental and non-governmental) gain in capacity to take more and more of the lead responsibility in a genuine partnership. Over time, sound economic and social policies implemented through competent institutions and broad participation should enable the recipient country to build domestic savings and attract private capital in international markets, lessening aid dependence and permitting a further evolution in the development co-operation relationship. The international community has learned that, from the developing country side, development is more than aid projects. The recipient country's economic and social policy environment and the political dynamics which produce that environment are crucial factors. In the same way, we are coming to recognise the importance of coherence in donor policies, both at the national level and between donors. An integrated approach to encouraging the conditions conducive to sustainable development is important. The multiplicity of each donor's policies in its relations with developing countries and multiplicity of policies among donors are central to the consideration of aid effectiveness. Examples of internal inconsistencies within donor governments are well known -- the government that reduces development aid to countries that spend large amounts on arms, but also finances arms sales to such countries; the government that assists in strengthening capacity to produce goods for export and then erects barriers to its own country's importation of those goods; the government that assists small farmers to increase productivity and then sells competing products at subsidised prices in the same markets. These kinds of inconsistencies cannot help but to undermine the effectiveness of aid. They result from policies not under the control of aid agencies and greater coherence will require higher priority for sustainable development in inter-agency deliberations. Perhaps the Development Committee, with the strong representation of Finance Ministers within its ranks, could help to diminish these kinds of inconsistencies. The other kind of inconsistency might be described as a weakness of international co-ordination. When the aid recipient has not yet acquired the capacity to take the lead in managing development co-operation relationships there is a high risk of chaos. Each donor is free to offer advice, establish conditions of performance, insist on compliance with its own accounting procedures, and otherwise make demands of usually weak host-country institutions without regard for the simultaneous actions of other donors in the same country. The recipient country tends to accept these burdens, even though they impose major distractions on limited management resources and institutional capacity. This kind of inconsistency is more within the control of the aid agencies and they bear much responsibility for diminishing it. Addressing the individual and collective inconsistencies of donors would be facilitated more than anything by increased recognition of the central importance of development for the security and well being of the people of the industrialised countries. Aid cannot be treated in isolation from issues of debt, trade and investment, and indeed the entire panoply of global issues -- from the environment to AIDS to conflict resolution to mliration. Aid agencies need to accept that their work is relevant to that of other ministries and other ministries need to elevate the importance of development objectives and development co-operation. We are seeing more integration of aid efforts into policy decisions in the international responses to complex emergencies. We - 72 - need to extend that integration into an international strategy of crisis prevention and sustainable development if relations with developing countries are to be maintained on a more constructive basis than the present emphasis on crisis management. Human Security as a Unifying Rationale The citizens of the industrialised countries have repeatedly demonstrated their humanitarian compassion and their concern for the disadvantaged. The challenge now is to move beyond those motivations to a new vision of a mutually beneficial development partnership. Of course, citizens and political leaders in the industrialised countries should care about greater equity and reduced suffering for other human beings. But they should also care about sustainable development because without it many interests of the industrialised countries will suffer and their own people will be less secure. Human security should be a uniting objective that joins governments and peoples in support of sustainable development. The people of the industrialised countries are concerned about preserving the environment, limiting population growth, controlling the production and transit of drugs, and discouraging conflict that produces suffering and mass migration. Sustainable development -- development that diminishes poverty, improves access to the means to satisfy basic needs and increases opportunities to participate in economic and political processes and decisions -- is a direct and effective response to these concerns. Greater human security in the developing world thus translates directly into greater human security in the industrialised world as well. The shared objective of hlman security would thus seem the most powerful argument in favour of increased recognition of the central importance of sustainable development on the international agenda. Moreover, concentrating on human security as the predominate shared objective seems most likely to shape development co-operation in ways that will command greater prominence in international relations, broader popular support and better results. Development co-operation that is focused on human security can be expected to be people-centered. Efforts that are people-centered, in turn, tend to be more credible and popular. What we have learned over several decades of progress and setbacks about the importance of popular participation in development suggests that people-centered development efforts are also likely to be the most effective. Current Efforts It is satisfying to be able to report that some useful work is underway under the auspices of the Development Assistance Committee of the OECD to improve the effectiveness of aid. The DAC has developed an extraordinary body of work in the form of the "Principles for Effective Aid." These DAC Principles, addressing such diverse themes as aid co-ordination, technical co-operation, environmental impact assessment, women in development, and evaluation, provide authoritative policy. orientations and operational guidance for Member countries. Each set of - 73 - Principles is the result of extensive staff work, deliberations by experts from Member countries and (in recent years) from developing countries as well, consultations with multildteral organisations (especially the IMF, World Bank and UNDP), and review and approval by senior policy officials of the DAC Members. Published in 1992 as the "Development Assistance Manual", the Principles have since been augmented by the adoption of two sets of orientations of fundamental importance. These are the Orientations on Participatory Development and Good Governance, adopted in December 1993, and the Orientations on Co-operation in Support of Private Sector Development, adopted in June 1994. The emphasis of work in the DAC is increasingly on outcomes -- what is happening in individual countries and regions, what impact programmes of international co-operation are having, and how international prcgrammes might help achieve more positive development outcomes. With this sharpened focus, the DAC Principles are taking on increased prominence in the regular peer reviews of the performance of Member programmes. The publication of these peer reviews, a practice initiated this year, should provide an additional incentive for greater coherence and consistency. The Principles are also being accepted as a point of reference for collaboration with multilateral organisations to further-aid efficiency and effectiveness. An example is the use of the DAC Principles on Technical Co-operation by the informal network that was established this year, with representation from several DAC Members as well as from the World Bank and UNDP, to devise and recommend ways to improve the management of this important development resource. The DAC is now disseminating the Principles to developing countries as indications of the best current thinking and practice of DAC Members. A workshop organised early this year in co-operation with the Government of Turkey used the DAC Principles as a basic instructional material for engaging policy leaders from the Central Asian republics on development issues. This kind of activity, which we intend to continue, has the combined advantages of helping the participating developing countries to manage development co-operation activities and also reminding the participating donors of standards to which they had agreed. In addition, the DAC is working closely with multilateral donors and international experts on the study of indicators of development needs and progress. This work is expected ultimately to enable us to provide Member countries with more specific information that they may find useful in making decisions about the volume, allocation and content of their aid programmes. And we are looking to initiate a pilot activity in 1995 that will augment our traditional donor-based aid reviews with an examination of the impact of all donors in selected developing countries. These studies should prove instructive as to our understanding of the key issues of donor coherence and co-ordination. One broader current effort within the OECD should also be mentioned. That is the Secretary-General's linkages study. Undertaken by the Development Centre under the personal direction of Deputy Secretary-General Makoto Taniguchi, this exploratory effort examines the implications of linkages with _ OECD Members for sustainable development. The study explores a broad range of - 74 - linkages for fourteen major developing countries* and includes contributions from many directorates and offices within the OECD Secretariat. It is focused on results and views development as an integrated process. These features should make it an important resource in efforts to shape effective development co-operation strategies and to broaden international understanding of the links between sustainable development and human security. Conclusion Aid can be effective for advancing sustainable development. In order to fulfil that role, it must be integrated into the entire range of issues and instruments that enter into relations between industrialised and developing countries. It must be used, within the framework of coherent donor policies, to encourage and support locally-owned participatory development efforts. Most important of all, the objective of sustainable development must be given a more central and prominent place on the international agenda. Current efforts to increase the effectiveness of aid need to be continued and expanded so that the relevance of sustainable development and increased human security to the interests of the industrialised countries and their people will become more broadly apparent, and so that the potential contribution of aid within a broader framework of development co-operation will be better understood. None of this is easy. But none of it is impossible. The question then is whether it is worth the effort. As we commemorate the fiftieth anniversary of the Bretton Woods institutions we can imagine what the world would have been like without the development progress that we have witnessed since those dark days of World War II. With the same kind of vision in the far less dark days of 1994 we can act to consolidate progress and preserve opportunities for future generations. Effective aid can be a useful tool in this work. It is up to all of us to make it so. * The countries studied are Algeria, Bangladesh, China, Colombia, Egypt, India, Indonesia, Iran, Nigeria, Pakistan, Peru, Philippines, Saudi Arabia, and Venezuela. - 75 - OLTCONIE OF THE UrRUGUAY ROLND FOR DEVELOPING COUNTRIES' Paper prepared bv the GATT Secretariat for the Meeting of the Development Committee. 3 October 1994 L Overview For all small and medium sized crading nations, conducting trade according to multilaterally agreed concepts, principles and rules rather than resort to bilateral negotiating power is of paramount importance. For developing countries, one of the most important outcomes of the Uruguay Round is the substantial strengthening of the rules based multilateral trading system and its extension to new areas ofactivity. Existing disciplines have beentightened in a numberof areas including those involving the use of subsidies, countervailing and anti-dumping duties and safeguard measures. This will have important implications for developing countries. For example, 'grey area measures" such as voluntary export restraints will be eliminated and there will be tighter disciplines on the use of anti-dumping measures. D)eveloping countries have frequenrly found themselves on the receiving end of such measures. The extension of the rules of the multilateral trading system to new areas will serve to further increase the importance of the rules-based system for developing countries. Tightened disciplines covering a wider area of international commerce are only effective, however, if there exists an efficient and equitable means to setle disputes in the event of a breach of obligations. There will be considerable improvements in the disputes settlement mechanism as a result of the Uruguay Round. The General Agreement on Trade on Services (GATS) extends the rules based multilateral trading system to the wide area of services. Similar advantages should accrue to developing countries from the operation of a rules based system in services as has been the case for merchandise trade. While many developing countries are not presentdy well placed to take advantage of some of the improved markcet access opportunities which the Agreement will provide, they will be in a position to do so in the future as their domestic supply capacity increases. However, a number of areas of export interest to developing countries (for example the movement of natural persons) have already been committed to liberalization by major importing countries or are the subject of ongoing negotiations to improve market access. Further, the GATS is unique in that it permits Member countries. including developing countries, to negotiate the conditions under which foreign services suppliers may establish in their countries. These terms and conditions are bound in the schedules of the Members concerned. The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) offers potential benefits for developing countries by creatng a framework which is conducive to technology transfer and foreign direct investment. Its main disciplines include non-discrimination (i.e. most-favoured-nation and national treatment) and the equal application by all Members of minimum standards of protection in relation to all categories of intellectual property rights. There have been important results for developing countries with the liberalization of trade and the improvement in their access to foreign markets. In spite of the sensitivities rhat exist in a number of areas of trade such as textiles, clothing, leather products and other areas where developing countries already hold a competitive advange, there have nevertheless been significant reductions in tariffs. 'This study is part of the continuing efforts by the GATT Secreariat to descnbe the oumome of the Uruguay Round for the GATT contracting paries. A more comprehensive assessment of the results of the Uruguay Round is forthcoming. This study has been prepared under tde sole responsibility of the GATT Secremriat. The analysis and conclusions contained herein should not be attributed to the contacing parties of GATT, individually or colaecively. - 76 - Further. in textiles and clothing. for example. the proposed phase-out of the Multi-Fibre Arrangement is of even greater significance than the reduction in tariffs; the tariff equivalent of export restraint arrangements is in most cases higher than the tariff itself. In the agricultural sector, there are a number of products where developing countries will be the primary beneficiaries of the reduction of both border- protection and the value and quantity of subsidized exports. Similarly. the increase in minimum access to agricultural markets that is assured through the Uruguay Round will provide developing countries with improved prospects for export earnings. Evidence on the relationship between an outward orienlation in government policies and growth points to the fact that if trade is to be a positive stimulus to achieving sustainablc development in Ehe corning decade, the conditions affecting supply in developing countries, including competitiveness at the domestic level play a critical role. Consequently, many developing countries have undertaken autonomous trade liberalization as part of wider programnnes of econormic reform and chosen to bind their recent trade liberalization. In this respect, the Uruguay Round has proven particularly timely, as these countries have been able to parricipate fully in the Round and actively promote and consolidate their owneconomic reforms. Adoption by developing countries of binding commitments in the Uruguay Round is a manifestation of their contribution to.operating a transparent. open and predictable regime. This represents an important change in the relationship for many developing countries with the multilateral trading system. As a result of the Uruguay Round, developing countries will in general assume the same disciplines as their developed country trading parmers, but in some instances benefit from greater flexibility in their implementation. Under certain circumstances developing countries can, for example, use quantiative restrictions and export subsidies that are not available for their developed counterparts. Further, they have been required to bind fewer tariffs than the developed countries, open fewer service sectors and have a longer time-frame for the implementation of their TRIPS obligations. In any nmltilateral trade negotiadons - in particular those as complex as the Uruguay Round negotiations - not all countries can expect to achieve what they consider to be positive results in each area of interest to them. However, with broadbased and significant reductions in border restrictions, all countries benefit positively even if there are, on occasions, temporary negative side effects. While the results of the Uruguay Round offer benefits for all developing countries, various aspects have been identified as having potential negative implications. In the main body of this document, these concerns are addressed with a view to providing a balanced view of the outcome of the negotiations for developing countries. The vast results of the Uruguay Round require an institution to facilitate the implementation, administration, operation and furthering of the objectives of the Agreement Establishing the World Trade Organization (WTO). Thus, a common institutional framework encompassing the GATT as modified by the Uruguay Round (i.e. the GATT 1994). alongside all Agreements and Arrangements concluded under GATT auspices and other Agreemeats and Ministerial Decisions resulting from the Uruguay Round is envisaged. This will serve as a vehicle to ensuLe a "single undertaking approach' to the results of the Uruguay Round: membership in the WTO will automatically entail accepting all the results of the Uruguay Round without exception. One of the functions of the WTO will be to cooperate with the International Monetary Fund, the International Bank for Reconstruction and Development and its affiliated agencies. In this respect, a Ministerial Declaration emanating from the Uruguay Round on the contribution of the WTO to achieving greater coherence in global econorric policy-making is important. It sets out concepts and - 77 - proposals with respect to increasing the contribution of the WTO to achieving greater coherence in global economic policy-making. The Declaracion recognizes the need for an adequate and timely flow of concessional and non-concessional financial and real investment resources to developing country Members, and for further efforts to address debt problems, to help ensure economic growth and development. There is also a recognition that trade liberalization forms an increasingly important componemn in the success of the adjustment programmes that many Members are undertaking, and that this often involves sigrnificant transitional social costs. The Director-General of the WTO is called upon to review, with his opposite numbers in the World Bank and the International M4onetary Fund, the implications of the WTO's future responsibilities for its cooperation with the Bretton Woods instimutions. H. Principal elements of the Uruguay Round Agreement The World Trade Organization (WTO) is a single institutional framework encompassing the GATT and all the agreements and legal instruments negotiated in the Uruguay Round: the General Agreement on Tariffs and TLade or.GATT 1994 and other agreements covering trade in goods; the General Agreement on Trade in Services or GATS; the Agreement on Trade-Related Aspects of Intellectual Property Protection or TRIPs; the Understanding on the Dispute Settlement System (DSU,; and the Trade Policy Review Mechanism (TPRM). In adoiuon, there are a number of Ministerial Decisions and Declarations that supplement the agreements reached. The WTO will be headed by a Ministerial Conference meeting at least once every two years. A General Council will be established to oversee the operation of the WTO between meetings of the Ministerial Conference, including acting as a Dispute Settlement Body and administering the Trade Policy Review Mechanism. The General Council will have threeprincipal subsidiary bodies: the Goods Comucil, the Services Council and the TRIPs Council. Unless otherwise provided for, decisions will be taken by consensus, continMing the GATT practice. While the WTO is not a successor organization to the GATT, contracting parties to the GATT 1947 will automatically become Members of the WTO if they assume the obligations provided for in the agreements on goods, services and intellectual property protection, and submit schedules of concessions covering wrade in goods (including both market access and subsidy commitments in the case of agricultural products) and services. This ensures a 'single undertaking' approach to the results of the Uruguay Round, since membership in the WTO will entail accepting all the results of the Round withaOit exception.2 The WTO will also provide a fonun for future trade negotiations. The special starus of developing countnies in the GATT will continue to receive recognition in the WTO. The preamble of the Agreenent Establishing the WVTO states that 'there is a need for positive efforts designed to ensure that developing countries, and especially the least developed among dthe, secure a share in the growth of international trade commensurate with the needs of their economic development". In addition to retaining the provisions tlat concerned developing countries in GATT 1947, the new agreements generally contain provisinns fcr developing countries and le- developed countries, often consisting of longer transition periods for the full implementation of some obligations and various exemptions from obligations, particularly for the latter group of countries. me wTO will also encompass die plurilateral armnge=ents which are Wot partof thc single undortking (Trade in Civil Aircraft. Government Procurement. Dairy Produas and Bovine Meat). - 78 - Also, in some instances, the exports of developing countries benefit from a better treatment with respect to mecasures taken by ocher WTO Mrnembers. Technical assistance is to be provided to developing countries to assist themn in assuming their obligations and more effectively realizing the bencfits of the multilateral trading system. Least-developed countries are singled out in the Final Act as requiring special artention. T: is is reflected in the agreements through a number of provisions which provide the most favourab% treatrnentfor thisgroup in terms of righcs as well as lowerlevels of obligations. Inaddition, theDeciaion on Measures in Favour of Leasr-Developed Counmes makes provision for measures of special assista=ce, including technical assistance "in the development, strengthening anddiversification of their production and export bases including those of services, as well as in trade promotion, to enable them to maxnimize the benefits from liberalized access tG markets". As part of its funCEions, the Committee on Trade and Development (a subsidiary body of the General Council) will periodically review the special provisions in favour of least-developed countries and report to the General Council of the WTO for appropriate action. The Declaration on the Conrribution of the WTO to Achieving Grearer Coherence in Global Economic Policy-moIang identifies the need for strengthening the relationship between the activities of the WTO, the international Monetary Fund (IMF) and the World Bank (IBRD) as a way of ensuring greater coherence in global economic policy-making. It notes, amongst other things, that progress in the trade area is linked to greater exchange rate stability, to an adequate and timely flow of concessional and non-concessional financial and real investment resources to developing countries, and further efforts to address debt problems. It also recognizes that while difficulties whose origins lie outside the trade field cannot be redressed through measures taken in the trade field alone, there are nevertheless intcerlikages between the different aspects of economic policy. The Declaration provides guidelines on how the cooperation between the three organizations could be developed; in particular, it calls on the Director-General of the WTO to review, with his opposite numbers of the 1BRD and the IMF, the implications of WTO's futre responsibilities for its cooperation with the Bretton Woods Instimtuions. The fac that such interlinkages and, further, that the relation berween economic adjustment and social costs have been explicitly recognized within the WTO context has been considered of considerable importance by developing counties. As underlined during the Uruguay Round negotiations, Ministers expect that such greater coherence will result not only in reinforced surveillance of national policies, but also, inter alia - and according to the working reations that will be established between the three institutions - ensure chat developing countries whichjoin multilateral efforts to liberalize trade can count on support to overcome financial pressures arising during the adjustnent process, and help in reducing a perceived lack of consistency. in certain instances, between trade policy recommendations made in the context of lending programmes to developing countries and GATT/WTO requirements. A. Trade in Goods The first part of this section describes the main elements of the agreements covering trade in goods, and the second section summarizes the main results of the market acLess negotiations. It pays particular attention to maters of concen to developing countries. - 79 - Rules The comerstone of the agreements covering trade in goods is the GATT 1994. which is an updated version of GATT 1947, supplemented by understandings interpreting various provisions. In addition, there are agreements covering practices of relevance to GATT rules (trade-related invesunent measures and "grey-area" measures), agreements directed to liberalizing trade in agriculture and in textile and clothing, and agreements governing the applicarion of non-tariff (see Box 1).3 While agriculture and textiles and clothing are in principle covered by GATT rules. the rules have been less effective in the past than for other products. For agriculture, the principal outcome of the negotiations includes the reduction of barriers to market access, a progressive reduction in trade-distorting measures of domestic support, and the lowering of subsidies to promote export competition. This process will set the stage for market-opening negotiations in the future. In the case of textiles and clothing, the reduction of restraints and the phase out of the Multi-Fibre Arrangement over a period of ten years will mean that a key export sector for many developing countries will be fully within the disciplines of the multilateral trading systems. Agreement was reached in tLhe Uruguay Round that existing 'grey-area measures' (voluntary export restraints, orderly marketing arrangements or any other similar measures on the export or the import side) will be eliminated or phased out within four years' and the rules goveming the application of non-tariff measres have been clarified and updated. Of particular imnportance for developing counries is that the application of anti-dumping and countervailing measures has been clarified in relation to determining whether a product is being dumped/subsidized, the criteria for determining that dumped/subsidized imports are causing injury to a domestic industry, the procedures to be followed in initiating and conducting anti-dumping/counmervailing investigations, and the implemenaion and duration of anti-dumping/countervailing measures. There is a new provision under which anti-dumping measures expire five years after the date of imposition. unless a determination is made that, irL the event oftennination ofthe measures, dumping and injury wouldbe likely to continue orrecur. Anodier new provision requires the immediate termination of an anti-dumping/countervailing investigation in cases where the authorities determine that the margin of dumping/subsidization is de minm&is, or that the volume of dumped/subsidized imports is negligible. These provisions are more generous in the case of developing countries than for developed countries. 'The GATT 1994 contains the provisions of the legal instrumemts that have entered into force under The GATT 1947 before dhe dae of entry into force of the WTO. including protocols and cerifications rlating to tariff concessions, protocols of accessions: waivers granted under Artice OCV; and otherdecisions of the CONTRACTING PARTMS to GATT 1947. With respect o the laner, decisions of particular intest to developing countries include the 1966 Decision on Procedurcs under Aridle XXM' (BiSD 14S118). which expedites prcedures for disputcsetslement involving developing countries. and the 1979 Decision on 'Differential and More Favourble Trmaue Recprocity and Fuller Participaion of Developing Counties" (BISD S/103), known as the Enabling Clause. which provides a legal cover for differentia and morc favourable aeatnent to developing countries. 'An exception can be made for one specific masure for each importing counny. subject to munal agmement with the diecdy concerned exporting country. where the phase-out date will be 31 December 1999. - 80 - Box 1 - Main elements of the Uruguay Round agreements covering trade in goods CAir 1994: The cornerstone of trade relations in the area oi goods. Given the numerous agreemems concluded under its auspices relating to non-tariff measures, the GAIT 1994 is the centre piece for rules on tariffs, Key obligations include non- discrimination through the most-favoured-nation principle (Article 1); the national treatment of imported products once inside the border UArticle 1111, and the protection oi domestic industries essentially through tariffs. Quantirative resrricions are prohibited (Article Xl). The binding of tariffs (Article 1I) provides a stable and predicmable basis for trade, since they can only be increased under srict circumsrances and provided that compensation is given in the form of bindings on other tariff lines (Artic!e XXVIII). Exceptions to these obligations may be invoked under certain conditions for balance-of-payments purposes (Article XIIt for developmene (Article XVIII, which includes special balance of payments provisions). as safeguards from serious injury (Article XIX), for health or safety (Amcle XXI, national security (Article XXI) and for regional integration| agreements (Article XXIV). Differential and more favourable treatment to developing countries and to least-developed countries is perrnitted under the 1979 Enabling Cause with respect to tariffs in the context of the Generalized System of Preferences (CSP) and non-rariff measures. notwithstanding the most-favoured-nation clause, and with respecr to regional or global arrangements concluded by developing counries. The results of the Uruguay Round include seven understandings on the inteiperation of existing CATT Articles dealing with schedules of concessions (Article 1I 1(b)). state-trading enterprises (XVII), balance-of-payments provisions (XII and XVIII:B1. customs unions and fee-trade areas (XXIV), waivers (XXV), modification oi CATr schedules (XXVIIII and non-application of the General Agreement (XXXV). Agreements integrating practices otherwise on the margin of GATT rules: Includes trade-related investment measures (TRIMS) (which can be found to be inconsistent with the national rreatrnent provision or the prohibition on quantirative restrictions), such as local content requirements or trade-balancing requirements- CATT-inctnsistenr TRIMs are required to be notified and eliminated within a transition period of two years (developed countries), fve fears (developing countries) or seven years (least-developed countries). A further extension may be requested by developing and least- developed countries. The Agreement on Safeguards prohibits the use of 'gre-rea measures',. such as voluntary restraints or orderly marketing arrangements; such measures are to be notified and eliminated. Agreement on Agricutture Clarifies how CATT rules will be applied to this secor. All Members are required to convert all non-tariff measures to tariffs (except for those products for which a special treatment have been negtiated) and bind 100 per cent of agricultural tariff lInes. Members, with the exception of least-developed countries, are required to undertake reduction commitments with respect to maret- access, domestic support and exporr subsidies. The required reductions in tariffs,- domestic. support and export subsidies for developing countries are two-thirds- of those applying to deveEoped countries..| Developing countries may exempt certain fains of domestic support and export subsidies from conmmimnents, which involve the subject of reduction comrnmitrnents by developed countries. Reduction commitments for developed country Members will be implemented over six years, and over ten years for developing countries. Agreernent on Textiles and Cothing Provides for the eventual elimination of the Multi-Fibre Arangenienc (MFA after a ten- year transition period. In place since 1973, the MFA currently groups eight "importers; Of these Austria, Canada. he European Communities, Finland, Norway and the United Stares apply restrictions under the MFA, while Japan and Switzerland do not- The other participants in the MFA are the exporters imainly developing countries), whose exports or part of their exports covefed by the MFA are subject to bilatelly agreed quantitative restraints or unilateralIy imposed restraints on imports, typically applied at the product level but in some cases to various aggregates as well. MFA restraints will be phased-our in four stages, the fir srarting at the date of entry into force of the WTO. Concurrent with this integration process, there is a promgm providing for the progressive liberalization of existing quotas imposed under the MFA, with an accelerated liberalization for small exporters. The Agreerment also provides for a transitional safeguard mechanism in the event of import surges which applies under certain conditions in respect of any produa nct yet integrated into GATT and not already undef restnint, with more favourable trearemnt provided to least-developed countries and small suppliers- Agreements an norn-triff barriers: Agreements on the applicat;on of santary and phytosanitary measums, technicl barnier to trae customs valuation, anti-dumping, preshipment inspectior, rules atorigin, import licensing procedures subsidies and counrervail, and safeguards. The agreements on technicat barriers to trade* subsidies and countervail, anti-durtping imporr licensing, and customs valuation ar more extencive versions of the agreements concluded in th- Tokyo Round, while odthe agreemerts are new. The agreementoan rles of origin contais a three-ear progrmme of-work that shalL result arhe end of the period, on the harmonization of rules of origin of a non-pferental basis- The- agreements on non-tariff measures; generally contain precise guidelines conceming the administrive procedures for the appliction of non-aviff measwes; incduding transparency, predictability (including specified criteria for decisions) and procedural guarantees for expoatner For example, before ni-dumping or counenvailing duties are applied, art investigation rnust be conducted by a competent authority, including public hearings and norice to intersted parties. - 81 - Mlarket Access5 Industrial products For developed countries, the main features of their market access cormmitments in industrial products include (i) the expansion of bindings Eo cover 99percent of imports (Table 1): (ii) the expansion of duty-free access from 20 to 44 per cent of total imp6rts; and (iii) the reduction of the trade-weighted average tariffby 40 per cent (i.e. from the pre-Uruguay Round level of 6.2 per cent to the post-Uruguay Round level of 3.7 per cent (Table 2). With respect to tariff reductions on individual product categories (Table 3). developed counrries will (i) reduce ariffs by substantially above-average amounts (60 per cent or more) in ihree categories - wood, pulp, paper and furniture; metls; and non-ele-cric machinery; and (ii) reduce ariffs by less than the 40 per cent overall reduction in four categories - fish and fish products: textiles and clothing; leather, rubber, fooEwear; and transport equipment. In terms of exports from developing to developed country markets. above-average triff reductions apply to product categories accounting for slightly less dtn one-half of tota exports. The result is [hat the total reduction in the average tariff of developed countnies is 37 per cent (Table 3). Labour-intensivc mnanufacrures (textiles and clothing, learher goods) and certain processed primary products (fish products) have been - and continue to be - regarded as "sensitive" and therefore have below average tariff reductions. In the case of textiles and clothing, however, it is important to also consider the market access oppormnities provided by the phase-out of restraints applied under the Multi- Fibre Arrangement (MFA). For those products for which an MFA quota is the binding restraint, the tariff-equivalent of the quota may well exceed the ordinary tariff, with the result that the percentage reducions in import barriers calculated on the basis of ordinary tariffs will understate the true increase in market access resulting from the Uruguay Round. On the basis of data available for 26 developing countries,. the GATT Secretariat has identified the main feaures of their market access cormninnents. These include: (i) the expansion of bindings to cover 61 per cent of imports, compared to the pre-Uruguay Round level of 13 per cent (Table 1); and (i) a reduction of ceiling rates for tariffs leading to a decline of 30 per cent in the trade-weighted average tariff of dc--:loving economies (Table 2).6 The increase in the security of trade among developing regions is reflected mainly in Latin America - where participams will bind 100 per cent $The description of results for market access in goods is aflecrd by die fact thac noc all parucipanus in die Uruguay Round have finalized their schedules of omrie for idmus and agricultural pmducts. In partmuar. a number of leas-developed counries have not completed their submissions under the Decsion on Measwurs in Favour of Leoas-Deve!oped Cow1wi.s which makes provision for an additional year for this purpose from April 1994. 4Comparable data are available for the 26 developing counwy participants in dte GATIfs Integrated Database (IDB). Ftgures on the scope of commitments are not availabkc for the remaining 67 developing county participats in the Uruguay Round. The incomplete covepe of developing countries in die IDB could have a substantial effc on figures for the percentage oftarif lines bound by developing economies and by developing regions since the 26 panctpants for which dat ar available account for less tdan one-third of the ttal taniff lines of developing etonomies. but has less of an effect on figures for the coveage of bindings based on import values since the 26 participants account for roughly 80 per cent of the toal merchandise impoms of developing economy participants in the Uruguay Round. - 82 - of tariff lines at ceiling rates.' In the case of transition economies, the main features of improved mnarket areas include (i) the expansion ofbindings to cover 96 per cent of imports, compared to the pre-Uruguay Round level of 74 per cent (Table 1): and (ii) a reducaion of the average tariff of 30 per cent (Table 2). To suwmarize, the Uruguay Round will provide more secure and open markers for world trade in industrial products (see Box 2). The proportionof total trade that is subject to bound rates will increase from 68 co 87 per cent, mainly as a result of the substantial increase in the level of bindings in developing economies (Table 1). And markets will be more open as a result of the reductions in average triffs of developed countries (down 40 per cent), developing economies (down 30 per cent), and transition economies (down 30 per cent), with a post-Uruguay Round average tariff of 6.3 per cent on imported industrial products (Table 2). Box 2 - The central role of bindings in the GATT and WTO If a tariff lowered during a CATr rour i could be unilaterally raised again a few months later, that tariff concession would have little or no value to foreign and domestic producers. An exporting firm will be reluctant to pursue new markets if the- treatment afforded to products it intends to export is uncertain. This is especially true if taking advantage of the lower tariff requires investment in plant, equipment and distribution networks - investments that would become unprofitable if the tariff was raised. For domestic producers, the facr that the national govemment might subsequently raise a tariff also creates uncerainty, not only for the firms that use the import as an input into their own production, but especially for export-oriented firms that have to compete for human and financial resources with import-competing firms. This is where the importance of 'bindings' rcsides. When a country agrees to hind in GPTr a tariff (and other duties and charges - OMCs - applied with respec¢ to this tariff item) on a product at a certair -level - say 15 per cenr - it commits itself. not to increase the tariff above that level (except by negotiation with compensation for affeiced trading partners). Binding is. considered to be so impotanr that counmries which agree to bind previously unbound tarinsare giver 'negociating credir for the decision even if the tariff is bound at a level above the currently applied levef (the 'ceilingbinding. which has been used by many developing country participants- in the Uruguay Roundl. Bindings have also played a-key role in establishing the: Idomestic and intemational aedibility o-domnestic rfuomr prognrms in mary countries. In addition to tariff levels Cincluding OOCs) or non-tariff measures affecting trade inr industrial- products,. the-schedules.of- commitments made by Members of the fture World Trade Organization (WTO) covermeasureaffectlingtrade in agricultural-- products (tariffs, expon subsidies and domestic support, and service actvities. Additional seairity for negodated reductions. in trade barriers is provided by CATTIWTO rules which ensure that counties do not use. other trade measures to restore previous levels of protecion. In the area of goods, these indude limitations on the use of anti-dumping and countervailing duties, of fees and other charges for customs services, the prohibition of quantitative restrictians, and the requinrmnt to grant national treatment (non.discriminatory- treatment) *o imported goods once they have entered the cstms terriory of the imporing cocnty. In assessing -le new mnarket access opportunities for developing countries which will result from the Uruguay Rouna, the observation has been made that market access possibilities may be reduced since the preferences to devc!oping country cxporters under the Generalized System of Preferences (GSP) and ocher arrangements providing tariff preferences will be reduced by the cuts in MFN tariffs. In this respect, it is important to note that the objective of GSP preferences is not to divert trade from other exporters, but rather to provide the possibility for developing countries to compete 'Chilr was the only developing country offering to bind 100 per cent of its aifff lines in tie context of the Tokyo Round. while Costa Rica. El Salvador. Mexico and Venezuela bound 100 per cent of triff lines (and of imports) upon accession to GAIT during de period 1986-91. In dte Uruguay Round. odier developing countries have commiced to binding all or a major portion of their impors. - 83 - on an equal footing with producers in developed importing market. This objective is effectively met through the negotiated reduction of tariffs in multilateral trade negotiations. In addition, preference schemes frequently place a prion restrictions and criteria on the granting of preferences. This is not the case with negotiated reductions of tariffs that are entered in national schedules. Further, in many instances, tariff preferences are temporary and non-contractual. In contrast, tariff comumitments made in the GATT are legally binding comnuninents. It is only through liberalizacion, and exceptionally through increases of tariffs in exchange forcompensation to suppliers, that bound rates can be changed. A final poinc is that the granting of GSP treatrnent may also be considered as the advanced implementation of MFN tariff reductions offered only to developing countries. In this respect, the further liberalization of tariffs for non-GSP countries can be viewed as the normal extension of preferential tariff reductions (i.e. the GSP) to non-GSP countries. The binding of tariff reductions implemented in the context of GATT negotiations provide security of market access, foster trade expansion, and consequently industrialization and economic growth. Broad based tariff liberalization as achieved in the Uruguay Round provides an important seimulus to economic growth in both developed and developing countries through promoting diversification of products and markets. In addition, a stimulus to developing countries manufactured exports will follow from the substantial reduction intariffescalationformay products inthemajor markets as a result ofthe Uruguay Round. This too will encourage increased diversification of production and exports and encourage the production of higher value-added items in the developing countries (see Table 4) 8 Agricultural products Increased market access for agricultural products (seeBox 3 formain elernents of theAgreement on Agriculture) includes the 'tariffication' of all non-tariff border measures (conversion to tariff- equivalents) - with the exception of those products for which special treatment has been negotiated - and a binding of all tariffs on agricultural products (Table 5). As a result, the security of trade in agricltural products will - for the first time in GATT's history - be greater than in industrial products, since 100 per cent of agriculrural produc tariff lines will be bound. Tariffs resulting from the 'tariffication' process, together with the othe- tariffs on agriculnural products. are to be reduced by a simple average of 36 per cent over six years in the case of developed counmries and 24 per cent over ten years in the case of developing countries, with minimum reductions per tariff line of 15 per cent and 10 per cent, respectively. The reductions in the tariffs of developed counties - which account for about two-thirds of world imports of agricultural products - indicate an 'Tanff escalaion occurs when the tariff applied on a product category rses as the level of processing increases. In such cases, the 'eflctive rate of promection of value added' in die procssing industries in die importing county is nornmaly higher tantde nominal tmriffs. The result is (i) higher leve ofproduction ofthe moreprocessed products hine poarting counry. and (ul smaller inporms of the more processed versions bod bemause domestic production is larger and because the higher (than otherwise) domesc prices reduce domestic consumption of dye more processed produc. Thus. tariff escalatin effetvely limits the scope for trade-reltd industrialization in developing counties. Changes in tariff escalain as a result of the Umguay Round are measured by changes in the tariff wedges. that is by the change in the absolute difference between the riff a a parcular stage of processing and at the prceding stage. Aording to tbis detfition. tariff escaltion bertween two stages of production is reduced when there is a greater absolute decline in tariffs at the higher stage than at the lower stge. A reduction in (or unchanged) tariff escalation (wedge) is a sufficient condition for market access to increase when uriffs are reduced. The stages of processing used in this analysis are those adopted by GAIT contracting paries in the Tokyo Round. - 84 - average percentage reducEion of 37 per cent. With respect to individual product categories, developed countries will (i) cut tariffs by above-average amounts on oilseeds, flowers and plants; and (ii) cut tariffs by below-average amounts on sugar and dairy products, with other product categories close to the average cuE. In the categories of 'tropical products", which account for one-half of exports of developing countries of agricultural products. a 43 per cent reduction in tariffs will be implemented by developed countries (Table 6).9 Current access opportunities will be maintained on termns at least equivalent to those existing priorto the tarifficacion process. However. for thoseproducts where tarifficationtcookplaceand imports were less than 5 per cent of domestic consumption because of the existing restrictions, minimum market access commitments, imnplemented through tariff quotas on an MFN basis at a low or minimal tariff rate, are required. Figurec on the increased market access rising over the transition period in terms of tonnage for foreign producers resulting from these connitments indicaEe that substntial increases in market access occur f - -narse grains (1,757,000 tons) and rice (1,076,000 tons), as well as for other products. With reg. commitments on export competition, the quantities of exports which can be legally subsidized L.. be reduced by 21 per cent. The importance of this commitment is illustrated by the fact that, on average, developed countries subsidized anually during 1986-90 48.2 nillion cons of wheaE, 19.5 million tons of coarse grains, 1.8 million tons of sugar, 1.2 million tons of beef. etc. Furthermore, total export subsidy outlays will decline by 36 per cent, from 521.3 billion co S 13.7 billion by the end of the transition period (Table 7). These reductions are of paircular significance for heavily subsidized products on world food markets such as wheat, beef, coarse grams, dairy products and sugar. '° With regard to commitments on domestic support to agricultural producers, total outlays (in terms of the Aggregate Measurement of Support) will be reduced by 18 per cent, from S197 billion to S162 billion by the end of the transition period (Table 8).1" The new market access opportunities for agricultural products - which wiUl result from the Uruguay Round as a result of a change in border measures, and policies relating to export competition and domestic supporr - will be of particular interest to developing countries exporting temperare food products. More generally, multilateral disciplines on trade-distorting practices in agriculture are expected to stabilize world food markets in the coming decades, providing potential trade opportunities for developing countries and reducing fluctuations in food import bills. However, the potential situaion 'Table 6 reports a reduction of 35 per cent for dte category defined as -coffee. cocoa, tea and mai' and a reduction of 46 per cent for 'iropical beverages-. The principal cause of tbe difference between tse two sets of figures is the inclusion in die former of chocolate. for which tariff reduction commimuens are much lower than for coffee. cocoa, tea- the subsidy figures tend tO undersate the effectaofexportsubsidies. as well as die benefits oftheir reduction, i inStances where they are concemred on cerain more detailed product categories. in such situaions the reduction cuommier of developed countries are likely o have a much grcater impact on export oppornnities for other countries iha die :ggregat data suggesL "Table 7 reports a reduaion of outlays for domestic support for the Europen Union of 17 per cent, from S924 bion to S76.9 billion, because the figures include credit for reductions undertken since 1986. - 85 - Box 3: Elemrents for agriculture in the Uruguay Round ;Tariffication': At the beginning of the Uruguay Round. govemment intervention in support of domestic agncultural producers was limited to unbound or bound tariffs for approximately two-thirds of alt agricultural tariff lines of the particpating counines. For the remaining one-third oi the tariff lines, the intervention extended to non-t2riff measures and/or various subsidies. It is this latter one-third of the tariff lines that was subjea to 'tariffication', in which for each taiff line the package of protective measures (including the existing tariff) is replaced by a single new tariff that is estimated to provide substantially the same level of protecion as the existing package of measures. Special safegard: For products that have been subject to tariffication, the Agreement allows Members to have recourse to a special safeguard mechanism, on a temporary basis, so as to limit imports in the event of a surge of imports or significant falls in the import price. Such safeguard measures are to take the form of increased tariffs. The trigger in the safeguard for imsport surges depends on the 'import penerrtion' currently existing in the market li.e where imports make up a large proportion of consumption, the import surge required to trigger the special safeguard is lower). This special safeguard mechanism will remain in force for the duration of the reform process Special treatment In order to facilitate the implementation of tariffication in particularly sensitive situations, a -special treatmenr clause oi the Agreement allows, under certain carefully and strictly defined conditions, a Member to maintain import restrictions up to the end of the imnplementation period. Negotiations on any possible extension of such cial treatment must be coenpleted before the end of the six year implementation period. Tariff reductiorw Tarifis resulting from the 'tuiffication' process can be either an ad valomem or specific, but in nearly all. inscances, the new nariifs are specific duties, for which ad valorem equivalents are not currently awailable. Tariffs resulting from the tarifficarion' process, together with the other tariffs on agricultural products, are to be reduced by a simple average of 36 per cent over 6 years in the case of developed countries and Z4 per cent over 10 years in the case of developing. countries, with minimum reductions per tariff line of 1S per cent and 10 per cent, respectively (no reductions ar required of least-developed countries. Because of the high proportion of speciric duties,. together with the presence of ceiling bindingsp- (particularly in Latin America and. A ka), levels of tariffs cannot be computed- Current and minimurm access commitment For produccs. covered by the tariffictiort process, the maintenance of current marker access opportunities is provided for supplemented by the esmblishment-of minimum access tariff quotas; (ar reduced- tariff razes) where the current acress is less than 5 per cent of domestic consumption. These minimum access tariff quots are-- to start at 3 per cent andare to be expanded to reach 5 per cent at the end of the implementation periodL.- Reductions. in export subuidln Countries are required to reduce the value of direct export--subsidies to a level 36 per cent below the: 1986-90 base period level over- the sixyear implementation period, and-the quantity of subsidised export by. 21 per cent ov the same period. In the case of developing economies, he reductions are zwo.chirds tse. of developed countries over a ten-year period (with no reductions required of leas-developed econornies). Where subsidised eopoius have- increased since the 1986-90 base period, 1991-92.or the average between 1986-90 and 1991-92 may be used, in cerain circumstances, as the beginning point of reductions although the endpoint remains that based on the 1986-90 base period- level. Cbmmitmerns also indude undertakings not to introduce or re-introduce subsidies on the export of agricultural. products or groups of products in respect of which such subsidies were not applied during-he base period.. Reductions in domestircsupport The Toal Aggregte Measue of Support (TotaL AMS) reduci commitmen which cover alL domestic support provided on either a product-specific or non-product-specific basis that does not qualify for exemption, is to be reduced by 20 per cent ower 6 yeats for developed countries and 13.3 per cent for developing economies over 10 years (no reductions are required of least-developed countries)- At the end of the ifnplementatior- period they will be bound. So- called 'green box- poicis are excluded from- thc reduction commitments: general govemment services Isuch as research, disease conuol inrastructum and food security), certain forms of 'decoupleW (rm producidon) ricome support structural adjustment assistance, direct payments under environmenta prgrarmmes and uider regional assistnce prograrrure In addition to the green box policies, other policies that need not be incuded in the Total AMS reduction commitment include' directpayments under production4imiting a cetuin govenmnt assistance mwsesto-ncourage agricultuaaLand rural development in developing countries and other suppout which nmkes up only a tow proportion. 5 per cent in he case of developed couries and TO per cent in the case of developint countries) of thvalue of producion of individual p or, in te case of non.product-specific suppot, the value of toul agicukura} production. - 86 - in net food-importing developing countries is of particular concern. ' Potential problemns relating to least-developed and net food-importing developing countries are the subject of the Decision onMeasures Concerning the Possible NVegauzve Effects of the Reform Programme on Least-Developed and Net Food- Importing Developing Countries. The Decision recognizes that, as a result of agricultural reform, these countries may experience negative effects with respect to supplies of food imports on reasonable terms and conditions. The Decision sets out objectives with regard to the provision of food aid, the provision of basic foodstuffs in full grant formrand aid foragricurrural development. Italso refers to thepossibiliy of assistance from the Inernational Monetary Fund and the World Bank with respect to the short-term financing of food imports. The Comnmitree of Agriculture, established under the Agreement on Agriculture, will monitor the implementation of the Decision. However, developing countries which are net-importers of agriculturalproducts, while benefiting intheshort-term fromthegreateravailability of food aid, are experiencing a decline in the profitabiliry of domestic and foreign investments in their own agricultural sector. The consequences of this reduced investment has been resulting in diverting production resources to other less competitive sectors, in delaying the adoption of new technologies and, could in the longer term. impair capaciry to pursue adequate policies for the production of food. In this sense, the long-term effect of the reform will certainly be positive for at least a number of net food-importing countries. B. Trade in Services The General Agreement on Trade in Services is the first multilateral agreement on trade tbat has as its objective the progressive liberalization of trade in services. It will provide for secure and more open markets in services in a similar manner as the GATT has done for trade in goods. The Agreement covers trade in all services sectors and the supply of services in all forms (i.e. modes of deUvery), including consumption abroad of services, cross-border supply of services, pmvision of services through a commercial presence and the movement abroad of the person supplying the service. The GATS has two components: the framework agreement containing 29 Articles and am er of Annexes, Ministerial Decisions etc., as well as the schedules of commitmenrs undertaken by each Member governmenE to bind theexisting degree of openmess orremove existing restrictions (seeBox 4). Although the coverage of the GATS in terms of service sectors is universal, the liberalization conuniunents follow aposizivelist approach, whereby each participant inits schedule lists theconditions of market access and national treatment for foreign service suppliers in the sectors and modes of supply for which it has undertken a comminnent Ninety-five schedules of specific commitments (the European Union has submitted a common schedule on behalf of.its 12 Member States) contain the results of the market access negotiations for services. With respect to the level of marker openness for a service activity provided by any commitment, it depends on the existing regulatory regime and whether limitations have been placed on market access and national treatmen by the importing cotmtry. In fact, the majority of the schedules contain bindings of the existing level of access while others also contain liberalizaton commitments. With the binding of commiments, foreign service suppliers - and domestic customers of foreign service suppliers - are given an assurance that conditions of entry 'Ajoint OECD-World Bank study published in 1993 pointd to increases in the range of 5 per cent in the word pric of cerin tempene food products (wheat. coarse grains, meat). which could be expectd to impact heavily on aft fwod- impordng counties in Sub-Saharan Afica. It should be noted dia the fuime evolution of die situation of individl net food-importers will depend not only on reform in OECD counties. but also on the uncertmin evolution of world food markes in the years ahead, and on the responsc of domestic agricultural supplies both to the higher world prices expectd to prevail and wo domestic rmform policies. - 87 - and operation in the r.trkeE will noE be changed to their disadvantage. The GATS explicitly provides forsuccessive rounds of negotiation in the furure with a view to achieving a progressively higher degree of liberalization. Box 4 - Main elements of the Ceneral Agreement on Trade in Services (CATS) The General Agreemenr on Trade in Services (GATS) consists of the Articles of the Agreement. a number of annexes addressing the special situations of individual services secaors. and schedules of commitments on service acivities (the equivalent of the market access component of the negotiations on goods). Part I of the Agreement derines its scope - specifically, services supplied from the territory of one Member to the temtory of another (cross-border); services supplied in the territory or one Member to the consumers oi another (for example, tourism); services provided through branches of entitles of one party in the territory of another (for example, a branch of a foreign bank): and services provided by nationals of one party in the territory of another (for example, construction teams). Parr 11 oi the Agreement sets out general obligations and disciplines. There is a basic mosr-iavoured-nation (MFN) obligatiort Members have negotiated specific MFN exernptions, which will be reviewed after five years and are subject to a normatl limitation of 10 years duration. Transparency requirements include publication of all relevant laws and regulaions Since| domestic regulations, nor border measures, are the major iniluence o n services trade, all such measures of general appliation are to be administered in a reasonable, objective and impartial manner. The Agreement also contains obligations with respec- to mutual recognition requirements qualilcations, for instance, for the purpose of securing authorization, licences or cenification to supply services. Restrictive business practices are subject to consultations between parties with a view to their elimination. Part In of the Agreement contains provisions on market access and natinal treatunenr which are the subject of. specific commitnents made in national schedules, rather than general obligations. As of I September 1994, schedules had been. submitted by 95 pazr.ipants (including a single schedule for the twelve membe or the European Unionl) which idnify tie service actvities which are the subjecr of commnitrments and the limittions in terms of each of the snodes of supply for market access Ce.g~ number of service providers, number of service operations; the kind of legal entity through which a sernce is provided), or onr national treatment. Part IV establishes the basis for progressive liberalization in the semces area through successive rounds of negotiatons and the development of nationaL schedules. Part V contains institutional provisions, including consuaion and.dispute setemenn procedures and theestablishment of a Councif on Services. The annex address the-maverrienrtof 1abour, financial servicei (largely banking and insurance), access to and use of public telecommunications, servces and networks, air-transpot servics (aoder than trafific righss and direcly related activities); to begin negotiaons for the gradual liberarization of basic telecommunications (to be concluded nrt fater than 30 ApriL 1996); and to begin negotiations for maritime serices (to be concluded by June 1996) and labour movernent I It is not possible to provide quantitative measures of commianents to liberalize services trade in the same way as for goods (see Box 5 for a description of the contents of schedules). As there is no inrernarional nomenclamure for traded-services dat- covers the different modes of supply, there is no comprehensive set of damtahat could provide reliable estimates of imports of particular services under the different modes of supply. Further, there is no equivalent of customns duties in services; limittions on foreign services and service suppliers, where they exist, typically take the form of regulations relating to the supply of services. The effea of such measures, or of their removal. cannot be easily assessed, if at all. Of importance to developing countries is the fact that virmally all Members have made commitments on the movement of natural persons, even if these are frequently circumscribed by the requirement of intra-corporate transferee status. In addition, commitments made by developedcountries generally cover the cross-border supply of labour-intensive services such as computer-rdated services, professional and construction services. Further. most developing countries have committed themselves - 88 - to bind or liberalize tourism and Eravel services, including, for example, the liberalization of foreign investment restrictions for hotel and resort operators. These commitments are likely to improve the supply capacity of this key sector, which provides the major source of foreign exchange earnings in a number of island developing countries and least-developed countries. In addition, a number of developing countries have taken the opportunity the GATS provides to schedule commitments, thereby binding their own domestic reform process. Improvemenes in the quality of services that will result from liberalization and increased competition will cdntribute more generally to improved efficiency, consumer welfare and growth in developing countries as well as all other countries. Box S - Dscription of schedules of commitments for services In its national schedule earh Member govemment indicates the service secors and activities to which it will apply the market access and national treatment obligations of the CATS. For each service aaivity inscribed in a schedule, there are eight entries, referring to the obligations of market access and national treatment. and to the iour modes or supply through which international trade in services rakes place: - Cross-border supply of a service to a consumer located in the Member s terrfforty - Consumption abroad by a residenr of a memnber who purchases a service in the territory of another Member - Commercial presence, meaning the supply of a service within the Members territory through a commercial presence established there by a foreign supplier, | - Presence of natural persons, meaning the entry and temporary stay of foreign individuals- in the Member's territory fior the purpose of supplying a service. The entries represent a binding commitment to allow supply of the service activity in question on the terms; in condits specified, and not to impose any new measures that would mestria entry into the market or the operationn of the service supplier. C. Trade-Related Intellectual Property Rights The Agreement on Trade-Related Aspects of Intellectual Property Rights (rRJPS) establishes minimum stndards of protecEion for each category of intelecal property rights (IPRs). These stndards must be available in the national law of each WTO Member and provided on the basis of most-favoure. nation and national treamient (see Box 6). These standards incorporate and extend to all WTO Members the substantive obligations of the main WIPO conventions, the Beme and Paris Conventons on copyright and industrial property, respectively, with the addition of other obligations on matters where it was thought these Conventions could be complemented. This involves, in particular, seting standards on categories of IPRs where they were lacking (e.g. patents), setting disciplines relating to the enforcement of IPRs, and providing an effective dispute settlement mechanism. A key feature of the Agreement is that Members are required to provide within their national laws effective procedures and remedies for the enforcement of rights to the holders of those rights, mainly private enterprises. It is, however, recognized that Members are not obliged to create special judicial system for the enforcement of EPRs. Once the WTO is operational, the rnuber of countries providing intellectual propertyprotecdon will increase over time. Developed countries have one year to meet their obligations, developing countries have five years and least-developed countries have eleven years, with the possibiliy of an exu:nsion. Special transitional arrangements apply in the simation where a developing country does not presently provide patent protection in a particular area of technology, such as pharmaceuticals or agriculrumal chemicals. - 89 - In fact. adherence to the Paris and Berne Conventions is fairly widespread among developing countries. Many developing countries already provide mirninunm standards of intellectual property protection on a national treaEment basis, although the scope of such proEection varies significantly. Potential benefits for developing countries emerging from the Uruguay Round include a framework more conducive to domestic research effors and to technology transfer and foreign direct investment. There will, however. be additional administrative burdens of enforcing such righes (specifically dealt with under the TRIPS Agreement).'" potentially higher royalry payments and adjustment costs for industries which, in the absence of domestic legislation in the area, were producing goods that would be considered as counterfeit in the future. There will also be requirements relating to paEents may well mean an increase in prices of certain goods in some developing countries. Pharmaceutical and agricultural products present examples. These increases are expected to be small, and there are provisions in the Agreement itself to minimize any adverse implications for developing countries. Box 6 - Main elements of the TRIPs agreemnoi. There are three patts to the Agreement on Trade Related Aspects of Intellecaual Properny Rights, Including Trade in Counterfeit Goods (TRIPsI. Part I sems out general pwrvsions and basic principles, notably a national-treatment commitment under which the nationals of other Members most be giver treatment no less favourable than that accorded to a Memberes own naionals with regard to the protection of intellectual property. It also contains a most-avoured-nation cause, a novelty in an intemational intellectual property agreement, under which any advantage a Member givesto the nationals of another country must be extended immediately and unconditionally to the nationals of all other Members, even if such tteatmnent is moce favourable than that which it gives to its own nationals. Part 11 addresses each intellectual propefty right in succession: copyright, including for computer programs, data bases sound recordfn p and films; trademaucs and sevice marks. geographical indiatons (Members rnust prevent the use of any indication which misleads consumers as to the origin of goodst: industral designs, patents; tayout designs of integrated cirouits; and undisclosed information. As regards. patenrs dtee is a general obligaian: to cornply with the substntive prvisions of the. Paris Convention 119671. In addition. the Agreemnt requires that 20-year pasenr protection be available for. all inventions, whether of products or processes, in aImost all fields of technology. Inventions may be excluded from patentability if their commercial exploitation is prohibited for rasons oi public. order or morality; otherwise, the pernitted exdusins are for diagnostic therapeutic and sursgcal methods, aid for planms and. (other than. microorgnisms) animals and essentially biological processes for the production of plants ar animals (other than microbiological processes. PLnt varieties, however, rnust be prorectable eiter by patents or by a surgeneis system (such as the breederes righms provided in a UPoV Coventoni. Detailed conditions are raid down for compulsory licensing or-govemmental use of patenrs without the authorization of the parent owner. With respect to the protection of layout designs of integrated circuits. the Agreement requires Members to provide protection an the basis of the Washington Treaty on katelleaua ProperEy in Respea of Integrated Circuits which was opened ror signature in May 1989. but with a number of addition&. The final section in Part It of the Agreement concems anti- competitive practices in contractual licences- It provides for consultations betweer governments where there is reasort to belieye that licensing practices or conditions pertaining to intellectual property rights constiiute an abuse of these rights and have an adverse effect on cornpetitionL Part Il of the Agreement sets out the obligations of Member govemrnments to provide procedures and remedies under their domestic law to ensure that intellectual property rights can be effectively enforced, by foreign right holders as welt as by their own naiionals. Requirments indude provisions on evidence of proof, injuncion, damages and other remedies - including the right of judiciaL audhories to order the disposat or destruction of infainging goods and ta inpose imprisonment and fines sunficient to act as a deterren in cases of wilful trademark counterfeiting or copyright piracy on a commercial scale. With respect to the implementation of the Agreement, it env irges a one-year tansition period for developed couniries to bring their legislation and pracices into conformity. Developing counies ad counties in the process of twansfomion (mm a centrailpanned into a marker econuny have a five-yeartransitson period, and leas-developed counries eleven yea. "'The fact that non-violation cae will not be subject to dispute setlement procedurrs for five years is of partcular importan for decvloping countmis in tbis instace. - 90 - D. Dispute Settlement The improvements in existing rules and the.ir extension to areas where they were absent would be worth little if there were not a sufficiently stroog dispute settlement system to enforce those obligations. For this reason. the GATT dispute settlement system has long been considered a cornerstone of the multilateral trading system. It has provided countries with the opportunity to challenge actions taken by trading parmers and obtain rulings from independent panels of experts on the GAIT-consistency of such measures. Upon their adoption by the GATT Council, such rulings have represented an authoritative basis on which to seek the removal of a GATT inconsistent measure. The Uruguay Round Dispute Settlement Undersnding (DSU) incorporates major improvenents in relation to GATT dispute settlement procedures. The first and perhaps most significant change is the elimination of the need for consensus at the procedural steps leading up to, and including, adoption of panel rulings. Instead, a negative consensus approach will apply: a consensus will be needed in order to halt the proceedings from advancing at any stage of the formal dispute settlement procedures.. This change will greatly enhance the confidence of all trading nations, large or small, in the multilateral trading systemn since the potential for procedural blockage will be removed. However, in order to ensure that this automaucity comes with a greater confidence in the results of the dispute settlement system, a new element is the independent review by an appellate body before a panel's recommendadons become legally binding. Another change is the introduction of more precise and shorter time-lmits for each stage of the procedures. One of the central provisions of the DSU reaffirms that Members shall not unilaterally make determinations of violations or suspend concessions, but shall make use of the multilateral dispute settlement rules and procedures of the DSU. From the perspective of developing countries, it should be noted that the elements of the 1966 Decision on Dispute Settlement wiII continue to apply under the WTO dispute settlement procedures. "6 Although this Decision has seldom been used, mainly because developing countries have only recently become more frequent users of the GATT dispute settlement procedures, it contains features of specific interestto developing countries, including automatic access to the good offices" ofthe Director-General of the GATTIWTO to mediate and seek to find a satisfactory resolution to the dispute, and shorter time-limits in which panels must complete their deliberations. Another major change - not in the procedures but in the functioning of dispute settlement within the system as a whole - is the integration of all the dispute settlement procedures established under the individual agreemern (goods, services, TREPS) into a single system operating under a Dispute Setdement Body. This integration of enforcement across the agreements is the mirror image of the integration of rights and obLigations implied by the single underamking of WTO Members. This change will help ensure that issues which arise in the enforcement of obligations in one area (e.g. anti-dumping) are dealt with by the WVTO Members at the highest political leve:. "rhe 1966 Decision on 'Procedures under Anice XXm- (BISD 14518). - 91 - Sex 7 -Main fatur of dispute setlement under the WrO Where a dispute is not setded throuh consultations, the understanding on Dispute Setlement (OSUI fquims the establishment of a panel, at the latest a the meeting of the Dispute Settement Body lOSS) followinrg that at which a request is rnade, unless the OS decides by consensus agpinst establishmen. The OSU also st out specific rules and deadlines for. deciding the tems of reerence and composition of panels. Where the pasties do not apee an the composition of the panel (normally three personsl, this can be decided by the 0ireaor-Ceneral. A panel will normally complete its wo* within six months or, in caes of urgency, within three months. Within 60 days of the- issua of the panel's report it will be adopted, unless the DS8 decides by consenus not to adopt the reportor oneof the paries notides the 0S5 of its intntion to appeaL- An Appellae Body will be established, composed of seven members,.thre of whom will serve on any one cas. An appeal. will be limited to issues of law covered in the p;ne report and lepl inte tions devlwoped. by the panel. .Appllae prceeding shall not exceed 60 days fron the dae a party foosally notifies its decision to appeal. The resulting rpoat shall be adopted by the 0SB and unconditionally accpted by the parties within 30 days fllowing is issuace to Members ulew- the DSS decides by cnsnsus. against its adooton- Once the panel mpott or the Appellate Body report is adopted, the pay concenmed will have tacnotihfy itsAntentions widk respect to inplementaion of adopted recommenr.ations. If it ts imptdcabkL to comply immediately, the patty concened shall be-given a reasonable period- of time, the 1as.r to be ddecid e by-aremof the-parIsanda pproval,by the-- DSB witvin 45 days of adoption of the m-oort orthugh a kbix h #ds o t - Futher provisions set out rules for compensain or the suspension of cancmons in the -event of-mno-'.npl rmentadon Within a speciaied timeframe, parties can enter into negotiations-to agree on mutuallys acceptable compensation. -Wheothis, has not been agreed, a pary to the dispa may request auizaion of the DSB t sund concessions or other obligations tothe-oder-party-concemned The0SBwil grantstck authorization withirv30daysofthse-expiry.ofthe hgmed.timeae di fr. implem ttion. Disagreements over the- pmposed- levet eB vspension may b&- r;eed- to- a2ristrat_i Iprin corcession uxsd beL suspended- irthe tsaseaios.thathm issue.in-thepanel.case Itffnhis in&praicabeiefie the-suspension an:be made in a &iffiet secsorfd Is-smex@ agemesn turn, if this is not effltie or pracrlable-n if dhe-circumstnces are serious enough, the on concesions.nsbe made wuier ir is A. E. Monitoring of Trade PoUdes The Trade Policies Review Mechanism (TPRM) has been given permanent status in the WTO, extending the mandate provisionally graned in 1989 following the Mid-Tenn Review of the negotiations held in Montreal. The objectives ofthe TPRM are to contribute tO improved adherence by all Members to ndes, disciplines and commitments made under the Multilateral Trade Agreemenrs and, where applicable, die Plurilateral Trade Agreements, and hence oo the smoother fmtioning of the multlatera trading system, by achieving greater transparency in, and understanding of, the trade policies and practices of Members. The mechanism enables the regular collective appreciation and evaluation of the full range of individual Members' trade policies aiid practices and their impact on the functioning of the multilateral tmding system. It is not, however, intended tm serve as a basis for the enforcement of specific obligations under the Agreements or for dispute setlemct procedures, or to impose new policy commitments n Members. Reviews take place against thebackground of wider economic and developmental needs, policies and objectives of individual Members, as wel as the external trading envirorment. The TPRM provides for a Trade Policies Review Body (TPRB) to examine regularly the trade policies and practices of WITO Menbers, every two years for the four major traders (the European Union. the United States, Japan and Canada), every four yer for the next sixten leading traders (a group which currently includes nine developing countries), and every six years for the remainig - 92 - traders, although longer intervals may be prescribed for least-developed countries. The basis for the examination is a report prepared by the Secretariat and a policy statement by the country under review. The TPRB will also carry out an annual overview of developments in the international trading environment which are having an impact on the multilateral trading system, assisted by an annual report by the Director-General setting out major activities of the WTO and highlighting significant policy issues affecting the trading system. Since the TPRM has been in place for over five years and has become a well-established feature of the GATT system, it is already possible to draw some conclusions regarding its contrbution to a more open and stable trading system. The first is the valuable stimulus of the TPR process to the intemal discussion of trade policies in countries under review. Conducding a review, compiling a government report and responding to questions raised by the Secretariat in the preparation of its report, means that the national administration has to carefully examine the overall structure and impact of its own trade policies. For developing countries, this experience has been particularly valuable in assessing - and possibly fine-tuning or providing additional motivation for - domestic reform programs, and enhancing the inter-agency cooperation on the broader range of issues covered by the Uruguay Round (agriculmre, services, intellectual property protection, etc.). For trading parmers, the TPR process provides an opportmity to examine tradepolicies and practices in deti with a view to counicaing major areas of concern, and assessing. over time, whether these concerns are being satisfactorily resolved. Together, these elements of the TPR process have helped countries assess their trade and economic reforms, and may have contrbuted to some portion of the liberalization dt has talkn place under the Uruguay Round. In the future, the TPR process will help WTO Members evaluate their inplemenation of the Agreements, as well as provide an early warning of trends of potental concern to all participants in the trading system. - 93 - Table I Pre- and post-riuuay Round scope or bindu rer indunrial products (Numbcr of lines. billions of US dolLm and peneugcs) Councy group Number Impoart Perceng Pencage of of lincs . value of triff lins inpors under bound bound mms P |- Post Prc- Post- Total 249,573 1.089.0 43 83 6B 87 By major coiu= group: Developed economies | 86369 |4 99'| 78 99 _ _ Developing economies 163.204 35M.1 i 21 73 13 61 Trsidnaeconoe es S1.96Z 34.7 73 98 74 96 By e N4ardi Azeri 14.136 325.7 99 100 99 100 LatzAmerica 64.136 40.4 3S 100 57 100 Wesun Epe . 57.8S1 239.9 79 82 98 98 Central Eupe 23.565 38.1 63 98 6g 97 Ahica 21.5W0 18.5 13 65 26 84 Asiz S7!.94 461.4 16 68 32 70 So4ur GA?1 SecunLa. - 94 - Tabek 2 Averae triflr reductions on indusrial products' (Billion US dollis and pctcouges) Country group I 1mpr J Tnae4weightd tariff awmg Pre UR Post UR PoRductio ARl punkipa Imparn from: Woatd 1.SSrL 9.9 6.5 34 Nor& America 333.5 8.9 5.5 38 LatinAmrica 69.1 9.1 6.1 33 Wesmm Euope 463.1 9.8 6.1 38 CenUalaELst Euope 37.9 7.7 5.7 26 Africa 39' 3.9 2.7 31 Asia 610.0 11.4 7.8 32 Developed eco__ies Impors from: WodLd 1.118.4 62 3.7 40 North Aeica 262.3 5.1 2.8 45 Lam America 55.7 4.9 3.3 33 Wesern Europe 362.4 6.4 3.5 45 CeaUE= Eumope 21.3 4.0 2.4 40 AJric 34.1 2.7 2.0 26 Asia 382.6 7.7 4.9 36 DeelpiZ e _mod nsipo L - . Wold 399.5 ZOS 14.4 30 Nordi Ameria 70.5 23.2 15.7 32 Larr America 13.0 27.6 115 33 Wes: Euope 783 25.8 18.3 29 Ce anUlE Emope 8.3 18.4 15.1 18 Aftica S.0 U2.3 8.0 35 Asia 224.4 L7.8 127 29 Tru.stion em hIports f*t Wodd 34.8 8.6 6.0 30 Nordh Americ 0.7 8.6 5.5 36 LainAmeria 0.4 41 2.4 43 Westm Euzpe 223 9.0 6.2 31 CenaallEas Europc 82 6.4 4.7 27 Africa 02 4.1 2.1 49 Asia 3.0 124 8.5 31 lpom of do 44 DB paUdcipa fom al angus (cchAdg b=-EU 02de). 3CWvM arff as whos thasvi rC (cxcbaies cs bislp). Saw=ces GATr Secretr-9L -95- Table 3 Tariff reductions or dewdoped couues an industial products by cateory (Billion US dollar and pcmagsJ Eniporr value Ta_ff ave_g _aeghd by: | Prduc camgory All sourccs Delopimg lmpocs fmo all soun cs _mpotu (m l cconomie developg economi | | . PM- re Prc- Pos | . UR * UR Red. UR UR Red. All uWduWal pmducts' 7;6.9 169.7 6.3 3.8 40 6.8 4.3 37 Fish & fish pmducts 18.5 10.6 6.1 4.5 26 6.6 4.8 27 Wood.pulp.paper & fumiwru 40.6 11.5 3.5 1.1 69 4.6 1.7 63 Tezles andclothing 66.4 33.2 15.5 12.1 22 14.6 11.3 23 Leather. ribber. fbotwear 31.7 12.2 8.9 7.3 18 8.1 6.6 19 Meals 69.4 24.4 3.7 1.4 62 2.7 0.9 67 Chemicals & phoogmphic supplies 61.0 8.2 6.7 3.7 4S 7.2 3.8 47 Transpor tipm 96.3 7.6 7.5 5.8 23 3.8 3.1 !a Non-eectic rcbmy 118.1 9.8 4.1 1.9 60 4.7 1.6 66 Elecurismachnery 86.0 19.' 6.6 3.5 47 6.3 3.3 48 hiusl producas&jpezous sunes 73.0 22.2 2.3 1.1 52 2.6 0.8 69 Manufacurod addces ns. 76.1 10.9 SiS 2.4 56 6.5 3.1 52 Induswl mpical ptducs 32.8 14.4 4.2 2.0 52 4.2 1.9 55 Naazralsoce-Ised pmdu=e 80.2 33. 3.2 2.1 34 4.0 2.7 33 'Exdudf peemleum pzduc. Sour= GATr S _ecuiae - 96 - Table 4 Chang. in taiff eakUton ae prndis Imparted by Canada. European Unha. Japan and Unted Stat from day-loping ecanomics (Absolutc wducwon on onffs at ach snge or ptoccmgj _ada _ r_can Jap_. UninXd Union Sinis Hides. skios ad lember. Rzw 0.0 0.0 0.2 0.0 Seni.mamieaues 3.4 0.6 4.3 0.9 Finsbed producs 7.5 2.3 1.5 0.9 TonI 6.0 . 1.0 1.7 0.8 Rutbbr Raw 0.0 0.0 0.0 0.0 Sead-mannftcnnes 3.8 2.3 4.8 2.0 FiutMed pacss 4.3 2.2 3.2 1.4 ToJ 2.5 0.5 05 0.5 Wood Wood aU die zugh 0.2 0.0 0.0 GA Wood bad panes 2.7 3.2 9.4 0.6 Sei-,aniacus 0.6 0.5 2.0 1.2 Wood auicks 4.7 5.4 2.2 2.5 Tool 2.3 1.7 2.1 1.3 Papr Pulp ad wam 0.0 0.0 2.2 0.0 Pa;r and papaboad 6.5 7.9 5.2 1.2 Primd mnar 7.4 1.1 0.3 0.5 Paper arddes 10.3 10.3 4.2 4.8 Tol- 7.4 3.5 2.3 22 Jmle Fibes - 0.0 0.0 0.0 Yams 6.0 5.3 10.0 3.7 Fabrics 49 5.0 . 10.0 0.0 Tooa 5.3 4.5 9.1 0.4 COver Unwmughe 0.4 0.0 3.1 0.3 Se =U 1.8 1.2 3.9 0.4 Tool 1.7 0.1 3.2 0.3 Nickel Unwroughz 0.0 0.0 0.6 0.0 Sc:mi-I=-.fwaw= 4.6 2.0 3.0 0.0 ToME 0.1 0.0 0.6 0.0 Unwrmagbc 0.0 . 03 0.9 0.3 Semni-umamacns 1. 2.5 2.0 0.0 Toad 0.9 0.9 1.0 0.2 Lead U nc O 0.9 5.4 1.6 _cmi-=Mtlcmm - 2.6 2.8 0.0 ToIl 0.2 0.9 5.3 1.4 7.0 0.9 25 0.0 _ - 1.6 3.0 2.9 0.8 Taoo 6.9 14 2.5 0.0 Tin Unwev& 0.1 0.0 0.1 0.0 Seini-mamabcs Q0.0 3.2 1.2 12 Tool 0.1 0.0 0.1 0.0 Tobacc U.nau(acuu!d 2. 4.0 0.0 3.4 M _mdacUvd 9.2 25.6 3.1 4.A Toal 7.5 5.7 0.2 3.5 Souic: GATr Scrcusia - 97 - Table S Pre- and past-Unruay Round scope or bindiW ror agrictdtural producs (Number of lines. billions of ULS dolars and percnzges) County grup or Pcenuge or Percentage or rction Number Import niff lies impom unider oa lines valuc bound bound rams Pr- I Post- P. Post- I~ ~ u I us UR UR By znjor comey roup: - - Developed ecoconoes 14.976 84.2 58 1lo 81 100 Developmg economis 23.615 30.4 18 t00 25 100 Transicon economies 2.41 4.8 St 1oo 54 100 By selected rneion: Nordn America 2.297 19.6 92 10 96 100 Lnd Amed= 8.867 5.6 36 100 74 tOO wammEuzoe 11.345 38.4 45 100 87 100 CeAl Euope 3.02 5.7 45 100 I 0 100 Ask 1.660 49.1 17 100 40 100 Sau. GATr Secrmmi - 98 - Table 6 Developed economy imports and tarilf reductioms an apiCtdtural products (Millions of US dolars and percentages) Value of ipors Pcengc reduction _________ a~~~~~~n rarffs Poduct camgories All sourccs Developing economnies All aVcultural products 84.240 38.030 37 Co ff6 ea.coa 9.136 8.116 35 Fnuits and vegembles 14.575 8.B87 36 Oilsceds. fars and oils 12.584 6.S33 40 Od:er agiculral products 15.5W8 4.233 48 Animals and products 9.596 2.690 32 Beverages and spiri|s 6.608 2.012 1 38 Flowems, plaes. vegemable _areials 1.945 1.187 48 Toba 3.086 1.135 36 Spices and cereal prparations 2.767 1.134 35 Sugar t.730 1.030 30 Grains 5.310 r25 39 Dairy products 1.317 48 26 Tropical produrts 24.02 18.744 43 Tmpical beverages 8.655 8.041 46 Tropical utS and fruis 4.340 3.672 37 CertLin oilseeds. oils 3.43* 2.546 40 Roots. c. dobcco 4.591 2.497 40 Spices. flowers and pLms 2.992 1.987 52 Source: GATr SecroriacL - 99 - Table 7 Export subsidy reducion commitmenu by country (Nilltons of U.S. dollars) ParucTax Export subsidies Praouct composmoon ot expor: subsidics Base Final | Change Total 21,334 13,720 -36 E:Wpean Unio 13 74 8.496 -36 Bovuw (195). whea (1715). COarsc gri(13). bucr (13 0). odter twilk;pPrducct (1O%) Ausua -35 7- -36 Live animals (45%). wheat (14%). bovine meat (13%). chee ( ) Unimd Sos 929 594 -36 Whet (61 %). skim milk Po-der (14%) Poland 7-4 493 -36 Meat preparacons (39%). teuks and vegembLes (21%) Mexico 748 SS3 -26 Sugar (76%). cerdal pr;aratons (¢1 a) Finad 708 453 -36 BEL=r (25%). coarsc g3ins =%). other Mlk prduci (13%) Sweden 572 366 -36 Pigmca (2%. whea (21%). coar graims (17) Canda 567 363 -36 Wheatr 4,%). coam grains (18O Swict:1nd 487 312 -36 Othcr dairy produes (65%) Colombia 371 28 -23 Rice (37%). coca (0%). fruits and vegebles (23%) Soudt Aftica 319 204 -36 Fn¢s and vegeobis (24%). cem paPmar s (14%). when (13). sugar ________I (low%) HEungary 312 200 -36 Poulay meat (3o%). pigmea (26%). whet (11%). fuis and vegetbLes (19%) Czech Rep. 164 105 -36 Oher milk pmoducrs (38%). fuits and vegembles (10%) Turky 157 98 -37 Fmi_ and vegebks (36%. what (23%) .New Z7alt 1V3 0 -100 Not avaiable Norway 112 72 n -36 Cheese (54%). pistear (19%). b1e (12%) Ausnalia 107 69 -36 Other mik pdcs (2%). sim milk powder (271.). che (s%). bueer (16%) Brazil 96 73 -24 Sugar (56%). fuits and vegcobles (30%) Slovak Rep. 76 49 -36 Oer diy p (195). creal praos (13 5). bovie ma (13%) Romana 59 45 -24 Cereal ptrpaganons (22%]. supr (19%). bovin ma (18%). fmit and _______________ __________ vegenbles (11 ') Lsad | 56 43 -24 Fuis and vegembles (595). plat (22%). cano (17%) Indonesia 28 22 -Z4 Rice (100%) |celand 25 16 -36 Sheeptea (78%). other dairy products (¢5%) Cyprus 19 14 -24 Fuics and vegebles (65%). alcohol (16%) [ Utsy \ 2 1 -23 Rice (83%). bucr (L2%) Moae= 1. Com et cOVerd tJ U5. dollars using 1990-91 avenge excbhan rtes Rd on r napply o izndivida product caqegies as define in this oble. 2. Cons havng Slb d schedules whihdo not Ce n eport aibsiis iuczdm Algcria. ABduaandRazbuda.AM=. Bahrain. Rbados. Beiize. Bolivia. Bnsci Darussla Ceoon_ Cile. Congo. Cosa Rica. C8r d voiv=r Cuba. Domini Dominc Rep.. Egypt El Salvador. Fiji. Gabon. Grnda. Gambia. Ghat. Guateala. Guyana. Hondugas. Hong Kog. India. hm~. Japan. Kenya. Konmre Kowair NMa. Malaysia.a u . Mornoco. Na a N g Nigeria.PakiSIn. Paagy. Peru Philippines. SL s dand Ncvs. Saint rScia. SL ncent and t Grcdins Seneal inpore. Sri Lanka. Su=e. Swazila Thailan Trinidad and Tobago. Tunisia. Zbia and Zimbab-e- Ezsdcdvelbped c0nnies a exemp frm expo subsidy tducon Sonu=e GATT Sez=ria - 100 - Table S Reductioes in domestic suppon to agriculturni produces Millions of U.S. dollas) Pasucipanu Basc Final Change Total 197,721 162.497 -is Euupean Union 92.390 76.903 -17 Japan 35.4r. 2S.3718 -20 Unimed Su=s 23.S79 19.103 -20 Mexico 9.669 8.387 -13 Camnda 4.650 3.720 -20 Fiuland 4.186 3.349 -20 Poland 4.160 3.329 -20 Etore 4.086 3.543 -13 Swiud 3.769 3.016 -20 Sweden 3.429 2.7-43 -20 Ausria 2.534 2.027 -20 Norway 2.247 1.797 -20 Vcn a 1.305 1.131 -13 BrAzil 1.053 912 -13 Thailand 866 745 -13 Czech Rep. 717 574 -20 Ised 654 569 -13 New Zenland 210 268 -20 HungTy 613 490 -20 Australia, 460 368 -20 Slovak Rep. 435 348 -20 Colombia 398 34S -13 iceland m 177 -20 Cyprus J27 110 -13 Morocco 93 81 -13 Tunisia 76 66 -13 Cosc Rica 18 16 -13 Soudt Afria 3 2 -20 Sourec: GATr Sceciar - 101 - lbsbk 9 Commemcs on se.-vice ivities or developed. deeloping and rsiio eco.me. and by region (Number of bindings on service acivioes and pcerzc=ges) Couniy group N tumber af co=enis | Perce=2ge of Be major cou' roup:. Dcveloped econoa:es 2470 61.4 Developing economis 1806 1&.6 TrAnsiion economies 306 47.5 By regiow-_ _ _ _ _ _ __ _ _ _ _ _ _ _ Nordi Amer=c 193 | 9.9 Exn Ameic1 738 15.3 Wesrm Europe 20=2 59. CcnL-l Eumpe 351 43.6 Afric 396 9.8 bfiddle F isr 1106 16.5 Asia __ _ 9 __ 796_t6.0 Saur: GATE Seca::=L - 102 - Table 10 ComnLtmeoLs on service actviies bv sub-seccor (Numtber of counmes) [DC L IDC I Trnsiiiou Tl IDC LDC Tunsican Total 1. Buse . 6. Eavirone__ A. Professionl _ 13 3 39 A. Sewage 23 6 2 31 B. Computr 24 21 S 49 B. Refus disposal 23 6 33 C. R&D 10 It 2 . C. Sanitnon 23 3 31 D. Ral csmamc 3 3 0 25 D chr 30 E. Rentalfleasing 19 6 2 2, | . F" dal F. Other 20 8 31 . LIsurance 25 35 67 2. Co D m.nicaton B. Banking 23 21 3 48 A. PosQI 0 3 0 3 C. Ocer 12 10 0 22 B. Courier 4 15 3 2S. Beah C. Telecom 11 12 3 26 A. Hospiul IS [S 2 32 - Basic I 8 0 9 B.Odter hun1eal 2 4 7 - Value-dded 19 15 S 38 C. Social 13 1 1 15 D. Audio-visujl 2 4 0 6 9. Touris and travel_ E. Other 6 0 6 12 A. Hatls andresmams 25 68 5 98 3. Consrueion _ B. Travel agencies. mur operatrs 25 52 S 82 A. Buldig 124 21 4 49 C. Tounstguide 24 23 3 50 B. Civ l nerig 1 24 20 4 48 D. Other 12 0 13 C. lasm1adon and assmbly 23 18 4 45 10. ReaenzLaL cultural. sporting D. Compledon afinisig| 23 12 4 31 A. Ememin 17 16 1 34 E. O2hcr |0 13 3 36 B. News agency 2 1 2 4. Disitulo . C. Lbr. ar:hiveL s useus 5 4 01 9 A. CommisionC p 23 3 1 1 27 D. SporTig LS20 1 U36 B. Wholesale nde 25 7 5 37 E.Other 2 0 4 C. Re;iling I SI 5 38 11. TsporS D. Fnnchising I m | 3 31 A. Marime transport 4 10 a 14 E- Other 14 0 0 °4 B. Intera Iwamrways 3 1 2 7 |15- FA n C. IAirI 13 19 3 25 A Pray |18s 41 41 26 |D.SpaI 2 0 0 2 B.SecOnry 19 6 3 28 E.Rail 6 4 1 11 C. Nfigher i8 3 4 25 F. Road 17 6 1 24 D. Adult 18 1 4 23 G. Pipi|ne 2 1 1 4 |E other 3 4 2 9H. Anxdiay sevicCs 16 10 0 27 11____________t I LOther 14 61 0 20 Note: Where smb-sectors am further disaggjd. figU fr to ra number of Couw Cmt having rmde a COmmkie L Soure: GATI Secrenuiat. - 103 - DEVELOPMENT COMMITTEE JOINT MINISTERIAL COMMITTEE OF THE BOARDS OF GOVERNORS OF THE BANK AND THE FUND ON THE TRANSFER OF REAL RESOURCES TO DEVELOPING COUNTRIES 1818 H Street. N.W., Washington, D.C. 20433 Telephone: (202) 458-2980 Fax: (202) 522-1618 October 3, 1994 COMMUNIOUE 1. The 49th meeting of the Development Committee was held in Madrid, Spain on October 3. 1994 under the chairmanship of Mr. Mourad Cherif, Minister of Finance and Investments of Morocco. 1/ On its own 20th Anniversary, the Committee joined in congrarulations to the World Bank and IMF on the 50th Anniversary of the Bretton Woods agreement, and welcomed the World Bank's publication "Learning from the Past - Embracing the Future". TRANSFER OF RESOURCES 2. The Conmmittee's main task is to keep under review the transfer of resources to developing and transition countries. It therefore welcomes the continued high level of total flows to these countries. It notes the slow rate of growth in official development assistance. and calls on donor countries to enhance their aid as soon as possible and to increase its fbcus on the poorest countries. Where appropriate, the Committee favors a reduction in the stock of debt and an increase in concessionality for the poorest countries facing special difficulties. The Committee recognizes the special needs and problems of counEries emerging from economic and political disruption and also of the poorest. most indebted countries, and requests the Executive Boards to examine proposals in these areas. 3. The Committee welcomes the increased volume of private flows in recent years. to a growing number of countries which are implementing economic reforms. It notes uncertainties about the sustainability of such flows in changing world conditions. and the fact that they continue to be concentrated in a small number of countries. It urges countries not currently receiving such flows to improve their creditworthiness through macro-economic reform. and to create a climate favorable to sound private sector development: these measures will attract more foreign portfolio and direct .nvestment. The Committee asks the World Bank Group. the IMF and industrial countries to continue their efforts to facilitate and encourage private flows to all developing and transition countries. I/ Mr. Lewis T. Preston. President of the World Bank. Mr. Michel Camdessus. Managing Director of tie Ineremnaonal Monetarv Fund. Mr. Willy W. Zapama. President of the Banco de Guatemala and Chairman of the Group of 24. Mr. PetEcr Suthcrland. Director-General of the GAiT. Mr. James H. Michel. Chainrmn of the DAC. and Vr. Peter Mountfield. Executive Secretary. took part in the meeting. Observers from a number of international and reeional organizations also attended. - 104 - AID EFFECTIVENESS 4. Effective aid requires closer collaboration between receiving countries, international organizations and donors. For aid to be most effectiye, it has to be adequate. and to operate in a favorable environment. Prime responsibility for domesEic policies which conEribute to aid effectiveness rests. of course, with the recipient countries themselves. The guiding principles for- recipients are: a. Appropriate domestic economic policies Lailored to local conditions are essential if aid is to be effective; b. The effective use of aid requires strong a,wninistrative and institutional capacity. c. "Ownership' by the government and participation by other stakeholders, including beneficiaries, are essential; 5. The guiding principles for donors and international agencies are these: a. The best conditions and policies for aid cannot substitte for strong 'ownership", by the recipient government and good governance. Donors and recipients must collaborate to make this the basis for effective aid. b. Donors should support participation by relevant stakeholders (especially women, the poor and other disadvantaged groups); this helps to improve the design of projects and ensure that they are properly implemented and operated. The Bank should strengthen its sldll mix and incentive system for these purposes. c. Technical assistance (TA) is likely to be most effective when it responds to clearly-defined needs and absorptive capacity of the recipient. TA should work within, and if necessary seek to strengthen. the institutional environmenE along the lines approved by the OECD Development Assistance Committee (DAC). d. Multilateral agencies, including the IMF. the World Bank Group and the regional development banks. work closely to support countries' own efforts to put in place a sound framework for macro-economic and structural policies which foster the private sector and strengthen public sector management. Aid programs should be consistent with this framework. and with the country's own development priorities. Innovative approaches to achieve this objective are to be encouraged. The World Bank will strengthen its consultations with other donors who in mm will collaborate in this approach. e. Efforts to coordinate and simplify donor aid procedures and practices should be accelerated. Aid operations should be made more transparent to improve accountabiliry. Donors should avoid setting up mechanisms which are inconsistent with the recipients' own efforts to manage their own budgets and implement aid. Ministers support recent efforts in the DAC to reduce the use of tied aid credits. They also urge donors to minimize the additional costs associated with trade-distorting tying of aid, where this can be done without reducing volume. - 105 - f. The DAC Principles provide an appropriate framework for improving aid coordination. Consultative Groups and Roundtable Meetings are more effective when preceded by active involvement of the recipient government, and consultation with other donors. The agenda for Consulmtive Groups should cover issues of development strategy, aid utilization, aid coordination and technical assistance, in addition to mobilization of financial resources. g. Recent efforts to improve the effectiveness of the World Bank and other development agencies, focussing on their development impact and on results in the field, need to be sustained and extended. Particular attention should be given to: shifting the focus from projects to country prograrns; improving the "quality at entry" of projects: strengthening evalua bon and disclosure policies; streamlining procedures; addressing urgently the adequacy of field office networks; and changing staff incentives to focus on development impact. h. Aid can also help to stimulate private investment; institutions like the IFC and NIGA can play a valuable role, but must pay due attention to development effectiveness. i. Many of these principles apply with equal force to the countries in transition. However, more attention needs to be given in these countries, in differing degrees, to informing both policy makers and public opinion at large of the workings of a market economy and the complementary roles of the public and private sectors. 6. The Comnittee will follow up these issues carefully at futr meetings and particularly looks forward to the report of its Task Force on the Multilateral Development Banks. THE URUGUAY ROUND AND THE DEVELOPING AND TRANSITION COUNTRIES 7. The Committee reviewed the results of the recently-completed Uruguay Round negotiations and their impact on the developing and transition countries. At this stage, it was only possible to make a preliminary assessment of the likely effects They also considered the implications for the future work of the World Bank and the IMF. The Committee believes that: a. In addition to its global effects. the successful conclusion of the Uruguay Round will bring significant benefits to developing countries over time, through increased market access, the integration of new areas into the svstem, and through strengthened rules and institutions. Early ratification and implementation are therefore essential. b. These benefits will accrue particularly to those countries which pursue sound macroeconomic policies and adopt market-based reformns. c. A number of developing countries should benefit in particular from the phased integraion of textiles and clothing into the multilateral system. although the timetable for liberalization will delay these benefits. d. Some countries may need help to adjust to higher world food prices and the erosion of preferences. although most of them will gain from the reduction of agricultural subsidies. Initial studies made by the Bank and the Fund indicate that the negative effects are likely to be fairly small. and existing instruments seem adequate to deal with them. Further research may refine these findings. Meanwhile. the Bank and the Fund must be ready to address these problems. - 106 - e. In the longer run, it is important to keep up the momentum of mutually-advantageous trade liberalization and avoid new formis of prctectionism. f. The task of the Bank and the Fund is to assist developing and transition countries to ease the change to the new trading system, by providing policy advice, financial support and technical assistance in order to maximize the gains from new market opportunities. g. It will also be necessary to bring the transition countries (many of whom are not yet members of GATT) into the multilateral process as quickly as possible, so that they can fully share the benefits of trade liberalization and enlarged market access, without discrinination. The Bank and the Fund should encourage and assist these countries in their efforts to become more fully integrated into the multilateral trading system and to adopt policies that will facilitate their accession to the WTO. 8. The Committee believes it is essential for both institutions to collaborate closely with the new World Trade Organisation and notes that the ministerial Declaration at the end of the Uruguay Round calls for early talks between the Director-General of the WTO and the heads of the Bank and Fund. POPULATION 9. Ministers from the participating countries welcomed the outcome of the recent United Nations Conference on Population and Development which it discussed at its last meeting. The Commitmee called on the World Bank and conference participants to play an active part in implementing the Programme of Action approved by the Conference. DESERTIFICATION 10. It also welcomed last month's agreement on the anti-desertification convention, caled for its early ratification, and encouraged the World Bank to continue its active support for development and environmental management in dryland areas. NEXT MEETING IL. The Conunittee agreed to meet again in Washington. DC on April 27, 1995, when the principal topic for discussion will be the financing of infrastucture in developing countries. - 107 - APPEIDIX A DEVORP:MN-T COMMrIrEE ( (JObt Miniseri Committee Boards of Govenors of the Bank and the Fund Tnnsfer of Real Resources to Developing Counmies) DC/94-14 September 6, 1994 NOTT-CE OFMETN The 49th meetng of the Deveopment Commitee will be held on Monday, October 3. 1994. commeancig at 9.00 a.mL, in the Palacio Municipal de Congresos, Campo de las Naciones, Madrid, Spain. PROVS1O NAL AGENDA jL Moming Session 1. Aid Effectiveness 2y Afternoon Session 2. The Impact of the Uruguay Round on the Developing and Transition Economies 2/ 3. Oher Business 1/ In addition to the issues papers shown below, there will be a report by the President of the World Bank to the Development Committee and a statment by the Managing Director of the IMF on the World Economic Sitation and Economic Trends in Developing Countries. I/ Issues paper, prepared by the World Bank in consultation withe IMF, as requested in para.19 of the April 1994 Communique. See also DC194-19 'improving Aid Effectiveness' by the Chairman of the Development Assistance Committee of the OECD. I/ Joint issues paper prepared by the Bank and the Fund, as requested in paras. 13 and 19 of the April 1994 Communique. See also DC/94-20 by the Director-General of the GATT. - 108 - Appendix B MEMBERS OF THE DEVELOPMENT COMMNTTEE List of Countries Represented by them and their Executive Directors at the World Bank and the Intcmational Monetary Fund (As of October 3, 1994) Members Executive Directors Countries Group No. Mohammad Abalkhail Muhammad Al-Jasser Saudi Arabia I Minister of Finance (Fund) and National Economy Ibrahim A. Al-Assaf Saudi Arabia (Bank) Altemate Member* Hamad Al-Sayari Governor Saudi Arabian Monetary Agency Saudi Arabia Ibrabim Abdul Karim A. Shakour Shtalan Babrain, Egt hraq, Jordan. 2 Minister of Finance (Fund) Kuwait, Leban, Socialist and National Economy Faisal Abdulrazak Al-Khaled People's Libyan Arab Jamahiriya, Bahrain (Bank) Malives, Oman, Qatar, Syria Arab Republic, United Arab Emirats, Republic of Yemcn Edmond Alphand&y Marc-Antome Autheman France 3 Minister of Economy (Fund and Bank) France -yod M. Bentsen Karn Lissakers United States 4 Seeary of the Treasury (Fund) United States Jan Piercy (Bank) Franz Blankarr Daniel Kaeser Azerbaijan, Kyrgyz Republic 5 State Secretary for (Fund) Poland, Swizeland Exteral Economic Affairs Jea-Daniel Gerber u istn, Uzbdkistan Federal Department of (Bak) (TjiItm) Economy Switzerland Mourad Cherif (Chairman) Abbas Mirakhor Isamic State of Afghanist 6 Minister of Fmance (Fund) Algeria, Ghana, Ilamic and Investmen Mohmed Benhocine Rcpublic of Irm, Morocco, Morocco (Bank) Pakistan, Tunisia Alternate for the Chairman Omar Kabbaj Minister-Delegate to the Prime Minister, in charge of Economy Morocco -109- Members Executive Directors Countries Group No. Kenneth Clarke Huw Evans United Kindgom 7 Chancellor of the Exchequer (Fund and Bank) United Kindgom Paul Nidson Jarle Bergo Denmark, Estonia, Finland 8 Minister for Development (Fund) Iceland, Latvia, Lithuania, Cooperatioa Ruth Jacoby Norway, Sweden Ministry of Foreign Affairs (Bank) Denmark Lamberto Dini Giulio Lanciotti Albania, Greece, Italy, Malta 9 Minister of the Trasury (Fund) Portugal, San Marino Italy Eno R. Grilli (Bank) Liu Zhougli Zhang Ming China 10 Minister of Fnance (Fund) China Wang Liansheng (Bank) Paul Martin Douglas E. Smee Antigua and Barbuda, The Bahaas 11 Minister of Fnance (Fund) Barbados, Belize, Canada, Dominica, Canada Robert R. de Cotret Grenada, Ieland, Jamaica, St. Kitts Altemnate Member (Bank) and Nevis, St. Lucia, St. Vincent and Dougls Peters the Grenadines Secry of State International Financial Institutions Canada Philippe Maystadt Willy Kids Austria, Belarus, Belgium, 12 Minister of Finance (Fund) Czech Republic, Hungary, Belgium Walter Ril Kazakbstan, Luxembourg, (Bank) Slovak Republic. Turkey (Slovenia) Festus G. Mogae L.J. Mwanandi}lu Angola, Botswana, Burundi 13 Vice-President and (Fund) Ethiopia, The Gambia, Kenya, Minister of Finance O.K. Matmbo Lesotho, Liberia, Malawi, and Development Planning (Bank) Mozambique, Nanibia, Nigeria, Botswana Siera Leone, Swazilnd, Tanzania Altemate Member Uganda, Zambia, Zimbabwe Abd Alla Hassan Ahmed Minister of Finance Suda - 110 - Members Executive Directors Counhies Group No. Mar'ie Muhammad J. E. Ismael Fiji, Indonesia, Lao People's 14 Ministr of Finance (Fund) Democratic Republic, Malaysia, Indonesia Aris Othian Myanmar, Nepal, Singapore, (Bank) Thailand, Tonga, Viet Nam, Alternate Member (Camb'dia) Saleh Afiff Coordinating Minister of Economy, Finance and Development Supervision Indonesia N'Goran Niamien Corentinos V. Santos Benin, Burkino Faso, 15 Minister Delegate to the (Fund) Cameroon, Cape Verde, Prime Minister in charge of Jean-Pierre Le Bouder Central African Republic, Economy, Finance, Commerce (Bank) Chad, Comoros, Republic of Congo, and PlannI ng C6te d'lvoire, Djibouti, C6te d'lvoire Equatorial Guinea, Gabon, Guinea, Guinea-Bissau, Republic of Madagascar, Mali, Mauritania, Mauritius, Niger, Rwanda, Sao Tome and Principe, Senegal, Togo Crispiniano Sandoval A. Guillermo Zoccali Argentina, Bolivia, Chile, Paraguay, 16 Minister of Fmane (Fund) Peru, Umguay Paraguay Nicolas Flano (Bak) Aleksandr N. Shokhin Konstantin G. Kagalovsky Russian Federation 17 Deputy Prime Minister (Fund) Russian Federation Andrei Bugrov (Bank) Manmohan Singh KP. Geeiakdrishnan Bangladesh, Bhuta India, Sri L mlka 18 Minister of Finance (Fund) India Bimal Jalan (Bank) Julio Sosa Rodriguez Roberto Marino Costa Rica, El Salvador, Guatemala, 19 Minister of Finance (Fund) Honduras, Mexico, Nicaragua, Spain, Venezuela Angel Torres Venezela Alternate Member (Bank) Wemer Corrales Leal Minister of State and Head Officina Central de Coordinacion y Planificacion Venezuela Carl-Dietr Spranger Stefam S enberg Germa 20 Federal Minister for (Fund) Economic Cooperation and Fritz Fischer Development (Bank) Germany - 111 - Members Executive Directors Countries Group No. Masayoshi Takemura Hachiro Mesaki Japan 21 Minister of Finance (Fund) Japan Yasuyuki Kawahara (Bank) Ralph Willis Ewen L. Waterman Australia, Kiribati, Korea, 22 Treasurer (Fund) Marshall Islands, Mongolia, Australia John H. Cosgrove New Zealand, Papua New Guinea, (Bank) Philippines, Seychelles, Solomon Islands, Vanuatu, Western Samoa, (Federated States of Micmnesia) Gerrit Zalm Godert A. Posthumus Armenia, Bulgaria, Cyprus, Georgia, 23 Minister of Finance (Fund) Israel, Moldova, Netherlands, Netherlands Eveline Herfcens Rornania, Ukraine (Bank) Alternate Member J. P. Pronk Minister for Development Cooperation Ministry of Foreign Affairs Netherlands Hector Manuel Valdez Albizu Alexandre Kafka Brazil, Colombia, Dominican 24 Governor (Fund) Republic, Ecuador, Guyana, Haiti, Banco Central de la Republica Marcos Caranmum de Paiva Panama, Suriname, Trinidad and Tobago Dominicana (Bank) Dominican Republic * Altemate Members are ose who attended the 49th Meeting of the Committee for their Members. - 112- APPENDIX C: OBSERVERS OF THE DEVELOPMENT COMMIEE (for the 49th Meetng) African Development Bank (AfDB) Associate: Arab Bank for Economic Development in Africa (BADEA) Arab Fund for Economic and Social Development (AFESD) Arab Monetary Fund (AMF) Asian Development Bank (AsDB) Commission of the European Communities (CEC) Commonwealth Secretariat (COMSEC) Associate: European Investment Bank (EIB) General Agreement of Tariffs and Trade (GATI) The Cooperation Council for the Arab States of the Gulf (GCC) (Gulf Cooperation Council) Inter-American Development Bank (IDB) International Fund for Agicultural Development (IFAD) Islamic Development Bank (IsDB) Organization for Economic Co-operation and Development (OECD) Associate: Development Assistance Committee (DAC) OPEC Fund for International Development (OPEC FUND) United Nations (UN) Associates: United Nations Conference on Trade and Development (UNCTAD) United Nations Development Programme (UNDP) - 113 - Development Committee (joint Ministerial ComIiittee of the Boards of Governors of the World Bank and the Internationai Monetary Fund on the Transfer of Real Resources to Developing Countries) 1818 H Street, N.W., Washington, D.C. 20433 U.S.A. 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