45403 GLOBAL MONITORING REPORT 2008 MDGs and the Environment Agenda for Inclusive and Sustainable Development GLOBAL MONITORING REPORT 2008 GLOBAL MONITORING REPORT 2008 MDGs and the Environment: Agenda for Inclusive and Sustainable Development © 2008 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 5 11 10 09 08 This volume is a product of the staff of the World Bank and the International Monetary Fund. The findings, interpretations, and conclusions expressed herein do not necessarily reflect the views of the Board of Executive Directors of the World Bank, the Board of Executive Directors of the Interna- tional Monetary Fund, or the governments they represent. The World Bank and the International Monetary Fund do not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202- 522-2422; e-mail: pubrights@worldbank.org. ISBN: 978-0-8213-7384-2 eISBN: 978-0-8213-7385-9 DOI: 10.1596/978-0-8213-7384-2 Cover photo: © Robert Wallis/Panos Pictures. Cover image: Women in Rajasthan, India, carry sand near the village of Paladi Bhopatan to form rainwater collection channels. Rajasthan has been suffering from a drought for the last eight years. Cover design by Quantum Think. Contents Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xvii Overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Part I Monitoring the Development Agenda . . . . . . . . . .19 1 Sustaining and Broadening the Growth Momentum . . . . . . . . . . . . . . . . .25 2 Achieving Better Results in Human Development . . . . . . . . . . . . . . . . . . .59 3 Scaling Up Aid: Opportunities and Challenges in a Changing Aid Architecture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .91 4 Harnessing Trade for Inclusive and Sustainable Growth . . . . . . . . . . . . .117 5 Leveraging through the International Financial Institutions. . . . . . . . . . .143 Part II Special Theme: Environmental Sustainability. . .179 6 Ensuring Environmental Sustainability at the National Level . . . . . . . . .181 7 Global Environmental Sustainability: Protecting the Commons. . . . . . . .205 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .237 ANNEX Monitoring the MDGs: Selected Indicators. . . . .251 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 v C O N T E N T S Boxes 0.1 MDGs and the environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1 Assessing whether countries are on or off track . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 2 Statistical capacity building: furthering progress . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 1.1 Recent revisions of purchasing power parities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 1.2 The recent financial market turbulence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 1.3 Growth in Africa: rising but uneven. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 1.4 Management of natural resource revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 1.5 Impact of oil price increases on low-income countries . . . . . . . . . . . . . . . . . . . . . . . 38 1.6 Rising food prices and their policy implications. . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 1.7 Vietnam: Growth with equality leads to dramatic success in reducing poverty. . . . . 42 1.8 Private remittances: positive effects and risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 1.9 The Commission on Growth and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 1.10 Institutions, inequality, and growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 2.1 Comparing inequality in health in India and Mali . . . . . . . . . . . . . . . . . . . . . . . . . . 62 2.2 The Education for All Fast-Track Initiative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 2.3 Improving educational quality and stimulating growth . . . . . . . . . . . . . . . . . . . . . . 72 2.4 Indicators of environmental risk factors--DALYs . . . . . . . . . . . . . . . . . . . . . . . . . . 79 2.5 Exposure to indoor air pollution: Evidence from Bangladesh. . . . . . . . . . . . . . . . . . 84 3.1 Improving the predictability of aid: Ghana and Tanzania . . . . . . . . . . . . . . . . . . . 106 3.2 Debt Management Performance Assessment Tool . . . . . . . . . . . . . . . . . . . . . . . . . 113 4.1 Trade data and trade restrictiveness indicators. . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 4.2 The World Bank Logistics Performance Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 4.3 WTO negotiations and climate change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 4.4 Will carbon labeling help or hinder developing-country trade? . . . . . . . . . . . . . . . 141 5.1 Bank-Fund Collaboration: Joint Management Action Plan . . . . . . . . . . . . . . . . . . 150 5.2 Lending by the IMF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 5.3 Global Emerging Markets Local Currency Bond Initiative . . . . . . . . . . . . . . . . . . 154 5.4 Supporting the preparation of poverty reduction strategies: The case of Mozambique. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 5.5 The IMF's programs for improving statistical capacity . . . . . . . . . . . . . . . . . . . . . 159 5.6 Malaysia-Africa Knowledge Exchange Seminar: An example of South-South knowledge sharing. . . . . . . . . . . . . . . . . . . . . . . . . . . 160 5.7 Coordination among donors in Bolivia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 5.8 Recent examples of country-level harmonization with regional development banks . . . 163 5.9 The Africa Action Plan: progress in implementation . . . . . . . . . . . . . . . . . . . . . . . 165 5.10 World Bank country systems pilot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175 5.11 Carbon Partnership Facility and Forest Carbon Partnership Facility . . . . . . . . . . . . . 176 6.1 The importance of environmental income to the poor . . . . . . . . . . . . . . . . . . . . . . 183 6.2 MDG 7 indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184 6.3 Assessing the performance of subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 6.4 Adjusted net savings as a sustainability indicator. . . . . . . . . . . . . . . . . . . . . . . . . . 202 7.1 Weather-index insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217 7.2 Adaptation to climate change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218 7.3 Sources of carbon finance under the UNFCCC . . . . . . . . . . . . . . . . . . . . . . . . . . . 228 vi G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 C O N T E N T S Figures 1 At the global level, progress and prospects vary widely across MDGs . . . . . . . . . . . 20 2 Progress toward MDGs is slowest in fragile states . . . . . . . . . . . . . . . . . . . . . . . . . . 22 3 Most countries are off track to meet most MDGs . . . . . . . . . . . . . . . . . . . . . . . . . . 22 1.1 Poverty head count . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 1.2 Per capita GDP growth rates by country group, 2003­07 . . . . . . . . . . . . . . . . . . . . 32 1.3 Number of emerging-market and developing countries by annual real GDP per capita growth rates, 2003­07. . . . . . . . . . . . . . . . . . . . . . . 32 1.4 Commodity price indexes, 1991­2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 1.5 Terms-of-trade changes by country group, 1991­2007 . . . . . . . . . . . . . . . . . . . . . . 35 1.6 Real per capita GDP growth rate for low-growth fragile states, adjusted for terms-of-trade changes, 1991­2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 1.7 Annual change in Gini coefficient in 59 developing countries . . . . . . . . . . . . . . . . . 40 1.8 Decompositions of change in the Gini coefficient. . . . . . . . . . . . . . . . . . . . . . . . . . . 41 1.9 Average ranking of "ease of doing business," by region and income group . . . . . . . . . . 49 1.10 Aggregate labor productivity gains in Latin America, by firm size . . . . . . . . . . . . . . 51 1.11 CPIA governance indicators, 2000­06. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 1.12 GDP growth vs. adjusted net savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 1.13 Adjusted net saving trends, 1990­2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 2.1 Regional disparities in primary school completion and participation, 1990­2005 . . . . 62 2.2 Incidence of public health spending on poorest and richest quintiles, 1989­2001. . . . 63 2.3 Incidence of public education spending on poorest and richest quintiles, 1985­2001 . . . 63 2.4 Differences in Laotian education achievement across age, gender, and ethnic group, 2002­03 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 2.5 Relationship between health and education inequality and income inequality . . . . . 66 2.6 Relationship between health and education inequality and per capita income . . . . . 67 2.7 Absenteeism among primary health care workers, 2002­03 . . . . . . . . . . . . . . . . . . 69 2.8 Relationship of health quality to income and public health care expenditures . . . . . . . . 73 2.9 Stunting and wasting for under-five children, 2000­present. . . . . . . . . . . . . . . . . . . 75 2.10 The relationship between malnutrition, poverty, and education. . . . . . . . . . . . . . . . 77 2.11 Relation of reductions in under-five malnutrition to increases in income . . . . . . . . . . 78 2.12 Environmental disease burden in DALYs per 1,000 people, 2002 . . . . . . . . . . . . . . . 80 2.13 Environmental contribution to disease burden. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 2.14 Economic burden associated with poor environmental health . . . . . . . . . . . . . . . . . 82 2.15 Trends and projections of access to water and sanitation in developing countries, 1990­2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 2.16 Access to clean water and sanitation by expenditure quintile, 32 African countries . . . . 83 3.1 DAC members' net ODA flows and 2010 target . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 3.2 DAC members' ODA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 3.3 Distribution of DAC members' ODA by type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 3.4 Top 10 recipients of the increase in net ODA, 2002­06. . . . . . . . . . . . . . . . . . . . . . 95 3.5 Rising trend in aid from non-DAC bilaterals and NGOs . . . . . . . . . . . . . . . . . . . . . 97 3.6 Net ODA to Sub-Saharan Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 3.7 Conflict risk, aid, and peacekeeping. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 3.8 Humanitarian aid, 1970­2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 vii C O N T E N T S 3.9 Concentration of DAC donors and multilaterals in selected countries, measured by programmable aid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 3.10 In-year predictability is improving . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 3.11 Strong growth in assistance for health, 2000 and 2006 . . . . . . . . . . . . . . . . . . . . . 109 3.12 Ethiopia: Distribution of aid within the health sector . . . . . . . . . . . . . . . . . . . . . . 110 3.13 Reduction of debt stock for the 33 post-decision-point HIPCs. . . . . . . . . . . . . . . . 111 3.14 Risk of debt distress in post-completion-point HIPCs . . . . . . . . . . . . . . . . . . . . . . 113 4.1 Change in OTRI, 2000­06 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 4.2 Producer support estimates for OECD members, 1999­2006 . . . . . . . . . . . . . . . . 125 4.3 Nominal rate of assistance to farmers in high-income and developing countries, 1960 to 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 4.4 Nominal rate of assistance to farmers in developing countries, 1960 to 2004 . . . . 126 4.5 Gross subsidy equivalents of assistance to farmers in developing and high-income countries, 1960­2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 4.6 Change in the average MA-OTRI for all exports, 2000­06 . . . . . . . . . . . . . . . . . . 129 4.7 Higher growth is associated with lower trade restrictiveness . . . . . . . . . . . . . . . . . 130 4.8 Countries with better trade logistics have higher trade-to-GDP growth . . . . . . . . . . 132 4.9 Restrictiveness of services trade policies, 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 4.10 Services trade restrictiveness indices, by sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 4.11 Distribution of aid for trade by income group and region, and by category, average 2002­06 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 4.12 Environmental goods confront significant trade restrictiveness . . . . . . . . . . . . . . . 138 5.1 MDBs' gross disbursements, by type of flow and region, 2000­07 . . . . . . . . . . . . 151 5.2 World Bank knowledge service inputs, by type, 2002­07 . . . . . . . . . . . . . . . . . . . 160 5.3 World Bank portfolio of global partnership funds by theme and host institution. . . . 161 5.4 Progress toward operational development strategies in low-income countries . . . . 164 5.5 Policy and poverty selectivity of concessional assistance by the MDBs. . . . . . . . . . 166 5.6 IBRD and IDA disbursements by sector and themes . . . . . . . . . . . . . . . . . . . . . . . 167 5.7 Active World Bank environment and natural resource portfolio, by thematic distribution, as of June 30, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 5.8 ADB projects with environmental elements by theme, 2006 . . . . . . . . . . . . . . . . . 177 1 Framework for monitoring environmental sustainability . . . . . . . . . . . . . . . . . . . . 180 6.1 Annual deforestation by region and for top 10 countries, 2000­05 . . . . . . . . . . . . 185 6.2 Internal freshwater resources per capita, by region and income group, 2005. . . . . 186 6.3 Trends and projections in freshwater availability, West Asia . . . . . . . . . . . . . . . . . 187 6.4 Annual freshwater withdrawals, by region and income group, 2002 . . . . . . . . . . . . 187 6.5 Total water withdrawal relative to renewable water resources, selected countries . . . . 188 6.6 Sustainability in energy- and mineral-rich economies. . . . . . . . . . . . . . . . . . . . . . . 189 6.7 Annual particulate matter (PM10) concentrations, 1990­2004 . . . . . . . . . . . . . . . 190 6.8 Use of biomass products and waste, by income, 1990­2004 . . . . . . . . . . . . . . . . . 191 6.9 Adjustments to the saving rate: The case of Bolivia in 2002 and 2005 . . . . . . . . . . . 193 6.10 Relative importance and composition of natural capital, 2005 . . . . . . . . . . . . . . . 194 6.11 Natural capital per capita across regions of the world, 2005 . . . . . . . . . . . . . . . . . 195 6.12 Evolution of the value of natural capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 6.13 Environmental Performance Index, by income group and region, 2008. . . . . . . . . 197 6.14 Evolution of the CPIA environment score, 1999­2006 . . . . . . . . . . . . . . . . . . . . . 198 viii G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 C O N T E N T S 6.15 CPIA environment score and its subcomponents, 2006 . . . . . . . . . . . . . . . . . . . . . 199 7.1 Projections of surface temperatures for three IPCC scenarios. . . . . . . . . . . . . . . . . 208 7.2 Impacts of increases in temperature and precipitation on agricultural yields, 2079­99 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 7.3 Estimated death rate from climate change in 2000, by WHO subregion . . . . . . . . . 212 7.4 Vulnerability to sea level rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 7.5 World GHG emissions, by sector, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219 7.6 Per capita GHG emissions in 2000, including emissions from land use change. . . . . 221 7.7 Annual CO2 emissions under the A1FI scenario, 1965­2035. . . . . . . . . . . . . . . . . 222 7.8 Cumulative atmospheric CO2 under the A1FI scenario, 1965­2035 . . . . . . . . . . . 222 7.9 Change in annual CO2 emissions by carbon intensity class, 1994­2004. . . . . . . . . . 223 7.10 Energy intensity by region, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 7.11 CO2 emissions from land use changes, 1850­2000 . . . . . . . . . . . . . . . . . . . . . . . . 227 7.12 Kyoto targets and changes in GHG emissions for Annex B countries. . . . . . . . . . . 230 7.13 Proportion of terrestrial and marine area protected . . . . . . . . . . . . . . . . . . . . . . . . 231 7.14 Living Planet Index, 1970­2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231 7.15 Living Planet Indexes for terrestrial, marine, and freshwater organisms . . . . . . . . . . 232 7.16 Global trends in the world's marine stocks since 1974. . . . . . . . . . . . . . . . . . . . . . 233 Tables 1.1 Summary of world output . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 1.2 Net financial flows to developing countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 1.3 International remittances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 1.4 The quality of macroeconomic policies in low-income countries, 2003­07 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 1.5 Status of investment climate reform, 2003­07 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 1.6 Low coverage and high cost of Africa's infrastructure . . . . . . . . . . . . . . . . . . . . . . . 50 1.7 Total per capita wealth and its components, by developing region and economy type . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 1.8 Per capita natural wealth and its components, by developing region and economy type, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 1.9 Adjustments to savings, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 2.1 Selected measures of health inequality, by region and income group, 2000­present . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 2.2 Selected proximate measures of health care quality for selected countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 2.3 Downward trends in under-five malnutrition, 1990­2005 . . . . . . . . . . . . . . . . . . . . 74 2.4 Deaths and DALYs lost due to solid fuel use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 2.5 Projected health effects of climate change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 2.6 Cost per DALY of alternative interventions for addressing environmental hazards, US$ per healthy year gained. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 4.1 OTRI and TTRI, by income group, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 4.2 OTRI and TTRI, by developing country region, 2006 . . . . . . . . . . . . . . . . . . . . . . 123 4.3 OTRI and TTRI for the four largest traders, 2006 . . . . . . . . . . . . . . . . . . . . . . . . 123 4.4 Gross subsidy equivalents of assistance to farmers, by region, 1960­2004 . . . . . . 126 4.5 MA-OTRI and MA-TTRI by income group, 2006. . . . . . . . . . . . . . . . . . . . . . . . . 128 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 ix C O N T E N T S 4.6 Aid for trade, 2006, and annual average, 2002­06 . . . . . . . . . . . . . . . . . . . . . . . . 136 4.7 Increase in trade volumes from liberalizing clean energy technologies . . . . . . . . . . 138 5.1 Strategic shifts by IFIs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 5.2 IBRD cofinancing by types of cofinancier, 1998­2007 . . . . . . . . . . . . . . . . . . . . . . 153 5.3 Record expansion of IDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 5.4 Reports posted by agency at Country Analytical Work Web site, 2007 . . . . . . . . . . 157 5.5 MDB gross disbursements to fragile states, 2002­07 . . . . . . . . . . . . . . . . . . . . . . . 167 5.6 A comparison of MDB assessment systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 6.1 The targets under MDG 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 6.2 Environmental links to the MDGs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 6.3 Top 10 emitters of industrial water pollution, 2001. . . . . . . . . . . . . . . . . . . . . . . . 190 6.4 Access to electricity, by region, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 6.5 Top 10 users of biomass products and waste, 1990­2004 . . . . . . . . . . . . . . . . . . . 192 7.1 Likelihood of various CO2e concentrations exceeding various increases in global mean surface temperature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 7.2 Changes in mean global temperature and sea level associated with various IPCC scenarios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 7.3 Possible impacts of climate change in the mid-to-late-21st century . . . . . . . . . . . . 209 7.4 Estimated DALYs attributed to climate change in 2000. . . . . . . . . . . . . . . . . . . . . 211 7.5 Ten countries most affected by a one meter rise in sea level . . . . . . . . . . . . . . . . . . . 215 7.6 Weather damage index (WDI), by country and region . . . . . . . . . . . . . . . . . . . . . . 215 7.7 GHG emissions, by sector and region, 2000, metric tons of CO2e. . . . . . . . . . . . . 220 7.8 Comparison of GHG emissions for Annex I and non-Annex I countries . . . . . . . . 223 7.9 Comparison of industrial energy efficiency across countries. . . . . . . . . . . . . . . . . . 225 7.10 Availability of renewable resources relative to current consumption, by World Bank region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226 x G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 Foreword T he Global Monitoring Report 2008 success on a number of other MDGs which comes at an important time. This are unlikely to be met, including maternal year marks the halfway point in the health, infant mortality, and education. effort to achieve the Millennium Develop- Shortfalls in the human development areas ment Goals (MDGs) by 2015. This is also an are especially serious in South Asia and important year to work toward a consensus Sub-Saharan Africa. Within this overall pic- on how the world is going to respond to the ture, there is considerable variation across challenge of climate change, building on the countries. The report finds that, on current foundation laid at the conference in Bali in trends, most countries are off track to meet December 2007. Successfully meeting this most of the MDGs, with those in fragile sit- challenge will be essential for durable prog- uations falling behind most seriously. ress toward the MDGs and related develop- The implication of this assessment is ment outcomes. In providing an integrated clear. If the world is to get back on track assessment of the agenda for development to meet the MDGs, the international com- and environmental sustainability, this year's munity needs to move quickly to generate report offers timely input on issues that will stronger and broader momentum toward be at the center of discussions at various these goals. In the context of expediting and international forums in coming months. broadening progress toward the MDGs, and The report's assessment of the MDGs at ensuring the sustainability of that progress, midpoint presents a mixed picture. The first the report proposes an agenda for inclusive MDG calls for reducing extreme poverty and and sustainable development. hunger by half. Although the poverty goal is Strong and inclusive growth must be at the likely to be met at the global level, thanks center of the strategy to achieve the MDGs, to a remarkable surge in global economic including concerted efforts to spur growth growth over the past decade, there are seri- in lagging countries in Africa and elsewhere ous shortfalls in fighting hunger and malnu- and in fragile situations. While specific pol- trition--the "forgotten MDG." High food icy priorities for growth vary from country and energy prices have brought increased to country, looking across countries, several attention to these issues, but more is needed. areas emerge as essential to robust growth: Reducing malnutrition is the MDG with a sound macroeconomic policies; a conducive "multiplier" effect, because it is essential to private investment climate, including access G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 xi F O R E W O R D to energy and other key infrastructure; and port should not divert resources from other good governance. In many countries in development programs. Africa, and in low-income countries more Donors must scale up aid in line with their generally, a dynamic agricultural sector is commitments. Sizable shortfalls loom if cur- crucial for strong and inclusive growth and rent trends in aid persist. Thanks to reforms, will help to mitigate the recent upward pres- a number of developing countries are in a sures on food prices. In countries that are position to utilize increased resources pro- severely affected by the food price increases, ductively. The changing aid architecture, well-targeted safety nets may also be needed including new sources and modalities of aid, to cushion the impact on the poor. promises more resources and innovation but The recent financial market turbulence also poses new challenges for aid effectiveness and the resulting global economic slowdown and coherence. We should use the opportunity pose difficult challenges for policy makers. provided by the Accra High Level Forum in We will need decisive monetary and fiscal September 2008 to address the new, dynamic policy action to head off a deterioration of dimensions of the aid effectiveness agenda. growth prospects in advanced and devel- We also need to catalyze and leverage more oping economies, and stronger prudential private capital in support of development. supervision to put the financial system on a We can and should harness trade more firmer footing. effectively to contribute to strong and inclusive We must accelerate progress toward the growth. The international community must human development goals. There is a clear achieve a successful outcome of the Doha need to step up programs in health and trade negotiations in 2008. The current high education, but it is also clear that increased food prices provide a window of opportunity public spending alone is not the answer. The to break the impasse on agricultural trade lib- quality and equity of spending are equally eralization. We should increase aid for trade; important. And policy interventions must together with behind-the-border reforms of factor in the strong links that exist between key trade-related services, it can help poor health and education outcomes, nutrition, countries take advantage of trade opportuni- and environmental factors--water and sani- ties, promoting more inclusive globalization. tation, pollution, and climate change. The international financial institutions We must integrate environmental sus- (IFIs) have a crucial role to play in sup- tainability into core development work, porting this agenda through their financ- maximizing synergies. For natural resource­ ing, knowledge, and coordination services. dependent countries, sound resource man- At the country level, these institutions need agement is critical for sustainable growth. to tailor their products and services to the Poor countries will suffer the most from increasingly differentiated needs of member climate change and are the least able to countries. They also need to respond to the adapt. For them, the best way to adapt is to expanding agenda of global and regional develop--by diversifying their economies, public goods, such as combating climate strengthening infrastructure, and developing change. In a more complex international health systems. Mitigation of carbon emis- financial and development architecture, the sions will require financing and technology coordination and leveraging role that the transfer to developing countries. Such sup- IFIs play will be increasingly important. Robert B. Zoellick Dominique Strauss-Kahn President Managing Director World Bank International Monetary Fund xii G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 Acknowledgments T his report has been prepared jointly A number of other staff made valuable by the staffs of the World Bank and contributions, including the following from the International Monetary Fund. In the World Bank: Issam Abousleiman, Mehdi preparing the report, staff have collaborated Akhlaghi, Juan Alonso, Philippe Ambrosi, closelywithpartnerinstitutions--theAfrican Jorge Araujo, Elizabeth Ashbourne, Soma Development Bank, the Asian Development Bhattacharya, Iwona Borowik, Eduard Bos, Bank, the European Bank for Reconstruc- Paul Brenton, Shaohua Chen, Ajay Chhib- tion and Development, the Inter-American ber, Michael Child., Kenneth Chomitz, Sus- Development Bank, the Organisation for mita Dasgupta, William Dick, Ariel Dinar, Economic Co-operation and Development, Yvonne Edwards, Nevin Fahmy, Manuela the World Trade Organization, and the Ferro, Viven Foster, Homa-Zahra Fotouhi, United Nations. The cooperation and sup- Dianne Garama, Colum Garrity, Batshur port of staff of these institutions are grate- Gootiiz, Vincent Gouarne, Gloria Grando- fully acknowledged. lini, Christopher Hall, Michael Jensen, Ellis Zia Qureshi was the lead author and Juan, Sima Kanaan, Arthur Karlin, Hiau manager of the report. The core team for Looi Kee, Jung-Kwan Kim, Jane Kirby-Zaki, the report included Punam Chuhan, Mau- Peter Kolsky, Markus Kostner, Aart Kraay, reen Cropper, Stefano Curto, Kirk Ham- Arianna Legovini, Soe Lin, Andres Londono, ilton, Bernard Hoekman, Homi Kharas, Ana Lopes, Mariem Malouche, Aaditya Maureen Lewis, Jamus Lim, Muthukumara Mattoo, Susan McAdams, Craig Meisner, Mani, Alessandro Nicita, and Giovanni Gary Milante, Don Mitchell, Lalita Moorty, Ruta (World Bank) and Richard Harmsen Richard Newfarmer, Kyran O'Sullivan, and Alexei Kireyev (IMF). Other significant Abha Prasad, Xiaolin Ren, Ashok Sarkar, contributions were made by Sebastien Des- Banafsheh Siadat, Susan Stout, Jana Stover, sus, Mary Hallward-Driemeier, and Linda Gary Stuggins, Gaiv Tata, Margret Thal- Lee (World Bank) and Emmanuel Hife witz, Mark Thomas, Sumter Travers, Kath- and Ioana Niculcea (IMF). Sachin Shahria erine Tulenko, Gallina Vincelette, Roberto assisted with the overall preparation and Zagha, and Albert Zeufack. coordination of the report. The work was Other contributors from the IMF included carried out under the general guidance of Sonia Brunschwig, David Hofman, Subir Alan Gelb, Acting Senior Vice President and Lall, Dustin Smith, Mark Tareen, and Anna Chief Economist, World Bank. Unikovskaya. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 xiii A C K N O W L E D G M E N T S Contributors from other institutions and David Wheeler for valuable contribu- included: Philibert Afrika, John Kofi Baf- tions and comments. foe, Ferdinand Bakoup, Shen Gao, Onyango Guidance received from the Executive Ouma James, Penthesilea Lartey, Mohamed Directors of the World Bank and the IMF Manai, and Daniele Ponzi (AfDB); Chris and their staff during discussions of the MacCormac, Bruce Purdue, Antonio Res- draft report is gratefully acknowledged. sano-Garcia, Manju Senapaty, and Sha- The report also benefited from many useful hid Zahid (ADB); Alistair Clark, James comments and suggestions received from the Earwicker, Elisabetta Falcetti, Jacquelin Bank and Fund management and staff in the Ligot, Nicolas Mathieu, Terry McCal- course of its preparation and review. lion, and Alan Rousso (EBRD); Marcelo The World Bank's Office of the Publisher Barrón, Tracy Betts Sikander Daryanani, managed the editorial services, design, pro- Fernando Fernández, Orlando Ferreira, duction, and printing of the report. In par- Carlos Herrera, Mercedes Mateo, Patricia ticular, Susan Graham, Denise Bergeron, Meduña, Fernando Mendoza, Max Pulgar- Nancy Lammers, Stephen McGroarty, Vidal, Susana Rubio, Alejandro Soriano, and Santiago Pombo-Bejarano, along with Raul Tuazon, and Natasha Ward (IDB); Kirsten Dennison and associates at Precision and Yasmin Ahmad and Brian Hammond Graphics, Candace Roberts and associates (OECD). at Quantum Think, and Martha Gottron, Acknowledgments are also due to Joseph provided excellent help with publishing this Aldy, Robert Mendelsohn, Nicholas Stern, report on a very tight schedule. xiv G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 Abbreviations ACP African, Caribbean, and Pacific EIF Enhanced Integrated countries Framework ADB Asian Development Bank EITI Extractive Industries AfDB African Development Bank Transparency Initiative AIDS acquired immune deficiency EPA Economic Partnership syndrome Agreement AMC Advanced Market EPI Environmental Performance Commitment Index (of the EU ACP) ASEAN Association of Southeast Asian EU European Union Nations FAO Food and Agriculture CCT conditional cash transfer Organization (of the UN) CDM Clean Development FDI foreign direct investment Mechanism GAVI Global Alliance for Vaccines CEA Country Environmental and Immunizations Analyses (of the World Bank) GDP gross domestic product CERs Certified Emissions Reductions GEF Global Environment Facility CPIA Country Policy and GFATM Global Fund to Fight AIDS, Institutional Assessment Tuberculosis, and Malaria CRS Creditor Reporting System (of GHG greenhouse gas the OECD DAC) GNI gross national income DAC Development Assistance HIPC heavily indebted poor Committee country/countries DALY disability-adjusted life year HIV human immunodeficiency DRF Debt Reduction Facility (of the virus World Bank) IBRD International Bank for EBRD European Bank for Reconstruction and Reconstruction and Development Development IDA International Development EC European Commission Association (of the World Bank EDF European Development Fund Group) EFA-FTI Education for All­Fast-Track IDB Inter-American Development Initiative Bank G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 xv A B B R E V I A T I O N S IEA International Energy Agency OTRI overall trade restrictiveness IFC International Finance index Corporation (of the World PEPFAR President's Emergency Plan for Bank Group) AIDS Relief IFI international financial PPP purchasing power parity institutions PRS poverty reduction strategy IFFIm International Finance Facility PTA preferential trade agreement for Immunization SADC Southern Africa Development IHP International Health Community Partnership SME small and medium enterprise IMF International Monetary Fund SWAp sectorwide approach IPCC Intergovernmental Panel on TTRI Tariff Trade Restrictiveness Climate Change Index ITC International Trade Centre UA unit of account LDCs least-developed countries UN United Nations LICs low-income countries UNCTAD UN Conference on Trade and MDG Millennium Development Goal Development MDB multilateral development bank UNFCCC UN Framework Convention on MDRI Multilateral Debt Relief Climate Change Initiative UNHCR UN High Commissioner for MICs middle-income countries Refugees NAMA non-agricultural market access UNDP UN Development NGOs nongovernmental organizations Programme NTM nontariff measure UNRWA UN Relief and Works ODA official development assistance Agency OECD Organisation for Economic WFP World Food Programme Co-operation and Development WHO World Health Organization OPEC Organization of Petroleum WTO World Trade Organization Exporting Countries xvi G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 Executive Summary T hecentralmessagesoftheGlobalMon- Within this overall picture, there is con- itoring Report 2008 are clear: urgent siderable variation across regions and coun- action is needed to help the world meet tries. At the regional level, Sub-Saharan the Millennium Development Goals (MDGs) Africa lags on all MDGs, including the goal by 2015; and urgent action is also needed for poverty reduction, though many coun- to combat climate change that threatens the tries in the region are now experiencing well-being of all countries, but particularly of improved growth performance. South Asia poor countries and poor people. The goals of lags on most human development MDGs, development and environmental sustainabil- though it will likely meet the poverty reduc- ity are closely related, and the paths to those tion MDG. At the country level, on current goals have many synergies. trends most countries are off track to meet most of the MDGs, with those in fragile sit- MDGs at Midpoint uations falling behind most seriously. Yet most MDGs remain achievable for Assessment of the MDGs at midpoint pres- most countries if stronger efforts are made ents a mixed picture, one of both signifi- both by the countries and their development cant progress and formidable challenges. partners. Progress must be accelerated and The first MDG calls for reducing extreme made more inclusive. International attention poverty and hunger by half. Although the associated with the MDG midpoint makes poverty goal is likely to be met at the global 2008 a crucial year to generate the neces- level, thanks to a remarkable surge in global sary momentum. The planned high-level economic growth over the past decade, meetings during the year provide an oppor- there are serious shortfalls in fighting hun- tunity to agree on priorities for action and ger and malnutrition. The recent rise in food milestones for monitoring progress. prices has brought increased attention to these issues, but more is needed. On cur- Development and rent trends, the human development MDGs Environmental Sustainability are unlikely to be met. Prospects are gravest for the goals of reducing child and maternal Concurrently, building on the outcome of mortality, but shortfalls are also likely in the the December 2007 conference in Bali, 2008 primary school completion, empowerment is also an important year to make progress of women, and sanitation MDGs. on the climate change agenda. MDG 7 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 xvii E X E C U T I V E S U M M A R Y underscores the strong links between devel- growth in Africa has improved, only opment and environmental sustainability, about one-third of the region's popula- the special theme of this year's Global tion lives in countries that have achieved Monitoring Report. Ensuring environmen- sustained GDP growth of 7 percent or tal sustainability is necessary for achieving more in the past decade. the other MDGs and maintaining long-term While specific policy priorities for growth growth and development. vary from country to country, looking Early action to control greenhouse gas across countries, three areas emerge as emissions will significantly reduce mitiga- essential to robust growth: sound macro- tion and adaptation costs. Even if efforts economic policies; a conducive private to stabilize emissions are successful, some investment climate, including access to degree of warming and related impacts will key infrastructures; and good gover- continue to occur into the next decades. nance. In fragile states, improvement of Developing countries will be the most the governance environment, together affected. In the 1990s about 200 million with security enhancement, is crucial. people a year, on average, were affected by In many countries in Africa, and in climate-related disasters in developing coun- low-income countries more generally, tries, compared with 1 million in developed a dynamic agricultural sector is key to countries. Heavier dependence on natural achieving strong and inclusive growth, resources and agriculture in poor countries and will help to mitigate the upward pres- makes them more vulnerable to the impact sures on food prices. An African Green of climate change, and their poverty and Revolution would provide a strong foun- lack of development make them less able to dation for growth and poverty reduction adapt. Thus development, adaptation, and in the region. mitigation are closely connected. Risks to developing-country growth aris- ing from the financial market turbulence Inclusive and Sustainable and the rise in energy and food prices Development: A Six-Point need careful monitoring and appropriate Agenda policy responses, including prudent fiscal and monetary policies and, where needed, To expedite and broaden progress toward well-targeted safety nets to cushion the the MDGs, and to ensure the sustainability impact of the price increases on the poor. of that progress, the report proposes a six- point agenda for inclusive and sustainable 2. Achieve better results in human development. development Progress toward the human develop- 1. Sustain and broaden the growth ment goals must be accelerated. That will momentum require commitment of more resources, Strong and inclusive economic growth including increased donor support, to key must be at the center of the strategy to programs in education and health--for achieve the MDGs. Poor countries need example, the Fast-Track Initiative in edu- to achieve annual GDP growth of 7 per- cation, health systems strengthening, and cent or more to make serious dents in combating malaria. poverty. More spending on education and health Stronger, concerted efforts are needed to programs, however, is not the sole answer. spur growth in lagging countries in Africa The quality and equity of spending are and elsewhere and in fragile states. While equally important. Improved governance, xviii G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 E X E C U T I V E S U M M A R Y stronger accountability mechanisms, and which is vitally important for them given sound expenditure management are essen- their greater vulnerability. For poor coun- tial to raising the quality of education and tries, the best way to adapt is to develop-- health services and improving the access by diversifying their economies, strength- of poor, underserved populations. ening infrastructure, developing health A stronger focus is needed on combating systems, and curbing climate-sensitive malnutrition, especially among children, diseases such as malaria and diarrhea. to underpin better human development outcomes. 4. Scale up aid and increase its Policies and programs must factor in the effectiveness strong links that exist between health and education outcomes, nutrition, and envi- The time to deliver on aid commitments ronmental factors--water and sanitation, to support the effort to meet the MDGs pollution, and climate change. is now. Donors must expedite aid deliv- ery to meet their commitments. Sizable shortfalls loom if current trends in official 3. Integrate development and development assistance continue; short- environmental sustainability falls will particularly hurt those poor Environmental sustainability must be countries and fragile states that, thanks integrated into core development work, to their reform efforts, offer promising maximizing synergies. Environmental scale-up opportunities. management and integration with the The changing aid architecture, including development agenda require institutional new sources and modalities of aid, prom- strengthening in developing countries, ises much-needed increases in resources including capacity building for related and creates opportunities for experimen- institutions and improvement of poli- tation and innovation in development cies such as property rights to natural finance. It also poses new challenges resources. for aid effectiveness and coherence. The For natural resource­dependent coun- opportunity provided by the Accra High tries, sound resource management is criti- Level Forum in September 2008 should be cal for sustainable growth. The quality of used to address the new, dynamic dimen- macroeconomic management and gover- sions of the aid effectiveness agenda. nance can determine whether the resource Increased private flows to developing wealth is a source of development finance countries create opportunities to catalyze or a contributor to the "resource curse." and leverage more private capital in sup- The Extractive Industries Transparency port of development, including through Initiative has laid a good foundation for innovative public-private partnerships. enhancing international cooperation in Both borrowers and creditors need to pay support of efficient and transparent man- attention to debt sustainability consid- agement of natural resources. erations to prevent a reaccumulation of Mitigation of carbon emissions will unsustainable debts following debt relief. require financing and technology trans- fer to support transition to low-carbon 5. Harness trade for strong, inclusive, growth in developing countries. Such and sustainable growth support should not divert resources from other development programs. The international community must aim Developing countries will also need sup- for a successful outcome of the Doha port with adaptation to climate change, trade negotiations in 2008. The current G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 xix E X E C U T I V E S U M M A R Y high food prices provide a window of services. In a more complex international opportunity to break the impasse on agri- financial and development architecture, cultural trade liberalization. the coordination and leveraging role that Aid for trade should be increased; the IFIs play will be increasingly impor- together with behind-the-border reforms tant, even as their relative financing role of key trade-related services, it can help declines. poor countries take advantage of trade At the country level, the IFIs need to tai- opportunities, promoting more inclusive lor their advice, products, and services globalization. to the increasingly differentiated needs Trade policy can facilitate transfer of of their member countries, including a environmentally friendly technologies strong focus on low-income countries, by removing barriers to trade in environ- fragile states, and concentrations of pov- mental products and services. erty within middle-income countries to help the "bottom billion" grow and con- nect to the global economy. 6. Leverage IFI support for inclusive and The IFIs also need to adapt their strate- sustainable development gies to respond to the growing importance The international financial institutions of global and regional public goods, such (IFIs) have a crucial role to play in sup- as combating climate change, through porting this interrelated development advice, direct interventions, and working and environment agenda through their with other development partners and the financing, knowledge, and coordination private sector. xx G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 Overview D eclaring a "development emergency," toward the goals to focus the action and mea- a host of world leaders meeting in sure progress. Davos, Switzerland, in January 2008 Building on the outcome of the Bali cli- issued an MDG Call to Action to help the mate change conference, 2008 is also an world get back on track to meet the Millen- important year to make progress on the cli- nium Development Goals. Halfway to 2015, mate change agenda. MDG 7 underscores the international community needs to recom- the strong links between development and mit to the development goals and redouble environmental sustainability. Ensuring envi- efforts to achieve them. International atten- ronmental sustainability is important for tion and a series of planned high-level meet- achieving the other MDGs and sustaining ings in connection with the MDG midpoint long-term growth and development. Climate make 2008 a crucial year to build stronger change and loss and degradation of natu- and broader momentum toward the MDGs-- ral resources have the potential to severely to make the midpoint a turning point for the reverse hard-earned development gains of the development goals. past and constrain prospects for the future. While many developing countries are mak- Developing countries will suffer the most and ing impressive progress toward the MDGs, are the least able to adapt. As World Bank many others are falling behind. On cur- President Robert B. Zoellick observed at the rent trends, a majority of countries will fall Bali conference, "Climate change is a devel- short of most MDGs. Yet, the MDGs remain opment, economic, and investment challenge, achievable for most countries if stronger not just an environmental issue. . . . Address- efforts are made both by the countries them- ing climate change is a critical pillar of the selves and their development partners--in development agenda."2 the spirit of mutual accountability for these This report addresses the interrelated goals agreed at Monterrey, Mexico, in 2002.1 challenges of development and environ- Assessment at the MDG halfway point shows mental sustainability. It assesses progress a clear, urgent need to accelerate progress and priorities in the agenda to achieve the and make it more inclusive. The planned MDGs. It assesses the challenge of environ- high-level international meetings in 2008 mental sustainability and its implications for provide an opportunity to agree on priorities, developing countries, and monitors progress including setting possible interim milestones at national and global levels to address the G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 1 O V E R V I E W challenge. Based on its assessment, the report is needed to make serious dents in poverty sets out an integrated agenda for develop- and reach the poverty-reduction target under ment that is inclusive and sustainable. MDG 1. In Africa as well as in other regions, progress in poverty reduction has been slow- MDGs at Midpoint: est in fragile states. Indeed, in aggregate, the Significant Progress, incidence of extreme poverty rose in this Yet Formidable Challenges group of countries. Fragile states, wracked by conflict and hampered by weak governance Poverty reduction: strong but uneven progress. and capacities, account for about 19 percent First the good news. The world is on course of the population of low-income countries to achieve the first target under MDG 1-- but more than one-third of their poor people. halving extreme poverty between 1990 and Globally, around 1 billion people continue 2015. This success owes much to a remark- to live in extreme poverty. Excluding China, able surge in economic growth. The world extreme poverty between 1990 and 2004 economy and the developing countries have declined by a much smaller 32 million. rarely grown faster over a sustained period. Growth in developing countries has averaged Human development goals: more serious over 7 percent in the past five years. The num- shortfalls. Notable progress has been made ber of extreme poor--those living under $1 on human development­related MDGs, a day--in the developing world declined by but the risks of falling short are far greater 278 million between 1990 and 2004, and by for these goals than for the income poverty a stunning 150 million in the last five years MDG. Again, the good news first. Halfway of that period. The sizable reduction in the to 2015, about 40 million more children are absolute number of poor people is all the more in school; gender disparity in primary and remarkable as it was achieved notwithstand- secondary schools has declined by 60 per- ing a rise in the population of the developing cent; 3 million more children survive every world by about 1 billion between 1990 and year; 2 million lives are saved every year by 2004. The decline in poverty has been the immunization; and 2 million people now largest in regions with the strongest growth. receive AIDS treatment. Yet, about 75 mil- East Asia, the fastest growing region, has lion children of primary school age are still already reached the poverty-reduction MDG. not in school; 10,000 women die every week Other regions have also shared in the rise in from treatable complications of pregnancy economic growth and reduction of poverty. and birth; more than 190,000 children under Yet progress has been uneven, with many five die of disease every week; over 33 mil- countries lagging behind, especially in Africa. lion people are infected with HIV, with more While the MDG 1 poverty-reduction target than 2 million dying every year from AIDS; will be met at the global level, Sub-Saharan more than 1 million people die of malaria, a Africa is likely to fall well short. There has preventable disease, every year, including 1 been a very encouraging pickup in growth child every 30 seconds; and about half of the in the region. Some 18 countries with better- developing world lacks basic sanitation. managed economies have grown at an aver- Despite progress, on current trends most age rate of about 5.5 percent over the past 10 human development MDGs are unlikely to years. But roughly as many countries in the be met at the global level. While some regions region, some 20 in number, many affected will meet some of these goals, Sub-Saharan by conflict, have remained trapped in low Africa and, in some cases, South Asia are growth, averaging only about 2 percent. Even likely to fall seriously short. Prospects are among the faster growers, only a few, mainly gravest in health, with large shortfalls likely resource-rich countries, have managed to at the global level and in several regions in achieve growth in the 7­8 percent range that reducing child and maternal mortality by 2 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 O V E R V I E W two-thirds and three-quarters, respectively, lagging countries, including in Africa, prog- and halving the proportion of those without ress is being made. The strengthening of eco- access to basic sanitation (there is greater nomic growth in a number of African coun- progress on the related goal of halving the tries is especially significant. Some African proportion of those without access to safe countries recently have achieved impressive water). While much progress has been made results: for example, Ghana, Mozambique, in reducing child malnutrition, shortfalls are Tanzania, and Uganda in accelerating growth likely in reaching the goal of halving its inci- and reducing poverty; Malawi in achieving dence, especially in Sub-Saharan Africa and particular success in boosting agricultural South Asia. The HIV prevalence rate has productivity; Ghana, Kenya, Tanzania, and shown some decline in Africa but has risen Uganda in increasing primary school enroll- in some other regions, albeit from much ment; Niger, Togo, and Zambia in combat- smaller levels than in Africa. Mortality from ing malaria; Senegal and Uganda in increas- malaria remains high but lack of data makes ing access to water and sanitation; Niger it difficult to monitor incidence over time. in promoting reforestation; and Rwanda in Prospects are better in education. The achieving an impressive recovery from con- world is likely to miss the goal of univer- flict. This progress needs to be quickened and sal primary school completion, though it broadened--across MDGs, across countries, will come close. However, sizable shortfalls and across populations within countries. are likely in Sub-Saharan Africa and South Asia. The goal of eliminating gender dis- Development and parity in primary and secondary education Environmental Sustainability: seems attainable by 2015, although Sub- Integrally Linked Saharan Africa is likely to fall short. Pros- pects for achieving gender parity in tertiary Urgency of action to accelerate and broaden education and other gender-related targets progress toward the development goals are less promising. The regional shortfalls in is paralleled by urgency of action to com- Sub-Saharan Africa and South Asia in part bat climate change that threatens the well- reflect the lower base they started from. being of all countries but particularly that of poor countries and poor people. Develop- Overall outlook: daunting challenges, but ment and environmental sustainability are grounds for hope. In sum, while many coun- fundamentally complementary objectives tries have made impressive progress, most (although in the short term they may appear countries are currently off track to meet most as trade-offs). Environmental sustainability oftheMDGs,withfragilestatesfallingbehind is essential for continued economic growth most seriously. At a regional level, Sub-Saha- and reduction of poverty. It also exerts posi- ran Africa lags on all MDGs, including MDG tive impacts on human development goals-- 1 for poverty reduction. South Asia lags on health, nutrition, and education outcomes. most human development goals, although it Economic growth and development in poor will likely meet the poverty reduction MDG. countries in turn can contribute to environ- With the world already at the halfway mental sustainability by improving their point, recovering lost ground on some of the access to modern energy and cleaner and MDGs seems daunting. Indeed, it is a huge more efficient technologies and by reducing challenge. But rapid progress is possible. The reliance on activities, such as cutting forests, success of better-performing regions and that are detrimental to the environment. countries inspires and gives reasons for hope. Deforestation contributes about one-fifth One such example is Vietnam's achievement of total greenhouse gas (GHG) emissions. in reducing poverty from around 58 percent At present, 1.6 billion people, about a third in 1993 to 16 percent in 2006. Even in many of the developing world's population, are G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 3 O V E R V I E W without access to modern energy, forced to scenarios show developing countries in rely on more carbon-emitting biomass and Sub-Saharan Africa, South Asia, and parts fossil-fuel energy. Economic development of Latin America, which are home to 1 bil- also expands the resources and capacities lion of the world's poorest people, suffer- of poor countries to adapt to environmental ing the largest losses in agricultural output, impacts. ranging from 15­60 percent. Environmen- tal risk factors play a role in 80 percent of Sound natural resource management essen- diseases globally, and the economic burden tial. For developing countries, most of whom of environmental health hazards has been have a high dependence on natural resources, estimated at 1.5­4 percent of GDP. The cost carefully managing those resources and the of climate change in disability-adjusted life environment is especially important for the years was estimated at 5.5 million annually sustainability of growth and development in 2000, an estimate that will only rise if outcomes. On average, natural capital con- climate change is not checked. Children of stitutes more than 40 percent of the national the developing world bear the brunt of the wealth of low-income countries (close to 60 health impact of climate change through percent if the more advanced emerging mar- increased incidence of diseases such as diar- ket countries are excluded from this group), rhea, malaria, and respiratory infections. compared with only 5 percent in high-income More than 200 million people in develop- countries. Issues of sustainable use of natu- ing countries live in potential impact zones ral resources are typically raised in relation where they would become refugees from to subsoil assets, notably oil, but extend to coastal flooding at a three-meter sea level other resources such as forests and water. rise. Even at a one-meter sea level rise, a An area of forest equivalent to the size of number of countries would be significantly Panama or Sierra Leone is lost every year to affected: for example, without adaptation land use changes, with most of the loss con- efforts, more than 10 percent of Vietnam's centrated in Latin America and Sub-Saharan population would be affected, and the coun- Africa. Per capita freshwater availability try would lose 10 percent of its GDP and 29 could fall below critical levels in the near percent of its wetlands. During the 1990s, future in many countries in the Middle East 200 million people per year, on average, and South Asia. Pollution threatens the qual- were affected by climate-related disasters in ity of air and water. The major urban air pol- developing countries, compared with about lutant affecting human health is particulate 1 million in developed countries. matter whose concentrations in low-income countries are on average nearly three times Inclusive and higher than in high-income countries. How Sustainable Development: these resources are managed will be critical A Six-Point Agenda to longer-term sustainability of growth. What is the agenda implied by this assess- Climate change: poor countries most affected. ment? Progress toward the MDGs must be Heavier dependence on natural resources quickened and broadened to include the and agriculture and lack of development many countries that are lagging behind. To also render poor countries more vulnerable ensure the sustainability of this progress, the to the impact of climate change and less able environmental challenges must be addressed to adapt. These include impacts on agricul- in a manner that is supportive of develop- ture and human health, and the effects of sea ing countries' growth and development. To level rise and extreme weather events. meet these challenges, the report sets out a Estimates of the impact of global warm- six-point agenda for inclusive and sustain- ing through 2080 based on nonmitigation able development (box 0.1). 4 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 O V E R V I E W BOX 0.1 MDGs and the environment A six-point agenda for inclusive and sustainable development Sustain and broaden the growth momentum ­ Strong and inclusive growth must be at the center of the strategy to achieve the MDGs. ­ Concerted efforts are needed to spur growth in lagging countries in Africa and fragile states; a dynamic agri- cultural sector is crucial for strong and inclusive growth in many poor countries. ­ Sound macroeconomic policies, a conducive private investment climate (regulatory environment, infrastruc- ture), and good governance are essential for growth. ­ Risks to developing-country growth arising from recent financial market turbulence and rises in oil and food prices need careful monitoring and appropriate responses. Achieve better results in human development ­ Key programs in health and education must be stepped up--for example, the Fast-Track Initiative in educa- tion, eradication of malaria, and health systems strengthening. ­ Increased public spending alone is not the answer; quality and equity of spending are equally important. ­ A stronger focus is needed to combat malnutrition, especially among children, and to underpin better human development outcomes. ­ Policies and interventions must factor in the strong links between health and education outcomes, nutrition, and environmental factors--water and sanitation, pollution, and climate change. Integrate development and environmental sustainability ­ Environmental sustainability must be integrated into core development work, maximizing synergies. ­ For natural resource­dependent countries, sound resource management is critical for sustainable growth. ­ Developing countries will suffer most from climate change and are least able to adapt; for them the best way to adapt is to develop. ­ Transition to climate-resilient and low-carbon growth will require financing and technology transfer to devel- oping countries. Such support should not divert resources from other development programs. Scale up aid and increase its effectiveness ­ Donors must expedite aid delivery in line with commitments. Sizable shortfalls loom if current ODA trends per- sist, which will particularly hurt poor countries and fragile states that offer promising scale-up opportunities. ­ The changing aid architecture promises more resources and innovation but also poses new challenges for aid effectiveness and coherence. The Accra High Level Forum provides a timely opportunity to address the new, dynamic dimensions of the aid agenda. ­ Increased private flows to developing countries create opportunities to catalyze and leverage more private capital in support of development, including through innovative public-private partnerships. ­ Both borrowers and creditors need to pay attention to debt sustainability to prevent a reaccumulation of unsustainable debts following debt relief. Harness trade for strong, inclusive, and sustainable growth ­ Countries must aim for a successful Doha outcome in 2008. High food prices provide a window of opportu- nity to move on agricultural trade reform. ­ Aid for trade to strengthen trade logistics, supported by services liberalization, is important for poor coun- tries' competitiveness and ability to benefit from trade opportunities. ­ Trade policy can facilitate transfer of environmentally friendly technologies by removing barriers to trade in environmental products and services. Leverage IFI support for inclusive and sustainable development ­ The declining relative financing role of the international financial institutions (IFIs) does not imply less relevance. Their impact through leverage remains key in achieving collective action on development (MDGs and related outcomes) and the increasingly important global and regional public goods such as combating climate change. ­ Adaptation of operational strategies initiated by several IFIs in response to increasing client differentiation and global change is important and timely. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 5 O V E R V I E W 1. Sustaining and Broadening the of the sharp rise in the prices of oil and food. Growth Momentum Both supply constraints and rapid growth in demand have contributed to the rise in prices-- Strong and inclusive growth is central to including, in the case of food prices, the achieving the MDGs and related development increasing use of food crops for biofuels. Thus outcomes. It reduces poverty directly and far the macroeconomic impact on importing expands resources and capacities for achiev- countries in general has been relatively lim- ing the other MDGs related to human devel- ited, offset by rising prices of other commod- opment and environmental sustainability. ity exports and higher capital inflows. But the situation of net oil and food importers could Implications of Global Economic Developments worsen if oil and food prices rise further or if Financial turbulence, global slowdown. An the favorable offsetting developments reverse. immediate priority is to contain the interna- Poor people in developing countries spend as tional financial market turbulence and limit its much as a half of their income on food. The impact on developing country growth. Thus urban poor are the most directly affected. far the effects on developing countries have Possible policy responses range from energy been relatively contained, thanks to improved demand management and targeted safety nets macroeconomic policies and stronger funda- for affected poor in the short term to longer- mentals. Global GDP growth in 2008 is pro- term measures to increase energy production jected to slow to 3.7 percent from 4.9 percent and promote agricultural growth. To cushion in 2007, with growth in developing countries the impact of price shocks on the poor, reliance slowing by about a percentage point but still should be placed on targeted safety net pro- remaining relatively strong at 6.7 percent. grams, avoiding recourse to price controls and Nonetheless, the persistence of financial trade restrictions that are distortive, ineffec- market turbulence and its knock-on effects tive, and ultimately unsustainable. If needed, on growth pose downside risks to this out- the International Monetary Fund (IMF) and look. Also, private capital flows, which have the World Bank could provide financial sup- become much more important as a source of port through the Exogenous Shocks Facility or external financing in developing countries, IDA (International Development Association) could reverse. Countries with large current financing. account deficits and asset bubbles are par- ticularly vulnerable, especially in emerging Policies and Institutions for Strong Europe, and bear close monitoring. Given and Inclusive Growth current uncertainties and country differences, Looking to the medium term, a key chal- there is no single policy prescription for devel- lenge is to spur stronger growth in lagging oping countries in addressing the implications countries that have not shared in the surge of the financial market turmoil. Vulnerabilities in growth witnessed in much of the devel- and the appropriate policy responses must be oping world over the past several years. assessed on a country-by-country basis. Pru- Specific policy priorities and sequencing dent policies that allow automatic stabilizers of actions to promote growth necessarily to operate may be preferable to policy activism vary by country. Across developing coun- for many countries. Renewed attention to fun- tries there is considerable diversity in eco- damentals--prudent external debt manage- nomic circumstances. The specifics of the ment, fiscal discipline, and flexible exchange policy agenda for growth at the country rate policies--can cushion shocks and facili- level must be defined as part of individual tate adjustment in vulnerable countries. country development strategies. Looking across countries, three broad areas emerge Rise in oil and food prices. Another, and as being essential to robust growth: sound related, immediate concern is the implications macroeconomic policies; a conducive private 6 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 O V E R V I E W investment climate, including a business- agricultural sector is crucial for strong and friendly regulatory environment and access inclusive growth and will help to mitigate the to key infrastructure; and good governance. upward pressures on food prices that became Policies in all three areas have been improv- visible in 2007. An estimated 900 million rural ing in developing countries but progress people in the developing world live on less than has been uneven, which is mirrored in the $1 a day; most of them are engaged in agricul- improving but uneven growth performance ture in some form. A recent World Bank study across countries in recent years. Deeper and estimated that GDP growth originating in agri- more consistent progress on reforms in these culture is about four times more effective in key areas will be needed to achieve sustained reducing poverty than GDP growth originat- and more broadly based growth. ing outside the sector.3 An African Green Rev- olution would provide a strong foundation for The growth agenda in Africa. Sub-Saharan growth and poverty reduction in the region. Africa perhaps illustrates the diversity of countries' growth performance most strik- Managing natural resource revenues. Some ingly. About 20 countries, accounting for a African countries that are rich in natu- third of the region's population, continue to ral resources, and that together account record very low rates of economic growth for most of the remaining one-third of the that imply stagnant or even declining per cap- region's population, have achieved average ita incomes. Many of these are fragile states growth rates as high as 9 percent, fueled affected by conflict. Their policy agenda by the boom in resource prices. Their main comprises a mix of security enhancement, challenge lies in managing and transforming political reform and consolidation, capacity their natural resource wealth into long-term building, and actions to build private sector sustainable growth. This calls for good gov- opportunities. They need international aid, ernance to support extracting and managing but they also need to strengthen basic govern- the resource wealth efficiently and transpar- mental capacity to ensure its effective use. ently and transforming resource revenues Another group of African countries into productive investments that help diver- accounting also for roughly a third of the sify the economic base. Explicit resource region's population has improved growth rent policies are often needed: the chain from performance in recent years to an average rent capture to the management and use of of 5­6 percent, with some achieving higher resource rents can determine whether rich growth. This group includes countries such resource stocks are a source of development as Ghana, Mozambique, Rwanda, Tanzania, finance or a contributor to the "resource and Uganda, which a decade ago appeared to curse." Countries should be encouraged to have rather grim prospects. Their main chal- participate in the Extractive Industries Trans- lenge is to build on reforms to strengthen the parency Initiative (EITI), which is making foundations for strong, sustained, and broad- headway, with 24 implementing countries (of based growth. Solidifying macroeconomic which 17 are in Sub-Saharan Africa) includ- stability, further improving the climate for ing 7 with national EITI reports out and a private investment through regulatory and system in place for validating performance. institutional reform and strengthened physical infrastructure, and deepening regional and Rise in income inequalities: Is globalization global links are key elements of their growth to blame? Besides disparities in growth per- agenda. These countries demonstrate capacity formance across developing countries, there to utilize scaled-up external assistance effec- has been an increase in income inequality tively to further their growth prospects. within many countries. That increase has In many countries in Africa, and in low- been more pronounced in countries with income countries more generally, a dynamic higher growth rates. A recent IMF study ana- G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 7 O V E R V I E W lyzing the impact of globalization on inequal- this report assesses the quality of programs ity found that the major factor contributing to and services in health and the role of qual- the rise in inequality has not been globaliza- ity in achieving the desired health out- tion, but rather technological progress, which comes. Addressing the issue of quality in has reduced demand for low-skill workers public health care can make a significant and increased opportunities and rewards for contribution toward reducing child mortal- higher-skill workers. Financial globalization ity, improving maternal health, checking has contributed too, but its effect has been the spread of major diseases, and reducing more than offset by the equalizing effect of malnutrition. Health care quality is highly trade liberalization. Broadening access to uneven, both across and within countries, education and financial services would help whether measured by the breadth of medi- counter the disequalizing effects of techno- cal facility and treatment coverage, health logical progress and financial globalization.4 care provider competence and motivation, Also important is an investment climate that or medical outcomes. Thanks to expanded expands opportunities by providing a level health programs, access to health care is playing field to firms. In poor countries, improving, but poor outcome measures in boosting agriculture is crucial for inclusive many instances suggest low or falling quality growth, as noted above. as access rises. Research shows that rising per capita income is positively related to health care quality, but rising public health spend- 2. Achieving Better Results ing alone is not. Effectiveness of spending in Human Development and service delivery matters. Improved gov- Progress toward the human development ernance is critical for raising quality, includ- MDGs must be expedited if serious short- ing attention to the competency of provid- falls are to be avoided. A major scaling up ers, incentives to improve performance, and of efforts is needed in education and health, accountability mechanisms to ensure better and especially in health, where on current outcomes. Sound expenditure management, trends shortfalls are likely to be the most seri- better information (real-time data, oversight, ous. This will require commitment of more including checking the extensive prevalence resources, including donor support, to pro- of absenteeism, and monitoring and audit- grams in these sectors--for example, the Fast- ing), and a focus on results are essential to Track Initiative in education, health systems more effective service delivery. Strategies to strengthening, and combating malaria. But make effective use of the private sector and more spending alone is not the answer. The to strengthen the voice of clients at the point quality and equity of spending are equally of service delivery and within communities important. More attention needs to be paid also contribute to better quality services. to early childhood interventions, such as improved nutrition, that can establish a stron- Achieving more equitable outcomes. In ger foundation for better human development addition to quality issues, progress toward outcomes later in life. Policies and programs the MDGs is undermined by inequity in must also factor in the strong links that exist health and education spending and out- between health and education outcomes and comes. Health and education spending is environmental risk factors, such as lack of often skewed toward higher-income house- access to clean water and basic sanitation, holds. Analysis of the incidence of public pollution, and climate change. health and education spending shows the top income quintile benefiting substantially Raising quality of health services. Comple- more than the bottom quintile in practically menting the focus on quality in education all developing regions--by a factor of more in the 2007 Global Monitoring Report, than two in South Asia and Sub-Saharan 8 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 O V E R V I E W Africa. Inequity in outcomes is illustrated by mother's education and family income are the fact that in Latin America a child born in equally, if not more, important. Through the poorest quintile is almost three times as reducing the risk of diseases such as diar- likely to die before the age of five as a child rhea, access to clean water and basic sani- born in the richest quintile, almost six times tation also matters. Technical interventions as likely to be malnourished, and only two- to combat malnutrition already exist. They thirds as likely to receive medical treatment need to be expanded to scale and placed in for a simple complaint such as a fever. Low a wider multisectoral context. Donor pro- service quality exacerbates inequity as the grams to combat nutrition typically have poor are much more likely to receive sub- been dominated by food aid and supply-led standard services and could be discouraged technical assistance. An integrated, multi- from using the services altogether--even if sectoral approach is needed that recognizes these are free. Achieving gender parity in the multiple factors involved and exploits service access and outcomes has been a rela- related synergies, emphasizes education for tive success, but large disparities persist for mothers, explores innovative delivery mech- poorer segments of the population, those anisms such as school feeding programs in rural areas, and minority groups. Better with locally purchased food and CCTs, and targeted and tailored programs are needed engages communities and the private sector. to reach the underserved and marginalized The recent sharp rise in world food prices groups. Where feasible, conditional cash only increases the urgency of action. transfer (CCT) programs can help. Addressing environmental health risks. Tackling malnutrition. Malnutrition, espe- Principal environmental risk factors for cially among children, directly affects the health include water and sanitation (diar- incidence of disease and the probability of rhea and malaria), indoor and urban out- mortality. Malnutrition is the underlying door air pollution (respiratory infections), cause of at least 3.5 million deaths annually and climate change (tropical vector-borne and accounts for 35 percent of the disease diseases such as malaria). About a quarter of burden of children under age five. Better all deaths in the developing world are princi- nutrition in early years influences children's pally attributable to environmental risk fac- subsequent educational performance and tors. Unsafe drinking water and poor sani- their prospects for finishing school. Malnu- tation and hygiene account for around 90 trition during pregnancy increases the risk of percent of diarrhea cases worldwide. More a mother's death at delivery and accounts for than 40 percent of the global burden of more than 20 percent of maternal mortality. malaria can be prevented through improved Combating malnutrition, part of MDG 1, is environmental management. An estimated thus important also to the achievement of 1.5 million deaths annually caused by respi- MDGs 2, 4, and 5. While much progress has ratory infections are attributable to environ- been made in reducing child malnutrition in mental pollution. the developing world, it remains widespread In addressing the environmental risk in many countries, especially in Sub-Saharan factors, a key priority is to improve access Africa and South Asia where severe to mod- to clean water and basic sanitation and to erate stunting affects as many as 35 percent promote better hygiene, a vital comple- of children under five. South Asia has the ment to water and sanitation expansion in highest incidence of child malnutrition; the poor countries. It is estimated that meeting child malnutrition rate in India is double the the water and sanitation MDG will require African average. annual investment on the order of $30 bil- Food security is important for combat- lion, roughly double the current level.5 But it ing malnutrition, but factors such as the is not only a matter of public investment in G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 9 O V E R V I E W new systems. Better operation and mainte- effects of climate change manageable will nance of existing systems, and use of tariffs require a significant reduction of carbon to help finance that while protecting the emissions by developed countries along with poor, are essential, as is the exploitation of a curbing of growth in emissions by devel- opportunities for private participation. Insti- oping countries with eventual stabilization tutional strengthening of sector agencies will in the longer term. This accords with the be necessary, as will coordination across principle of "common but differentiated sectors given the strong linkages to health. responsibilities and respective capabilities" Responses to environmental health risks that recognizes developing countries' lower arising from pollution and climate change historical contribution to GHG concentra- are part of the broader agenda of mitigation tions and much lower energy use and carbon and adaptation addressed below. emissions per capita. However, even if total carbon emissions of developing countries are allowed to rise for some time, efforts 3. Integrating Development and must be made to reduce the carbon intensity Environmental Sustainability of GDP (emissions per unit of GDP). Key Environmental sustainability must be inte- elements of a mitigation framework include: grated into core development work, maxi- mizing synergies. Countries have over the pricing of carbon to provide market-based years increasingly incorporated into their incentives to mitigate growth and development strategies impor- development and diffusion of cleaner and tant aspects of environmental management, more energy efficient technologies and of including energy access and efficiency, con- renewable energy sources trol of pollution, improvement of water and financing and technology transfer to sup- sanitation systems, forest resource and land port transition to low-carbon growth in use management, and preservation of fisher- developing countries ies and biodiversity. Building on this prog- reducing deforestation. ress, the growing threat of global warming now necessitates an increased emphasis on Low-cost, high-impact opportunities should integration of climate change prevention be fully exploited, such as investing in "no- in development strategies--not to curtail regrets" options for improving energy development but to sustain it by permitting efficiency--investments that are based on continued economic growth through reduc- existing technologies or approaches and would tions in carbon intensity and by strengthen- pay for themselves if subsidies to energy con- ing capacity to adapt to climate risks. sumption and production were removed. Early action to control GHG emissions will significantly reduce mitigation and Strengthening adaptation: vital for devel- adaptation costs. Even if efforts to stabilize oping countries. Adaptation is particularly GHG emission are successful, some degree important for developing countries as they of warming and related impacts will con- will suffer the most from climate change tinue to occur into the next decades. An and are able to adapt the least. For them, the effective response to climate change must best way to adapt is to develop, which will combine both mitigation and adaptation. strengthen adaptation options and capacities by diversifying their economies and expand- Moving forward on mitigation. The inter- ing the resources they need to adapt--by national community must work toward a strengthening infrastructure, developing timely agreement on a post-Kyoto frame- health systems and curbing climate-sensitive work for mitigation. Stabilization of GHG diseases such as malaria and diarrhea. Pro- concentrations within levels that keep the grams to reduce vulnerability and "climate 10 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 O V E R V I E W proofing" of investments can have immediate to accelerate progress toward the MDGs-- payoffs, such as implementing early warning moving vigorously to spur economic growth, systems for heat waves, floods, and droughts; strengthening revenue administration, and building dams to accommodate increased improving the efficiency of spending. They runoff; and making roads and bridges climate must also build on reforms to mobilize pri- proof. As vulnerability to climate impacts var- vate investment--domestic and foreign. ies widely across developing countries, adap- Still, for most low-income countries, offi- tation programs must be country specific. cial development assistance (ODA) remains a major source of development finance. In Financing mitigation and adaptation. The Sub-Saharan Africa, home to most of these Secretariat of the UN Framework Conven- countries, official flows account for about tion on Climate Change has estimated that two-thirds of all capital inflows. Even with by 2030, annual financial flows to develop- stronger efforts to mobilize more domestic ing countries will need to be on the order of resources and attract more private capital $100 billion to finance mitigation and $28 inflows, these countries will need a substantial billion to $67 billion for adaptation. While increase in ODA to improve their prospects over 80 percent of these flows are expected for achieving the MDGs. In middle-income to come from the private sector, with car- countries aid plays a much smaller but still bon markets playing an increasingly impor- important role, by catalyzing reforms, sup- tant role, public sector financing also will be porting efforts to tackle concentrations of essential to create the enabling environment poverty, helping to counter negative shocks, for private financing. Assistance for mitiga- and assisting with global or regional public tion and adaptation should be additional to goods such as climate change. current levels of official development assis- tance so that resources are not diverted from Increasing aid to exploit scale-up opportuni- other development programs. ties. The time to deliver on aid commitments to support the effort to achieve the MDGs is Institutional strengthening. Environmental now. Donors must expedite aid delivery. If management and its integration with the current ODA trends persist, sizable shortfalls development agenda will also require insti- loom, which would particularly hurt poor tutional strengthening in developing coun- countries and fragile states that offer prom- tries. This includes both capacity building ising opportunities to scale up development for related institutions and improvement of results. Many countries have improved their key policies such as property rights to natu- policies and capacities and are able to utilize ral resources. While progress is being made, increased aid productively. But donor response institutions for environmental management has tended to fall short. Both aid recipients in developing countries are particularly and donors need to deliver on their commit- weak. Progress has been strongest in East- ments if the MDGs are to be achieved. ern Europe and Central Asia whereas South The latest aid numbers give cause for Asia and Sub-Saharan Africa have lagged concern. The rise in ODA appears to have behind. Progress on environmental policies stalled. After rising during 2002­05, total in many cases is undermined by weak insti- net ODA from Development Assistance tutional capacities for enforcement. Committee (DAC) donors fell by 5 percent in real terms in 2006, and preliminary indi- cations are that it declined by a further 8.4 4. Scaling Up Aid and Increasing percent in real terms in 2007. At $103.7 bil- its Effectiveness lion in 2007, DAC net ODA was about $15 Developing countries must make stronger billion higher than its 2004 (pre-Gleneagles) efforts to mobilize more domestic resources level, but much larger and sustained G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 11 O V E R V I E W increases in aid will be needed to reach the Ensuring aid effectiveness in a changing aid target of a $50 billion increase in real terms architecture. Overall, there is some encour- by 2010 that was set at the 2005 Group of aging progress in the implementation of Eight summit in Gleneagles, United King- the Paris Declaration on Aid Effectiveness. dom (which would raise total net ODA to Progress on aid alignment and harmoniza- $130 billion in constant 2004 dollars). Aid tion has been notable though uneven. The to Sub-Saharan Africa shows broadly the predictability of aid is improving. However, same pattern: it has risen but at well short much of that improved predictability relates of the rate that would achieve the targeted to the near term. Medium-term predictabil- doubling of aid by 2010. Moreover, the ity, important for countries' planning and bulk (about 70 percent) of the increase in implementation of development strategies ODA post-Gleneagles has been in the form and programs, remains low. Longer time of debt relief. Core development aid--pro- horizons for aid commitments and clearer gram and project aid--has shown relatively rules for qualification and disbursement are little increase. Debt relief has significantly needed. Even as gains are made on the Paris reduced the debt burden of beneficiary coun- aid alignment and harmonization agenda, tries and expanded the fiscal space for devel- new challenges have arisen as the aid archi- opment spending. As debt relief operations tecture has become more complex with more wind down, core development aid will need donors, the potential for increased fragmen- to rise quite sharply to reach the Gleneagles tation of aid, and increased earmarking target for total ODA. However, preliminary through vertical approaches. evidence from DAC's 2007 forward survey The increased complexity of the aid archi- of donors' aid intentions suggests that, over- tecture enhances the role of strong country- all, these are not yet sufficiently ambitious led strategies as a critical element in aid to meet the targets set for 2010. effectiveness. Empowered by clear, coher- While traditional donors remain the domi- ent national development strategies that nant source of development aid, the aid land- are linked to budgetary frameworks and scape is changing rapidly. New sources of aid underpinned by stronger country systems have emerged, both from new official bilat- and capacities, countries themselves will be eral donors, including some developing-coun- best positioned to engage with a plurality try donors such as China and India, and from of aid sources and ensure coherence of aid private donors, who are playing an increasing with their development priorities. A chal- role in aid. New modalities of aid include lenge for the Paris agenda is the integration global vertical funds focused on specific of the new sources and modalities of aid in objectives, such as the Global Fund to Fight the aid alignment and harmonization frame- AIDS, Tuberculosis, and Malaria and the work. The Accra High Level Forum in Sep- Global Alliance for Vaccination and Immuni- tember 2008 provides a timely opportunity zation, and innovative financing modalities, to address the new, dynamic dimensions of such as the International Finance Facility for the aid agenda. Immunization, Advance Market Commit- ments, and the solidarity levy on airline tick- Health sector financing. The health sector ets. These new sources and modalities of aid, epitomizes the challenges to aid effectiveness whose role in the overall aid architecture is in the new aid architecture. New donors likely to increase, are expanding the potential and aid channels--global vertical funds, aid envelope and creating new opportunities earmarked funds from bilateral sources, for experimentation and innovation in devel- private donors--have brought much needed opment finance. They also pose new chal- attention and financing. Aid to health has lenges for aid effectiveness and coherence, to increased sharply, more than doubling maximize their development impact. between 2000 and 2006. But the multiplic- 12 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 O V E R V I E W ity of donors and aid channels and a verti- has improved the debt indicators, long-term cal focus on specific communicable diseases debt sustainability remains a challenge for have also made aid effectiveness and coher- several post completion­point countries. ence more challenging. Issues of alignment Prudent debt management as part of a sound with country strategies and priorities are macroeconomic framework and reforms to illustrated by the fact that in seven African build resilience to exogenous shocks will countries support from vertical funds for help prevent debt burdens from becom- fighting HIV/AIDS ranges from one-third to ing unsustainable again. Creditors need one-half of total spending on health. Donor to take debt sustainability considerations funding for HIV/AIDS exceeded that for into account in their lending decisions. The malaria by 40 percent in Ghana and 160 Bank-Fund Debt Sustainability Framework percent in Rwanda, even though in both is a tool that can be used by borrowers and countries malaria is the leading cause of creditors alike to assess and manage risks. morbidity and mortality. Issues of efficiency of use are illustrated by the fact that roughly 5. Harnessing Trade for Strong, Inclusive, one-half of health aid is off budget and by and Sustainable Growth mismatches between rapid increases in ear- marked funds and absorptive capacity. In Strong expansion in world trade has been Ethiopia health systems strengthening has a powerful force boosting global economic recently received only about 15 percent of growth. Worldwide merchandise exports donor financing for health, compared with grew 14 percent in value in 2007, well above 60 percent for HIV/AIDS. the average 9 percent growth recorded in the Such consequences, however, are not previous 10 years, with developing-coun- inevitable. The key is to better align and try exports rising still faster at 17 percent. integrate vertical and earmarked funds with Research shows that economic growth has country strategies and systems and improve been faster in countries that have liberal- donor coordination and complementar- ized their trade more. Trade restrictiveness ity. The strengthening of health systems-- has been on a declining trend in developing human resources, financial management countries in this decade, with middle-income and procurement, information, the gov- countries seeing the largest declines. ernance framework--needs greater atten- tion in donor support. This is important Unleashing trade. A successful Doha Round to bolster country capacities to plan and is crucial for sustaining strong trade growth implement effective and integrated health and making the sharing of its benefits more programs--for communicable diseases but inclusive--even more so now as protection- also for other programs such as mother and ist pressures may intensify with the prospec- child health that are interrelated. The need tive slowing of the global economy. A key for greater coordination and integration is bottleneck holding up progress has been recognized by recent initiatives such as the the lack of agreement on agricultural trade International Health Partnership that brings liberalization. The current high prices for together traditional and new donors and the food provide a window of opportunity that selection of health as a special focus sector World Trade Organization (WTO) members in monitoring the application of the Paris should use to break the impasse on reform- principles. ing agricultural trade policies in high-income countries. The highly restrictive and distor- Securing debt sustainability. While debt tive agricultural support policies maintained relief provided under the Heavily Indebted by these countries hurt both their consum- Poor Countries (HIPC) Initiative and the ers and producers in developing countries, Multilateral Debt Relief Initiative (MDRI) including some of the poorest countries. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 13 O V E R V I E W The linkage to agricultural growth in poor ness typically is hampered by weaker trade countries makes reform of these policies logistics. Many developing countries have especially important for achievement of the sought to improve the quality of key logisti- MDGs. The Doha outcome must aim for a cal services by opening them to foreign com- major reduction of barriers to agricultural petition. However, services trade regimes in trade. The bulk of the potential benefits most developing countries remain relatively from Doha are dependent on that. restrictive. Most services liberalization so Significant trade policy commitments by far has been undertaken unilaterally. The developing countries also are essential for Doha Round provides an opportunity to use realizing the potential of trade for develop- the WTO as a mechanism to further services ment, including tapping the considerable liberalization. scope for expanded trade among them. Aid for trade needs to be scaled up sub- Developing countries have higher average stantially to help countries address the levels of trade restrictiveness than high- behind-the-border constraints on their income countries but more neutral trade capacity to exploit trade opportunities. It policy regimes between agriculture and is particularly important for the least devel- manufacturing. The traditional policy of oped countries (LDCs), most of which are taxing agriculture in many developing coun- in Africa, for whom lack of trade capacity tries has become much less prevalent. Since and competitiveness arising from poor logis- the mid-1980s, gross subsidy equivalents of tics such as trade-related infrastructure and support to farmers in high-income coun- customs services, rather than market access, tries have remained high, at about $200 bil- is often the binding constraint. Progress lion a year, but have moved in developing has been made recently on aid for trade, countries from a negative amount (implying as illustrated by the initiative to enhance effective taxation) of about $100 billion a the Integrated Framework for trade-related year to positive amounts, signifying small assistance for LDCs and the willingness of to moderate positive support (except in donors to make commitments to the associ- Africa where the trade policy regime on bal- ated trust fund to support its operations. Aid ance continues to tax farmers). Doha offers for trade rose 10 percent in 2006 to reach an opportunity to developing countries to an estimated total of about $23 billion, with lock in the current relatively neutral cross- well over half of it directed to economic sectoral trade policy stance and to reap the infrastructure. Only half of the total flowed efficiency gains of further lowering applied to low-income countries, and only about a levels of protection. quarter to LDCs. Promoting inclusiveness in exploitation Facilitating transfer of environmentally of trade opportunities. Enabling firms to friendly technologies. Trade policy and aid exploit opportunities created by trade lib- for trade also have a role to play in fight- eralization and expanded market access ing global warming and supporting sustain- requires complementary behind-the-border able development by promoting the transfer policies to improve competitiveness and and adoption of environmentally friendly supply response capacities. Of particular technologies. Trade barriers confronting importance are services policies. The quality environmental goods and services, such as and cost of services such as transportation, products that generate energy in more envi- telecommunications, and finance are major ronmentally friendly ways or use energy determinants of competitiveness. Research more efficiently, tend to be highest in low- shows that countries with better trade logis- income countries, paralleling the overall tics are more successful in integrating into pattern of trade restrictiveness. From an global markets. Poor countries' competitive- environmental perspective, the best trade 14 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 O V E R V I E W policy is one that encourages the use of the tion, an evolving international financial most efficient environmental goods and ser- architecture, and increasingly differentiated vices. Removing policies that restrain trade client needs across low-income countries, in such products, and assisting producers in fragile states, and middle-income countries. developing countries to benefit rather than They must adapt their strategies to this lose from initiatives such as carbon label- change. While a process of adaptation has ing, can help harness the potential of trade been under way for some time, all IFIs over to support strong and inclusive growth and the course of the past year initiated major improve environmental outcomes. Comple- strategic reviews and introduced important menting trade policy, streamlining of intel- shifts. These strategic shifts have three com- lectual property rights and investment rules mon themes: can further aid in the transfer and assimila- tion of environmentally more efficient tech- First is a shift in client and business focus nologies, which can help with both the miti- to promote inclusive and sustainable glo- gation and adaptation aspects of the fight balization. One aspect of this shift has against climate change. been a sharpened focus on low-income countries and fragile states, and also on major concentrations of poverty within 6. Leveraging IFI Support for Inclusive middle-income countries, to connect the and Sustainable Development "bottom billion" to the global economy. How should international financial insti- Another is a strengthening of private sec- tutions (IFIs)--multilateral development tor operations, as private sector supply banks (MDBs) and the IMF--strengthen response is essential to reap the full ben- and sharpen support for the foregoing efits of globalization. Common to these agenda for inclusive and sustainable devel- shifts is a sharper differentiation of prod- opment? Net financial flows to developing ucts and services across clients. countries from IFIs relative to other sources Second is an orientation toward knowl- of financing have been declining. In 2007 edge services as a critical means of the IFIs had a share in net ODA of only 8 achieving development leverage and as percent. Net nonconcessional flows turned the glue that binds development part- slightly positive in 2007 after four years of ners--by building country absorptive large negative flows. But the IFIs' declining capacities, strengthening country strat- relative financing role does not imply less egies, underpinning aid effectiveness, relevance. The true measure of their impact disseminating best practice, and devel- must consider the development leverage they oping a shared knowledge base. There achieve beyond their narrow financing role. is demand for knowledge services from Their impact through leverage remains key both low- and middle-income countries, in achieving collective action on the MDGs but innovation is required to increase and related development outcomes and flexibility and responsiveness. Middle- on the increasingly important global and income countries also offer practical regional public goods. Shareholder recogni- experiences that the IFIs can increas- tion of this broader impact through lever- ingly tap for dissemination to low- age is reflected in record pledges made in income countries. the past year for IDA15 and AfDF (African Third is an increased emphasis on global Development Fund) XI. and regional public goods, through direct interventions and by creating an Responding to change: new strategic frame- enabling environment to leverage private works. IFIs face a challenging context of sector. These public goods span global rapid change brought about by globaliza- macroeconomic and financial stability, G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 15 O V E R V I E W international financial architecture, Bank for Reconstruction and Development trade, control of communicable diseases, have an average leverage ratio of almost 10 global environmental commons, regional to 1). On the other hand, nonconcessional economic integration, and global and lending to sovereigns, about $23 billion in regional knowledge goods. The increased 2007, has been generally flat, with large focus on global and regional public goods fluctuations depending on circumstances in poses a challenge for IFIs whose business individual countries. model has in large part been structured Challenges to effective engagement are around country platforms. especially complex in fragile states. The needs in these countries are huge, as they Success in carrying out these strategic shifts are farthest away from reaching the MDGs, will be crucial to the IFIs' ability to increase but they present difficult political and gov- impact by leveraging their assets and activi- ernance contexts for effective delivery of ties. Progress in ongoing efforts to adapt development finance and services. Nonethe- governance structures--members' quotas, less, MDB financial flows to fragile states voice, participation--also will be important rose by about 55 percent in the five-year for continued effectiveness. period 2002­07, reaching $2.4 billion. As some of these states move from peace-build- Ensuring strong operational outcomes in ing to state-building, demand for MDB sup- a context of change. Amid this process of port will rise further. Developing and imple- strategic change, MDBs posted an over- menting effective operational strategies for all strong performance in their financial fragile states is a key element of the IFIs' operations during 2007. Their gross dis- contribution to the agenda for inclusive and bursements reached a record $49 billion. sustainable development. Concessional flows and nonconcessional Strong country-led development strate- flows to nonsovereign entities have been gies (poverty reduction strategies or equiv- the most dynamic elements. Gross conces- alent strategic frameworks) are central to sional flows rose by 11 percent to over $12 development effectiveness, even more so in billion, with flows to Africa showing the a changing aid architecture characterized fastest increase. MDB support to Sub-Saha- by a plurality of aid sources and modali- ran Africa has more than doubled since ties. Strengthening country strategies is an 2000. Implementation capacity (including important focus of IFI knowledge services fiduciary) constitutes the key bottleneck in and capacity building. In 2007, 13 percent scaling up concessional finance. MDB non- of low-income countries were deemed to concessional flows to nonsovereign entities have well-developed operational frame- rose to over $13 billion in 2007, a quadru- works while another 67 percent had taken pling since 2000. Half of these flows are significant action to develop such frame- accounted for by the International Finance works (comparable figures for 2005 were 8 Corporation (IFC) and the other half by percent and 56 percent, respectively). These private sector arms of other MDBs. Encour- figures show progress but also a continuing agingly, nonsovereign flows to Africa have challenge. Both the IMF and the MDBs are also more than doubled since 2000. An engaged in efforts to strengthen analytic important IBRD-IFC innovation in 2007 support and policy advice, tailor it better was the establishment of a Global Emerg- to different client needs, and enhance its ing Markets Local Currency Bond Fund impact. (GEMLOC). Guarantees, cofinancing, and The IFIs are making progress on align- trust fund operations have also expanded ment and harmonization in the framework (guarantees from IDA and the International of the Paris Declaration, but monitoring 16 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 O V E R V I E W surveys show room for improvement on correct underinvestment in regional public several dimensions: use of country systems goods, achieve further progress in decen- and implementation frameworks; efficient tralization, and improve the development modalities for joint operations and pro- impact of private sector projects. Over- grammatic and sectorwide approaches; and all, results tracking methodologies need to predictability of support. Harmonization in develop a stronger focus on real results on the context of the changing aid architecture, the ground, such as the MDGs, rather than with the emergence of new players such as processes. Also, stronger, concerted support vertical funds that committed around $3.5 is needed to build country development data billion last year, poses new challenges. capacity. In 2007 the report of an External Review Committee (Malan report) identified areas for strengthening collaboration between the Rising to the environmental challenge. Pro- IMF and the World Bank, including in cri- grams supporting environmental sustain- sis management, work on fiscal and finan- ability exemplify the IFIs' increasing engage- cial sector issues, and technical assistance.6 ment in the provision of global public goods. Implementation of the committee's recom- Over the years, the IFIs have considerably mendations is proceeding under a Joint expanded their environmental activities--in Management Action Plan drawn up during energy, pollution control, water, land, bio- the year. diversity, environmental institutions. These activities have accounted for 12­15 percent Better tracking results. IFIs are making of their lending in recent years. Going for- progress in strengthening the results ori- ward, a major priority will be responding to entation of their operations and support- the increasing challenge of climate change. ing partner countries' capacity to manage The IFIs have a crucial role to perform in for results. A range of internal and exter- supporting global collective action to combat nal monitoring and evaluation methodolo- climate change. They are actively developing gies have been developed to track IFI per- new strategies to scale up work in this area. formance and results. Findings from these An example is the Clean Energy Investment exercises over the past year show mixed Framework. Key elements of their engage- results. Improvements have been made in ment will include: implementation of key programs such as the development outcomes targeted in the Integrating climate action into core devel- IDA14 Results Measurement System, and opment work the World Bank's Africa Action Plan and Providing innovative and concessional Infrastructure Action Plan. MDBs' Com- financing, such as the Global Environ- parative Assessment System (COMPAS) ment Facility and carbon finance indicators show progress on several dimen- Expanding the role of markets, such as sions of the results agenda, such as results the Carbon Partnership Facility and For- orientation of country assistance strategies est Carbon Partnership Facility and processes related to projects and pro- Facilitating new technology development gram design and implementation. But the and diffusion indicators also point to the need for stron- Creating an enabling environment to tap ger efforts to link resource allocation, incen- the private sector--engaging the IFC and tives, and institutional learning to results. other MDB private sector arms Findings from IFI independent evaluations Expanding research on mitigation and conducted over the past year included the adaptation, such as low-carbon country need to further streamline conditionality, growth studies. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 17 O V E R V I E W Notes 3. World Bank. 2008, World Development Report 2008: Agriculture for Development. Wash- 1. The MDGs flowed from the Millennium ington, DC: World Bank. Declaration adopted by 189 countries at the UN 4. IMF. 2007. World Economic Outlook: Glo- Millennium Summit, held in New York in 2000. balization and Inequality. Washington, DC: IMF. The Monterrey mutual accountability compact 5. This estimate does not include costs of all (also known as the Monterrey Consensus) emerged related water infrastructure, such as wastewater from the UN Conference on Financing for Devel- treatment. opment, held in Monterrey, Mexico, in 2002. 6. IMF and World Bank. 2007. Report of the 2. Robert B. Zoellick, speech at the United External Review Committee on Bank-Fund Col- Nations Climate Change Conference in Bali, Indo- laboration. OM2007-0014, Washington, DC. nesia, December 12, 2007. 18 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 I Monitoring the Development Agenda Millennium Development Goals at Midpoint: Where Are We? At midpoint between the adoption of the Progress toward the MDGs: MDGs in 2000 and their target date in 2015, A Mixed Picture the review of progress gives a mixed picture of significant improvement and formidable Accelerated economic growth makes the challenges ahead. It is mixed because prog- MDG 1 of halving extreme poverty by 2015 ress is uneven across MDGs, with goals likely at the global level (figure 1). Thanks to related to human development (primary a more conducive global environment--for school completion, child and maternal mor- trade, finance, technology, and migration-- tality) recording slower progress than those per capita GDP growth accelerated in most more immediately influenced by economic low- and middle-income countries in the past growth or the expansion of infrastructure decade, paving the way for substantial pov- networks (income poverty, gender parity erty reduction.2 Faster growth was in many at school, access to water and sanitation); cases accompanied by rising inequalities. But mixed because progress differs significantly with better economic management, it was across countries, regions, income groups, also characterized by a much lower incidence or institutional status--with fragile and of recessions and crises, events that most conflict-affected states lagging behind on often hurt the poor.3 As a result, current esti- all counts.1 mates4 suggest that two-third of the poverty G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 19 P A R T I FIGURE 1 At the global level, progress and prospects vary widely tive terms) than countries starting from more across MDGs favorable positions. HIV/AIDS and malaria MDG 1.A: Extreme poverty significantly contribute to slowing progress in the former group of countries, mostly located MDG 1.C: Hunger in Sub-Saharan Africa. Similarly, maternal MDG 2: Primary education mortality progress between 1990 and 2005-- MDG 3: Gender parity at school an estimated reduction from 430 to 400 deaths per 100,000 births--represents less than one- MDG 4: Child mortality tenth of the distance to be covered to meet the MDG 5.A: Maternal mortality MDG 5 of reducing maternal mortality by MDG 7.C: Access to safe water three quarters between 1990 and 2015. On current trends, these two MDGs will unlikely MDG 7.C: Access to sanitation be met at the global level, in Sub-Saharan 0 20 40 60 80 100 Africa and South Asia, and in most countries % distance to goal (see box 1 on country-level assessment). Distance to goal achieved Distance to goal to be achieved Rising enrollments are paving the way for by 2006a by 2006a to be on track reaching universal primary education comple- Source: Staff calculations based on World Development Indicators. tion and gender parity at school, though likely a. Most recent year for which data are available. not by the target date. In recent years, school Notes: MDG 1.A: Poverty headcount ratio (PPP93 US$1.08 a day); MDG 1.C: Underweight under-five children (U.S. child growth standards); MDG 2: Primary education comple- enrollments rose sharply, in Sub-Saharan tion rate; MDG 3: Gender parity in primary and secondary education; MDG 4: Under-five Africa and South Asia in particular--often mortality rate; MDG 5.A: Maternal mortality ratio (modeled estimates); MDG 7.C: Access to improved water source; MDG 7.C: access to improved sanitation facilities. in response to comprehensive educational reforms such as the abolition of tuition fees.5 With higher enrollments, gender disparity in reduction effort to be accomplished between primary and secondary education declined 1990 and 2015, had been realized by 2005, by 60 percent between 1990 and 2005. In and that a prolongation of current GDP turn, the MDG 3 of eliminating gender dis- trends would most probably allow achieve- parity at school is now attainable by 2015 ment of MDG 1 before 2015.4 While most (it had originally been hoped that this target of the poverty reduction between 1990 and would be met by 2005).Yet, enrollments-- 2004 took place in East Asia and the Pacific, even universal enrollments--do not ensure South Asia would contribute the most to that all children will be able to complete a global poverty reduction in the next decade. full course of primary schooling (MDG 2) Nonetheless, significant progress could also by 2015. Enrollment measured with admin- be registered in other regions--Sub-Saharan istrative data often significantly exceeds Africa and Latin America and the Caribbean attendance measured with surveys, revealing notably, but Sub-Saharan Africa is likely to the extent of absenteeism. Furthermore, sub- fall short of the MDG 1 target. stantial drop-outs, repetition, and late entry Conversely, slower progress made in terms at school (above the official age) make the of child and maternal mortality casts doubts MDG 3 very ambitious at the global level, on the prospects of reaching MDGs 4 and 5. if not unrealistic, given the little time left to Between 1990 and 2006, the probability for have all children enrolled in time to complete a child born in a developing country dying primary school by 2015. Between 1990 and before the age of 5 declined from 10.1 to 7.9 2006, only 41 percent of the total distance percent, an achievement hardly sufficient to to the MDG was covered using the primary cover half the distance needed to meet MDG completion rate6 as an indicator of progress, 4 of reducing child mortality by two thirds. and even less ground was covered when using Countries with higher mortality rates face instead the proportion of a cohort persisting greater difficulties in reducing them (in rela- to the fifth grade. The challenge is particu- 20 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 M O N I T O R I N G T H E D E V E L O P M E N T A G E N D A BOX 1 Assessing whether countries are on or off track When at least two observations are available after 1990, with a sufficient number of years sepa- rating them, the World Bank determines whether a country is on or off track to meet a given MDG by 2015. To do so, it compares the progress recorded so far with that needed to reach the MDG. Technically, this is equivalent to comparing the annual growth rate between 1990 and today with the constant growth rate required to reach the MDG in 2015 from the situation in 1990. The assessment assumes that progress becomes increasingly difficult the closer countries get to the goal. Such a methodology to assess progress toward MDGs is based on two premises. First, historical records suggest that MDG progress is not linear. Countries starting from less favorable positions make more rapid progress on most MDGs.a This is consistent with the idea of decreasing returns: as countries get closer to a goal, they face increasing difficulties to make additional progress and need to further increase their levels of policy effort. For instance, public service delivery in remote areas is more costly than in cities, making it difficult to maintain the same pace of progress when cities are already covered. Second, if understood as a means to focus the attention of donors, governments and citizens on lagging sectors and countries, a geometric approach (in comparison to a linear one) reduces the risk of underestimating the problem, while possibly increasing the risk of overstating it. In the face of possible irreversible damage (to human capital and the environment), which increases the cost of inaction over time, it would seem advisable to minimize the first risk. Obviously, being off track does not mean that the related MDG will necessarily not be met. Many factors--policies and shocks--can affect the progress rate toward MDGs. It is hoped that the designation of sectors and countries as off track will focus increased attention on them and expedite progress. a. World Bank. 2007. World Development Indicators 2007. Washington, DC: World Bank. larly acute in Sub-Saharan Africa, which is stable since 2003. As such, MDG 6 is far off track to meet both MDGs 2 and 3. attainable except that it is still very difficult The prevalence of HIV/AIDS and tuber- to monitor the incidence of malaria (mostly culosis started to stabilize at the turn of the located in Sub-Saharan Africa). decade. It is estimated that 31 million to 36 Substantial progress has been registered in million people worldwide were living with terms of people's access to water and sanita- HIV in 2007; of these, 21 million to 24 mil- tion, less so in terms of integrating the prin- lion were in Sub-Saharan Africa, and 3 mil- ciples of sustainable development into coun- lion to 5 million were in South Asia. Most of tries' policies. Data from 2004 suggest that the recent progress originates in Sub-Saha- 60 and 50 percent, respectively, of the dis- ran Africa, where the proportion of people tance to MDG 7 of halving the proportion of living with HIV decreased from 6 percent people without access to safe water and sani- to 5 percent between 2001 and 2007. But tation facilities had been covered. A signifi- progress was not noticeable elsewhere. cant part of the remaining distances is likely Europe and Central Asia and Latin America to be covered before 2015. But broader prog- and the Caribbean even recorded significant ress to integrate the principles of sustainable increases, although the two regions started development into country policies is much from much lower levels than Sub-Saharan slower. In fact, the cost of resource depletion Africa. Conversely, the prevalence of tuber- and air pollution was estimated to amount culosis is on the decline everywhere but in to 15 percent of developing countries' GNI Sub-Saharan Africa (which has the highest in 2005, up from 11 percent in 1990. Some prevalence rates), where it has been roughly of the environmental costs remain localized, G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 21 P A R T I such as those originating from particulate (figure 3).This picture is somewhat masked emissions, which rose sharply in East Asia by the influence of large and better-perform- and the Pacific between 1990 and 2005. But ing developing countries, such as China and others (CO2 emissions) have global conse- India, on aggregates. But observation at the quences for the environment. country level provides a more heterogeneous, less positive picture. On all MDGs--except The Challenges Ahead MDG3--the proportion of off-track coun- tries exceeds that of on-track countries. On Looking ahead, the challenge to reach the several MDGs, data gaps remain large. MDGs will increasingly be concentrated in Notwithstanding the progress made on low-income countries, and especially fragile country statistical capacity, it is still chal- states, where progress is slower--although lenging to assess countries' progress toward many middle-income countries, especially the MDGs. As noted above, global poverty those with large concentrations of poverty, is likely to be halved by 2015. But it is still will continue to face substantial challenges. the case that 78 out of 149 developing coun- On all MDGs, fragile states lag behind other tries lack adequate data to monitor poverty developing countries (figure 2).7 This group trends--the more so in countries where pov- of countries poses particular development erty reduction is believed to be particularly challenges, as many are dealing with conflict slow. Data are especially weak for some or post-conflict environments that make the MDGs such as maternal mortality. In the delivery of development finance and services absence of hard numbers, reliance has to be especially problematic. placed on modeling estimates of maternal At the country level, on current trends most mortality (or on some indirect measures of countries are off track to meet most MDGs policies assumed to influence mortality out- comes). Stronger efforts are needed to build on progress in developing countries' statisti- FIGURE 2 Progress toward MDGs is slowest in fragile states cal capacity (box 2). MDG 1.A: Extreme poverty FIGURE 3 Most countries are off track to meet MDG 1.C: Hunger most MDGs MDG 2: Primary Poverty education reduction MDG 3: Gender parity Primary at school completion rate MDG 4: Child mortality Gender equality MDG 5.A: Maternal Child mortality mortality reduction MDG 7.C: Access to safe water Water access MDG 7.C: Access to sanitation Sanitation access ­60 ­40 ­20 0 20 40 60 80 100 ­100 ­50 0 50 100 Progress toward goal by 2006, % % of 149 countries Middle-income countries Low-income countries Fragile states No data Seriously off track Off track On track Achieved Source: Staff calculations based on World Development Indicators. Source: Staff calculations based on World Development Indicators. Note: Indicators defined as for figure 1. Indicators are defined as in figure 1. 22 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 M O N I T O R I N G T H E D E V E L O P M E N T A G E N D A BOX 2 Statistical capacity building: furthering progress Developing countries are making progress in improving statistical capacity, as measured by a World Bank statistical capacity index for 117 low- and middle-income countries between 1999 and 2007. Progress is being recorded on the availability of statistics (MDG indicators in particu- lar), adherence to international statistical standards (statistical practice), and to a lesser extent, frequency with which data are being collected. Practice 100 75 1999 2007 50 25 0 Availability Collection Progress is also being made in terms of designing and implementing National Strategies for the Development of Statistics (NSDS) to strengthen countries' statistical systems: by February 2007, more than 100 developing countries had developed or initiated an NSDS. Such strategic framework of action (the centerpiece of the Marrakech Action Plan for Statistics, MAPS, agreed upon in 2004) was reaffirmed in Hanoi in February 2007 at the third international roundtable on managing for development results. Consultations between donors and partner countries pro- duced an agreement on the need to pool (greater) resources and to better coordinate efforts through NSDS mainstreamed in poverty reduction strategies. But several issues remain. Without stronger incentives to produce and use statistics, it is dif- ficult to ensure adequate allocation of attention and resources by donors and governments to statistical capacity building against competing claims of other sectors--even if progress in those sectors might not be measurable because of the lack of good statistics. Notwithstanding the fact that it might pay to be ignorant (to protect the continuation of ineffective public programs), the high fixed costs required to overhaul statistical systems might also discourage decision makers. There are some options that can be considered to strengthen incentives to give high priority to statistical work. Raising user demand for reforming statistical systems may be achieved through greater awareness of the quality of available statistics. For instance, the statistical capacity index (shown above) could be improved by incorporating an assessment of statistical institutional sus- tainability (political and financial independence), which is ultimately linked to the quality of statistics. From a supply perspective, the use of catalytic vertical funds could protect resources from being used for purposes other than implementing NSDS. A further option is to incorporate measures of statistical capacity into aid allocation and evaluation processes. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 23 P A R T I The foregoing assessment of progress negative side. While worst poverty reduction at the MDG halfway point shows a clear performances are strongly associated with worst need to generate a stronger and broader growth performances, best growth performances momentum toward the MDGs and related are less significantly associated with best poverty development outcomes. Part I of the report reduction performances (World Bank. 2007. World Development Indicators 2007. Washing- addresses key elements of that agenda. It ton DC: World Bank). assesses progress on policies and actions for 4. The recent release (World Bank. 2007. achieving the development goals and iden- 2005 International Comparison Program Pre- tifies priorities going forward. The assess- liminary Report, Washington, DC) of a new set ment covers the roles of all parties in that of purchasing power parities (PPP), based on effort--the developing countries themselves, 2005 prices, will lead the World Bank to revise developed countries, and international insti- its estimates of global poverty. Compared with tutions. Part II of the report provides a more the PPPs based on 1993 prices and used until in-depth assessment of progress and priori- now to compute international poverty lines, PPPs ties relating to environmental sustainability, in 2005 show different patterns due to economic the special theme of this year's report. transformation over the period 1993­2005 and improved methodologies to compare prices across a larger sample of countries. Inevitably, Notes the use of more recent PPPs will modify poverty estimates estimated and published so far. It is not 1. More details on trends in progress toward expected, though, that it could affect fundamen- the MDGs are provided in the annex, Monitor- tally the projection that global poverty will likely ing the MDGs. be halved in 2015. 2. Related to income poverty, progress in 5. Low-income countries' gross enrollment terms of reducing malnutrition (as measured by ratios in primary schools went up from 81 per- the proportion of underweight under-5 children) cent in 1991 to 102 percent in 2005. has also been substantial. Data are currently 6. This indicator is computed by dividing the being revised to account for new child growth number of students in the last grade (excluding standards. But trends observed using older U.S. repeaters in that grade) by the total number of growth standards are not likely to be radically children of graduation age. It typically includes affected. Using such standards, malnutrition in the numerator a large number of children declined from 34 to 23 percent between 1990 above graduation age, who repeated in previous and 2006 in developing countries. grades or started school late. As such, it tends to 3. The number of developing countries expe- overestimate the genuine proportion of gradua- riencing prolonged economic recessions (nega- tion age children actually graduating. tive per capita GDP growth) went down from 7. While individual countries may transition 26 to 13 between 1985­95 and 1995­2005. into and out of such status, this status actually The observation of countries' poverty reduc- tends to be persistent for many countries (World tion and growth performances suggests that the Bank. 2007. Meeting the Challenges of Global relationship is particularly pronounced on the Development, Washington DC). 24 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 1 Sustaining and Broadening the Growth Momentum F ollowing a long uninterrupted period the many fragile states where per capita of strong global expansion, world eco- growth rates remain negative. Also, income nomic growth has begun to moderate inequality has risen within many countries, in response to the continuing financial mar- mainly as a result of the effects of technologi- ket turbulence that started in August 2007. cal progress on relative wages of unskilled Although downside risks have increased, workers, confirming the importance of global growth prospects remain broadly improving access by low-income workers to positive, with world GDP growth in 2008 high-quality education. slowing to a projected 3.7 percent, from 4.9 A stable macroeconomic policy frame- percent in 2007. What makes this period of work, strong private sector development, economic expansion different from previ- and good governance are key to strong ous periods is the broad-based character of growth and poverty reduction. Many devel- the growth momentum: emerging market oping countries have made steady prog- economies and other developing countries ress in improving macroeconomic policies, have rapidly increased their shares in global the investment climate, and governance in production and trade.1 The resulting con- recent years. The World Bank's Doing Busi- vergence of income levels between advanced ness 2008 and Enterprise Surveys show that and developing economies helps in the fight changes are occurring across many areas, against poverty, because poverty reduction although governments need to step up their will be elusive without strong, private sec- reform efforts in areas such as labor laws, tor-based economic growth. The increas- property rights, and contract enforcement. ing significance of developing countries as Also, the depletion of natural resources and attractive places to invest, the international environmental degradation undermines the migration of labor, and the emergence of long-term growth prospects of many devel- new donors have also changed the composi- oping countries. tion of international financial flows: private capital and workers' remittances have grown The Global Economy: Recent in importance as main sources of financing Developments and Prospects in many developing countries. The benefits of the global expansion, however, have not Notwithstanding the tightening of global reached all developing countries, especially credit conditions following problems in the G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 25 C H A P T E R 1 U.S. subprime mortgage markets and the been flat, headline inflation in the United spread to other segments of financial markets, States and the Euro area increased in Feb- global growth eased only modestly in 2007, ruary 2008, to 4.1 percent and 3.3 percent, to 4.9 percent, supported by robust expan- respectively. Inflation has also picked up in a sions in emerging market and other devel- number of emerging market and developing oping countries (table 1.1). Rapid growth in countries, reflecting strong domestic demand most emerging markets counterbalanced the and rising food prices. The upward pressure slowing of growth in the United States, which on food prices reflects the increasing use of grew at about 2.2 percent in 2007 (compared corn and other food items for biofuel pro- with 2.9 percent in 2006), as the correction in duction, poor weather conditions, supply the housing market continued to act as a drag disruptions in a number of countries, and on the economy. Growth in the Euro area global demand growth. Meanwhile, oil prices and Japan slowed in the last quarter of the rebounded to new highs in March 2008. year after two years of strong gains. Global Global credit market conditions have growth is projected to slow in 2008 to 3.7 deteriorated sharply since August 2007 as a percent. As a result of revisions to estimated repricing of credit risk sparked increased vol- purchasing power parity exchange rates, his- atility and a broad loss of liquidity (box 1.2). torical data for world economic growth were Rising delinquencies on U.S. subprime mort- revised in early 2008 (see box 1.1). gages have led to higher yields on securities Core inflation has increased since mid- collateralized with such loans and a sharp 2007 in both advanced and emerging econo- widening of spreads on structured credits, mies, driven by the spillovers of higher energy particularly in the United States and the and food prices to other sectors of the econ- Euro area. Market strains are amplified by omy. While prices in Japan have essentially uncertainty about the distribution of asso- TABLE 1.1 Summary of world output annual % change 2008 2009 2002 2003 2004 2005 2006 2007a (projectedb) (projectedb) World output 3.1 4.0 5.3 4.4 5.0 4.9 3.7 3.8 Advanced economies 1.6 1.9 3.2 2.5 3.0 2.7 1.3 1.3 of which United States 1.6 2.5 3.6 3.1 2.9 2.2 0.5 0.6 Euro Area (15) 0.9 0.8 2.0 1.5 2.8 2.6 1.4 1.2 Japan 0.3 1.4 2.7 1.9 2.4 2.1 1.4 1.5 United Kingdom 2.1 2.8 3.3 1.8 2.9 3.1 1.6 1.6 Canada 2.9 1.9 3.1 3.1 2.8 2.7 1.3 1.9 Other advanced economies 3.9 2.6 4.9 3.9 4.5 4.6 3.3 3.4 Emerging market and developing countries 5.1 6.7 7.7 7.0 7.8 7.9 6.7 6.6 Africa 3.6 4.7 5.8 5.9 5.9 6.3 6.3 6.4 Central & Eastern Europe 4.5 4.8 6.7 5.6 6.6 5.7 4.4 4.3 Commonwealth of Independent States 5.3 7.9 8.4 6.6 8.2 8.5 7.0 6.5 Developing Asia 7.0 8.3 8.8 9.0 9.6 9.7 8.2 8.4 Middle East 4.0 6.6 5.6 5.6 5.8 5.8 6.1 6.1 Western Hemisphere 0.3 2.4 6.0 4.6 5.5 5.6 4.4 3.6 Source: IMF. Note: Real effective exchange rates are assumed to remain constant at the levels prevailing during January 30­February 27, 2008. a, b. Country weights used to construct aggregate growth rates for groups of countries were revised from those reported in the October 2007 World Economic Outlook to incorporate updated purchasing power parity (PPP) exchange rates released by the World Bank. 26 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S U S T A I N I N G A N D B R O A D E N I N G T H E G R O W T H M O M E N T U M BOX 1.1 Recent revisions of purchasing power parities The International Comparison Program (ICP) has recently revised its estimates of purchasing power parities (PPP) for exchange rates of developing countries. The PPP rate is defined as the amount of currency that would be needed to purchase the same basket of goods and services as one unit of the reference currency, usually the U.S. dollar. The ICP project, coordinated by the World Bank, produces PPP estimates based on statistical surveys of price data for a basket of goods and services for 100 developing countries. The Eurostat-OECD (Organisation for Economic Co-operation and Development) PPP program provides estimates for another 46 countries. In Decem- ber 2007 the ICP released preliminary PPP estimates for the 2005 benchmark year, replacing previous benchmark PPP estimates, which date back to 1993 or earlier for most emerging market and developing countries. The PPP rate can deviate by a large amount from the market exchange rate between two currencies. For exam- ple, developing countries typically have relatively low prices for nontraded goods and services, and a unit of local currency thus has greater purchasing power within a developing country than it does internationally. Whereas PPP-based GDP takes this into account, conversions based on market exchange rates typically underestimate the value of economic activity and output of a developing country relative to an advanced economy. PPP exchange rates are used in estimating aggregate economic activity across the world, because they tend to lead to a more accurate estimate of global economic activity than is produced by simply using market exchange rates. The ICP revisions have implications for the share of global GDP accounted for by individual countries and aggregate global growth based on PPP exchange rates: the International Monetary Fund's estimate for global growth in 2007 has been revised down to 4.9 percent from 5.2 percent in the October 2007 World Economic Outlook. Downward revisions for PPP-based GDP of two of the world's fastest-growing economies, China and India, are mainly responsible for the overall reduction of global growth estimates. For 2007 China's share of global output is now estimated at 10.9 percent (down from 15.8 percent) while India's share has declined to 4.6 percent (from 6.4 percent). Reflecting the overall reduction in GDP in PPP terms of other countries, the share of the United States in global GDP has been revised up from 19.3 percent to 21.4 percent. Notwithstanding these changes, it remains true that emerging market countries have been the main recent driver of global growth in PPP terms--led by China, which alone contributed nearly 27 percent to global growth in 2007. Inevitably the new PPPs will also lead to revisions of poverty estimates, such as the number of people living under US$1 a day. The new PPP-based poverty estimates, being prepared by the World Bank, are likely to become available later this year. While poverty levels (number of poor) for some countries may change appreciably, changes in poverty levels over time are likely to be less affected. ciated losses and the exposures of financial interbank market eased somewhat in early institutions through off-balance-sheet liabili- 2008, the problems in the structured credit ties. These strains have led to a drying up of markets put pressure on some financial insti- high-yield corporate bond issuance, a sharp tutions' balance sheets and have also started contraction in the asset-backed commercial to affect the financial guarantors of over paper market, a sharp reduction in liquidity US$3 trillion in securities (monoline insur- in the interbank market, and stress on finan- ers), which could undermine the functioning cial institutions relying on wholesale markets of other financial markets in 2008. for funding. The resulting flight to quality Overall, economic activity in emerg- has served to drive down yields on govern- ing economies remained buoyant in 2007. ment debt. Although emerging markets have Direct spillovers from the turmoil on emerg- thus far been less affected by the financial ing economies have been largely contained turmoil, sovereign spreads have widened, to date. In contrast to previous episodes of with some scaling back of capital flows, and financial turbulence, the effects on emerging stock market volatility has increased consid- and other developing economies have thus erably. Although the liquidity tensions in the far been relatively limited although trade G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 27 C H A P T E R 1 BOX 1.2 The recent financial market turbulence Mature financial markets have been experiencing significant turbulence since July 2007. In the summer of 2007 problems that surfaced in the U.S. subprime mortgage and leveraged loan markets prompted a retrenchment from risky assets and a process of deleveraging, causing severe disruptions in money markets, funding difficulties for several financial institutions, a widening of credit spreads in riskier asset classes, and more volatile bond and equity markets. Major central banks have responded with exceptionally large liquidity injections, and the U.S. Federal Reserve has lowered interest rates six times since August. Although immediate pressures in mature money markets have eased somewhat, financial sector problems have both widened and deepened in recent months as the size of the credit losses and their impact on banks' balance sheets have become more evident. Spillover effects on other segments of financial markets, in particular credit insurance, have also emerged. Meanwhile, the combination of financial sector weakness and an ongoing deepen- ing of the slump in the U.S. housing sector have increased the risk of a sharp slowdown in U.S. output growth and dampened the outlook for global growth. This worsening outlook has been reflected in substantial corrections in global equity markets. The problems in credit and asset markets have been principally a mature market phenomenon, and--in contrast to previous episodes of financial turbulence--the effects on emerging markets and other developing countries have thus far been less severe than in previous crises. This is not to say, however, that these countries have not been affected. Emerging markets have seen a marked increase in risk premiums (EMBIG spreads have roughly doubled since June 2007) and orderly but substantial reductions in equity valuations, in line with mature markets. Generally, however, these developments have not given rise thus far to acute financing difficulties in develop- ing countries, although private external debt market issuance has declined. Some repricing of risk was inevitable, and even desirable, because risk appetite had risen to unprecedented levels and was contributing to demand booms and excessive borrowing, fueling vulnerabilities in some countries. Several factors help explain why developing countries have been relatively resilient. The recent turbulence has been closely related to innovative financial instruments that so far are less prevalent in less-developed markets. More important, many of these countries exhibit stronger fundamentals and improved policies than in the past. In particular, in many countries current account positions are more favorable this time around, with developing countries as a group showing a significant surplus. And several emerging economies benefit from high levels of foreign exchange reserves and are thus more resilient to short-term funding disruptions. This improved resilience notwithstanding, the persistence and recent deepening of turbulence in mature mar- kets, and the knock-on effects on world growth that are gradually becoming evident, pose significant risks to economic conditions in developing countries. There is a risk that a continuation and further deepening of problems in mature financial markets, and a fur- ther retreat of risk appetite, may start to affect flows to emerging markets in a more profound way. In particular, this would seem a risk in countries that have large current account deficits, that have experienced sharp increases in asset prices fueled by foreign currency lending, or that have large balance-sheet vulnerabilities, including sub- stantial currency and maturity mismatches (examples include various countries in Central and Eastern Europe, some of which exhibit all of these characteristics). But more important, emerging economies and other developing countries will be affected through the chan- nel of lower global economic growth. Against the backdrop of lower global demand, trade flows and commodity prices may potentially see substantial corrections. Since the boom in commodities prices has been one of the key factors underpinning the strong performance in many commodity exporters, a sustained decline in commodity prices may have significant adverse effects on economic performance and balance of payments positions. For low-income commodities exporters, to the extent that they are less diversified, the direct effects of fall- ing commodities prices on economic growth may be particularly acute. For emerging markets, however, a sharp worsening of the external environment could trigger a vicious cycle of lower growth, weaker fundamentals, higher risk premiums, and faltering asset prices. Commodity importers, however, may experience beneficial effects from lower commodity prices. Given current uncertainties and country differences, there is no single policy prescription for developing countries: vulnerabilities and the appropriate policy responses must be assessed on a country-by-country basis. 28 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S U S T A I N I N G A N D B R O A D E N I N G T H E G R O W T H M O M E N T U M BOX 1.2 The recent financial market turbulence (continued) However, countries with prudent external debt management, fiscal discipline, and flexible exchange rate policies will be in a better position to cushion shocks and facilitate adjustment when faced with external shocks such as the current financial market turbulence. Financial sector supervisors--in financial systems that have not yet been tested--also need to learn from the fault lines exposed in the current market turmoil and strengthen their arrangements to facilitate the continued capacity of their financial systems to support growth. Emerging market spreads Emerging market currencies Basis points Index (Jan. 2006 = 100) 350 120 115 300 110 Asia 105 250 Latin America 100 Emerging Markets Bond Index Global Europe 200 95 90 150 85 US$ Credit default swaps trade-weighted index 80 100 75 50 70 Jan. Mar. May Jul. Sep. Nov. Jan. Jan. May Sep. Jan. May Sep. Jan. 2007 2008 2006 2007 2008 Source: Bloomberg. and industrial production are beginning to Although the underlying driving forces and moderate. This is not to say, however, that economic policy settings differ from country these countries have not been affected. Not to country, the growth trends are broadly only have emerging markets seen a marked based, affecting all major regions. Growth increase in risk premiums and substantial performance in emerging Asia reflects high reductions in equity valuations, but aggregate productivity growth and sound economic capital flows to these economies have also policies in general. The regional expansion moderated since August 2007. Overall flows, in Asia continues to be led by China and however, remain well sustained, and interna- India, where real GDP growth is projected tional reserves have continued to rise. to reach 9.3 percent and 7.9 percent in 2008, For 2008 growth for emerging and devel- respectively, reflecting strong exports and oping economies as a group is projected to gains in domestic investment demand. Eco- slow to 6.7 percent, from 7.9 percent in 2007. nomic activity remains buoyant in most G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 29 C H A P T E R 1 other emerging economies in the region as Sub-Saharan Africa, projected to reach 6.3 well, including Indonesia and the Philippines. percent in 2008, will be led by the expansion Emerging economies in the Middle East of oil production and the traditional nonfuel continue to benefit from high oil prices and commodity exporters, although the slow- strong domestic demand, with GDP growth ing of the global economy could threaten projected to reach 6.1 percent on average in the outlook in some countries. Many low- 2008. Economic activity in the oil-exporting income countries in the region are experienc- countries is particularly buoyant in the non- ing positive spillovers in the non-commodity oil sectors, fueled by increasing public invest- sectors, as evidenced by broad-based domes- ment in infrastructure, social spending, and tic demand growth. The positive domestic consumer demand. Oil-importing countries growth dynamics, against the backdrop of in the region are benefiting from the favor- continued progress in macroeconomic stabi- able external environment in the region lization, steady improvements in the business and beyond: their GDP growth rates out- climate, the favorable impact of debt relief, pace growth in the oil-exporting countries. and increased capital inflows, may put Sub- Although economic developments in emerg- Saharan Africa on a sustained path toward ing Europe have benefited from the sustained more rapid poverty reduction. Growth per- recovery in Western Europe and further inte- formance in the region is uneven, however, gration in the global economy, the outlook is with some subregions and countries (e.g., clouded because of the recent slowdown in countries in the CFA franc zone, fragile Western Europe and the prospect of lower states) remaining on a low growth path, and capital inflows on which a number of coun- most countries will need to make further tries are reliant. Regional growth is expected progress in improving the business climate to to reach 4.4 percent in 2008, with the Baltics attract investment and foster growth in the in the lead. By historical standards, growth nontraditional sectors. Although resource- in emerging economies in Latin America intensive low-income countries in Asia and remains robust, although the growth pros- the Commonwealth of Independent States pects for 2008 are vulnerable to the slow- (CIS) are benefiting from high commodity down in the United States. prices and expansion of production capacity Many emerging economies should be in traditional export sectors as well, achiev- relatively well-prepared to deal with a less ing higher productivity growth and attract- favorable external environment, as their ing investment in the nontraditional sectors underlying vulnerabilities have declined remains a challenge. to the lowest level in a decade. Underlying The overall balance of risks to the global trends, however, vary considerably across outlook is tilted to the downside. The main regions. While emerging Asia, the Middle risk to the outlook for global growth is East, and Latin America are showing contin- that ongoing turmoil in financial markets uous improvements, less progress has been will further reduce domestic demand in the made in reducing vulnerabilities in emerging advanced economies with more significant Europe. External and financial sector vul- spillovers into developing countries, lead- nerabilities in emerging Europe have edged ing to sharper downturns. Emerging mar- up in recent years, reflecting weak current ket countries that are heavily dependent on account positions, rapid credit growth, capital flows could be particularly exposed. and extensive foreign currency lending to In addition, a number of other risks remain unhedged borrowers. elevated. Oil and nonfuel commodity prices Continuing the trend that started in the continue to pose risks to both activity and beginning of the decade, many low-income inflation, so that monetary policy could face countries are benefiting from strong demand the difficult challenge of balancing the risks for commodities. Growth performance in of higher inflation and slow economic activ- 30 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S U S T A I N I N G A N D B R O A D E N I N G T H E G R O W T H M O M E N T U M ity. Heightened financial sector vulnerabili- FIGURE 1.1 Poverty head count ties also raise risks of a disorderly unwind- percent of population living on less than $1 a day and $2 a day ing of global imbalances should investor preferences shift abruptly. Emerging markets % of population 60 Growth in Developing Countries: Strong but with Widening Gaps 50 40 The favorable global economic environment of the past years has contributed much to 30 the fight against poverty in the world. Over- 20 all, developing countries remain on track 10 to meet the first Millennium Development 0 Goal (MDG), with the population share of 1990 2004 2015 1990 2004 2015 the extremely poor (living on less than $1 Less than $1/day Less than $2/day a day) projected to fall from 29 percent in 1990 to 10 percent in 2015. By 2004 this Other developing countries 60 share had already dropped to 18 percent. Preliminary estimates suggest that the num- 50 ber of extremely poor people in developing 40 countries fell by about 278 million between 30 1990 and 2004. There are, however, sig- 20 nificant differences between groups of coun- tries. Most Sub-Saharan African countries 10 remain a long way off the path that would 0 take them to MDG 1, even assuming pro- 1990 2004 2015 1990 2004 2015 jected growth rates higher than the historic Less than $1/day Less than $2/day averages since 1990. Progress among frag- Fragile states ile states with relatively low growth rates, 60 most of which are in Sub-Saharan Africa, is 50 particularly disappointing: income poverty rates in these countries have not declined 40 much since the early 1990s (figure 1.1). 30 Per capita growth performance shows 20 marked differences within regions and 10 groups of countries, with implications for progress in reaching the poverty MDG (fig- 0 1990 2004 2015 1990 2004 2015 ure 1.2). To get a clearer picture of the dif- Less than $1/day Less than $2/day ferences in performance and the potential impact of growth on poverty reduction, figure 1.3 presents developing countries' Source: World Bank. Note: Figures for 2015 reflect poverty headcount projections. Poverty numbers based on per capita growth performance in four sub- new estimates of purchasing power parities are forthcoming. categories: countries with negative average growth; with less than 2 percent average growth; with between 2 percent and 5 per- past five years remained on average below cent average growth; and with more than 5 2 percent a year, which was in most cases percent average growth during the period insufficient to make a serious dent in income 2003­07. In about one-fourth of develop- poverty rates. This group of countries ing countries, per capita growth during the includes some emerging market economies G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 31 C H A P T E R 1 FIGURE 1.2 Per capita GDP growth rates by contracted annually by about 1 percent on country group 2003­07 average. Although many fragile states in this group showed some improvement in growth trends in recent years, their overall perfor- Percent mance remains disappointing. 10 The diversity of development in Sub- 8 Top quintile Saharan Africa is particularly striking (box 6 1.3). Countries with good growth perfor- Mean 4 mance, such as Ghana, Mozambique, Tan- Bottom zania, and Uganda, which a decade ago 2 quintile appeared to have grim prospects, are mak- 0 ing solid progress toward the MDGs. These ­2 countries are also stepping up investment in infrastructure and energy, thereby strength- ­4 Emerging markets ening the foundation for sustained, broad- Other developing countries based growth. At the same time, about a Fragile states third of Africa's population lives in coun- tries that are facing economic conditions severely constrained by internal conflict and Source: IMF. weak governance. These countries are fac- ing a mixture of security, political, legal, FIGURE 1.3 Number of emerging-market and developing countries economic, and developmental challenges. by annual real GDP per capita growth rates, 2003­07 Poverty in many of them has increased, and problems in some cases have spilled over to their neighbors. No. of countries Per capita growth performance in the 70 majority of developing countries, however, 60 improved significantly during the past years, 50 including in some fragile states. Most coun- tries achieved average per capita growth 40 rates above 2 percent during 2003­07, lay- 30 ing the basis for steady progress in reduc- ing poverty rates. Emerging market econo- 20 mies in this category (including countries 10 in emerging Europe, Latin America, and 0 Southeast Asia) led in this respect, with per <0% 0% to <2% 2% to <5% 5% & above capita growth rates roughly doubling in Real GDP per capita growth rates comparison with the 1990s. Several fragile 2003 2004 2005 2006 2007 states experienced a strong acceleration of growth in recent years, reflecting the transi- tion from a conflict situation (Sierra Leone), Source: IMF. or the effects of higher oil and gas exports (Angola, Chad, and Sudan). and a number of other developing countries (mainly low-income countries in Sub-Saha- Rising Commodity Prices: ran Africa and Latin America) and fragile Impact and Implications states. The situation of the 17 fragile states in the low-growth category is particularly wor- The positive growth trends in developing risome: over this period, per capita income countries in recent years occurred against 32 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S U S T A I N I N G A N D B R O A D E N I N G T H E G R O W T H M O M E N T U M BOX 1.3 Growth in Africa: rising but uneven Economic growth in Africa has been rising, from a low of 2.3 and 2.1 percent annnually in the 1980s and 1990s, respectively, to an average of 5.6 percent in the past five years. The growth per- formance, and related policy challenges, however, vary considerably across countries (see map below for growth dispersion during 2004­06). Reviewing trends over the past 10 years, three broad groups of countries can be distinguished. The first group has enjoyed strong growth averaging about 9 percent annually during that period. It comprises 7 resource-rich countries accounting for about one-third of the region's population. The main challenge they face is in managing and transforming their natural resource wealth into long-term sustainable growth. This calls for good governance to support extracting and managing the resource wealth efficiently and transparently and transform- ing resource revenues into productive investments that help diversify the economic base. The second group has achieved moderate to strong growth averaging about 5.5 percent in the past 10 years. This group comprises some 18 countries, home to roughly one-third of the region's population. These countries have fairly well-managed economies and potential to improve their growth performance. Their main challenge is to build on reforms to strengthen the foundation for strong, sustained, and broad-based growth. Further improving the climate for private invest- ment, through regulatory and institutional reform and strengthening physical infrastructure, and deepening regional and global links are key elements of the policy agenda. In support of this agenda, they need scaled-up assistance from development partners. The third group is characterized by low, and in some cases negative, growth. It comprises some 20 countries, accounting for the remaining one-third of the region's population, that achieved average growth of only 2.1 percent in the past 10 years. These countries have much weaker policies and institutions, with many affected by conflict. Their policy agenda consists of a challenging mixture of security enhancement, political reform and consolidation, capacity building, and actions to build private sector growth opportunities. They need international aid but must build basic governmental capacity to ensure its effective use. GDP per capita growth in Africa GDP per capita growth, average 2004­06 <0.3 0.3­2 2.0­3.3 3.3­4.6 >4.6 No data G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 33 C H A P T E R 1 the background of strong upward move- tries that are less well-endowed with natu- ments in world commodity prices (figure ral resources. 1.4).2 World prices for key commodities The commodity price boom has led to exported by developing countries increased important shifts in the terms of trade of by 100­300 percent during the past four developing countries. Terms-of-trade changes years. Exporters of copper and uranium have been a factor contributing to the differ- experienced the steepest world market price ential growth performance of these countries increases, which more than quadrupled, (figure 1.5).3 Staff calculations of the effects while oil prices tripled and aluminum, coal, of terms of trade on domestic purchasing and gold prices doubled. power show that the recent commodity price Nonfuel and fuel commodities constitute boom has positively affected most oil export- about one-fifth of world trade. Developing ers among emerging countries (Kazakhstan, countries are highly dependent on com- República Bolivariana de Venezuela), other modity exports: On average commodities developing countries (Azerbaijan, the Islamic represented about 74 percent of develop- Republic of Iran), and the fragile states ing countries' exports during 2003­06. Oil (Angola, Sudan). Other commodity export- exporters are among the countries having ers, in particular of metals such as copper, the least diversified export base, with oil gold, nickel, cobalt, and uranium (Mongo- exceeding 70 percent of total exports. At lia, Niger, Papua New Guinea, and Zambia) the same time, developing countries are have also benefited from the terms-of-trade affected, as importers, by the commodity gains. For these countries sound manage- price boom. Rising energy and food prices ment of the rise in natural resource revenues affect the external payments positions and will be important to translate this boom into growth prospects of those developing coun- laying stronger foundations for sustainable growth (box 1.4). At the same time, many countries expe- FIGURE 1.4 Commodity price indexes, 1991­2007 rienced a negative terms-of-trade shock, with particularly damaging effects on the urban poor faced with high petroleum and Index (1991 = 100) food prices: for example, El Salvador among 400 emerging markets, Jordan, Madagascar, and 350 Mauritius among other developing coun- tries, and Haiti and Togo among the fragile 300 economies. The large group of fragile states 250 with weak growth performance and deterio- 200 rating terms of trade is particularly hard hit: during the period 2003­07, their domestic 150 per capita purchasing power declined by an 100 average annual rate of 2 percent, as against an annual per capita GDP decline of almost 1 50 percent (figure 1.6). For countries negatively 0 affected by oil and food price increases, pos- 1991 1995 1999 2003 2007 sible policy responses range from energy Agricultural raw materials Metals demand management and targeted safety Fuel (energy) Cereals nets for the affected poor to longer-term measures to encourage energy production and diversification and to promote agricul- Source: IMF. Note: Price index in special drawing rights. tural growth (boxes 1.5 and 1.6). 34 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S U S T A I N I N G A N D B R O A D E N I N G T H E G R O W T H M O M E N T U M Rising Income Inequality FIGURE 1.5 Terms-of-trade changes by country group, 1991­2007 within Countries Although high growth rates have helped High-growth countries Percent reduce global poverty, they have been 14 accompanied by rising income inequality in 11 many developing countries. A recent study 8 by International Monetary Fund (IMF) staff shows that since the beginning of the 1980s, 5 per capita incomes rose in most countries, 2 making most people in developing countries ­1 better off.4 However, income inequality ­4 within countries, as measured by the Gini ­7 coefficient, also increased in most cases (fig- ­10 ure 1.7). The increase in inequality in gen- ­13 eral was more pronounced in countries with 1991­2001 2002 2003 2004 2005 2006 2007 relatively high growth rates. At the same Medium-growth countries time, income inequality tended to decline 14 or remain relatively stable in countries with 11 lower growth rates, primarily CIS countries 8 and countries in Sub-Saharan Africa. In 5 some of these countries, the poorest quin- 2 tiles of the population have benefited from rapidly growing private transfers and higher ­1 agricultural exports. ­4 Technological progress has had the great- ­7 est impact on increasing income inequality ­10 within countries (figure 1.8).5 It has been ­13 found to affect adversely the distribution of 1991­2001 2002 2003 2004 2005 2006 2007 income in both developed and developing Low-growth countries countries by reducing demand for low-skill 14 activities and therefore the incomes of low- 11 skilled workers. Financial globalization has 8 also been a factor contributing to increased 5 inequalities. Although financial deepening 2 promotes higher growth, it can also increase ­1 income inequality because richer segments of society have better access to financial ser- ­4 vices. The strong growth of foreign direct ­7 investment in recent years has been directed ­10 mainly to technologically intensive sectors, ­13 pushing up wages of skilled labor relative to 1991­2001 2002 2003 2004 2005 2006 2007 those of unskilled labor. In contrast, trade Emerging markets Other developing countries liberalization has had the effect of reducing Fragile states income inequality in developing countries. It has helped increase exports and incomes in Source: IMF. agriculture, an important source of income Note: Low-growth countries have per capita growth rates of less than 2 percent. Medium-growth countries have per capita growth rates between 2 percent and 5 percent. for less-skilled workers. The overall effect of High-growth countries have per capita growth rates above 5 percent. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 35 C H A P T E R 1 BOX 1.4 Management of natural resource revenues Economies benefiting from additional revenue inflows face a fundamental choice on how to manage the resulting gains. The windfall from high prices on oil and other primary commodities accrues to both public and private sectors in many commodity-exporting developing countries. For the public sector, such a windfall translates into higher fiscal revenues, but its potentially destabilizing effects are a challenge for macroeconomic management. Experience in macroeconomic management of the recent resource revenue windfall suggests that policy responses can be guided by the following principles: The medium-term fiscal policy should be guided by estimates of the magnitude and perma- nency of additional fiscal revenue. If the increase is substantial and is considered permanent, the government can build a gradual increase of spending into its expenditure plans. Such an increase should be made effective with a certain lag from the initial rise of revenue to cre- ate a safety margin and ensure that the price increase is indeed permanent. If the gains are expected to be reversed soon--either because of a price reversal or because of the depletion of natural resources--the increase in permanent income will be limited and most of the windfall should be saved. Countries faced with a rapid decline in their natural resources and perma- nent income should consider allocating the windfall revenue to investments that will generate alternative sources of permanent income in the future. Depending on the circumstances, this could include higher public investment in growth-enhancing projects and the accumulation of foreign financial assets. One-off increases in spending financed by temporary windfalls are possible, as long as they are limited in duration and address a specific problem. Natural and health disasters and crucial development needs where short-term investment may make an immediate and substantial differ- ence are the obvious target areas for the one-off increases in spending. Such additional spending of part of the temporary windfall should be limited to projects that do not entail sizable recur- rent spending in the future and in areas where the implementation capacity is not a binding constraint. The windfall can be also spent on retirement of public--domestic or external--debt, in particular the repurchase of nonconcessional debt held by external commercial creditors. In all cases, the absorptive capacity and the quality of spending should remain the guiding posts. The overall macroeconomic policy mix should be geared to reconciling the effective use of all resources with price stability. Under a flexible exchange rate regime, to control inflation the authorities have a policy choice between sterilization through higher fiscal surpluses and nominal exchange rate appreciation. As time passes, however, sterilization through higher fiscal surpluses may not be sustainable, as pressing spending needs translate into an adjustment of spending levels to higher permanent fiscal income. Therefore, some appreciation of the nomi- nal exchange rate seems to be the appropriate medium-term policy response. In the case of a fixed exchange rate regime, temporary higher domestic inflation and real appreciation may be unavoidable. Improvements in productivity are the main way to address the resulting loss of competitiveness in these countries. Sound institutions, governance, and public finance management are essential to ensure quality spending of the windfall. Windfall gains should be considered in a medium-term framework, which would link annual budgets to longer-term policy objectives. The development of special institutions to manage resource windfalls (i.e., oil and stabilization funds, oil accounts, special fiscal rules and legislation, and the like) is in general useful, if such institutions are well-designed, transparent, and accountable. Integration of the special institutions with the budget and the legislated budgetary procedures generally helps strengthen their transparency and quality of spending of the windfall gains. Countries also should be encouraged to participate in the Extrac- tive Industries Transparency Initiative, which is making headway with 15 confirmed candidate countries and 7 countries with reports out and a system in place for validating performance. 36 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S U S T A I N I N G A N D B R O A D E N I N G T H E G R O W T H M O M E N T U M globalization in most developing countries These are either countries with a substantial has been to lower inequality marginally, mining potential (e.g., Chad and Sudan) or with the effect of financial globalization small economies, where a significant part of being more than offset by the effect of trade the private flows consist of workers' remit- liberalization. tances. In emerging market economies, offi- These findings point to the importance of cial financing has not been very significant expanding access to education to broaden in relative terms since the beginning of the opportunities for workers to participate in 1990s and, on average, became negative (on more technologically advanced and remu- a net basis) in the past few years, as many nerative sectors of the economy. They also countries accelerated the repayment of their suggest the need to broaden access to finan- official debt. With improved fundamentals cial services. Finally, they underscore the and high growth rates, demand for private opportunities for countries to harness trade equity and bonds in emerging markets was for stronger and more inclusive growth, a already high in the 1990s, in particular in topic discussed in chapter 4. Vietnam pro- emerging European economies (Bulgaria, vides an example of a successful reform Hungary, Serbia, Ukraine) and some other strategy for growth with equality (box 1.7). emerging economies (China, Kazakhstan). Debt-generating financing (official and pri- Continuing Shifts vate) has become less important in compari- in Foreign Public and son to nondebt forms of financing. Foreign Private Financing Flows direct investment and workers' remittances have grown considerably in emerging mar- The favorable global economic environ- kets, other developing countries, and some ment in the past years was associated with a fragile states. Although much of the growth strong increase in net capital flows and cur- in foreign direct investment is related to rent transfers to developing countries, both investment in extractive sectors in resource- in U.S. dollar terms and as a share of GDP rich countries, macroeconomic stabilization (table 1.2). Emerging market economies ben- and improvements in the investment climate efited most from the expansion in financial flows, but flows to some other developing FIGURE 1.6 Real per capita GDP growth rate for low-growth fragile countries and fragile states also increased. states, adjusted for terms-of-trade changes, 1991­2007 In many developing countries, private sources of external financing have grown in importance relative to official sources.6 Percent During the 1990s about half of external 2 financing available to developing countries 0 (as a percentage of GDP) consisted of pri- vate financing in various forms; by 2007 the ­2 share of private financing had increased to about two-thirds of total external financing. ­4 Much of private financing went to resource- ­6 rich economies, such as Guyana and, until recently, Azerbaijan. The increase in private ­8 financing has also been particularly clear in some fragile states, where private flows have ­10 1991­2001 2002 2003 2004 2005 2006 2007 almost doubled as a share of GDP. How- Unadjusted Adjusted ever, among the fragile states only a hand- ful of countries can be seen as relatively stable destinations for private financing. Source: IMF. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 37 C H A P T E R 1 BOX 1.5 Impact of oil price increases on low-income countries Oil prices have tripled in the past five years to record nominal highs of over $100 a barrel. The rise in oil prices has been mainly the result of strong growth in demand in combination with two decades of limited investment in production capacity. New capacity is only slowly coming onstream because of investment lags of several years and because of rising development costs, shortages of services and trained workers, and constraints on access to reserves in some oil-producing countries. Oil prices are also sensitive to geopolitical developments. In real terms, oil prices are near their historical peak of $96 a barrel (in today's dollars) reached in 1979. Part of the large increase in prices results from to the depreciation of the U.S. dollar. Expressed in euros, oil prices have only doubled over the last five years. Oil prices are expected to stabilize and fall gradually in the coming years. High oil prices have led to slowing demand growth and increasing supply, with rising capacity in OPEC (Organization of Petroleum Exporting Countries) and non- OPEC countries. Nevertheless, on current projections, prices could remain well above $60 a barrel this decade, before declining to $50 a barrel by 2015. Risks to this outlook are mainly to the upside. The oil price shock has had a mixed impact on oil-importing low-income countries. In a recent working paper on the effects of the 2003­05 oil price increases on 62 of these countries, International Monetary Fund (IMF) staff concluded that: For 16 countries there was a decline in the oil import bill relative to GDP owing to a contrac- tion in the volume of oil imports. Many countries passed on world market price increases to domestic prices. The oil price rise did not lead to an adverse impact on the balance of payments for this set of countries, as they saw improvements in both the current and capital accounts during 2003­05. Another 12 countries faced higher oil imports but benefited from substantial current account offsets in the form of improved exports or grant receipts, or both. A third category of 12 countries faced both higher oil imports and a worsened current account but a substantial improvement in the capital account. The remaining 22 importers benefited from neither current account nor capital account improvements sufficient to offset the oil shock and thus saw a deterioration in their interna- tional reserves. Within this group, however, a majority of countries maintained relatively com- fortable reserve coverage levels and could thus accommodate the drawdown in reserves. Only in a subset of 7 countries did reserves fall to very low levels.a Although more recent detailed cross-country analyses are not yet published, country-by- country information points to similar factors at work in 2006­07, underscoring the variable impact on countries. The impact, however, of higher oil prices--compounded by rising food prices--on the most vulnerable segments of the population may be severe. Even in countries that benefited from offset- ting price increases in commodity exports or capital inflows, the oil shock may have dispropor- tionate effects on the poorest. Going forward, it cannot be excluded that the current mitigating factors reverse if oil and commodity prices decouple, a scenario in which oil prices soar (as a result of political developments) while commodity prices deflate in a context of lower global demand. The IMF and the World Bank stand ready to assist their members in dealing with exogenous shocks of this nature. Under the IMF's Exogenous Shocks Facility, balance of payments support can be provided to countries faced with a significant increase in world market prices for major import products, such as oil or food. International Development Association financing could help prevent costly disruptions to priority spending and mitigate the impact on the poorest. At the same time, countries need to pursue policies to reduce their vulnerability to oil shocks through energy diversification and improved energy efficiency. The World Bank can assist coun- tries in this endeavor with development policy and sector support operations. a. Dudine and others 2006. 38 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S U S T A I N I N G A N D B R O A D E N I N G T H E G R O W T H M O M E N T U M BOX 1.6 Rising food prices and their policy implications Over the past 12 months, the world has experienced an average food price increase of 15 percent. Although this price shock does not necessarily translate into higher sustained inflation, it is bound to have adverse effects on poor urban residents in low-income countries. On the positive side, farmers in low-income countries may benefit from higher prices for their crops. A major driver of the food price increases has been high rates of global eco- nomic growth in recent years. Demand growth in emerging markets has been particularly strong. Price develop- ments have also been affected by serious droughts and animal diseases in some parts of the world. More recently food prices have jumped sharply, at least in part because of an attempt to encourage the use of biofuels in industrial countries. Although the use of biofuels has the advantage of diversifying energy sources, the production of ethanol from corn does not generate much net energy, and it has led to a doubling of corn prices during the past two years. This has had knock-on effects on other crops, as land is switched from wheat on the margin, for example, into corn or, as has been most marked in Europe, out of dairy production and into crops used for biodiesel. The industrial-country policy on biofuels is partly driven by agricultural protectionism. A number of coun- tries, including Brazil, can produce ethanol much cheaper, with a greater saving of nonrenewable energy and lower emissions, for example, by using sugar. But this sugar-based ethanol is subject to prohibitive trade barriers in the United States and Europe. In addition, production subsidies in industrial countries, which are intended to encourage innovation in this sector, seem to have led to excessive entry into the U.S. ethanol distillery business. Farm subsidies of various kinds in industrial countries have long affected the international trading system and currently make it difficult to move forward with further trade liberalization in the context of the Doha Round. With high food prices, subsidies are less compelling and--depending on how they are structured--may not even pay out when prices are above a certain level. Industrial countries need to seize this moment and eliminate subsi- dies. Industrial-country tariffs on ethanol should also come down. Allowing free trade in biofuels should gener- ally help agricultural sectors everywhere and bring benefits to poor, rural societies. Opportunities to expand land use will be greater if all countries have a fair chance to produce biofuels. At the same time, developing countries should pursue policies aimed at increasing growth in agricultural production through small-holder productivity gains. In the short term, there will likely also be the need to cush- ion the impact of food price increases on the affected poor. In particular, actions in the following areas will be needed: Trade reforms to facilitate flows within and among developing countries. Reducing barriers to regional trade can help improve the efficiency of regional markets. Also, improved infrastructure would reduce transporta- tion cost. More investment in the generation of improved technologies and improved extension services to promote the adoption of better crop varieties. Well-designed, targeted safety nets to provide transitory support to the affected poor in response to price shocks, avoiding recourse to distortive price controls and trade restrictions. Access to weather-based index insurance, which can reduce weather risks and cover loans necessary to finance new technologies. The World Bank is actively engaged in supporting countries in these efforts and could respond with additional financing if necessary. have facilitated the expansion of investment of foreign reserves during the past five years in other sectors as well. As a result of the exceeded the growth in capital inflows and shifts in the composition of external financing current transfers, reflecting the improvements and debt reduction operations, net liabilities in their trade accounts. As a result, the exter- to official creditors have dropped noticeably. nal asset/liability profiles of many develop- Also, in many countries the accumulation ing countries have changed considerably over G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 39 C H A P T E R 1 FIGURE 1.7 Annual change in Gini coefficient in 59 developing countries Percentage points 2.0 1.5 1.0 0.5 Declining inequality 0 Rising inequality ­0.5 ­1.0 ­1.5 Source: World Bank staff calculations based on latest available country surveys. time: short-term debt instruments held by the The Growing Importance of Workers' monetary authorities have increased as a per- Remittances centage of GDP. Private capital flows have a broadly posi- The growth of workers' remittances as a tive impact on growth. Recent studies gen- source of foreign financing for the economy erally find bidirectional causality between has been particularly strong in recent years foreign direct investment and growth, (table 1.3). Remittance flows represent the although the impact of foreign direct invest- single largest source of foreign exchange ment on growth is almost always stronger for many countries, exceeding total devel- than that of growth on investment.7 Most opment assistance.8 Cross-border move- country studies confirm that foreign direct ments of people and labor are increasingly investment and private loans are usu- important factors affecting growth and ally associated with higher growth as they poverty, with very sizable positive realized help increase production capacity, technol- or potential welfare effects. Nearly 200 mil- ogy transfer, and improvements in qual- lion people now live outside their country of ity standards. Research on the impact of birth. Recorded remittance flows to devel- foreign direct investment on growth at the oping countries grew fourfold between 1991 industry level underlines the importance of and 2006 and exceeded US$200 billion in the quality of investment. Some studies of 2006--twice the amount of official assis- specific countries actually find an opposite tance to developing countries. If unrecorded direction of causality, from GDP to foreign flows through formal and informal channels direct investment (e.g., in the case of Chile). are included, the actual flows would be sig- There have been no conclusive studies on the nificantly larger. impact of portfolio investments on growth, The economic gains for both receiving although they may contribute to a deepening and sending countries may be significant of financial markets and enhanced financial (box 1.8). According to one estimate, an intermediation, which promote growth in increase in migrants that would raise the recipient economies. workforce in high-income countries by 3 40 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S U S T A I N I N G A N D B R O A D E N I N G T H E G R O W T H M O M E N T U M FIGURE 1.8 Decompositions of change in the Gini coefficient Emerging market economies (23) Contribution of other factors Contribution of technology Contribution of globalization Change in Gini coefficient ­0.03 ­0.01 0.01 0.03 0.05 0.07 0.09 Average annual percentage change Other developing countries (12) Contribution of other factors Contribution of technology Contribution of globalization Change in Gini coefficient ­0.03 ­0.01 0.01 0.03 0.05 0.07 0.09 Average annual percentage change Industrial countries (20) Contribution of other factors Contribution of technology Contribution of globalization Change in Gini coefficient ­0.03 ­0.01 0.01 0.03 0.05 0.07 0.09 Average annual percentage change Source: IMF 2007. Note: 1991­2006, or shorter periods dependent on data availability. "Globalization" includes both trade and financial globalization. percent by 2025 could increase global real Tajikistan showed that most remittances income by 0.6 percent, or US$356 billion.9 are under US$1,000 a year and tend to be On average, the gains are higher for develop- spent mainly on consumption, primarily ing-country households than for rich-coun- food, clothing, and medical care.10 In the try households. Improved flows of migrants period of booming remittances in 2000­06 and remittances by reducing international the poverty rate in Tajikistan declined by 20 impediments, transaction costs, and red percent. Poverty-reducing effects are partic- tape would help realize these gains. ularly large in the countries where migrants Remittances have had a positive impact are associated with the lower part of income on poverty alleviation. Remittances mainly distribution. For example, extreme poverty finance primary consumption, critical for fell by 35 percent in El Salvador and Mex- the poorest segments of the population. ico, and moderate poverty fell by 21 percent For example, a survey of remittances in in El Salvador and 15 percent in Mexico.11 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 41 C H A P T E R 1 BOX 1.7 Vietnam: Growth with equality leads to dramatic success in reducing poverty Over the last 15 years, Vietnam has achieved one of the world's fastest declines in poverty. Vietnam's income poverty rate declined from about 58 percent in 1993 to about 16 percent in 2006 and some 34 million people have come out of poverty. Steady and rapid growth in income, of 7­8 percent, has been a key factor in reducing poverty. The high growth rates have been accompanied by only limited increases in inequality. The Gini coefficient increased from 0.34 in 1993 to 0.36 in 2006, a much lower increase than in many other emerging economies. Growth and poverty reduction have come in both rural and urban areas. While urban poverty is much smaller--about 4 percent in 2006--rural poverty has declined from two-thirds of the population in 1993 to about one-fifth today. The reduction in poverty has occurred in all parts of the country. Poverty is much lower in the Mekong and Red River delta than in other parts of the country, but the decline in poverty has also been felt in the Northern Mountains and Central Highlands where poverty is relatively higher. Three factors have led to Vietnam's inclusive growth--literacy, trade, and infrastructure. Vietnam's drive towards literacy began as early as 1945 and was reinforced throughout the 1970s and 1980s. A final major push for universal literacy was made between 1990 and 2000, when provincial and commune level literacy campaigns were launched. Today Vietnam has achieved over 95 percent literacy. Access to schools has improved dramatically, with average travel time to lower secondary school down to 15 minutes. Vietnam's openness to trade--the ratio of exports plus imports to GDP is about 150 per- cent--has been a second key to inclusive growth. From a food-deficit country in the early 1990s Vietnam has emerged as a major exporter of agricultural products. Bilateral and multilateral trade agreements have also helped to generate foreign direct investment and have made it a major exporter of apparel, wood products, and light industrial products, with major employment ben- efits to the economy. Finally, infrastructure, especially rural electrification and rural roads programs, has ensured that remote areas are not left behind. Today, almost 95 percent of Vietnamese households have electricity connections, compared with only 50 percent in the early 1990s, and 90 percent of the population is within two kilometers of an all-weather road. This has allowed connectivity between rural and urban areas and to the country's main ports and transport and communica- tion networks. Can Vietnam sustain its inclusive development model as it rapidly approaches middle-income- country status? Vietnam will need to help its citizens access higher education, just as it did with basic education, to ensure that rural productivity is lifted as it industrializes further and to see that its ethnic minorities are provided opportunities to develop. It will also need to build modern social safety nets to assist those affected by future transitions and to ensure that its growth does not come at the cost of its environment. A study of 76 countries (of which 24 are in additional means to recipient households for Sub-Saharan Africa) that utilized poverty financing their educational and health needs. surveys beginning in 1980 found that every For example, a study of three country cases 10-percent increase in remittances led to a (Guatemala, Mexico, and the Philippines) 1-percent decline in poverty.12 showed that remittances had reduced poverty The evidence on the impact of remittances and increased private spending on educa- on social outcomes is ambiguous. Remit- tion and health.13 At the same time, in most tances have contributed to better access developing countries international migration to health care and education by providing involves relatively better-educated people, 42 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S U S T A I N I N G A N D B R O A D E N I N G T H E G R O W T H M O M E N T U M TABLE 1.2 Net financial flows to developing countries in % of GDP Average 1991­2001 2002 2003 2004 2005 2006 2007 Emerging market economics 6.7 6.4 7.5 7.3 8.3 8.2 9.9 Private capital flows (net) 3.4 2.3 3.6 3.7 5.0 5.0 6.3 Private current transfers (net) 2.3 3.2 3.5 3.6 3.6 3.6 3.5 Official capital flows and transfers (net) 1.0 0.9 0.4 0.0 ­0.3 ­0.4 0.1 Memorandum item: Reserve assetsa ­1.2 ­1.0 ­3.4 ­2.7 ­3.0 ­4.0 ­4.4 Other developing countries 12.9 13.5 14.0 14.8 16.5 16.2 15.9 Private capital flows (net) 2.4 4.8 5.0 5.3 6.4 5.7 5.8 Private current transfers (net) 3.0 3.7 4.0 4.7 5.3 5.5 5.7 Official capital flows and transfers (net) 7.4 5.0 5.0 4.8 4.8 5.0 4.4 Memorandum item: Reserve assetsa ­1.5 ­1.6 ­2.3 ­2.3 ­2.9 ­4.7 ­3.9 Fragile statesb 14.0 19.3 17.8 17.9 21.7 20.5 18.9 Private capital flows (net) 2.8 4.9 2.4 1.1 4.7 5.7 3.5 Private current transfers (net) 3.2 4.7 6.1 7.0 6.8 6.4 6.3 Official capital flows and transfers (net) 8.0 9.7 9.3 9.8 10.2 8.5 9.1 Memorandum item: Reserve assetsa ­0.5 ­1.7 0.5 ­1.2 ­2.3 ­2.1 ­1.4 Memorandum item: Total net private financial flows including current transfers (US$ billions) 166.0 206.4 297.7 411.0 502.5 496.9 872.3 Of which: China 19.0 44.5 70.6 128.3 87.7 34.8 119.9 India 15.7 27.2 42.1 42.0 42.3 64.3 119.6 Source: IMF staff estimates. Note: Percentage numbers represent unweighted averages. a. A minus sign denotes an increase. b. Calculations exclude Sierra Leone, Timor-Leste, and Zimbabwe. TABLE 1.3 International remittances US$ billions Average 1991­2001 2002 2003 2004 2005 2006 Emerging market economies 43.5 76.9 95.3 100.2 118.9 128.0 Inflows 50.9 90.9 112.3 123.5 146.2 161.2 Outflows 7.4 14.0 17.0 23.3 27.3 33.2 Other developing countries 11.9 17.0 22.2 27.4 32.1 35.5 Inflows 15.8 22.4 27.9 33.7 39.4 43.2 Outflows 3.9 5.4 5.7 6.3 7.3 7.7 Fragile states 0.1 1.1 1.6 1.8 1.5 1.5 Inflows 1.0 2.2 2.8 3.1 2.7 2.7 Outflows 0.9 1.0 1.2 1.3 1.2 1.2 Sources: World Bank; IMF. Note: Remittances include workers' remittances, compensation of employees, and migrant transfers. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 43 C H A P T E R 1 BOX 1.8 Private remittances: positive effects and risks Remittances may have significant positive effects on the receiving countries: Poverty reduction. In countries without a developed social insurance system and efficient domestic labor market, labor migration and remittances often play an important role in addressing poverty. By financing primary consumption, remittances help alleviate extreme poverty, in particular in the countries where migrants represent the lower part of income distribution. Public finances. Imports boosted by remittances are a source of additional revenue collection in the form of value added taxes and import duties. Emigration helps ease the unemployment problem and contain the associated fiscal expenditures. Financial intermediation. As more recipients gain the confidence needed to deposit remittances, the scope for financial intermediation will grow. Remittances have also helped strengthen microfinance institutions, which in turn will be important in channeling remittances to pro- ductive use. Several banks in Brazil, the Arab Republic of Egypt, El Salvador, and Kazakhstan have raised cheaper international long-term financing by the securitization of future remittance flows. The inflow of remittances to a bank helps mitigate its currency convertibility risks and makes its securities more attractive for international investors. Investment, and entrepreneurship. There are strong indications that remittances in excess of a certain amount tend to be used for investment, rather than on subsistence consumption. Although a substantial part of large-scale remittances is directed to residential construction and imports, these remittances represent a financial source for establishing small business and equity participation. At the same time, reliance on remittances presents certain risks: Monetary management. In a small economy with a shallow foreign exchange market and insufficient monetary policy instruments, the magnitude of remittances may create challenges for monetary management. Like other large inflows, they may entail currency appreciation and inflationary pressures and may call for greater exchange rate flexibility. The risk of a brain drain. The current flood of emigration from many developing countries is a mixture of unskilled and skilled labor (teachers, doctors, engineers), which is already depriving the country of its future manpower. Although the returning workers provide additional quali- fied labor for low-income countries, on a net basis the flow of remittances continues to reflect the dominance of emigration. Diminishing pressure for reforms. Remittances may create an illusion of growing and sustain- able affluence. The ability of the private sector to address its immediate needs independently from the government can create a disincentive for the authorities to deal with the underlying problems that forced the people to leave the country initially. reducing the number of doctors, teachers and skills for those who stay, the departure of engineers in those countries. The brain drain skilled labor can adversely affect the liveli- exhibits significant regional differences and hood of the majority left behind.14 dynamics, with more serious implications Remittances-receiving countries need to for isolated smaller economies. Smaller low- develop a strategy to maximize the benefits of income countries, such as Haiti and Jamaica, remittances while minimizing their negative tend to suffer a greater brain drain with a repercussions. As a first step, it is important large negative social impact than do larger to determine whether or not remittances are countries like India and China. While skilled likely to be a permanent phenomenon. Most emigration may raise the incentive to acquire developing countries already grant tax exemp- 44 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S U S T A I N I N G A N D B R O A D E N I N G T H E G R O W T H M O M E N T U M tions for remittances, and some match invest- Quality of Macroeconomic Policies ments by migrant organizations in develop- Since 2003 IMF staff have used annual ment projects with public funds. Also, many surveys to monitor the quality of macro- countries have simplified banking procedures economic policies mainly in low-income for deposits and withdrawals of remittances countries (table 1.4). The assessment of fis- and increasingly involve microfinance institu- cal policies remains mixed, although there tions in the remittance market. Reducing the have been marked improvements. Almost costs of sending remittances would increase half of the monitored countries consistently the disposable income of migrants' families have scored good ratings on fiscal policy and would encourage them to use the official during the past five years, and the number banking channels. However, banking regula- of countries with unsatisfactory policies has tions in some sending countries, in particular declined substantially. Although the compo- those related to anti-money-laundering, while sition of public spending has also improved, necessary for security purposes, remain unfa- the quality of policies in this area remains vorable for remittances and are demanding weak, as policies in almost half of the coun- on the migrants, for whom sending money tries continue to be rated unsatisfactory. home may be the only contact with the bank- Monetarypolicy,accesstoforeignexchange, ing system. Encouraging partnership between and governance of financial institutions the international banking and postal services remain relatively strong areas of macroeco- and money transfer operators would help nomic policies. In particular, there have been reduce remittance costs while preserving high improvements in access to foreign exchange security standards. and governance in monetary and financial institutions in a number of countries. Con- Policies for Strong sistency of macroeconomic policies remains and Inclusive Growth mixed, as a number of relatively strong-per- forming countries scored lower in 2007 com- Strong and inclusive growth is central to pared with 2006 and policies in some new achieving the MDGs and related develop- countries were rated as unsatisfactory. ment outcomes. A key challenge is to spur The overall quality of policies in countries growth in lagging countries that have not with low growth rates and in fragile states shared in the surge in growth witnessed in remains clearly inferior to that of other much of the developing world over the past countries. The composition of public spend- several years. Factors underlying the differ- ing, fiscal transparency, and governance of ent growth experiences in developing coun- the public sector remain weak in these coun- tries are only partly known and continue to tries. Monetary policies and access to foreign be the subject of much research (box 1.9). exchange represent the few relatively strong Specific policy priorities and sequencing of areas of their macroeconomic policies, but actions to promote growth necessarily vary still remain weak relative to many other low- by country. Across developing countries income countries. However, some fragile there is considerable diversity in economic states (Afghanistan, Haiti, and Liberia) have circumstances. The specifics of the policy undertaken efforts in the past few years to agenda for growth at the country level improve their macroeconomic policies. must be defined as part of individual coun- try development strategies. Looking across Improvement of Private countries, three broad areas emerge as being Investment Climate essential to robust growth: sound macroeco- nomic policies, a conducive private invest- Many developing countries have made ment climate, and good governance. This further progress in improving the invest- section reviews progress in these areas. ment climate (table 1.5). The World Bank's G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 45 C H A P T E R 1 BOX 1.9 The Commission on Growth and Development The Commission on Growth and Development was established in April 2006 to learn from the growth experience of the past couple of decades and to assess the opportunities and challenges arising from globalization. Its objective is "to take stock of the state of theoretical and empirical knowledge on economic growth with a view to drawing implications for policy for the current and next generation of policymakers." The commission does not seek to design a blueprint, but instead aims to provide policy makers and others with the most current assessment of the forces that drive economic growth and with a framework to help design and implement strate- gies and policies to achieve and sustain rapid growth. The independent commission comprises 21 members (15 are political and policy leaders from developing countries), most with policy-mak- ing and business experience. There are two academics on the commission: the chair, Michael Spence; and Robert Solow, both Nobel Laureates. It is funded by the William and Flora Hewlett Foundation; the governments of Australia, the Netherlands, Sweden, and the United Kingdom; and the World Bank ( www.growthcommission.org). The commission invited world-renowned academics, practitioners, and experts to write papers exploring the state of knowledge on growth-related issues, which were reviewed and discussed at several workshops. The commission's final conclusions and report are scheduled to be published in May 2008. They are expected to cover a range of issues that were discussed at the workshops. One set of issues relates to the changing growth strategies and role of government in the course of development. Successfully making the strategic and policy transitions as the economy evolves is key to achieving sustained growth. Since World War II, 12 countries, most of them in East Asia, have managed to grow at rates in excess of 7 percent for 25 years or more--rates that allow "catch-up" with advanced economies in a generation or two. However, many more coun- tries--mostly in Africa, Latin America, and the Middle East--have been able to achieve high growth but have been unable to sustain it over time. Another set of issues discussed by the commission concerns the implications of the new global environment for developing countries' growth strategies: globalization; global imbalances and financial risks; the demographics of aging in many countries and high youth unemployment in others; and global warming. Also on the commission's agenda have been the equity dimensions of growth and key sectoral issues in growth including infrastructure, education, health, and labor markets where public sector investment is an important enabler of sustained growth dynamics. Doing Business 2008 report shows that although not always uniformly within a reforms have been most frequent in the country. area of starting a business. Within the last Results show that governments are rela- five years, 92 of the 175 countries covered tively reluctant to pursue reforms in more have reduced the number of days needed to sensitive areas, such as labor regulations or register a business, with 57 reducing the bankruptcy law, where social considerations number of procedures needed to do this. or the existence of significant interest group The time and number of procedures needed pressures may be important. Overall, there to trade goods across borders have been has been slower progress made in areas other areas where improvements have been where reform requires larger institutional made in a large number of countries. Nota- changes, such as labor laws, property rights, ble progress is also indicated in informa- and contract enforcement. tion and legal processes for getting credit. Rankings on the "ease of doing busi- The Bank's Enterprise Surveys confirm that ness" index generally improve with the changes are occurring across many areas-- income level, but there is considerable varia- 46 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S U S T A I N I N G A N D B R O A D E N I N G T H E G R O W T H M O M E N T U M TABLE 1.4 The quality of macroeconomic policies in low-income countries, 2003­07 share of countries falling in each category, % Governance Composition Cosistency in monetary Access to Fiscal of public Fiscal Monetary of macro and financial foreign policy spending transparency policy policies institutions exchange 2007 survey Unsatisfactory 18.5 45.7 22.5 9.9 17.3 8.6 4.9 Adequate 34.6 45.7 45.0 18.5 37.0 28.4 12.4 Good 46.9 8.6 32.5 71.6 45.7 63.0 82.7 2006 survey Unsatisfactory 20.5 48.7 21.8 10.3 15.4 15.4 3.9 Adequate 33.3 38.5 43.6 19.2 32.1 28.2 12.8 Good 46.2 12.8 34.6 70.5 52.6 56.4 83.3 2003 survey Unsatisfactory 33.8 49.4 .. 11.7 22.4 17.1 9.2 Adequate 19.5 32.5 .. 11.7 29.0 22.4 13.2 Good 46.8 18.2 .. 76.6 48.7 60.5 77.6 Fragile states (2007 survey) Unsatisfactory 31.3 71.9 45.2 12.5 28.1 18.8 12.5 Adequate 37.5 25.0 35.5 6.3 37.5 28.1 18.8 Good 31.3 3.1 19.4 81.3 34.4 53.1 68.8 Fragile states (2006 survey) Unsatisfactory 46.7 70.0 40.0 20.0 30.0 30.0 10.0 Adequate 26.7 20.0 43.3 10.0 30.0 33.3 20.0 Good 26.7 10.00 16.7 70.0 40.0 36.7 70.0 Source: IMF Staff. Note: The 2007 survey includes countries absent in the 2006 survey: Cape Verde, Central African Republic, and São Tomé and Principe. It also includes Montenegro and Serbia, two new and separate countries. tion within each income group. A number analysis of the investment climate in 34 of lower-middle-income counties--and even Sub-Saharan countries, using data from some low-income countries--rank in the Enterprise Surveys, shows that unreliable top half of countries (figure 1.9), illustrating or costly infrastructure is particularly con- that fostering a stronger business environ- straining in landlocked countries, where it ment does not require a lot of resources. hampers access to markets, and in countries In 2006 Sub-Saharan Africa had the third- with greater concentration of manufactur- highest share of reforming countries. In 2007 ing exports, where timely delivery is increas- the region slipped to fifth place on that score. ingly important (table 1.6). A more developed However, some countries made impressive financial system and supportive but prudent gains: Ghana rose in the Doing Business regulatory frameworks are associated with rankings from 109 to 87, Madagascar from better outcomes, particularly in lower- 160 to 149, and Kenya from 82 to 72. income countries. Addressing skill shortages and improving access to finance are most Research confirms impact of reforms. The helpful to expanding firms, while labor regu- top constraints to growth of firms vary by lations and corruption are most constraining country and firm characteristics. Recent to declining firms.15 Another recent study G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 47 C H A P T E R 1 TABLE 1.5 Status of investment climate reform, 2003­07 2005­07 2003­07 Regulatory action Reform Reversal No change Reform Reversal No change Starting a business Number of procedures 43 7 125 57 8 110 Time (days) 66 6 103 92 5 78 Dealing with licenses Number of procedures 11 6 158 -- -- -- Time (days) 34 12 128 -- -- -- Employing workers Hiring index 23 20 132 23 28 124 Firing index 4 5 166 6 7 162 Restrictions on hours worked 6 3 166 7 3 165 Labor firing costs 3 7 164 6 12 156 Getting credit Legal rights index 20 2 153 -- -- -- Credit information index 50 7 118 -- -- -- Protecting investors Disclosure index 10 0 165 -- -- -- Extent of director liability index 4 1 170 -- -- -- Ease of shareholder suits index 5 0 170 -- -- -- Registering property Number of procedures 8 3 160 11 4 156 Time (days) 32 5 134 36 7 128 Paying taxes Number of procedures 19 8 148 -- -- -- Time (days) 10 5 150 -- -- -- Trading across borders Number of procedures (exporting) 31 14 130 -- -- -- Time (days) (exporting) 50 11 114 -- -- -- Number of procedures (importing) 47 6 122 -- -- -- Time (days) (importing) 50 8 117 -- -- -- Enforcing contracts Number of procedures 23 6 146 32 6 137 Time (days) 10 0 165 31 0 144 Closing a business Time (years) 11 1 137 14 3 132 Source: Doing Business database. Note: The table shows the number of countries that have reformed, reversed, or made no change in regulations regarding various investment climate indicators. The number of countries has increased over time from 133 in 2003 to 175 in 2007. Because some indicators are available for five years and others for three years, both time frames are shown. Only countries with at least two years of data are included in the chart. --Not available. based on Enterprise Surveys in Latin America as key priorities for improving firm perfor- highlights the importance of the governance mance in the region. Additional areas high- agenda (figure 1.10).16 The study calls for lighted include expanding access to credit, strengthening of the rule of law and of insti- followed by policies to encourage innovation tutional frameworks to enforce compliance and investments in human capital. 48 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S U S T A I N I N G A N D B R O A D E N I N G T H E G R O W T H M O M E N T U M FIGURE 1.9 Average ranking of "ease of doing business," by region and income group Europe & Central Asia 76 East Asia & Pacific 77 Latin America & Caribbean 87 Middle East & North Africa 96 South Asia 107 Sub-Saharan Africa 136 High-income countries 27 Emerging markets 82 Other developing countries 103 Fragile states 145 Source: Doing Business database. Note: Each line shows the rank of one country in the group. Investment climate reform promotes a level encouraging the growth of microfirms. In the playing field and broad-based growth. case of the former, the effect comes through Weak investment climates affect the pros- the choice of technology and greater reliance pects of small, medium, and large enterprises on labor-intensive processes. In locations in different ways. One dimension by which where the incidence of bribes is higher, firms the impact of the investment climate varies have the incentive to remain small and "fly across firms is by size. The impact has some- below the radar screen" of officials. thing of a u shape--with a weak investment Among formal firms, a weak investment climate generally hurting small and medium climate generally lowers productivity and enterprises (SMEs), while often encouraging growth prospects. It is often SMEs that are the growth of micro- and informal firms and hurt most as they have fewer alternative having less of a detrimental impact on the ways of compensating for limited access to large firms. Weak infrastructure and cor- finance, inefficient government services, and ruption are most strongly associated with poor infrastructure. SMEs not only have G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 49 C H A P T E R 1 TABLE 1.6 Low coverage and high cost of Africa's infrastructure Coverage deficit High costs Sub-Saharan Other developing Sub-Saharan Other developing Item Africa countries Item Africa countries Paved road density 31 134 (per 1,000 sq. km) Power tariffs 0.05­0.30 0.05­0.10 Total road density (US$c/kWh) 137 211 (per 1,000 sq. km) Mainline density (lines 10 78 per 1,000 people) Road freight tariffs 0.05­0.25 0.01­0.04 Mobile density (lines (US$c/ton-km) 55 86 per 1,000 people) Generation capacity (MW per million 37 326 International phone people) call (US$/3-min. 0.80 0.20 call to the United Electricity coverage 16 41 States) (% of population) Improved water 60 72 (% of population) Internet dial-up 50 15­25 Improved sanitation service (US$/month) 34 51 (% of population) Source: World Bank Africa Region Infrastructure Country Diagnostic project. less access to formal finance and pay more which affects enforcement. An evaluation of in bribes than larger firms, their growth the impact of Mexico's reform of the time opportunities are more sensitive to financing and costs associated with registering a busi- constraints. In contrast, larger firms can be ness on new business entry also confirms the disproportionately hurt by a weak judicial importance of regulatory complementari- or property rights system. Weak property ties.18 The impact was greater in states that rights lower the ability of firms to undertake had lower regulatory burdens overall. arms-length transactions, activities most associated with larger firms.17 Strengthening Need for greater emphasis on implementa- the investment climate is thus an important tion and enforcement. Reforming what is way of leveling the playing field and ensuring on the books is an important step but only a dynamic SME sector with incentives--and part of the story. What matters is how mea- opportunities--to grow and prosper. sures are actually implemented or enforced. The gap between what is on the books and Interactions across policy areas are impor- what happens on the ground can be large. tant. The effectiveness of reforms can In many cases the gap can be explained depend importantly on the broader quality by corruption. Greater numbers of proce- of institutions. For example, using data from dures and longer delays open opportunities 27 countries in Eastern Europe and Central for demands for extra payments or offers Asia, a recent study shows that changing of speed money, particularly if democratic the formal rights of creditors has little effect institutions are weak.20 The effectiveness on the share of bank financing available to of investment climate reforms is enhanced firms.18 However, the effect is larger when by broader improvement in the quality of a complemented by an efficient court system, country's institutions and governance. 50 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S U S T A I N I N G A N D B R O A D E N I N G T H E G R O W T H M O M E N T U M FIGURE 1.10 Aggregate labor productivity gains in Latin America, by firm size Percentage gain 30 25 20 15 10 5 0 Bribes Crime & Regulatory Audited & Infrastructure Access to Technology Training security compliance incorporated quality finance Small (<19) Medium (20­99) Large (100+) Source: World Bank 2007. Note: The figure depicts the potential percentage gains that could be achieved if firms were to move to the 75th percentile of the same industry and firm size. Financial Management (PEFA) indicator sys- Governance Reform tem.21 At end-February 2008, 74 countries Good governance has a positive impact on had completed or substantially completed growth. Research shows that it can also sup- a PEFA assessment, with 4 countries hav- port growth that is more inclusive (box 1.10). ing had repeat assessments. Since the PEFA An increased focus on governance reform is framework was launched only in 2005, it is yielding progress, but institutional weaknesses too early to have a broad assessment of prog- remain a key obstacle to better growth and ress over time. A recent analysis of data on development outcomes in many countries. poverty-reducing public spending in heavily The World Bank's Country Policy and indebted poor countries (HIPCs), however, Institutional Assessment (CPIA) ratings sug- shows some improvements in public financial gest that governance in developing countries management between 2001 and 2006.22 As improved between 2000 and 2006 (fig- of end-February 2008, only 28 PEFA reports ure 1.11). Governance in low- and middle- had been made public and posted on the income countries has incrementally improved PEFA Web site. Efforts toward increased dis- in almost all categories. All groups of coun- closure of these reports must be continued. tries experienced the most progress on rev- enue mobilization and budget management Environmental Sustainability and the least progress on property rights and and Growth quality of public administration. As a group, fragile states showed only limited progress in In the previous sections, progress toward most areas and did not advance on the qual- the income poverty MDG is analyzed on the ity of public administration and transpar- basis of traditional economic variables: per ency, accountability, and corruption. capita GDP, corrected for variations in the Important progress has been made in external terms of trade. The discussion shows implementing the Public Expenditure and that developing countries' strong growth G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 51 C H A P T E R 1 performance in recent years has made a cru- land or pastureland, forests or fish, minerals cial contribution to the poverty reduction or energy. Tables 1.7 and 1.8 present asset effort; without strong growth, achieving the accounts for developing regions and income MDGs will remain illusory. The traditional groups in 2005.23 Oil-producing countries measures of economic growth, however, do are shown separately to account for the spe- not take into account the long-term effects cial characteristics of their economies. The of natural resource depletion and environ- tables also include a breakout of developing mental degradation on growth and poverty. countries into emerging economies, fragile One of the defining characteristics of devel- states, and other developing countries. In oping countries is their high dependence on these tables natural capital consists of crop- natural resources. This resource dependence land, pastureland, timber and nontimber can have implications for the sustainability forest resources, protected areas, and sub- of poverty reduction if growth is heavily soil assets (minerals and energy). "Intangi- based on the depletion and depreciation of ble" capital is an amalgam of human capital natural assets. and institutional quality. Development policy challenges depend Natural capital as a share of total wealth importantly upon whether a country has is high for developing countries but falls as abundant produced or human capital, crop- income rises. It exceeds produced capital as a BOX 1.10 Institutions, inequality, and growth Research shows a negative relation across countries between income inequality and institutional quality (see box figure). This modern-day association between inequality and institutions is the result of long and complex historical processes in which both inequality and institutions have influenced each other: a process the 2006 World Development Report (WDR) referred to as vir- tuous and vicious circles between the two. In countries where wealth and income were concen- trated in the hands of the few, exclusive institutions developed to concentrate power in the hands of the few and perpetuate the privileges. In other countries where the distribution of wealth was more equal, more open and inclusive institutions developed that protected the property rights of the many rather than the few. The 2006 WDR calls on a variety of historical examples, including the contrast between the developments of North and South America to illustrate this point. The interaction between inequality and institutions has in many countries undermined growth in the long term, with more-unequal societies with weaker governance ending up poorer than their more-equal and better-governed counterparts. A vivid illustration of how weak institutions that protect only the property rights of the few can undermine economic growth comes from recent work by Klapper and others.a They con- struct data on entrepreneurial activity, as measured by rates of new business formation, across a large set of developed and developing countries. They find a strong association between institu- tional quality and business entry rates that persists after controlling for per capita income and de jure regulatory barriers to firm entry. In particular, weak institutions that protect the property rights of the few shield incumbents from competitive pressure by stifling entrepreneurial activ- ity. This can contribute to the perpetuation of both high inequality and weak institutions. And it can also undermine growth: in a related paper, Klapper, Laeven, and Rajanb find that when weak institutions stifle entrepreneurial activity, growth of incumbent firms thus sheltered from competition is also significantly lower. a. Klapper and others 2007. b. Klapper, Laeven, and Rajan 2006. 52 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S U S T A I N I N G A N D B R O A D E N I N G T H E G R O W T H M O M E N T U M BOX 1.10 Institutions, inequality, and growth (continued) High inequality and weak institutions go together across countries Gini index of income inequality (higher values = more inequality) 70 65 60 Haiti South Africa 55 Argentina Malaysia 50 45 China Nigeria Thailand 40 United States Malawi India 35 Russian Fed. Canada 30 Germany Pakistan Norway 25 Slovak Republic Japan 20 ­3 ­2 ­1 0 1 2 3 Worldwide governance indicators Rule of Law index, 2006 (higher values = better governance) Note: Data on the Gini Index are taken from 2007 World Development Indicators, table 2.7, and refer to the most recent year for which data are available. Data on Rule of Law come from the Worldwide Governance Indicators project, www.govindicators.org, and refer to 2006, the most recent year available. Entrepreneurial activity is stronger in countries where property rights are protected New business entry rate, % 20 18 16 Germany Norway 14 Argentina United States 12 South Africa 10 Russian Fed. Slovak Republic 8 Pakistan 6 Malawi India Japan Canada 4 Haiti 2 0 ­3 ­2 ­1 0 1 2 3 Worldwide governance indicators Rule of Law index, 2006 Note: Data on new business entry rates are taken from Klapper and others (2007) and refer to the number of newly registered businesses in a year as a fraction of the total number of registered businesses in the previous year. Data are averaged for 2003­05. Data on Rule of Law come from the Worldwide Governance Indicators project, www.govindicators.org, and refer to 2006, the most recent year available. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 53 C H A P T E R 1 FIGURE 1.11 CPIA governance indicators, 2000­06 CPIA governance indicator (scale 1­6) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 LICs AFR Fragile MICs LICs AFR Fragile MICs LICs AFR Fragile MICs LICs AFR Fragile MICs LICs AFR Fragile MICs states states states states states Property rights & Quality of budgetary Efficiency of Quality of Transparency, rule-based and financial revenue public accountability, governance management mobilization administration and corruption 2000 2006 Source: World Bank CPIA database. Note: CPIA is on a scale from 1 to 6, with a higher score denoting better performance. LICs = Low-income countries; MICs = middle-income countries; AFR = Sub-Saharan African countries. share of wealth in these countries, but not in Net Savings, Environmental Resources, high-income countries. The share of intan- and Sustainable Growth gible capital tends to rise with income and is particularly important in Europe and Cen- Recent growth theory suggests a link tral Asia (72 percent of total wealth). Fragile between current net savings and changes in states are notable for having extremely low future consumption.24 Measures of saving levels of produced assets per person. should account for the depletion of natural Agricultural land is an important share resources and damage to the environment of total natural wealth in developing coun- in addition to the depreciation of produced tries. Preserving soil quality in these coun- capital. "Adjusted net savings" provides tries will be particularly important for such a measure, altering the measure of net maintaining wealth and sustaining develop- saving in the National Accounts to include ment. Similarly, fragile states show a rela- investment in human capital (an addition to tively large share of forest resources in total saving); depletion of minerals, energy, and natural wealth, suggesting that sound forest forests; and damages from emissions of par- management could be important for main- ticulate matter and carbon dioxide (CO2). taining the wealth of these countries. Total Negative adjusted net savings indicates that natural wealth per capita rises with income, an economy is potentially on an unsustain- reflecting high population-to-land ratios able long-term path. in lower-income countries, and the much The positive relation between adjusted greater productivity of agricultural land in savings and economic growth is illus- higher-income countries. trated in figure 1.12. Because there is a lag 54 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S U S T A I N I N G A N D B R O A D E N I N G T H E G R O W T H M O M E N T U M TABLE 1.7 Total per capita wealth and its components, by developing region and economy type, 2005 2000 US$ thousands 2000 US$ per capita Percent Total Produced Natural Intangible Produced Natural Intangible wealth capital capital capital capital capital capital East Asia & Pacific 16.4 4.7 5.6 6.1 28 34 37 Europe & Central Asia 36.2 9.2 11.5 15.5 25 32 43 Latin America & the Caribbean 66.3 10.2 16.6 39.5 15 25 60 Middle East & North Africa 22.3 5.5 12.2 4.5 25 55 20 South Asia 8.3 1.6 2.7 4.1 19 32 49 Sub-Saharan Africa 10.5 1.4 3.9 5.2 13 37 49 Emerging market economies 22.7 4.8 6.6 11.2 21 29 50 Other developing countries 12.6 3.0 7.2 2.4 24 57 19 Fragile states 4.9 0.7 5.4 ­1.3 15 111 ­26 High-income countries 453.4 78.6 21.0 353.9 17 5 78 World 93.1 16.9 9.0 67.3 18 10 72 Major oil producers 30.9 10.4 31.6 ­11.1 34 102 ­36 Source: World Bank estimates. All dollar figures are at nominal exchange rates. TABLE 1.8 Per capita natural wealth and its components, by developing region and economy type, 2005 2000 US$ thousands 2000 US$ per capita Percent Natural Agricultural Forest Protected Subsoil Agricultural Forest Protected Subsoil capital land resources areas assets land resources areas assets East Asia & Pacific 5.6 2.6 0.4 0.2 2.4 47 7 4 42 Europe & Central Asia 11.5 2.2 0.7 0.6 7.9 20 6 6 69 Latin America & the Caribbean 16.6 4.8 2.6 0.9 8.4 29 16 5 50 Middle East & North Africa 12.2 2.1 0.1 0.1 10.0 17 1 1 81 South Asia 2.7 1.7 0.2 0.1 0.7 62 8 5 25 Sub-Saharan Africa 3.9 2.0 0.8 0.2 1.0 51 19 4 26 Emerging market economies 6.6 2.5 0.6 0.3 3.2 38 9 5 48 Other developing countries 7.2 2.1 0.9 0.2 3.9 29 13 3 55 Fragile states 5.4 1.9 1.0 0.1 2.4 36 18 1 45 High-income countries 21.0 5.6 1.1 2.1 12.2 27 5 10 58 World 9.0 3.0 0.7 0.6 4.7 33 8 7 52 Major oil producers 31.6 1.7 0.8 1.2 27.8 5 3 4 88 Source: World Bank estimates. All dollar figures are at nominal exchange rates. between investment and growth in output, higher net saving rates to be associated with these figures scatter adjusted net saving rates higher growth in output per capita over the averaged over 2000­02 against per capita short run. Robust evidence on the linkage growth rates averaged over 2002­06. As fig- between net savings and growth over the ure 1.12 shows, there is some tendency for longer term is reported in a forthcoming G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 55 C H A P T E R 1 FIGURE 1.12 GDP growth vs. adjusted net savings Annual GDP growth rate, 2002­06 14 12 10 8 6 4 2 0 ­2 ­4 ­6 ­8 ­30 ­20 ­10 0 10 20 30 40 Adjusted net savings as % of GDP (2000­02) Source: World Development Indicators database and World Bank staff estimates. Note: Includes all countries except major oil producers. FIGURE 1.13 Adjusted net saving trends, 1990­2005 study, which shows, using historical series in per capita terms from 1970 to 2000, that adjusted net savings is correlated with % of GNI future changes in consumption in develop- 20 ing countries.25 15 Reflecting high rates of natural resource 10 depletion, adjusted net savings are negative 5 in many developing countries, putting these countries on an unsustainable long-term 0 path (table 1.9 and figure 1.13). In fragile ­5 states, adjusted net savings in 2005 were ­10 estimated at minus 22 percent of GNI. On ­15 average, other developing countries (exclud- ing emerging markets and fragile states) also ­20 had negative adjusted saving rates (minus 5 ­25 1990 1995 2000 2005 percent of GNI) as a result of high natural Emerging market economies Other developing countries resource depletion. Environmental health Fragile states High-income countries damages--which measure deductions to the stock of human capital caused by par- ticulate matter pollution--are particularly Source: World Development Indicators 2007. important in East Asia and the Pacific and in South Asia, as are the damages caused by 56 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S U S T A I N I N G A N D B R O A D E N I N G T H E G R O W T H M O M E N T U M TABLE 1.9 Adjustments to savings, 2005 % of GNI Gross Consumption Natural Environmental Adjusted national Education of fixed resource health CO2 net savings expenditure capital depletion degradation damages savings East Asia & Pacific 44.4 2.2 10.3 7.8 1.2 1.2 26.1 Europe & Central Asia 23.9 4.1 10.4 17.5 0.6 1.2 ­1.7 Latin America & the Caribbean 21.0 4.3 12.0 8.6 0.4 0.4 3.9 Middle East & North Africa 33.7 4.5 10.9 32.2 0.6 1.2 ­6.7 South Asia 29.4 3.5 9.1 5.5 0.8 1.2 16.5 Sub-Saharan Africa 17.3 3.8 10.7 16.1 0.4 0.7 ­6.8 Emerging market economies 30.6 3.5 10.7 9.9 0.8 1.0 11.7 Other developing countries 30.0 3.7 10.2 27.0 0.6 0.9 ­5.0 Fragile states 19.9 3.4 10.0 33.4 0.9 1.1 ­22.2 High-income countries 18.6 4.6 13.1 1.4 0.3 0.3 8.2 World 22.1 4.3 12.3 4.9 0.4 0.5 8.1 Major oil producers 34.6 3.6 9.1 41.7 0.5 1.5 ­14.4 Source: World Development Indicators 2007. carbon dioxide pollution. In contrast, emerg- terms of trade. If the terms of trade improve com- ing markets showed positive rates, reflecting pared with the base year, income generated by a the robust saving efforts in countries such as given level of real GDP increases, and vice versa. China and India, but also the much smaller 4. IMF 2007. impact of natural resource depletion. 5. IMF 2007. 6. See also Dorsey and others, forthcoming. 7. Hansen and Rand 2006; Alfaro and Charl- Notes ton 2007; Chowdhury and Mavrotas 2006. 8. The data on remittances remains patchy, 1. This chapter discusses growth and poverty although significant improvements have been reduction in emerging market economies, other achieved recently. The World Bank has devel- developing countries, and fragile states. Emerg- oped the most comprehensive database on skilled ing economies include those developing countries migration to date. with substantial access to international capital 9. World Bank 2006. markets. They include mainly middle-income 10. Kireyev 2008. countries, although some low-income countries 11. Ozden and Schiff 2007, p. 5. (such as India) are also included in this group. The 12. Gupta, Pattillo, and Wagh 2007. See also "other developing countries" category includes Adams and Page 2003. mainly low-income countries. 13. Ozden and Schiff 2005. 2. See also IMF 2008. 14. Ozden and Schiff 2005. 3. The terms-of-trade changes had a sizable 15. Aterido, Hallward-Driemeier, and Iarossi impact on domestic incomes and purchasing 2007. power in many developing countries. In coun- 16. World Bank 2007. tries with large terms-of-trade fluctuations, gross 17. Aterido, Hallward-Driemeier, and Pages domestic income (GDI) offers a more reliable 2007. measurement of changes in purchasing power 18. Safavian and Sharma 2007. than GDP. Real GDP measures the value added 19. Kaplan, Piedra, and Seira 2007. of physical output in the economy but says noth- 20. Gonzalez, Lopez-Cordova, and Valladares ing about its purchasing power. Changes in out- 2007. put at constant prices may differ from the income 21. PEFA is a partnership of the World Bank, generated by this output as a result of shifts in the the IMF, the European Commission, the United G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 57 C H A P T E R 1 Kingdom's Department for International Devel- The relatively low total wealth and high produced opment, the Swiss State Secretariat for Economic capital share in this region reflect difficulties with Affairs, the French Ministry of Foreign Affairs, the methodology of estimation for China. The the Norwegian Ministry of Foreign Affairs, and negative values for intangible capital reported for the Strategic Partnership with Africa. See http:// fragile states and major oil producers reflect very www.pefa.org. It includes 28 indicators covering low returns on total assets in these countries. aspects of budget formulation, execution, and 24. Dasgupta 2001; Hamilton and Hartwick reporting as part of an overall diagnostic Perfor- 2005. mance Measurement Framework report on the 25. Ferreira and others, forthcoming. Fer- quality of a country's public financial manage- reira and Vincent (2005) show that adjusted net ment (PFM) systems. saving is not significantly correlated with future 22. de Renzio and Dorotinsky 2007. consumption in developed countries, where tech- 23. The estimates are based on the method- nological change and knowledge generation are ology presented in World Bank 2006. Note that likely to be more important as sources of growth China dominates the East Asia figures in table 1.7. than physical asset accumulation. 58 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 2 Achieving Better Results in Human Development T he world has made steady progress quality discourages the use of services even if toward meeting the numerical targets they are free. The quantitative nature of the for the human development Millen- MDGs masks important variations in qual- nium Development Goals (MDGs). Achieve- ity, which in turn holds up the attainment of ments have been impressive in some cases, the MDGs in education and in health. and even in countries that are lagging, prog- For education, while several regions are ress is measurable. The glass is, at the very on track to meet the targets of universal pri- least, half full. Nonetheless, significant chal- mary completion and gender parity (MDGs lenges still exist as the global community 2 and 3), neither of these goals necessarily approaches the halfway point of the MDG translates into learning or human capital goals, and some countries and regions are development. The quality of education is as seriously off track for successfully meeting important, if not more so, as its quantity, as the goals. This chapter provides an overview the Global Monitoring Report 2007 empha- of the key issues and trends that underpin sized. In addition, addressing the issue of the human development indicators of the quality in public health care provision can MDGs, with an explicit focus on inequity in make a significant contribution toward com- spending and access, health care quality, and bating malnutrition, reducing child mortal- child malnutrition. The chapter also docu- ity, improving maternal health, and limit- ments environmental problems that pose ing the spread of HIV/AIDS, malaria, and barriers to the achievement of the human tuberculosis (MDGs 1, 4, 5, and 6). development MDGs. Malnutrition--"the forgotten MDG"-- One challenge for reaching the health and has received limited attention and invest- education MDGs relates to equity: uneven ment, and it continues to be a major con- access to resources and the exclusion of mar- cern in many countries, especially in South ginalized groups mean that the benefits asso- Asia and Sub-Saharan Africa.1 Malnutrition ciated with progression toward the MDGs lowers the immune system and undermines are not widely shared by all. These inequali- the individual's ability to deal with adverse ties are closely related to quality concerns, environmental hazards, in particular those because the costs of low-quality education associated with unsafe drinking water and and health care are likely to be dispropor- lack of sanitation. Water, sanitation, and tionately borne by the poor. Moreover, poor good hygiene are increasingly recognized as G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 59 C H A P T E R 2 important for improving health and nutri- metric indexes, and an aggregated measure tion status. of adult health.2 Education inequality is ana- Exposure to environmental health risks in lyzed by examining outcome measures such as early infancy can lead to stunting, wasting, school completion rates and student achieve- lowered immunity, and increased mortality. ment on standardized tests. There are also Indoor air pollution stemming from reli- input-based measures, such as public expendi- ance on biomass for energy raises morbidity, ture in health and education. These measures especially among children, and it is a major can be used to understand the current state of contributor to mortality. Outdoor air pollu- inequities in health and education, as well as tion increasingly places both children and their evolution over time. adults at risk, a problem particularly acute There are a few places in the developing in urban areas of fast-growing economies. world, such as Sri Lanka or Kerala, India, Climate change is expanding the exposure where disparities in income and educational to tropical vector-borne diseases, such as attainment are small, where health access malaria, as average temperatures rise and is equal, and where outcomes are similar as new areas become infested. All of these across the population. Virtually everywhere environmental hazards have a negative influ- else, however, and by almost any available ence on health, and bringing these hazards measure, the richest quintile is healthier under control will help not only to achieve than the poorest on an aggregate regional environmental goals but also to improve the basis, and the disparities can be sobering health status of children and infants. (table 2.1). For example, in Latin America and the Caribbean, a child born in the poor- Equity Considerations est quintile is almost three times as likely to in Meeting the MDGs die before his or her fifth birthday, almost six times as likely to be malnourished, and Inequalities in access to health and educa- about two-thirds as likely to receive medical tional services exist almost everywhere in the attention for a fever as is a child born in the world: the poor tend to be less healthy and richest quintile. In all regions, the concen- less educated than the rich. But income is not tration indexes--which are a measure of the the only factor leading to unequal access. So extent of socioeconomic-related inequality too are differences in ethnicity, gender, and in health outcomes--suggest the existence social status. In addition, the quality of edu- of inequalities that are detrimental to the cation and health services is often unequally poor (box 2.1). Health inequalities tend to distributed. Nonetheless, poverty remains be the most acute in upper-middle-income the largest roadblock to good health and countries, consistent with patterns of income education and can lead to a vicious cycle of inequality worldwide. deteriorating health, low demand for educa- Educational outcomes also appear to tion, and increased poverty. reflect this same inequality. With the excep- tion of Europe and Central Asia, school participation and completion rates are sig- How equitable are countries' education nificantly higher for the richest quintile of and health systems? the population (figure 2.1). In regions such Analyzing health inequality requires some as the Middle East and South Asia, where measures of living standards along with objec- intraquintile female completion rates are tive measures of the quality of health services already significantly lower than male com- provision, which can be disaggregated and pletion rates, the difference in the likelihood also collected for different groups of the pop- of completion for a boy in the richest quin- ulation. Three commonly employed outcome tile compared with a girl in the poorest is measures are child survival rates, anthropo- particularly acute. While inequalities in par- 60 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 A C H I E V I N G B E T T E R R E S U L T S I N H U M A N D E V E L O P M E N T TABLE 2.1 Selected measures of health inequality, by region and income group, 2000­present Poorest Richest Ratio of poorest Concentration quintile quintile to richest quintile Index Under-five mortality rate (per 1,000 live births) Latin America & the Caribbean 86.5 34.8 2.95 ­0.17 Middle East & North Africa 101.0 44.0 2.27 ­0.13 South Asia 131.7 65.8 2.10 ­0.12 East Asia & Pacific 96.1 37.9 2.89 ­0.18 Europe & Central Asia 78.9 41.3 1.97 ­0.11 Sub-Saharan Africa 171.1 100.5 1.86 ­0.09 Low-income countries 166.4 96.7 1.84 ­0.09 Lower-middle-income countries 78.9 30.8 2.76 ­0.16 Upper-middle-income countries 91.1 35.8 2.81 ­0.18 World 136.0 73.6 2.17 ­0.12 Medical treatment of fever (% of under-five child population) Latin America & the Caribbean 37.2 58.7 0.66 0.10 Middle East & North Africa 26.6 36.2 0.72 0.09 South Asia 31.6 59.8 0.49 0.17 East Asia & Pacific 35.3 54.2 0.65 0.07 Europe & Central Asia 15.2 36.4 0.42 0.09 Sub-Saharan Africa 27.8 49.3 0.54 0.14 Low-income countries 27.2 48.8 0.54 0.14 Lower-middle-income countries 36.4 55.4 0.68 0.08 Upper-middle-income countries 30.3 56.1 0.53 0.12 World 30.2 51.1 0.58 0.12 Medical treatment of adult illnesses (% of female population) Latin America & the Caribbean 23.5 37.0 0.87 0.07 South Asia 17.2 49.6 0.35 0.20 Europe & Central Asia 32.6 51.8 0.63 0.06 Sub-Saharan Africa 39.4 63.7 0.61 0.12 Low-income countries 35.8 61.6 0.57 0.13 Lower-middle-income countries 23.9 35.2 0.89 0.06 Upper-middle-income countries 52.3 73.3 0.72 0.07 World 34.2 56.0 0.66 0.11 Source: Adapted from Gwatkin and others 2007 based on DHS data. Note: Averages are unweighted means for latest available years. ticipation rates apply across regions, they (figure 2.2), while spending on public educa- are especially dramatic in South Asia and tion favors the rich across all regions (figure Sub-Saharan Africa. 2.3). In Sub-Saharan Africa, for example, Much of the concern about the role of the highest quintile receives more than twice equity in reaching the MDG goals for health as much public funding for health care and and education revolves around the skewed education as the lowest quintile. This is allocation of public resources for programs typically also the case when countries are in these areas. Although there are varia- grouped by income. tions across countries, public spending on Out-of-pocket payments by patients and health care and education tend to be skewed parents for publicly provided services are also toward high-income segments of the popu- an equity concern. Fees for education and lation.3 With the exception of Latin Amer- health, both formal and informal, can repre- ica and the Caribbean, public spending on sent a significant portion of household income. health services consistently favors the rich In health, the proportion of out-of-pocket G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 61 BOX 2.1 Comparing inequality in health in India and Mali An examination of outcomes by income quintiles Distribution of under-five mortality, India and Mali provides a crude summary measure of inequalities. A smoother measure can be obtained from "concentra- tion curves" for health, which capture the distribu- Under-five deaths, cumulative % tion of a given health measure against living stan- 100 dards. The concentration index derived from this curve quantifies the magnitude of socioeconomic- related inequality in health (and education).a For 80 example, using data for India and Mali, it is possible to cumulate the relative percentages of births for each 60 quintile, order them by increasing wealth, and plot this against the cumulative percentage of under-five deaths. The resulting concentration curves show that 40 child deaths are concentrated among the poor (since both curves exceed the line of equality), although there is relatively less inequality in Mali than in India 20 (since the curve is less bowed outward). 0 Source: O'Donnell and others 2008. 0 20 40 60 80 100 Note: Curves based on DHS 1982­92 (for India) and 1985­1995 (for Mali). a. The concentration index is analogous to the Gini index. An index of zero Cumulative % births, ranked by wealth suggests no inequality, and since health outcomes can be measured as "bads," such as ill health, negative values mean that ill health is higher India Mali Line of equality among the poor. Inequality is greater the larger the absolute (positive or negative) value of the index. FIGURE 2.1 Regional disparities in primary school completion and participation, 1990­2005 Primary school participation rate, % 100 80 60 40 20 0 Latin America Middle East & South Asia East Asia Europe & Sub-Saharan & Caribbean North Africa & Pacific Central Asia Africa Poorest quintile participation, female Richest quintile participation, female Poorest quintile participation, male Richest quintile participation, male Primary school completion rate, % 100 80 60 40 20 0 Latin America Middle East & South Asia East Asia Europe & Sub-Saharan & Caribbean North Africa & Pacific Central Asia Africa Poorest quintile completion, female Richest quintile completion, female Poorest quintile completion, male Richest quintile completion, male Source: World Bank calculations, based on DHS data. 62 Note: Regional values are unweighted averages. A C H I E V I N G B E T T E R R E S U L T S I N H U M A N D E V E L O P M E N T FIGURE 2.2 Incidence of public health spending on poorest and richest quintiles, 1989­2001 Share of public health expenditures, % Share of public health expenditures, % 40 40 30 30 20 20 10 10 0 0 Latin America South Asia East Asia Europe & Sub-Saharan Low-income Lower-middle- Upper-middle- & Caribbean & Pacific Central Asia Africa countries income countries income countries Poorest quintile expenditure Richest quintile expenditure Source: Filmer 2003 and World Bank calculations. Note: Regional and income averages are unweighted averages. FIGURE 2.3 Incidence of public education spending on poorest and richest quintiles, 1985­2001 Share of public education expenditures, % Share of public education expenditures, % 40 40 30 30 20 20 10 10 0 0 Latin Middle South Asia East Asia Europe Sub- Low-income Lower-middle- Upper-middle- America & East & & Pacific & Central Saharan countries income countries income countries Caribbean North Asia Africa Africa Poorest quintile expenditure Richest quintile expenditure Source: Filmer 2003 and World Bank calculations. Note: Regional and income averages are unweighted averages. payments tends to be higher for countries with But some inequities persist, even in success- lower levels of national income. At the house- ful countries, particularly among excluded hold level that leads to inadequate health care groups and among rural populations. Girls utilization and households being driven into in both of these communities tend to lag poverty.4 significantly behind boys.5 In Lao People's Progress on gender equity in primary edu- Democratic Republic, for example, dispari- cation has been dramatic over the past four ties continue to exist in the average years of decades, and in some regions, such as Europe school completion for boys and girls between and Central Asia and Latin American and urban and rural areas, and between the the Caribbean, girls are surpassing boys. majority Lao-Tai population and minority G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 63 C H A P T E R 2 groups, highlighting the importance of tar- a more unequal distribution of health out- geting rural areas and, within them, minority comes. The level of income per se does not groups and girls (figure 2.4). The challenge affect health inequality either, although it is is to reach marginalized groups and--if the a highly significant predictor of education gender education goals are to be met in each inequality (figure 2.6).6 This finding suggests country--to focus efforts on girls. One effort that poorer countries, such as Bangladesh that aims to help countries meet the twin or Nepal, have more unequal outcomes in equity goals of universal primary education primary education than do middle-income and gender equality is the Fast-Track Initia- countries such as Brazil and Colombia. tive, which bundles donor funds to support the implementation of countries' objectives Improving equity in education of enrollment, gender parity, and primary and health school completion (box 2.2). Although it could be expected that Success in achieving the MDG goals in health health and education inequality is related to and education will hinge on reaching out to income distribution within a country, this is poor and marginalized groups through tar- not the case. Concentration ratios for health geted interventions. Tailored programs are and education, reflecting the distribution of often necessary to bridge language differences health and education outcomes, generally between marginal groups and the majority display a weak and statistically insignifi- population, and cultural barriers often need cant negative relationship with the income to be accommodated to ensure participation Gini coefficient (figure 2.5). In other words, in education and health programs. countries that are more unequal in terms of In Argentina, for example, public health income distribution do not necessarily have and nutrition programs are targeted to the FIGURE 2.4 Differences in Laotian education achievement across age, gender, and ethnic group, 2002­03 Average years of schooling 10 9 Urban male Lao-Tai 8 7 Urban female Lao-Tai Rural male Lao-Tai 6 5 Rural female Lao-Tai 4 3 Rural male (other) 2 Rural female (other) 1 0 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 Age Source: King and van de Walle (2007). Note: Figures are drawn after taking three-year moving averages. Data for the urban non-Lao-Tai are not included because of lack of observations. 64 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 A C H I E V I N G B E T T E R R E S U L T S I N H U M A N D E V E L O P M E N T BOX 2.2 The Education for All Fast-Track Initiative The Education for All Fast-Track Initiative (EFA­FTI) is a global partnership launched in 2002 to help low- income countries meet the education MDGs and the EFA goal that all children complete a full cycle of primary education by 2015. It is among the largest global partnerships (in which the Bank is a participant) and is a plat- form for collaboration at the global and country levels. FTI Achievements. FTI is widely regarded as a partnership with promise for achieving development impact; its achievements include: strengthening harmonization at both the global and country level around country plans raising the political profile of education and deepened country commitment to reform increasing domestic resource allocation for basic education (albeit unevenly across countries) generating momentum for accelerating progress on primary education in terms of primary school enrollment (an increase of 4.4 percentage points in all countries and 8.2 percentage points in Sub-Saharan countries), gender parity (from .87 to .92 between 2000 and 2006 and from .82 to .89 in Sub-Saharan countries), and primary completion rates (an average increase of 12 percentage points, from 57 to 69 percent in all countries, and a 17 point increase, from 37 to 54 percent, in Sub-Saharan countries) mobilizing external funding for education, through bilateral and multilateral channels as well as through the FTI Catalytic Fund, which grew rapidly in 2006-07 to over $1 billion in donor pledges. FTI Catalytic Fund. The Catalytic Fund was established in 2003 to provide transitional financial assistance to FTI-endorsed countries. The fund was designed both to complement other bilateral and multilateral funding and to ensure that countries' FTI-endorsed education sector plans could be adequately funded. As a joint agreement across 17 donor countries, the initiative puts into practice the harmonization and alignment goals of the Paris Declaration by: fostering collaboration among donors, and relying on local decision making to drive activity and ensure that countries' needs are met flexibly and in a timely manner. To date, fifteen donors have pledged $1.2 billion through 2009, and $301 million in grant agreements have been signed with 18 countries. Current requests for funding are estimated at $878 million and further pledges of funding are pending. FTI's Challenge. FTI's challenge is to stimulate strengthened dialogue, decision making, and commitment in four critical areas: enhancing local capacity to implement education sector plans more effectively to obtain results faster, more deeply, and more efficiently introducing strategies, policies, and interventions in partner countries to provide education to children living in marginalized communities, children with disabilities, and children living in situations of fragility or conflict aligning education reforms on the key objective of ensuring learning outcomes, and not just on school enrollment and completion strengthening the international aid architecture to facilitate more reliable, robust, and harmonized financial and technical support. poor even though their health coverage is lower-income groups.7 In contrast, such universal. Argentina's child-feeding pro- clear progressive outcomes were not found grams deliver between 40 and 75 percent of in two reproductive health programs-- their benefits to the poorest 20 percent of mobile reproductive health camps and edu- the population; similarly, between 20 and cation sessions--conducted in the rural 50 percent of all government-administered part of Gujarat state in India. In this case, immunizations were given to children from program beneficiaries were clustered among G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 65 C H A P T E R 2 FIGURE 2.5 Relationship between health and education inequality and income inequality Health concentration ratio 0.4 Ethiopia 0.3 Bangladesh Egypt, Arab Rep. Kyrgyz Republic Nepal Paraguay Brazil Philippines Peru 0.2 Mozambique Mali Nigeria Colombia Vietnam Nicaragua Dominican Republic Burkina Faso Ghana Zambia Jordan Rwanda 0.1 0 0.3 0.4 0.5 0.6 Gini coefficient Education concentration ratio 0.6 Ethiopia 0.4 Burkina Faso Mali Mozambique Nepal 0.2 Bangladesh Nicaragua Ghana Zambia Nigeria Brazil Rwanda Colombia Egypt, Arab Rep. Dominican Republic Paraguay Vietnam Peru Jordan Kyrgyz Republic Philippines 0 0.3 0.4 0.5 0.6 Gini coefficient Source: World Bank calculations, based on DHS and WDI data. Note: The health concentration index is calculated as the average of seven health status measures: under-five mortality rate, percent of children with moderate and severe stunting, percent of children without all essential vaccinations, percent of children receiving medical treatment for fever, percent of women with births receiving antenatal care, percent of women with births with delivery attended by trained medical personnel, and percent of women receiving medical treatment for adult diseases. The education concentration index is the average of school participation and completion rates. middle-income groups, with smaller num- health services in the Matlab subdistrict bers among both the rich and the poor.8 of Bangladesh increased the number of In some cases, the results of health inter- facility-based births among the population ventions are potentially regressive even as a whole but did not improve service usage where absolute improvements are achieved. by the very poor.9 As a result, the distribu- A program to expand the use of maternal tion of health benefits across income groups 66 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 A C H I E V I N G B E T T E R R E S U L T S I N H U M A N D E V E L O P M E N T FIGURE 2.6 Relationship between health and delivery led to more mixed results in Gujarat education inequality and per capita state in India.10 Similarly, while a campaign income to distribute insecticide-treated bednets in conjunction with measles immunization in Health concentration ratio Ghana and Zambia was successful in rais- 0.4 ing bednet ownership rates among the poor, the long-term sustainability of bednet pro- grams in reducing malaria incidence and 0.3 transmission is not so clear.11 In some cases, these contextual factors may even be region 0.2 specific. In rural Guatemala, different mod- els of delivery of government health services 0.1 provided mixed results, depending on the service area and population served.12 Over- 0 all, trends in health equity vary across coun- 5 6 7 8 9 tries and time periods. Log, per capita income Educational interventions to promote equity can improve enrollment, completion, Education concentration ratio 0.6 and test scores for the poor. However, tar- geted interventions do not always achieve the intended outcome of increasing access for disadvantaged groups for a number of 0.4 reasons. For example, recent evidence suggests that when preschool and compulsory education 0.2 is more extensive--in terms of enrollment and duration--equality of opportunity in education is increased.13 Achieving such an 0 5 6 7 8 9 outcome is not simply a result of increasing Log, per capita income educational spending and resources for stu- dents from targeted groups, whether at the class or school level.14 One recent finding of Source: World Bank calculations, based on DHS and WDI data. Note: For definitions of health and education concentration indexes, relevance to countries striving to meet the see figure 2.5. MDGs is that neglect of nutrition and cogni- tive stimulation in the first six years of life remained essentially unchanged between permanently affects an individual for life. 1997 and 2001, and in the most unequal Longitudinal studies show the serious behav- years service usage by the poor was so low ioral, health, and income effects of neglect in that a woman in the richest quintile of the early life.15 Access to early childhood inter- population could be up to 3.5 times as likely ventions is highly specific to the income and to be a beneficiary of the program as a education of parents, partly because infants woman in the poorest quintile. and small children are kept at home. The success of health equity interven- Where financially feasible, targeted con- tions varies according to country, strategy, ditional cash transfers (CCTs), whereby par- disease, or service. The large-scale delivery ents are paid to ensure that their children of primary health care services by nongov- receive education and health services, have ernmental organizations (NGOs) generated been shown to be highly effective in encour- improved services for the poor in Cambo- aging school enrollment and completion and dia and Nicaragua, but the same medium of in ensuring child health checkups.16 Among G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 67 C H A P T E R 2 the most challenging aspects of CCTs are whether doctors correctly diagnose medi- the administrative difficulties, especially in cal conditions and prescribe the appropri- remote areas, and the supply of services that ate treatment--or the demand side, such as are often insufficient to meet the demand patients' subjective evaluations of the qual- triggered by CCT programs. ity of care received. Measures of outcomes, such as mortality rates, are indirect; more- Health Care Quality Critical over, they often capture quantity as well as to Reaching the MDGs quality aspects of health care. Nonetheless, outcome indicators are typically correlated The quality of health care services matters with health care quality in other dimensions because it reflects the extent to which invest- and can serve as important complements to ments in national health care systems are these measures of health care quality. able to raise both human capital and indi- vidual welfare. Efficient and accountable Why Improve Quality? health care systems provide good returns on such investments, and in the long run By almost any measure, improvements in the quality of health care matters more to health care quality benefit not only the indi- improving health outcomes than increases vidual but households and society more in health care spending per se. broadly. Better-quality health care may posi- Health care quality can be defined as the tively affect nutritional and mortality out- "proper performance (according to stan- comes, infant health, and usage rates among dards) of interventions that are known to the underserved.19 Moreover, health quality be safe, that are affordable to the society in improvements need not be entirely precluded question, and that have the ability to pro- by cost considerations: there is ample evi- duce an impact on mortality, morbidity, dis- dence that even low-income households are ability, and nutrition."17 This definition is willing to pay higher user fees, if they obtain broad, and the specific dimensions or crite- improved access to, and enhanced reliability ria chosen can influence assessments of the of, health care services in return. Most impor- quality of health care. tant, higher one-time costs incurred as a result of receiving higher quality care may mean Health Care Quality Measurement: Complex. lower costs in the long run, since post-con- The measurement of the quality of health care sultation complications are less likely to arise provision is complicated and not standardized when the initial quality of care is high.20 The across countries and diseases. Unlike the case fact that formal and informal out-of-pocket of education quality, there is an absence of a payments are so widespread in low-income small number of universally agreed-upon indi- countries suggests a willingness to pay for cators for the quality of health care delivery, perceived failures in public services, either in and existing measures are often not systemati- terms of limited access or poor quality.21 cally available for all countries. In Ghana, improvements in public health Inherent in the definition of health care care services and infrastructure led to improve- quality is the notion that quality can be ments in child nutritional status, as captured evaluated from the perspective of inputs, by anthropometric measures.22 Children were processes, or outcomes.18 Input measures taller in communities where there were more are often aspects of structure; for example, doctors, lower consultation fees, and basic whether medical facilities possess and main- drug availability. In addition, these health tain medical equipment, or the extent to services had a positive impact on the prob- which they are stocked with essential drugs. ability of child survival. These results were Indicators of process attempt to gauge ser- particularly strong for children living in rural vice delivery from the supply-side--such as areas, although there was no distinguishable 68 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 A C H I E V I N G B E T T E R R E S U L T S I N H U M A N D E V E L O P M E N T effect between the quality of health services FIGURE 2.7 Absenteeism among primary health care workers, received by the poor versus nonpoor. This last 2002­03 result stands in contrast to a similar study of the Côte d'Ivoire, which--while echoing the findings that doctor and drug availability pos- Average itively influences child health--also notes that Uganda the quality of health services received were systematically different between children in Peru poor and nonpoor households.23 Indonesia Within countries, health care quality tends to depend on socioeconomic status, ethnicity, India and whether the medical provider is public or Bangladesh private. Doctors treating the poor tend to be of lower quality than those treating the bet- 0 5 10 15 20 25 30 35 40 45 ter off, even after taking into account differ- Absence rate, % ential abilities to pay. In India, the generally lower-quality medical training of physicians Source: Adapted from Chaudhury and others 2006. in the private sector--relative to the public Note: Absenteeism was defined as not being found in the facility for any reason at the time of the unannounced random visit. sector--was more than offset by higher effort in performance. As a result, the private sector in India delivers an overall higher quality of averaged 35 percent between 2002 and 2003 care.24 Racial inequalities may also be opera- (figure 2.7), and it is possible that this figure tive, as in the case of Mexico, where a large underestimates the severity of the problem, and significant difference was found in the because health care personnel can be present quality of health care provided to indigenous without actually providing medical care. versus nonindigenous patients.25 Low absenteeism is correlated with well- Well-trained doctors can make a dramatic functioning facilities--as measured by objec- difference in improving health care quality. tive criteria such as whether the facility has In a study of doctors in India, Indonesia, potable water--and greater utilization. and Tanzania, more competent doctors--as Chronic absenteeism leads to low usage, measured by an index of competency--were because health care personnel are not avail- more likely to ask the right questions dur- able, and dissuades future use because of unre- ing treatment.26 For example, doctors in the liable service. Evidence for low-income, rural top quintile of competence more frequently communities in Cameroon, Tanzania, and performed common diagnostic procedures Uganda suggest that NGOs charging modest for diarrhea--such as checking for blood or fees provide higher quality of care than free mucous in stools, or for fever--as compared government clinics, as well as higher rates of to doctors in lower quintiles. utilization. This is true even for NGOs that One measure of effort (or lack of it) is pay their health care personnel less than the absenteeism, which is both chronic and per- government rate. Greater accountability and vasive in primary health care facilities in more consistent and reliable health services many developing countries.27 In Bangladesh, result in higher quality care from NGOs.28 absenteeism by physicians in larger clinics was 40 percent, while the rate was much High Variability of Health Care Quality higher, 74 percent, in smaller subcenters with a single doctor. Meanwhile, absenteeism Although health care quality is notoriously rates were lower for other health care profes- difficult to measure, there is little doubt that sionals, such as nurses and paramedics. The quality of care varies from country to country absence rates across five developing countries and within countries, raising equity concerns G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 69 C H A P T E R 2 as well as health care concerns. The role that capital via education, and this improves pro- public spending plays in this variation is a ductivity, spurs greater overall economic matter of some controversy. Most studies growth, and raises incomes. Higher-quality have been unable to find strong links between health care is especially important for chil- health outcomes and government health dren, as healthy children are more likely to spending, although some recent work has go to school, finish school, and learn more, questioned this result.29 For example, the rela- which in turn has a positive effect on future tionship between infant and under-five mor- productivity and household income.32 Cross- tality rates and public health spending is weak country evidence for education shows the overall, and may depend on the specific set of insignificance of education spending in spur- countries or variables being considered.30 ring economic growth, but the central impor- This weak link between spending and tance of education quality (box 2.3). health outcomes is consistent with strong While the quality of health is often mul- evidence in education of an insignificant tifaceted and can involve strong value judg- relationship between spending and learn- ments, aggregate measures of health quality, ing. Even taking into account the one-time as captured by selected outcome indicators, nature of mortality, the statistical insignifi- provide some broad generalizations. Health cance of health care spending for mortal- quality is positively related to national income, ity rates suggests that the quality of service but there is little relationship between public delivery is likely to be low. However, varia- health spending levels and quality measures tions in the quality of service delivery across (figure 2.8). This apparent paradox--that countries are relatively large (table 2.2). income matters for health quality but health Measures of performance illustrate this spending does not--suggests that other driv- point. The provision of assistance during ers of health quality are important. delivery by a doctor or health care profes- There are several possible factors account- sional, for example, ranges from 78 percent ing for this finding. As noted above, public of all live births in the Middle East and health care expenditures are skewed toward North Africa, to 18 percent in South Asia. expensive secondary and higher-level care In contrast, the use of oral rehydration treat- that benefits higher-income quintiles. Sec- ment for children suffering from diarrhea ond, health care expenditures are a proxy for in South Asia is almost double that in the structural measures such as whether a clinic Middle East and North Africa. Even within has certain medical equipment or essential Sub-Saharan Africa, the vaccination cover- drugs, and these measures may be a rela- age of children ages 1­2 years ranges from tively poor determinant of health care qual- a low of 8.1 percent in Uganda to a high of ity. For example, a study to assess the quality 75.9 percent in Eritrea. of clinics providing prenatal care in Jamaica Despite this seemingly large cross-country found that clinic processes--such as exami- variation, evidence suggests that cross-coun- nation and counseling procedures--exerted a try differences may be smaller than intra- positive, significant impact on birth weights, country variations. Studies have also found while structural factors alone did not.33 Fail- large intracountry variations by type of facil- ure to monitor health care delivery services ity, medical condition, and domain of care.31 adequately can also lead to poor outcomes.34 This combination of inequality of spending, poor governance, and difficulties in captur- Relation of Quality to Income ing meaningful measures of quality health and Economic Growth care services may result in weak associations. Ultimately, the goal of a quality health care More balanced spending and raising service system is improved health status. Healthy performance therefore offer important tools populations are more likely to invest in human for reaching the human development MDGs. 70 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 A C H I E V I N G B E T T E R R E S U L T S I N H U M A N D E V E L O P M E N T TABLE 2.2 Selected proximate measures of health care quality for selected countries by region, 2002­06 Assistance during Children with delivery by doctor Receipt of acute respiratory or health care full set of infection treated Treatment of diarrheic professional vaccinations in at health care facility children with oral Country Year of data (% of all live births) first year of life (% of all under-five children) rehydration therapy Sub-Saharan Africa Burkina Faso 2003 37.9 27.8 35.9 26.5 Cameroon 2004 61.7 38.1 40.6 24.2 Chad 2004 16.1 5.4 6.5 17.7 Ghana 2003 47.1 49.8 44.0 46.4 Guinea 2005 38.1 29.1 42.0 36.6 Kenya 2003 41.6 43.7 49.1 29.2 Malawi 2004 57 47.1 36.5 61.1 Mozambique 2003 47.7 42.8 55.4 54.1 Niger 2006 17.7 16.8 47.2 26.2 Rwanda 2005 28.4 66.3 27.9 18.6 Senegal 2005 51.9 40.9 47.2 26.7 Uganda 2006 42.6 9.7 73.5 43.4 Zimbabwe 2005/06 68.5 34.1 26.3 61.6 Regional average 45.9 34.7 40.9 36.3 Middle East & North Africa Egypt, Arab Rep. of 2005 74.2 81.4 63.4 35.7 Jordan 2002 98.3 23.0 76.4 22 Morocco 2003/04 62.6 82.4 37.8 28 Regional average 78.4 62.3 59.2 28.6 Europe & Central Asia Moldova 2005 99.5 2.1 59.7 34.9 Regional average 99.0 2.1 59.7 34.9 South Asia Bangladesh 2004 13.2 67.0 19.9 74.6 Nepal 2006 22.8 77.8 34.3 29.3 Regional average 18.0 78.0 27.1 52.0 East Asia & Pacific Cambodia 2005 43.8 52.3 45.4 35.8 Indonesia 2002/03 66.3 42.1 61.3 48.4 Philippines 2003 59.8 58.9 54.8 57.6 Regional average 56.6 51.1 53.8 47.3 Latin America & the Caribbean Bolivia 2003 60.8 12.1 51.5 38.2 Colombia 2005 90.7 25.2 0 55.4 Dominican Republic 2002 97.8 22.3 63.5 32.3 Haiti 2005 26.1 27.0 31.5 43.8 Honduras 2005 66.9 2.2 53.9 55.7 Regional average 72.0 17.8 40.1 45.1 Source: Demographic and Health Surveys, various years. Note: Full range of vaccinations include BCG, diphtheria, polio, and measles. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 71 C H A P T E R 2 BOX 2.3 Improving educational quality and stimulating growth An emerging body of evidence shows the major role The long-term quality-of-education payoff that the quality of learning and the skills acquired through the educational system plays in spurring growth. Recent work commissioned by the World Increases in GDP per capita for Bank draws on the traditional human capital model 1 standard deviation increase in test scores to show the sizable effect that improvements in qual- % increases in GDP per capita ity may have on long-term income growth. Using a set 100 97.0 of international standardized test score for the last 90 40 years for a group of 50 countries, Hanushek and 80 80.1 Wößmann reach two key conclusions. First, educa- tional quality has a strong causal impact on individual 70 57.2 earnings and economic growth. The authors find that 60 one standard-deviation increase in international stan- 50 46.8 dardized test scores contributes to higher growth in 48.0 40 long-term GDP per capita of 2 percent. Second, the 25.4 role of educational quality in economic development 30 29.1 differs between developing and developed countries. 20 21.7 The payoff to increasing quality, per year of schooling 10 13.6 of the population, is 80 percent higher for developing 0 countries. 10-year 20-year 30-year Hanushek and Wößmann also make a strong case increase increase increase that improving educational quality requires a focus on Low-income countries Average efficient education spending, bolstered by sound insti- High-income countries tutions that encourage competition, autonomy, and accountability. Simply increasing educational spend- ing does not guarantee improved educational quality. Source: Adapted from Hanushek and Wößmann 2007. Quality of health care deserves greater pneumonia; malnourishment not only attention and measurement if reaching the increases the risk of contracting these dis- health MDGs is to be realized. As in edu- eases, it also influences the severity and cation, quality matters to outcomes, but the likelihood that the outcomes resulting from tools in health are more complex and less them are fatal. Malnutrition is also closely comparable across countries, making mean- related to performance in education; under- ingful comparisons difficult. This is clearly nourished children display reduced school an area for additional effort and financing. achievement and inferior cognitive abilities that diminish their lifetime accumulation Child Malnutrition: Tackling of human capital. Child malnutrition also Hunger and Mortality has consequences for adult health, because malnourishment in childhood can result in a Reducing child malnutrition is one area that higher disease risk in adulthood.35 holds great potential not only for improving Understanding the impact of malnutrition child health but also for improving educa- on early childhood and subsequent adult tion outcomes and ultimately the welfare development is complicated by the presence of individuals and families. A close epide- of other factors in households with mal- miological link exists between childhood nourished children, notably poverty, limited malnutrition and mortality across a range demand for education, and an adverse physi- of diseases, such as diarrhea, measles, and cal environment--all of which contribute 72 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 A C H I E V I N G B E T T E R R E S U L T S I N H U M A N D E V E L O P M E N T FIGURE 2.8 Relationship of health quality to income and public health care expenditures Health quality index 1.4 Uganda Moldova Rwanda Tanzania Lesotho Indonesia Egypt 1.2 Madagascar Cambodia Philippines Dominican Rep. Kenya Malawi Zambia Honduras Mozambique Zimbabwe Nicaragua Jordan Congo Ghana 1 Eritrea Benin Haiti Nepal Niger Burkina FasoGuineaBangladesh Senegal Bolivia Cameroon Morocco 0.8 Mali Nigeria Ethiopia Chad 0.6 5 6 7 8 Log of GDP per capita Health quality index Indonesia Lesotho 1.2 Tanzania Madagascar Philippines Zambia Kenya Dominican Rep. Nicaragua 1.1 Jordan Mozambique Malawi Ghana Eritrea 1 Benin Cameroon Bolivia 0.9 Morocco Burkina Faso Bangladesh Nepal 0.8 Mali Nigeria 0.7 Chad 0 0.5 1 1.5 2 2.5 Log of public health expenditure share of GDP, % Source: World Bank calculations, based on DHS and WDI data. Notes: Health quality includes 8 measures of health quality outcomes: percent live births with no antenatal care, percent live births with no tetanus injections, percent live births with no trained medics during delivery, percent children with no cocktail of essential vaccinations, percent women with births receiving key components of antenatal care, percent women with births receiving no postnatal care, percent children with acute respiratory infection not treated in a medical facility, and percent children with diarrhea with no treatment. to malnutrition. Because risks accumulate years of age. Nutritional deficits during this and are compounded over time, total accu- period can lead to irreversible physical and mulated risks are important,36 although cognitive impacts.37 there are certain sensitive periods of physi- The most readily available and observ- ological development where the appropriate able indicators for malnutrition outcomes intervention can make a major difference. are based on the anthropometric criteria of Of particular significance is the increasing height and weight. Two accepted measures evidence pointing to the narrow "window of are stunting (low height for age, a measure opportunity" for preventing malnutrition, of chronic malnutrition) and wasting (low which starts at conception and ends at two weight for height, which captures more G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 73 C H A P T E R 2 transient episodes of malnutrition). In addi- ation in nutrition would lead to enrollment tion, intake of micronutrients--principally improvements equivalent to between 11 and iron, iodine, and vitamin A--are increas- 21 months of school attendance.40 ingly being monitored as important metrics In rural Zimbabwe, nutritional deficits for gauging malnutrition. And the implica- sustained by children--as a result of civil tions of inaction are serious. For example, war in the late 1970s and two episodes of sustained iron and iodine deficiencies in drought between 1982 and 1984--led to pregnant women can lead to reduced cogni- delayed school entry by five months and an tion in babies.38 estimated reduction in lifetime earnings of 14 percent.41 A study of a randomized, com- munity-level nutritional intervention in rural Long-term Consequences of Malnutrition Guatemala that ran from 1969­77 found Nutritional deficits in childhood interfere persistent effects from the intervention. with human capital accumulation. Start- Twenty-five years after the program, women ing with primary education, malnutrition who received nutritional supplements as can result in lower enrollment levels, grade children had up to 1.2 years of additional repetition, failure to complete grades, and schooling compared with those who had not inferior performance on cognitive tests. Evi- received the supplement, as well as higher dence from country studies is instructive. levels of economic productivity.42 In rural Pakistan between 1986 and 1990, Nutritional deficits also exert a direct school enrollment rates rose as a result of effect on lifelong cognitive abilities and improvements in nutrition. By one estimate, well-being. In Jamaica a study that followed an increase of 0.25 of a standard deviation in a cohort of children from ages 9­24 months average nutrition translated into an increase into adolescence found that the beneficiaries of 5.5 percent in the probability of school of childhood nutritional interventions sig- enrollment for the entire cohort. This would nificantly outperformed those without the mean an increase in average productivity interventions in 11 of 12 cognitive and edu- equal to a 0.65 percent increase in lifetime cational tests.43 earnings. Moreover, this nutrition effect was seven times greater for girls than for boys.39 Steady Progress in Reducing Malnutrition A similar study that tracked Filipino chil- dren born between 1983­84 and 1994­95 Nutrition outcomes have been steadily found that an increase of one standard devi- improving over time, as reflected in the down- ward trend in the incidence of stunting in TABLE 2.3 Downward trends in under-five malnutrition, 1990­2005 most developing regions (table 2.3).44 Today just 36 countries account for 90 percent of all stunted children worldwide.45 Since the Moderate and severe stunting (as a % of under-five children) mid-1990s, the prevalence of stunting has fallen throughout Asia, with notable reduc- 1990 1995 2000 2005 tions in East and Southeast Asia. The notable Latin America & the Caribbean 18.0 15.3 13.0 11.1 exception to the trend is Sub-Saharan Africa, Middle East & North Africa 26.2 23.1 20.2 17.6 where declines have been modest, at best. South Asia 50.8 45.2 39.7 34.5 This steady progress can potentially be East Asia & Pacific 35.9 29.2 23.5 18.9 Sub-Saharan Africa 36.7 35.8 34.9 34.1 derailed by increases over the past four years Developing countries 37.9 33.5 29.6 26.5 in the worldwide prices of commodities (see Developed countries 2.8 2.8 2.7 2.6 chapter 1). Rising food and fuel prices lower World 33.5 29.9 26.7 24.1 the real income of households that do not produce these products, which may lead to Source: Adapted from de Onis and others 2004, based on WHO data. substitution toward less food or cheaper, but 74 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 A C H I E V I N G B E T T E R R E S U L T S I N H U M A N D E V E L O P M E N T less nutritious, substitutes for current diets. ure 2.9). Income is clearly correlated with That could raise malnutrition levels, espe- the prevalence of malnutrition, as measured cially among the poorest households. by stunting outcomes. The incidence of Post-2000 data on stunting from the moderate and severe stunting in low-income World Health Organization (WHO) suggest countries exceeds that in high-income coun- that reductions in child malnutrition vary tries by a factor of 16. Much of this differ- significantly from country to country (fig- ence stems from the high incidence of severe FIGURE 2.9 Stunting and wasting for under-five children, 2000­present Sub-Saharan Africa East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia Lower-income countries Lower-middle-income countries Upper-middle-income countries Male Female 0 5 10 15 20 25 30 35 40 45 Stunting, % under-5 child population Sub-Saharan Africa East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa South Asia Lower-income countries Lower-middle-income countries Upper-middle-income countries Male Female 0 2 4 6 8 10 12 14 Wasting, % under-5 child population Severe Moderate Source: WHO Global Database on Child Growth and Malnutrition, various years. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 75 C H A P T E R 2 stunting among children under age five in with those with lower rates of poverty, such Sub-Saharan Africa. South Asia actually as Colombia and the Islamic Republic of has a slightly higher incidence than Sub- Iran. Similarly, countries such as Niger and Saharan Africa of moderate stunting, but a Rwanda that have low primary education lower incidence of severe stunting. completion among females tend to demon- Stunting prevalence differs between strate higher rates of child malnutrition. males and females. Using severe stunting as The importance of education and income the measure of malnourishment, under-five as determinants of child malnutrition has females are less malnourished than males. been confirmed by household and cross- In countries in the Middle East and North country empirical evidence.50 Education Africa and in South Asia--regions where improvements seem particularly important. gender discrimination against females is Household analyses suggest that insufficient often perceived to be more common--the maternal schooling is frequently the main difference between male and female child constraint to adequate child nutrition. For malnutrition does not appear to be statisti- example, higher levels of maternal education cally significant. influence feeding practices, which directly Moderate and severe wasting is far less affect child health. In Ghana, the most highly pervasive than stunting. In fact, wasting in educated mothers were more than three times middle-income countries as a whole is statis- as effective in reducing child malnutrition as tically indistinguishable from that of high- the least educated mothers.51 income countries, which suggests worldwide Other evidence from household surveys progress in improving child malnutrition underscores the importance of income growth among those countries. Unfortunately, the for reductions in child malnutrition. Assum- gap in wasting prevalence remains between ing an annual per capita income growth rate middle- and low-income countries, and of 2.5 percent from the 1990s to 2015 for 12 pockets of malnutrition persist even in the countries, projections of reductions in child upper-middle-income countries.46 malnutrition range from a low of 13 percent Worldwide, patterns of micronutrient (for Romania) to as much as 63 percent (for deficiencies are very similar to the pat- Peru).52 However, these simulation results are tern for stunting and wasting. Vitamin A likely to be overoptimistic because, in real- deficiency is concentrated in Sub-Saharan ity, only 3 of the 12 countries actually met Africa and South Asia. High-risk areas for the study's assumption of a 2.5 percent per zinc deficiency are, likewise, mainly in those capita income growth during the 1990s. two regions.47 Finally, anemia prevalence While the influence of income growth is is highest in South Asia and Sub-Saharan positive and statistically significant, the mag- Africa, with little evidence of improvement nitude of the effect can be relatively small. over time.48 The impact of economic growth on malnutri- Two of the main factors contributing to tion is tempered by the relatively low income the notable differences in malnutrition preva- elasticity of nutrition, so that changes in lence across regions and countries are income income have a relatively limited impact on and education. Empirically there is a strong nutrition outcomes. The estimated decrease positive association between poverty rates in a given measure of malnutrition is dramat- and malnutrition and a strong negative corre- ically affected by estimates of this elasticity, lation between levels of female education and and current evidence suggests a range from malnutrition (figure 2.10), and this is the case ­0.01 to ­0.82 (figure 2.11). For example, even when controlling for other factors.49 assuming an annual income growth rate of A country with a high poverty rate, such as 5 percent and an elasticity of ­0.5 percent, it Rwanda or Zambia, is much more likely to would still take Tanzania until 2026 to meet have a high child malnutrition rate compared the MDG malnutrition goal.53 76 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 A C H I E V I N G B E T T E R R E S U L T S I N H U M A N D E V E L O P M E N T FIGURE 2.10 The relationship between malnutrition, poverty, and education Malnutrition rate, % 60 Ethiopia Guatemala Malawi Zambia Rwanda Honduras Burkina Faso Mali Nigeria 40 Mauritania Tajikistan Pakistan AlbaniaKyrgyz Republic Philippines Peru Nicaragua Algeria 20 Colombia Iran, Islamic Rep. Tunisia GeorgiaBrazil ArgentinaTurkey Venezuela, RB Azerbaijan Costa Rica Jamaica Chile 0 0 20 40 60 80 100 Poverty ratio, % Malnutrition rate, % 80 Burundi 60 Nepal Niger Yemen, Rep.Malawi Madagascar India Rwanda Sudan Cambodia Ethiopia ZambiaGuatemalaLesothoBangladesh Lao PDR Chad BurkinaEritrea Mali Faso Tanzania Nigeria Vietnam 40 Benin Uganda Myanmar Guinea-Bissau Guinea Cameroon Swaziland Ghana Tajikistan Zimbabwe Albania Philippines Congo, Rep. Iraq BotswanaBolivia NamibiaPeru Nicaragua El SalvadorMongolia South Africa Egypt,EcuadorRep. Arab 20 MoroccoOman AlgeriaUzbekistan Mexico Senegal SyrianUnitedRepublic ArabArmenia Colombia Arab EmiratesGuyana Venezuela,Dominican Paraguay ArmeniaFederation RussianRB Uruguay TunisiaJordan MoldovaGeorgia Republic Azerbaijan Bahrain Bulgaria Mauritius Qatar Costa RicaTrinidad and Tobago Jamaica Cuba 0 Croatia Chile 0 20 40 60 80 100 120 Female primary completion rate, % Source: World Bank calculations, based on WHO and WDI data. Note: Partial regression plots of bivariate regression of height two standard deviations below median on: (a) poverty headcount ratio ($2 day PPP adjusted basis) as percentage of population; and (b) female primary education completion rate, as percentage of relevant age group. Rising nutrition levels can lead to a vir- found that such nutritional interventions tuous cycle of improvements in health and would allow the income poverty MDG to be increases in income. Evidence from northwest- attained at an annual income growth rate of ern Tanzania between 1991 and 1994 on the 1.5 percent, lower than the 2.2 percent rate role of supplementary child feeding programs required in the absence of such a policy.54 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 77 C H A P T E R 2 FIGURE 2.11 Relation of reductions in under-five malnutrition to increases in income Prevalence of underweight children in Tanzania, % Prevalence of underweight children in India, % 35 50 MDG will MDG will 30 be met in be met in 2109 40 2059 25 2065 2035 20 2026 30 2020 15 10 20 1998 2004 2010 2016 1998 2004 2010 2016 2.1% growth/­0.3 elasticity 2.1% growth/­0.5 elasticity 3.0% growth/­0.3 elasticity 3.0% growth/­0.5 elasticity 5.0% growth/­0.5 elasticity MDG 5.0% growth/­0.5 elasticity MDG Source: World Bank 2006c. Making a Difference tion. Except where subsistence is the norm in Child Malnutrition and consumption of commercial foods rare, such efforts are highly effective and deserve Malnutrition is often assumed to be caused to be priority interventions. by food insecurity. Recent evidence sug- Recent evidence on the importance of gests that household behavior and assets are nutrition during pregnancy and during the equally important (or perhaps even more first two years of life suggests that focus- important) determinants. Food security, ing investments on nutrition supplements while necessary, is not sufficient to guarantee for pregnant women and children under age positive nutrition outcomes. The potential two would have a high payoff over the long for interaction and feedback effects between term. Maternal education makes a big dif- child nutrition, education, and income sug- ference in ensuring adequate nutrition, as gest a role for policy interventions in child does rising household income, but shorter- health that work concomitantly with other term efforts such as teaching mothers about investments.55 Addressing nutrition rein- hygiene and sound feeding practices have forces other efforts to improve child health. been shown to be effective even among Several interventions to stem both short- uneducated women.57 Availability of forti- and long-term malnutrition are well known fied snack foods at home or school can com- and simple to achieve--examples are oral pensate for poor nutrition without leading rehydration therapy and the promotion of to substitutions for meals, which is a com- exclusive breastfeeding. Ensuring adequate mon practice in some countries. Commu- levels of iron, iodine, vitamin A, and zinc for nity nutrition interventions can also have an pregnant women, infants, and children can impact on how communities compensate for often be effectively achieved through forti- inadequate food for children and mothers. fying common foods such as flour and salt As with health care quality, these inter- with micronutrients, and promoting the use ventions will be effective only to the extent of iron cookware.56 These offer inexpensive that they are targeted to the populations in but effective means of implementation as need. The quality of the delivery of these they harness the private sector in distribu- services will also affect their success. 78 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 A C H I E V I N G B E T T E R R E S U L T S I N H U M A N D E V E L O P M E N T The Environment Impacts of Environment on Health and Health Goals Environmental health refers to all the physi- The interrelationships among environmen- cal, chemical, and biological factors exter- tal factors, child health, nutrition status, nal to a person, as well as to all the related and education are strong and multifaceted, factors affecting individuals' behaviors, and together significantly influence progress and encompasses the assessment and con- toward the MDGs. Environmental risk fac- trol of those environmental factors that can tors such as access to water and sanitation potentially affect health status.62 Modifi- play a role in many diseases. It has been esti- able environmental risks are deemed to mated that 23 percent of all deaths are prin- be those that are "reasonably amenable to cipally attributable to environmental factors. management or change" and that can be Children are among those most vulnerable classified into either traditional or modern and adversely affected. Diarrhea, malaria, forms.63 Traditional hazards are those envi- and lower respiratory infections are most ronmental health risks closely linked with closely linked to environmental factors. poverty and development: lack of access to Malnutrition is among the most important clean water, poor sanitation, poor waste determinants of child mortality, together with disposal, indoor air pollution, and vector- respiratory infection (largely caused by indoor borne diseases such as malaria. Modern air pollution), diarrheal diseases (mostly from hazards include environmental health risks inadequate water, sanitation, and hygiene), such as urban air pollution, agro-industrial and malaria (from inadequate environmen- waste, and toxic chemicals. The sources of tal management and vector control).58 Lack these environmental challenges vary widely, of food and nutrients, along with the conse- their implications are broad, and interven- quences of lack of access to clean water, poor tions range from highly private goods and hygiene and sanitation, and repeated infec- services (such as cleaning up indoor air pol- tions, lowers resistance to disease, which in lution) to public goods (such as provision of turn, leads to a cycle of illness and chronic sanitation). malnutrition.59 The WHO estimates that the Environmental risk factors play a role in environment--in particular poor water, sani- more than 80 percent of diseases globally. tation, and hygiene--accounts for about half An estimated 24 percent of the global disease of the health burden of malnutrition.60 Recent burden from all causes is attributable princi- evidence also points to the negative effects on pally to environmental factors (box 2.4). In child growth of infections and of exposure to developing countries, 25 percent of all deaths environmental health risks in early infancy were found to be attributable to environmen- that lead to permanent growth faltering, low- tal risk factors, compared to 17 percent in ered immunity, and increased mortality.61 developed countries (figure 2.12).64 BOX 2.4 Indicators of environmental risk factors--DALYs The disability-adjusted life year (DALY) is a measure used to quantify the burden of disease by combining years of life lost due to premature death and years of healthy life lost due to morbidity, with one DALY representing the loss of one year of equivalent full health. The use of the DALY measure allows quantification and comparison of the impact of different environmental risk fac- tors on health. In calculating the burden of disease attributable to an environmental risk factor, it is often not practical to assume that exposure to the risk factor can be reduced to zero. Instead, the contribution of environmental risk factors is estimated by how much the disease burden would decline if exposure to a given factor were reduced to a certain achievable baseline level. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 79 C H A P T E R 2 FIGURE 2.12 Environmental disease burden in DALYs per 1,000 of population, 2002 Disability-adjusted life years per 1,000 people 10­20 20­50 50­100 100­200 No data Source: Prüss-Üstün and Corvalán 2006. In addition, the poorest and most vul- Roughly 94 percent of diarrheal cases nerable populations--women, children, worldwide can be attributed to the environ- migrants, people living with HIV/AIDS-- ment, primarily to unsafe drinking water, are generally the most adversely affected by poor sanitation, and hygiene, resulting in 1.5 environmental risk factors as they tend to million deaths annually, many of them chil- reside in areas with the worst environmen- dren. Another estimated 1.5 million deaths tal conditions or have greater exposure to annually result from respiratory infections risk factors. Moreover, these populations caused by environmental factors. In develop- typically have lower resistance to infection. ing countries alone, approximately 24 percent Among children under five, over 40 percent of upper respiratory infections and 42 percent of the global disease burden is linked to envi- of lower respiratory infections were attribut- ronmental risk factors: an estimated 4.7 mil- able to environmental risk factors, such as lion children under five died in 2000 from outdoor and indoor air pollution, and con- illness related to unsafe environments.65 tributing risk factors, such as tobacco smoke, For the lowest-income countries striving solid fuel use, and housing conditions.67 to reach the MDGs, the diseases estimated Roughly two-fifths of global malaria cases to have the largest epidemiological burden could be prevented through improved envi- attributable to environmental factors include ronmental management, such as modifica- diarrhea, lower respiratory infections, and tions to the natural environment or to human malaria. These diseases also constitute the habitation. Behaviors, such as the consistent greatest burden on children ages 0­14 years. use of bed nets, can also enhance preven- Together, the three conditions account for tion.68 Climate change, which raises malaria 24 percent of all deaths in children under incidence through meteorological effects on age 15 (figure 2.13).66 pathogens and vectors, is expected to expand 80 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 A C H I E V I N G B E T T E R R E S U L T S I N H U M A N D E V E L O P M E N T FIGURE 2.13 Environmental contribution to disease burden Diseases with the largest environmental contribution, total population Diarrhea Lower respiratory infections Other unintentional injuries Malaria Road traffic injuries COPDa Perinatal conditions Ischaemic heart disease Childhood cluster diseases Lead-caused mental retardation Drowning HIV/AIDS Malnutrition Cerebrovascular disease Asthma Tuberculosis Suicide Depression Poisoning Falls Nonenvironmental fraction Hearing Loss Environmental fraction Violence Lymphatic filariasis Lung cancer 0 1% 2% 3% 4% 5% 6% 7% Fraction of total global burden of disease in DALYsb Main diseases contributing to the environmental burden of disease, children ages 0­14 yearsc Other 19% Diarrheal diseases 29% Intestinal nematode infections 1.5% Drownings 2% Road traffic injuries 2% Malnutrition 4% Childhood-cluster diseases 5% 6% 16% Perinatal conditions Lower respiratory infections 6% Neuropsychiatric disorders 10% Malaria Source: Prüss-Üstün and Corvalán 2006. a. COPD = Chronic obstructive pulmonary disease. b. DALYs represents a weighted measure of death, illness, and disabilities. c. The environmental disease burden is measured in DALYs. the geographical distribution of several increases could potentially cause large rela- vector-borne diseases, including malaria, and tive increases in the risk of malaria.69 may even come to extend transmission sea- Environmental effects on health status sons in some regions. Even small temperature also affect incomes. The economic burden on G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 81 C H A P T E R 2 FIGURE 2.14 Economic burden associated with poor environmental health percentage of GDP Tunisia Lebanon Colombia Peru Guatemala Egypt Nigeria Iran Ghana Pakistan China 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 Percentage of GDP Urban air pollution Indoor air pollution Water, sanitation, and hygiene Source: World Bank Country Environmental Analyses, various years, and Baris and Ezzati (2007). Note: The economic burden of health costs are typically measured as costs of poor health in terms of DALYs and adjusted by either human capital or value of statistical life methods. Since different methodologies and parameters may have been used for estimating costs across countries, these cross-country comparisons are only indicative. society caused by poor environmental health institutional costs of operating and man- has been estimated at approximately 1.5­4 aging them are relatively high and are best percent of GDP annually (figure 2.14).70 financed by users, and government has a necessary role in overseeing and regulat- ing their operation. Clean water is vital and Water and Sanitation demand for it is high. But sanitation gen- While wide agreement exists on the need for erates large externalities and low demand adequate water and sanitation, progress has because the beneficiaries of sanitation are been slow, particularly compared with prog- not only those who create the problem, but ress on other MDGs.71 According to the particularly those residing "downstream." WHO's Joint Monitoring Programme for Hygiene entails behavior changes that are Water Supply and Sanitation, over a billion notoriously difficult to achieve rapidly. people do not enjoy reasonable access to a Almost all diseases associated with the safe drinking water supply, and a staggering lack of drinking water supply and sanitation 2.6 billion people (40 percent of the world's are transmitted by fecal material that has population) do not have access to basic sani- not been disposed of properly. Contamina- tation. While these needs may appear basic, tion from fecal material can occur through the challenges involved in meeting them are many transmission routes. Adequate water complex. Political, economic, and institu- and sanitation can interrupt some of these tional demands have complicated efforts routes but not all of them, and recent evi- to close the gap. Facilities typically require dence suggests that behavioral changes are large initial fixed costs. The economic and also needed. Changes in hygiene behavior 82 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 A C H I E V I N G B E T T E R R E S U L T S I N H U M A N D E V E L O P M E N T FIGURE 2.15 Trends and projections of access to water and sanitation in developing countries, 1990­2015 Improved water Improved sanitation Access, % Access, % 100 90 95 Urban Urban 80 MDG target 90 MDG target Total 70 Total 85 60 80 Rural 50 Rural 75 70 40 65 30 60 20 1990 2004 2015 projected 1990 2004 2015 projected Source: WHO and UNICEF 2006. must accompany infrastructure investments sanitation in rural areas has been improving. in water and sanitation systems if the full set Nonetheless, significant disparities continue of health benefits is to be realized. to exist in urban and rural levels of access. The most recent assessment suggests that In addition, the summary global statistics the world is roughly on target for reaching are averages and conceal major disparities the MDG goal of halving the proportion of by income group. When disaggregated, it people without sustainable access to safe is clear that access to different levels of ser- drinking water, but it is expected to miss the vice varies with income quintile.73 As figure goal for access to basic sanitation by half a 2.16 shows for 32 countries in Africa, the billion people (figure 2.15).72 The data also distribution of access to clean water and show that levels of access to improved water proper sanitation is highly unequal: while and sanitation in urban areas have been less than 10 percent of the bottom expen- static, whereas access to water supply and diture quintile has access to improved water FIGURE 2.16 Access to clean water and sanitation by expenditure quintile, 32 African countries Service level access, % Sanitation coverage, % 100 100 90 90 80 80 70 70 Traditional 60 60 unimproved latrine 50 50 40 40 No sanitation 30 Improved water 30 20 20 Improved 10 Piped water 10 sanitation 0 0 1st 2nd 3rd 4th 5th 1st 2nd 3rd 4th 5th Expenditure quintile Expenditure quintile Source: Banerjee and others 2008. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 83 C H A P T E R 2 supply, nearly 70 percent of the top quintile Approximately 32 percent of the global has such access. Similarly, over half of the burden of disease caused by indoor air pol- bottom quintile has no access to sanitation lution occurs in Sub-Saharan Africa, 37 per- of any kind, while only 6 percent of the top cent in South Asia, and 18 percent in East quintile has no access to sanitation. Given Asia and the Pacific. In developing countries, the fundamental nature and cost of water solid fuel use is the fourth most important and sanitation services, it is not surprising environmental risk factor, and it accounts that service levels are linked to expenditure for approximately 3.7 percent of DALYs lost. levels; that is, as incomes increase, many Because of their reliance on solid fuels, the families will invest in these basic services, poorest regions of the world suffer the most, and they are willing and able to pay at least both in terms of deaths and DALYs (table for water. 2.4). The specific health outcomes associated with indoor air pollution include acute lower respiratory infection, chronic obstructive Air Pollution pulmonary disease, and lung cancer. A major source of indoor air pollution Outdoor air pollution is caused mainly by in developing countries is the burning of the combustion of petroleum products or coal solid fuels such as biomass (animal dung, by automobiles, industry, and power stations. wood, crop residues, and wastes) and coal In some countries, major sources include wood for heating and cooking. Currently half of or agricultural waste. Outdoor air pollution the world's population relies on inefficient, also stems from industrial processes that involve highly polluting solid fuels for their daily dust formation (such as that from cement fac- energy needs.74 Many use solid fuels that are tories and metal smelters) and the release of burned in open fires or simple stoves that gases (such as that from chemical production). release smoke into the home. These prac- Outdoor air pollution is believed to contribute tices increase indoor air pollution, posing a 0.6­1.4 percent of the total burden of disease serious health threat particularly for women in developing countries, and other forms of and young children who spend more time pollutants (such as lead in water, air, and soil) indoors close to fires (box 2.5). may contribute up to 0.9 percent.75 BOX 2.5 Exposure to indoor air pollution: Evidence from Bangladesh A recent study on Bangladesh analyzes individuals' exposure to indoor air pollution at two lev- els: differences within households attributable to family roles; and differences across households attributable to income and education. The findings revealed high levels of exposure for children and adolescents of both sexes, with particularly high exposure for children under five, as would be expected. Among adults, men had half the exposure of women (women's exposure was simi- lar to that of children and adolescents). Elderly men also had significantly lower exposure than elderly women. Household choices of cooking fuel, cooking locations, construction materials, and ventilation practices were found to be significantly affected by family income and adult edu- cation levels (particularly for women). Overall, the poorest, least-educated households had twice the pollution levels of relatively high-income households with highly educated adults. The study found that the typical household could cut their children's pollution in half by adopting two simple measures: increasing children's outdoor time from three hours a day to five or six hours; and concentrating that outdoor time during peak cooking periods. Source: Dasgupta and others 2004. 84 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 A C H I E V I N G B E T T E R R E S U L T S I N H U M A N D E V E L O P M E N T Urban air pollution has become a grow- TABLE 2.4 Deaths and DALYs lost due to solid fuel use ing concern for most large cities in devel- oping countries. An estimated 800,000 people die prematurely every year from Deaths DALYs Total burden Region (thousands) (thousands) (%) lung cancer and cardiovascular and respira- tory diseases caused by outdoor air pollu- East Asia & Pacific 540 7,087 18.4 Europe & Central Asia 21 544 1.4 tion.76 Other health effects from urban air Latin America & the Caribbean 26 774 2.0 pollution include chronic bronchitis, acute Middle East & North Africa 118 3,572 9.3 respiratory illness, asthma, and coronary South Asia 522 14,237 36.9 diseases. Quantifying the adverse health Sub-Saharan Africa 392 12,318 32.0 effects caused by urban air pollution is dif- World 1,619 38,532 100.0 ficult because of limited data availability, although this is beginning to change with Source: Bruce and others 2006. the World Bank's Country Environmental Analyses (CEAs), which highlight the need early stages of development. Estimates of the for ambient air quality monitoring stations, health effects of climate change are therefore and for strengthened legal and policy frame- based on measures of current and past effects works for urban air quality management.77 of climate variation (and other influences) on The health effects of air pollution depend health, and these derived relationships are on the nature and level of exposure, as well then applied to projections of likely changes as individuals' activity patterns. Children in future climatic conditions.80 are particularly susceptible to environmental Climate change has the potential to affect risks given that greater exposure to air pol- a variety of health outcomes (table 2.5). It lution can severely retard their growth and directly effects heat waves, floods, and storms development. Overall, an estimated 5 per- and indirectly affects the distribution and cent of global lung cancer cases, 2 percent transmission intensity of infectious diseases of deaths from cardiovascular and respira- and the availability of fresh water and food. tory conditions, and 1 percent of respira- In addition, climate change affects exposure tory infections are attributable to pollution to various communicable and noncommuni- caused by urban particulate matter, result- cable diseases. A global estimate measured ing in 7.9 million premature deaths.78 The the burden of disease in 2000 attributable potential savings from curbing health-related to climate change at 925 DALYs per million, problems caused by urban air pollution can with strong regional variations exhibited. thus be substantial. The largest burdens were found in Sub-Saha- ran Africa, Asia, and the Eastern Mediter- ranean.81 These regions are generally located Climate Change at lower latitudes, where the most important Climate change refers to human-induced climate-sensitive health outcomes--such as (anthropogenic) change to the global climate malnutrition, diarrhea, and malaria--are system. Climate change constitutes an envi- already pervasive, and where vulnerability to ronmental risk that has global implications for climate change is greatest. Changes in climate health, but that requires local interventions to are believed to have caused over 150,000 address the sources of the problem.79 How- deaths, or the loss of over 5.5 million DALYs ever, a causal relationship between climate annually, since the year 2000. change and health is difficult to show, given the numerous factors driving both health out- Addressing Environmental Health Risks comes and environmental conditions. Methods for describing and measuring the Addressing environmental health risks is health effects of climate change remain in the challenging because of the political, financial, G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 85 C H A P T E R 2 TABLE 2.5 Projected health effects of climate change Health effect Confidence Increased malnutrition and consequent disorders, including those related High to child growth and development Increased number of people dying and suffering from disease and injury due High to heat waves, floods, storms, fires, and droughts Continued change in the range of some infectious disease vectors High Mixed effects on malaria; in some places the geographical range will contract, Very high elsewhere it will expand, and the transmission season may change Increased burden of diarrheal diseases Medium Increased cardiorespiratory morbidity and mortality associated with ground-level ozone High Some increased benefits to health, including fewer deaths from cold. These benefits are High expected to be outweighed by the negative effects of rising temperatures worldwide, especially in developing countries Source: Confalonieri and others 2007. Note: The Intergovernmental Panel on Climate Change assigns confidence levels according to the scientific evidence available. TABLE 2.6 Cost per DALY of alternative interventions for addressing environmental hazards US$ per healthy year gained Intervention Cost per DALY Assumptions/Comments Insect-treated bed nets 9­31 Two net treatments with insecticide per year Insecticide residual spraying 11­34 Two rounds of spraying per hear Breastfeeding promotion and diarrhea treatment 930 Two interventions during first year of life Measles immunization 981 Cholera immunization 2,945 Water and sanitation upgrading Hand pump or standpost 94 House connection 224 Sanitation construction and hygiene promotion < 270 Acute respiratory disease in children (pneumonia) 398 Four case management interventions Source: Jamison and others 2006. and implementation difficulties. Simple is an awkward intervention because demand investments, such as bed nets, can produce is uncertain and reaching the right mother is large benefits at modest cost relative to more not always straightforward, particularly in complex interventions (table 2.6). However, rural areas. Residual spraying, if done consis- the manner in which bed nets are obtained, tently, is inexpensive and can protect house- treated, and used varies widely across coun- holds without any behavioral shift. tries, which accounts for some of the observed Measles immunization is also relatively ineffectiveness of this simple and cheap tech- inexpensive; moreover it has a positive effect nology. Poor governance, for example, can on reducing morbidity and mortality from raise the costs significantly. Breastfeeding diarrhea, so its effects are quite powerful promotion is relatively inexpensive, but this beyond simply preventing measles. Thus, 86 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 A C H I E V I N G B E T T E R R E S U L T S I N H U M A N D E V E L O P M E N T there are options for preventing and treating supply and sanitation systems. Not doing so the major environmentally driven diseases during the "Drinking Water Supply and San- that plague the lowest-income countries. itation Decade" of the 1980s led to the fail- The challenge is devising effective programs ure of the costly initiative. Part of the chal- that actually reach families and investing in lenge is ensuring an adequate financial base the education that helps households prevent through charges on users, something that illness and use treatment options. often succumbs to political pressures and leads to deterioration of the physical infra- Water supply and sanitation. Water and structure and water and sanitation services. sanitation infrastructure investments are not Thus a strengthening of the institutional and cheap, and although health benefits are likely policy framework must accompany water to be significant, they are only part of the supply and sanitation investments if they are considerable economic and environmental to have a sustainable impact. benefits that accrue to households and society from these investments. An estimated US$30 Indoor air pollution. A study that compared billion in annual investments is needed to the differences in healthy years gained for reach the MDG targets of halving the frac- four alternative solid fuels found that cleaner tion of the population without basic access fuels yielded the greatest gains across all to water and sanitation, and these costs do regions, but that improved stoves also had a not include wastewater treatment, which is significant impact.83 In Sub-Saharan Africa particularly expensive. Currently only US$15 and South Asia, regions with the largest bur- billion is spent globally per year. den of disease attributable to solid fuel use, The high costs and other problems asso- an improved biomass stove was the most ciated with building and maintaining water cost-effective intervention. Cleaner fuels, and sanitation infrastructure suggest that such as kerosene, were the most cost-effec- future investments should be subjected to tive in East Asia and the Pacific. the following considerations. First, institu- tion building should accompany infrastruc- Conclusion ture construction, something that has been achieved even in small rural areas through Halfway to 2015 the world has made seri- local professional operators (a local entity ous, if uneven, progress in numerical out- willing to handle the operations and mainte- comes toward achieving the MDGs for nance for a fee). The World Bank has found health and education. Stronger and more such programs to be effective in Rwanda, targeted efforts are needed to improve the and programs are currently being tested in access of the poor and underserved popu- Haiti, Mali, and Madagascar.82 Second, lations to these services. Greater attention urban water and sanitation networks need to also needs to be focused on the quality of be extended to peri-urban areas and smaller education and health investments--and to towns. Third, technical standards could be the governance and accountability of public adjusted so that the standards of the devel- programs--if they are to meet MDG objec- oped world are not imposed on low-income tives. Many countries are falling short on countries that cannot afford the gold stan- the malnutrition goal, and new evidence dard. Fourth, hygiene promotion should be is pointing to the need to reach pregnant included as part of the investment, as has women as well as young children if nutri- been the case in recent World Bank water tional status is to improve and education projects in China, Egypt, and Vietnam. goals are to be realized. Finally, it is clear Of greatest concern, however, is the need that environmental hazards pose a major to build the institutions that can ensure long- risk to health status. Efforts to mitigate the term operation and maintenance of water effects of climate change, reduce indoor and G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 87 C H A P T E R 2 outdoor air pollution, and expand water and 33. Peabody, Gertler, and Leibowitz 1998. The sanitation coverage have positive impacts on estimated magnitude of the impact of clinical pro- health that must be considered in weighing cess quality was large. Increasing the frequency the value of such investments. Ultimately, of one element of a given clinical exam (such as there are positive synergies across the goals, checking blood pressure) from once in the prenatal and these synergies need to be exploited.84 period to checks at every visit would increase aver- age birth weights by approximately 128 grams. 34. Lewis 2006. Notes 35. Grantham-McGregor and others 2007; Vic- tora and others 2008. 1. For more details on progress on the various 36. Sameroff and others 1993. MDG targets, see Annex: Monitoring the MDGs. 37. Victora and others 2008. 2. O'Donnell and others 2008. 38. Verhoef and others 2003. 3. O'Donnell and others 2007. 39. Alderman and others 2001. 4. Lewis 2006. 40. Glewwe and King 2001. 5. Lewis and Lockheed 2007b. 41. Alderman, Hoddinott, and Kinsey 2006. 6. Indeed, even in OECD countries, the inequal- 42. Maluccio and others 2006; Hoddinott and ity of health outcomes tends to exceed income dis- others 2008. parities. 43. Walker and others 2005. 7. Victora and others 2003. 44. de Onis and others 2004. 8. Ranson and others 2005. 45. Black and others 2008. 9. Anwar and others 2005. 46. World Bank 2006c. 10. Schwartz and Bhushan 2005; Ranson and 47. Black and others 2008. others 2005. 48. Mason, Rivers, and Helwig 2005. 11. Grabowsky and others 2005; Lengeler 49. Multivariate analyses produce similar 2004. results: Even after the inclusion of various con- 12. Danel and La Forgia 2005. trols that affect malnutrition outcomes-such as 13. Ranson and others 2005. the size of the rural population and the regulatory 14. Wößmann and Peterson 2007. quality of the country-education and income per 15. Grantham-McGregor and others 2007; capita are both negative and significant predictors Young and Richardson 2007. of child malnutrition outcomes. 16. Coady, Filmer, and Gwatkin 2005. 50. Smith and Haddad 2000; Alderman, Behr- 17. Roemer and Montoya-Aguilar 1988. man, and Hoddinott 2007. 18. Donabedian 2005. 51. Armar-Klemesu and others 2000. 19. Thomas, Lavy, and Strauss 1996; Collier, 52. Haddad and others 2003. Dercon, and Mackinnon 2002. 53. World Bank 2006c. 20. Alderman and Lavy 1996; Leonard, Mliga, 54. Alderman, Hoogeveen, and Rossi 2006. and Mariam 2002; Fronco and others 2002. 55. Wagstaff and Claeson 2004. 21. Narayan and others 2000; Lewis 2006. 56. Bhutta and others 2008. 22. Lavy and others 1996. 57. Behrman, Alderman, and Hoddinott 2004. 23. Thomas, Lavy, and Strauss 1996. 58. Prüss-Üstün and Corvalán 2006. 24. Das and Hammer 2007. 59. de Garbino 2004; Wagstaff and Claeson 25. Barber, Bertozzi, and Gertler 2007. 2004. 26. Das, Hammer, and Leonard 2008. 60. Prüss-Üstün and Corvalán 2006. 27. Chaudhury and others 2006; Banerjee, 61. World Bank 2008. Deaton, and Duflo 2004. 62. This definition follows that of WHO (2007). 28. Leonard and Leonard 2004; Leonard and Others have defined environmental health more Masatu 2007; Reinikka and Svensson 2007. broadly to include all those aspects of human 29. Bokhari, Gai, and Gottret 2007. health determined by social and psychosocial fac- 30. Filmer and Pritchett 1999; Lewis 2006; tors within the environment. Wagstaff and Claeson 2004. 63. Lvovsky 2001. 31. Peabody and Liu 2007. 64. Prüss-Üstün and Corvalán 2006. 32. Jack and Lewis 2007. 65. WHO 2005. 88 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 A C H I E V I N G B E T T E R R E S U L T S I N H U M A N D E V E L O P M E N T 66. Prüss-Üstün and Corvalán 2006. ing of hands with soap at appropriate times and 67. Prüss-Üstün and Corvalán 2006. the safe disposal of child feces. 68. Prüss-Üstün and others 2004. 72. WHO and UNICEF 2006. 69. McMichael and others 2004. 73. Banerjee and others 2008. 70. Johnson and Lvovsky 2001. 74. Bruce and others 2006. 71. The terms sanitation and hygiene can 75. Kjellström and others 2006. unfortunately mean many different things. Within 76. WHO 2002. this chapter, sanitation refers to infrastructure 77. The CEA report for Pakistan is an example and service provision required for the safe man- (World Bank 2006b). agement of human excreta, as exemplified by 78. Kjellström and others 2006. latrines, sewers, and wastewater treatment. As 79. Campbell-Lendrum and Woodruff 2007; such, important environmental health services, chapter 7 of this volume. such as solid waste management, vector control, 80. Campbell-Lendrum and Woodruff 2007. and surface water drainage, are not included, nor 81. Campbell-Lendrum and Woodruff 2007. are they tracked by the UN system for measuring 82. Prevost 2008. progress toward MDG Target 10. Hygiene refers 83. Bruce and others 2008. to the set of human behaviors related to the safe 84. Wagstaff and Claeson 2004. management of human excreta, such as the wash- G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 89 3 Scaling Up Aid: Opportunities and Challenges in a Changing Aid Architecture T he global aid landscape is undergo- a priority if these countries are to attain the ing profound changes in the way aid Millennium Development Goals (MDGs). is financed and delivered. The new Assistance from non-DAC donors, both aid architecture is marked by the emergence official and private, has grown in size and of global funds and nontraditional bilat- importance. The most dynamic parts of the eral donors; a growing role in aid of private aid system are the new players who are bring- foundations, nongovernmental organiza- ing fresh funding, enthusiasm, and business tions (NGOs), and corporations; and more models into the system. Although traditional public-private partnerships. Changes to the official donors remain major players in the aid architecture are expanding the availabil- development business, new public and private ity of resources for poor countries and spur- actors are committing growing volumes of ring new and innovative ways of addressing financial assistance to the developing world. pressing development needs. But they also The increasing complexity of the aid pose new challenges for aid effectiveness. architecture also presents challenges. In par- The latest aid numbers point to mixed ticular, a proliferation of aid channels, frag- progress on aid volumes from traditional mentation of aid, and a trend toward vertical Development Assistance Committee (DAC) programs and earmarking of funds pose new donors. Aid declined in 2006 and 2007 as challenges for coherence and predictability major debt relief operations tapered off. To in the delivery of aid. These developments meet the commitment of the Group of Eight call for better donor coordination, division and other donors to increase aid by $50 billion of labor, harmonization of the new sources (from 2004 levels) by 2010, donors will need of aid with the principles of the Paris Decla- to sharply accelerate the expansion of core ration, and alignment of global public needs development aid to an estimated 12 percent with national development interests. The annual growth rate. However, preliminary evi- upcoming Accra High Level Forum provides dence from the forward survey of donors' aid a timely opportunity to address these new, allocations suggests that these rates are not yet dynamic dimensions of the aid agenda. sufficiently ambitious to meet the targets set The health sector epitomizes many of the for 2010. Yet, a substantial number of African challenges to aid effectiveness in the new aid countries and fragile states remain dependent architecture. A wide range of new donors on external assistance. Scaling up of aid is and aid channels has contributed to a sharp G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 91 C H A P T E R 3 increase in aid to health. At the same time, by $50 billion (from 2004 levels) by 2010, with the multiplicity of donors and channels and half of the increase going to Africa, is becom- a vertical focus on specific communicable ing harder to achieve. Between 2002 and 2005, diseases have made aid effectiveness and DAC donors managed a creditable increase in coherence more challenging. The need to aid by relying on major debt relief operations, address these issues is recognized by initia- which have been instrumental in significantly tives such as the International Health Part- reducing poor countries' debt burdens and nership launched in September 2007. Health increasing fiscal space for priority spending. has been selected as a special focus sector in The latest DAC numbers show that the upward deepening and widening the Paris principles trend in official development assistance (ODA) and monitoring their application. stalled in 2006­07; after contracting by 4.5 Climate change is becoming an urgent percent in real terms in 2006, net ODA fell an concern, and addressing climate change additional 8.4 percent in real terms to $103.7 activities in mitigation and adaptation will billion in 2007 (figure 3.1).1 Aid levels were require significant increases in development pulled down as the exceptionally large debt- finance. It is important that support to devel- relief operations for Iraq and Nigeria tapered oping countries for mitigation and adaptation off.2 Most eligible countries will already have be additional and not divert resources from had their debts written off by 2010, so to meet other development programs. New and inno- the 2005 Gleneagles commitments, which vative sources of funding will be required to were reaffirmed at Heiligendamm in 2007, support climate change activities. donors need to find other channels through The Heavily Indebted Poor Countries which incremental aid can flow. (HIPC) Initiative and Multilateral Debt Relief Of the $104.4 billion aid envelope from Initiative (MDRI) have substantially lowered DAC in 2006, $73 billion was for core devel- debt burdens. Yet, vulnerability of economic opment assistance, which excludes bilateral activity to terms-of-trade and climate-related debt relief, bilateral emergency assistance, shocks presents a challenge to long-term debt and administration costs.3 The growth of sustainability of several post-completion-point this component of aid slowed to about 4 per- HIPCs. Strong debt management as part of a cent in real terms in 2006, below the 10.3 sound macro framework and reforms to build percent expansion reached in 2005 and also resilience to exogenous shocks will help pre- below the average annual growth of 5 per- vent debt burdens from becoming unsustain- cent during 2002­06. Prospects for meet- able again. On their part, creditors need to ing 2010 targets will depend on accelerating take debt sustainability considerations into the growth of core development aid. To put account in their lending decisions. this in perspective, assuming that debt relief falls back to levels of the early 2000s and the share of humanitarian assistance contin- Aid Trends and Prospects ues at current levels, core development aid would need to grow by about $40 billion or Mixed Progress on Aid Volumes at an average annual growth rate of around A growing number of public and private 12 percent.4 Without such expansion, 2010 actors are boosting global aid volumes. targets will not be met. But the overall picture is mixed. Aggregate The decline in aid volumes pulled down trends in volumes mask important differ- the size of donors' net ODA relative to gross ences across donor groups. national income (GNI). At 0.31 percent, com- bined net ODA/GNI in 2006 was below the DAC Donors level of the early 1990s and also below the Stalling aid volumes. The commitment of the 2010 projected target of 0.35 percent (based Group of Eight and other donors to increase aid on announced commitments). The ODA/ 92 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S C A L I N G U P A I D : O P P O R T U N I T I E S A N D C H A L L E N G E S I N A C H A N G I N G A I D A R C H I T E C T U R E FIGURE 3.1 DAC members' net ODA flows and 2010 target 2005 US$ (billions) ODA as % of GNI 150 0.40 2010 Target 2010 target* 0.35 120 0.30 90 0.25 0.20 60 0.15 0.10 30 0.05 0 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Core development aid Total net ODA ODA as a % of GNI (left axis) (left axis) (right axis) Source: DAC database, OECD 2008a and 2008b, and staff estimates. Data for 2007 are preliminary. Note: Targets are based on DAC members' announced commitments. GNI ratio for DAC members of the Euro- second-generation poverty reduction strategy pean Union (EU) was 0.43 percent. There is (PRS-II) countries, where the strengthening considerable variation across donors, with of the strategic and institutional framework five donors reaching or exceeding the United is sufficiently advanced to merit early deliv- Nations ODA target of 0.7 percent of GNI, ery on the Gleneagles commitments.5 Also, and two donors with net ODA less than 0.2 a larger proportion of aid can be provided to percent of GNI (figure 3.2). these countries in the form of budget support. DAC members' ODA shows a substantial Some examples include Burkina Faso, Ghana, shift in composition during 2004­06 (fig- Madagascar, Mozambique, Rwanda, Tanza- ure 3.3). The share of debt relief doubled, to nia, and Vietnam. There is scope as well for almost one-fifth of the total. DAC donors' scaling up of aid in many first-generation PRS contributions to multilateral institutions fell countries, starting with moderate increases from nearly a third to a quarter, as a larger but building to larger amounts as absorp- share of aid was provided bilaterally through tive capacities expand. In these countries aid exceptional debt relief. The share of techni- programs could comprise a mix of modalities cal cooperation also trended down--from such as budget support, investment projects, 24 percent in 2004 to 21 percent in 2006. including sectorwide approaches, and techni- cal assistance, depending on specific country Mixed response to scale-up opportunities. circumstances. Examples include Armenia, Thanks to the progress countries are making Bangladesh, Honduras, the Kyrgyz Republic, in strengthening their development strate- and Mali. Fragile states, particularly postcon- gies and institutional frameworks for imple- flict and reengagement countries, also present mentation, a broad range of countries can opportunities for selective, focused, and care- productively absorb increased aid flows. A fully sequenced increases in aid for projects recent World Bank report found that there and programs tailored to their weaker gover- are several strong performers, typically nance contexts. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 93 C H A P T E R 3 FIGURE 3.2 DAC members' ODA ODA as % of GNI Net ODA Sweden Sweden Luxembourg Luxembourg Norway Norway Netherlands Netherlands Denmark Denmark Ireland Ireland United Kingdom United Kingdom Belgium Belgium Austria Austria France France Finland Finland Switzerland Switzerland Germany Germany Spain Spain Australia Australia Canada New Zealand Canada Japan New Zealand Portugal Japan Italy Portugal United States Italy Greece United States DAC average Greece 0 0.2 0.4 0.6 0.8 1.0 1.2 0 4 8 12 16 20 24 28 Percent 2005 US$ billions 2004 2006 2010 Source: OECD 2008a. Note: 2010 ODA/GNI are based on announced commitments and are not forecasts. Not all donors have announced forward commitments. Despite the opportunities for scaling up, Faso, Ghana, Madagascar, Mozambique, much of the expansion in ODA over 2002­ Rwanda, and Tanzania, which had initially 06 has been concentrated in a few countries been singled out for scale-up efforts by the (figure 3.4). The pattern of concentration Organisation for Economic Co-operation reflects, in part, global and security con- and Development (OECD) DAC and the cerns--for example, Afghanistan and Iraq World Bank, is mixed: during 2002­06 aid account for nearly half of the increase in flows expanded by around 50 percent to ODA.6 Additional aid in the case of Nige- Burkina Faso and Madagascar and by about ria and the Democratic Republic of Congo 40 percent to Ghana, while other countries mostly reflects debt relief. Scaling up of donor saw modest increases or even a decline. support to countries that are well positioned to absorb more aid has been relatively lim- The challenge of meeting targets. It is not easy ited, and there is also wide variation across to set up new channels to disburse aid effec- countries. For example, the expansion in aid tively. One of the fastest-growing programs, flows to PRS-II countries such as Burkina the Global Fund to Fight AIDS, Tuberculosis 94 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S C A L I N G U P A I D : O P P O R T U N I T I E S A N D C H A L L E N G E S I N A C H A N G I N G A I D A R C H I T E C T U R E FIGURE 3.3 Distribution of DAC members' ODA FIGURE 3.4 Top 10 recipients of the increase in net ODA, 2002­06 by type Nigeria Percent 100 Iraq Sudan 26 32 80 Afghanistan Cameroon 60 22 Uganda 22 Zambia 40 21 Congo, Dem. Rep. of 24 Colombia 6 20 8 6 Kenya 7 18 0 2 4 6 8 10 12 9 0 2005 US$ billions 2004 2006 Debt relief Source: DAC database and staff estimates. Humanitarian aid Administrative costs & other try level and for which forward spending Technical cooperation plans are more likely to be available.8 Com- Other bilateral ODA pared with the 2006 survey, donor response Contributions to multilateral institutions to the 2007 survey was higher, at 47 per- cent of coverage of estimated total country programmable aid for DAC members and 69 Source: DAC database and staff estimates. percent for multilateral donors.9 Neverthe- Note: Administrative costs include in-donor country refugee costs. less, signs of scaling up in donors' plans are and Malaria (GFATM), was able to reach $1 modest. And though Sub-Saharan Africa billion in disbursements in its fourth year of receives the largest increase, the survey operation. Another new agency, the United indicates a planned increase in volume of States' Millennium Challenge Corporation, country programmable aid of $100 million had committed $5.5 billion in multiyear aid or more between 2005 and 2010 for only compacts to 16 countries as of February 2008 a handful of poor countries (IDA-eligible). but had disbursed only about $180 million.7 The results also indicate that several fragile Though the new channels are making a con- states are among those seeing increases in tribution, the bulk of the increase in aid flows planned country programmable aid. in the short to medium term will have to pass More encouraging are donors' funding through traditional channels. However, the commitments to the replenishment cycles planning in most agencies to scale up to the of the International Development Associa- required degree is not yet under way. tion (IDA) and the concessional windows Preliminary evidence from the forward of other regional development banks and survey of donors' aid allocations suggests GFATM. New donor pledges for IDA15 that these are not yet sufficiently ambitious to (covering the period mid-2008 to mid-2011) meet the targets set for 2010. The 2007 sur- amount to $25.1 billion, representing the vey adopted a new methodology--one where largest expansion in donor funding in IDA's information on forward spending plans was history and indicating strong support for collected for a subset of total ODA, defined IDA (see chapter 5 for details). The latest as country programmable aid. The idea was replenishment of GFATM also points to to measure aid that is planned at the coun- larger contributions by donors.10 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 95 C H A P T E R 3 Innovative financing approaches can help Federation, Thailand, República Bolivariana raise funds for short-term needs or provide de Venezuela, and a number of oil-rich coun- long-term, sustainable funding for develop- tries. These donors now provide significant ment. The solidarity tax on airline tickets was resources, totaling perhaps $8 billion annu- introduced in France in mid-2006, and has ally (figure 3.5a). Non-DAC OECD coun- been implemented since then in Chile, Côte tries are providing sizable amounts of aid and d'Ivoire, the Democratic Republic of Congo, have plans to substantially scale up flows; for the Republic of Korea, Madagascar, Mauri- example, Korea, which provided $455 mil- tius, Niger, and Norway. Another 15 coun- lion in 2006, has plans to provide $1 billion of tries are in the process of implementing the ODA by 2010.11 Non-DAC OECD countries tax. The funds are used to finance UNITAID, are expected to double ODA by 2015. New an international purchase facility for drugs EU member countries (not members of the and treatments for HIV/AIDS, malaria, and OECD) could well reach ODA effort of 0.17 tuberculosis. The contributions to UNITAID's percent of GNI by 2010 and 0.33 percent by budget for 2008, financed primarily through 2015. Middle Eastern countries provided $2.5 air ticket taxes, are expected to be $364 mil- billion in assistance in 2006, with Saudi Ara- lion. The International Finance Facility for bia contributing $2.1 billion (as reported to Immunisation (IFFIm) provides frontloading the DAC). Firm data on assistance from other to support development investments that are bilaterals are not available. Estimates place needed in the short term, even though donor aid from China and India at about $3 billion funding is available only over the long term. annually, and both countries are developing IFFIm was established as a new supranational larger aid programs.12 in 2006, with some $4 billion in assets in the form of irrevocable donor grants paid over Private donors. Private donors now contrib- 20 years. IFFIm's first triple-A rated $1 bil- ute substantial amounts of aid. Net grants lion bond issuance funded immunization pro- from NGOs in DAC countries are estimated grams of the Global Alliance for Vaccines and by the OECD at $14.6 billion in nominal Immunizations (GAVI). terms in 2006. Although these grants leveled Overall, however, DAC donor intentions off in 2006 in real terms, they have grown of scaling up assistance are falling short of by nearly 40 percent during 2004­06 (figure promised increases. A stronger and more 3.5b). Other estimates suggest that the total expeditious donor response is needed to sup- amount of private international giving, from port opportunities that exist in a number of NGOs as well as other entities such as corpo- countries for scaling up development results rations, educational institutions, and religious and accelerating progress toward the MDGs. organizations, may be substantially larger. One estimate places private international giv- Expanding Role of Non-DAC Donors ing from all sources in the United States alone New players such as non-DAC bilater- at $33.5 billion.13 A survey estimates that a als, private entities, and vertical funds are little over a third of this amount is related to the fastest-growing sources of funds. Their emergency assistance.14 increasing role is changing the aid landscape. Globally, there are thousands of interna- New donors and modalities promise more tional NGOs, foundations, and corporations resources and innovation for development. now engaged in transnational development activities.15 There are also tens of thou- Non-DAC bilateral donors. The number sands of developing-country NGOs that are of non-DAC countries that now provide aid increasingly active in raising local funds for has risen steeply to nearly 30. That number development, and possibly millions of com- includes emerging market countries such as munity-based organizations that implement Brazil, China, India, Malaysia, the Russian development projects. Private players are 96 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S C A L I N G U P A I D : O P P O R T U N I T I E S A N D C H A L L E N G E S I N A C H A N G I N G A I D A R C H I T E C T U R E FIGURE 3.5 Rising trend in aid from non-DAC bilaterals and NGOs a. Breakdown of non-DAC ODA b. Net grants by NGOs from DAC countries 2005 US$ (billions) 2005 US$ (billions) 8 16 7 China, India 14 6 12 5 10 4 8 3 6 2 4 1 2 0 0 1990s 2002 2006 1990s 2002 2006 OECD non-DAC Arab countries Other bilateral donors Source: DAC database; Kharas 2007a. Note: Data for non-DAC bilaterals are for countries that report to the DAC; OECD non-DAC countries include the Czech Republic, Hungary, Iceland, Korea (Rep. of), Poland, the Slovak Republic, and Turkey; Arab countries are Kuwait, Saudi Arabia, and the United Arab Emirates; and other bilateral donors are Israel, Taiwan (China), and Thailand. Data for China and India are estimates. changing the aid landscape in two ways. They sell (RED) products and make correspond- are providing significant sums of money to ing contributions. By the end of 2007, con- complement official aid, and prospects for tributions of the corporate partners totaled continued strong expansion are good--for more than $50 million. example, the Gates Foundation alone dis- Vertical funds. Vertical funds--or funds that bursed over $1 billion in 2006, and the out- are focused on specific objectives, such as look is for a ramping up of disbursements to fighting particular communicable diseases, about $3 billion annually in a few years.16 And for example, GFATM and GAVI--are one of they operate largely outside official structures, the most rapidly increasing sources of official dealing directly with local beneficiaries. aid and have also become platforms where Innovative approaches to financing the private and official sectors can cooper- development have also spurred increased ate with funding and expertise. New vertical voluntary contributions from individuals. funds have disbursed about $7 billion over Individuals holding "affinity" credit cards, the last five years. for example, agree to make small contri- butions proportionate to their purchases. Aid to Sub-Saharan Africa Growing, Investment funds can also generate contribu- at a Modest Pace tions; IDA receives a part of the manager fee income of the World Bank Bond Fund estab- Financial globalization is contributing to lished by Japanese financial institutions. a widening range of financing options for (PRODUCT) RED, launched in 2006, raises developing countries. Yet, for a substantial funds for GFATM HIV/AIDS programs in number of poor countries in Sub-Saharan Africa, as partner corporations design and Africa and for fragile and conflict-affected G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 97 C H A P T E R 3 states, official development assistance relief operations taper off, other types of aid remains important. Scaling up of aid is a to the region will need to rise sharply if the priority if these countries are to attain the Gleneagles commitment to increase ODA to MDGs. For low-income countries in the Sub-Saharan Africa to $50 billion (a dou- region, ODA accounts for almost two-thirds bling from the 2004 level) is to be achieved. of all external financing on average. Although aid to Africa has risen, new aid Assistance to Fragile States: Issues of has been largely debt relief. DAC donors are Timing and Duration providing larger amounts of bilateral aid to the region and are allocating a larger share Fragile states face the toughest challenges of ODA to Sub-Saharan Africa--over a in achieving progress toward the MDGs.17 third in 2006 compared to about a quarter More than four-fifths of fragile IDA coun- in 2000. Overall, aid flows from DAC and tries have been subject to conflict. Conflict is multilateral donors to the region climbed to one of the main reasons why countries slide $40 billion in 2006, representing an increase into fragility. While the number of conflicts of $6.9 billion in real terms over 2005 lev- in low-income countries has been declining, els and $12.4 billion over 2004 amounts. the risk of reversal in postconflict countries is The expansion in net ODA, excluding debt high: around 40 percent of countries relapse relief and humanitarian assistance, has been into conflict in the first decade of postcon- limited, however, accounting for less than a flict recovery.18 Recent research suggests third of the expansion in ODA to the region that conflict risk is particularly high in the in 2006 and a fifth of the increase in aid first four years of a peacekeeping operation, during 2004­06 (figure 3.6). Debt relief decreasing thereafter but still remaining sig- has benefited recipient countries through nificantly above the level of risk in other reduced debt burdens and expanded fiscal (non-postconflict) low-income countries. It space for development spending. As debt also appears to be correlated with the timing of elections, with the risk of relapse increas- FIGURE 3.6 Net ODA to Sub-Saharan Africa ing in the year following an election.19 Size and pattern of assistance. Development 2005 US$ billions assistance to fragile states rose from $9.7 40 billion to $26.2 billion between 2002-06, 35 a doubling in real terms.20 Bilateral donors, the source of about 90 percent of ODA flows 30 to fragile states, accounted for most of this 25 increase, much of it associated with debt relief. Support to individual countries var- 20 ied widely; countries affected by conflict and 15 post-conflict countries typically received much more aid than other fragile states.21 For exam- 10 ple, between 60­70 percent of the aid to frag- 5 ile states in 2005 and 2006 was concentrated 0 in four countries--Afghanistan, Democratic 2004 2006 Republic of Congo, Nigeria, and Sudan. Debt relief Technical cooperation One perspective on the effectiveness of Humanitarian aid Other ODA assistance in fragile situations is to evalu- ate the timing and duration of assistance-- namely, whether it was provided during Source: DAC database and staff estimates. Note: Net ODA received from DAC donors and multilateral donors. periods of highest conflict risk.22 Figure 3.7 98 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S C A L I N G U P A I D : O P P O R T U N I T I E S A N D C H A L L E N G E S I N A C H A N G I N G A I D A R C H I T E C T U R E FIGURE 3.7 Conflict risk, aid, and peacekeeping Pattern of peacekeeping and aid expenditures against conflict risk in the years following the deployment of a new peacekeeping operation Frequency or probability US$ per capita 0.6 350 0.5 300 250 0.4 200 0.3 150 0.2 100 0.1 50 0 0 0 1 2 3 4 5 6 7 8 Year of peacekeeping Frequency of elections (left axis) Probability of conflict relapse (left axis) Aid per capita (right axis) Peacekeeping expenditure per capita (right axis) Source: Cliffe and Milante 2008. Note: The first year of peacekeeping is denoted as zero. shows that in a sample of 54 cases both peace- commitments are provided when crises are keeping expenditures and development aid visible in the mass media, but this support dropped sharply in the fourth year following drops off as media coverage declines.24 But the deployment of a new peacekeeping opera- a sharp decline in aid mid-decade may well tion.23 This drop coincides with the period miss an opportunity to consolidate the early directly following the first post-crisis elec- gains of peace. tions and may reflect certain donor consider- ations: commitments to deploy peacekeepers Strengthening coordination in fragile situa- up to the elections and then draw them down tions. The international community is taking immediately following the election itself, or steps to strengthen coordination of activities donor concern over the potential to manipu- across as well as within peacekeeping, human- late aid for political advantage. Evidence on itarian, and development areas--examples the high risks accompanying post-election are the OECD's formulation of Principles of periods suggests the need to maintain both Good International Engagement in Fragile peacekeeping and development aid at a con- States and the establishment of the UN Peace- sistent level until the risk of conflict relapse Building Commission. Recently, the multilat- has diminished. The data also show that aid eral development banks (MDBs) have agreed tends to taper off mid-decade, even though to a common goal for MDB engagement in conflict risks remain significant and just fragile states, a set of guiding principles for when countries have rebuilt or strengthened MDB engagement, and a set of operational capacity to better absorb aid. This pattern and implementation arrangements that will of assistance to post-crisis countries may be contribute to improved coordination among driven by popular media coverage of crises, the MDBs. 25 As part of this, the MDBs also or the so-called CNN effect--large-scale agreed on a shared approach to identifying G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 99 C H A P T E R 3 fragility and on the need to continue to have with a larger share being channeled through regular consultations on priority country sit- consolidated appeals processes.26 Despite uations. OECD DAC is developing practical the global concern with humanitarian issues, guidance on state-building in fragile situa- there is still a gap between needs and funds: tions. It is also evaluating development effec- 72 percent of estimated funding require- tiveness in situations of fragility and conflict ments were met in 2006 compared with 59 and the applicability of the Paris Declaration percent in 2000.27 High-profile disasters in these situations. receive more resources and attention than less visible ones: a drought in Niger might see $20 per capita in assistance, while a vis- Donor Response to Climate Change: ible crisis such as the South Asia earthquake Scale-Up of Resources Needed might receive $300 per capita.28 Climate change has the potential to seri- The total size of global humanitarian ously undermine development progress. The assistance is not readily available. The Global impacts of climate change include, among Humanitarian Assistance Report 2006 others, increased frequency and severity estimates the amount to be $18 billion in of droughts, floods, and storms; decline in 2005, compared with $10 billion in 2001.29 agricultural productivity and food security; Humanitarian assistance from DAC donors further spread of water-related diseases (par- shows an upward trend--the size of bilateral ticularly in tropical areas); population dis- emergency and disaster relief was $7.1 bil- placement; and conflicts over scarce resources. lion in 2005 (boosted by the Indian Ocean With increasing climate variability and risks, tsunami and the South Asia earthquake) the poorest countries and communities, par- and $6.6 billion in 2006 (figure 3.8). DAC ticularly in Sub-Saharan Africa and South- bilateral humanitarian assistance is highly east Asia, are likely to suffer the earliest and concentrated, with the top five recipients most because of their geographical location, receiving nearly 50 percent of the resources. low incomes, and low institutional capacity, The Financial Tracking Service (FTS) of the as well as their greater reliance on climate- Global Humanitarian Aid Database shows sensitive sectors like agriculture. Addressing that private sources of funding rose sharply these challenges requires urgent action on in 2005 to nearly $4.5 billion, but have since several fronts: mitigation, adaptation, and fallen back to much lower pre-2005 levels. the global humanitarian system. Chapters The European Union collectively is the 6 and 7 address the challenge of combating leading provider of humanitarian assistance, climate change and promoting environmen- providing $3.7 billion of humanitarian aid tal sustainability. The focus here is on the in 2006. The EU has adopted a common donor community's mobilization of resources vision, policy objectives, and shared prin- to assist developing countries in meeting this ciples to enhance the coherence and effec- challenge and dealing with its impacts. tiveness of EU humanitarian aid.30 These principles emphasize adequacy and equity in Humanitarian aid. The rising frequency provision of humanitarian aid, partnership, and severity of natural disasters has focused effectiveness and accountability, and capac- increased attention on humanitarian aid. ity to respond rapidly. Humanitarian aid has risen, and new Along with seeking to provide more timely donors and new ways of delivering humani- and adequate aid, new approaches to human- tarian assistance are changing the response itarian assistance emphasize prevention and to disasters. There is a wider application longer-term risk reduction. Poor countries of good humanitarian donorship principles need to develop the capacity to monitor and that call for more adequate and equitable respond to risks if they are to reduce their assistance, provided in a timely manner, and vulnerability. An essential component of 100 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S C A L I N G U P A I D : O P P O R T U N I T I E S A N D C H A L L E N G E S I N A C H A N G I N G A I D A R C H I T E C T U R E FIGURE 3.8 Humanitarian aid, 1970­2006 2005 US$ (billions) 10 8 6 4 2 0 1970 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 DAC, non-DAC, and EC UNRWA, UNHCR, and WFP Source: DAC database, FTS, WFP, and Lee 2008. the EU's approach is promotion of disaster the additional cost will be $86 billion a year risk reduction strategies and preparedness by 2015--$44 billion for climate-proofing activities. The World Bank's Global Facility development investments, $40 billion for for Disaster Reduction and Recovery (estab- adapting poverty reduction programs to cli- lished in 2006) helps developing countries mate change, and $2 billion for strengthening fund projects and programs that enhance the disaster response system.31 local capacities for disaster prevention and The UNFCCC process has created a emergency preparedness. New approaches to number of avenues for increasing financing humanitarian response also recognize that a for mitigation (essentially through the cre- smooth transition from relief to rehabilita- ation of a carbon market, under the Kyoto tion and recovery is critical to aid effective- Protocol) and adaptation (with the Global ness. This calls for strengthened cooperation Environment Facility, or GEF, a key instru- between humanitarian and development ment to develop a knowledge base for adap- agencies and other actors. tation). To comply with their obligations under the Kyoto Protocol, industrial coun- Fundingmitigationandadaptation.Address- tries can, above and beyond domestic emis- ing climate change in developing countries sions reductions, trade emission permits or requires financial flows and technological purchase emission reduction credits from support much beyond current public fund- projects in developing countries using the ing levels. The UN Framework Convention Clean Development Mechanism (CDM), or on Climate Change (UNFCCC) estimates in economies in transition using Joint Imple- that by 2030 financial flows to developing mentation. This has led to a vibrant global countries should be on the order of $100 bil- carbon market reaching an estimated $30 lion annually to finance mitigation and some- billion in value in 2006, three times greater where between $28 billion and $67 billion for than in 2005. According to preliminary adaptation. Focusing on adaptation only, the estimates, this growth continued in 2007 Human Development Report concludes that (roughly doubling over 2006). The CDM G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 101 C H A P T E R 3 unambiguously dominates the project-based and other MDBs with interested parties market, with more than 1 billion Certified to establish a portfolio of strategic climate Emissions Reductions (CERs) transacted investment funds to facilitate early transfor- (from 2002 onward), for a cumulative value mational climate actions.33 exceeding $17 billion. By some estimates, the CDM--in 2006 alone--leveraged approxi- The Challenge of Aid mately $9.2 billion in clean technology Effectiveness investments in developing countries, about 48 percent of their total investments in clean New donors and modalities promise more technologies. Finally, the carbon market resources and innovation, but the increased provides additional resources for adapta- complexity of the aid architecture adds tion, through a 2 percent share of proceeds to the challenge of ensuring effectiveness on CERs issued for a CDM project activity, and coherence of aid. As aid increases and collected in the Adaptation Fund (together involves more players, three challenges with other sources of funding). The size of present themselves: how to integrate the the Adaptation Fund could reach $100 mil- new players harmoniously into the overall lion per year, or more, depending on the aid framework; how to develop modalities activity of the carbon market. that would permit new aid commitments In contrast to the rise of carbon finance, to be met in an effective way; and how to resource mobilization under the GEF has been improve the efficiency and effectiveness of modest. But the GEF has been a key instru- aid through better aid delivery. ment for addressing climate change (par- The Paris Declaration addresses some of ticularly adaptation), through its significant these issues. The Paris framework represents leverage power: during 1991­2007, the GEF the international community's consensus allocated $2.3 billion for climate change proj- and resolve to improve the effectiveness of ects.32 The GEF continues to rely principally aid. Implementation of the Paris Declara- on voluntary contributions--an arrangement tion is spurring important reforms of the that reduces the predictability of finance. aid system. But many of the new donors Clearly, new and innovative sources of bypass traditional channels and institutional funding will be required to support climate arrangements. The Accra High Level Forum change activities as highlighted in the Bali scheduled for September 2008 provides an Action Plan. The action plan embraces miti- opportunity to address the new, dynamic gation of climate change (including, for the dimensions of aid harmonization. The first time, consideration of reducing emis- forum will review progress on implement- sions from deforestation and land degrada- ing the Paris Declaration, address new chal- tion), adaptation, technology development lenges, and help shape the evolution of the and transfer, and provision of financial aid effectiveness agenda moving forward. resources in support of developing coun- tries' actions. The latter include, in particu- Integrating New Players into the Aid lar, better access to predictable, adequate, Architecture: Competitive Pluralism and sustainable financial support and pro- vision of additional resources; mobilization The current aid system is organized around of public and private sector funding and a dialogue between a recipient country gov- investment, including facilitation of climate- ernment and its major aid donors. These friendly choices; and positive incentives for country-level platforms coordinate devel- developing countries to enhance mitigation opment resources with country priorities and adaptation actions. There are some and translate broad strategies into specific encouraging developments in this direction, projects and programs. Donors are asked to including joint efforts by the World Bank be responsive to country development pri- 102 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S C A L I N G U P A I D : O P P O R T U N I T I E S A N D C H A L L E N G E S I N A C H A N G I N G A I D A R C H I T E C T U R E orities; recipients are asked to be focused on both donor and developing country govern- implementation of projects and programs. ments, multilateral institutions, the private The challenge of integrating new players sector, and civil society are also exploring into this framework arises on many fronts. innovative approaches to development financ- The new players may not have the flexibility ing. The Bill and Melinda Gates Foundation, to respond fully to recipient priorities--they for instance, has been a substantial supporter tend to be organized to deliver on a nar- of innovative initiatives, funding exploration rower set of areas. Vertical funds have spe- and design work for many new initiatives, in cific mandates, the non-DAC bilaterals may particular in the health sector. In coopera- have selected expertise to share, and private tion with the International Finance Corpora- donors must specialize to attract funds. At tion (IFC), it seeks to encourage the private the same time, the new players tend to have sector to invest in health care in Africa. The limited country presence and participation IFC plans to set up a $300 million­$350 mil- in the development dialogue. And the sheer lion equity fund to invest in health care busi- number of players implies that the process of nesses and a $400 million­$500 million debt face-to-face dialogue between governments vehicle to provide long-term finance to health and donors is harder to manage. care organizations. Other challenges also present themselves. Several initiatives link funding with per- Some new players eschew government agen- formance or results-based outcomes. The cies for implementation of their projects, either U.S. Millennium Challenge Corporation choosing private nonprofits or else undertak- provides assistance to countries showing ing implementation themselves. That raises good performance according to key indica- issues of whether local capacity and institu- tors. Debt buy-downs link debt relief with tions are being strengthened or weakened. successful project implementation. The $1.5 The aid architecture must recognize the billion Advanced Market Commitment opportunities and challenges that come with (AMC) pilot is results based, subsidizing vac- the new players. It will be difficult to bring all cines against pneumococcal diseases, which sources of aid under the same umbrella of a kill 1.6 million people every year (including country-level platform. The most urgent needs 1 million children), overwhelmingly in poor are for better information sharing, learning, countries. Donors commit to fund an AMC and evaluation of innovations and scaling up. of a specified market size and price for vac- There is currently not enough information cines that meet set specifications to ensure on the operations of the new players. When public health impact in developing countries. donors have different approaches to a prob- AMCs encourage the development of target lem, it is important to do comparative analysis products, but only subsidize actual product to establish which ones are more cost-effec- sales to interested governments. tive. A harmonized, coordinated system must Other new mechanisms linked to results be complemented by an openness toward include output-based aid. This aid provides alternative approaches and the innovation direct subsidies to service providers for the they may bring. Competitive pluralism needs delivery of specified basic services or out- to be built into the aid architecture. puts.34 For example, a recent output-based scheme in Uganda aims to give a subsidy (of $2.5 million) for connecting poor house- Innovative Financing for Development holds in slum and peri-urban areas of Kam- Recent innovative approaches include creating pala to water services.35 The output-based new competitive markets for undersupplied approach to aid delivery uses explicit per- goods and services, shifting risk to resolve formance-based subsidies to help the poor market failures, and using results-based afford access to basic services.36 The subsi- financing. Expanded partnerships involving dies target poorer consumers and are paid to G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 103 C H A P T E R 3 the service provider only after the delivery alignment and harmonization.38 For exam- or provision of the agreed-to service. This ple, the survey results show that donors pro- approach harnesses the private sector to vide 43 percent of their aid to governments deliver results. through program-based approaches such as budget support and sectorwide approaches, relative to the Paris target of 66 percent.39 Improving the Impact of Aid through In addition, the extent to which donors con- Better Aid Delivery duct joint missions is low--the survey found DAC peer reviews of aid programs point to that 18 percent of missions were undertaken 12 lessons for effective aid management.37 jointly, while 42 percent of country analytic Among these are the need for DAC donors work was prepared jointly with another to focus their assistance on fewer countries, donor, relative to the 2010 Paris targets of 40 fewer sectors, and fewer activities, and to percent joint missions and 66 percent joint develop a stronger culture for managing for analytical work. Greater donor efforts are results and aligning incentives accordingly, going to be needed if the 2010 targets in these but in ways that strengthen local structures areas are to be met. The 2008 survey, which of accountability. These issues have been is under way and which will cover nearly taken up through the Paris Declaration. Part- twice as many countries as the 2006 survey, ner countries, donors, and the international will provide stronger and more up-to-date financial institutions are taking substantial information on the progress and prospects actions toward meeting the Paris commit- for reaching the 2010 Paris targets. ments on aid alignment and harmonization. Fragmentation. Aid fragmentation has Alignment and harmonization. The find- emerged as a serious issue, with multiple aid ings of the 2006 Survey on Monitoring the agencies from each country joining the new Paris Declaration indicate mixed progress on players. Fragmentation refers to a large num- ber of donors each with a small share of total aid.Projectshavebecomesmaller.Eachagency FIGURE 3.9 Concentration of DAC donors and multilaterals in makes requests for studies and for individual selected countries, measured by programmable aid meetings with country officials;40 they often also establish separate project management Number of donors units and procurement practices for their own 35 projects. High fragmentation can have nega- tive implications for aid quality. DAC data for 30 maximum 61 PRS countries and fragile states show that 25 average over 60 percent of countries had 20 or more 20 donors and over 75 percent of countries had 10 or more donors together accounting for 10 15 minimum percent or less of aid (figure 3.9). 10 5 Division of labor. The EU has recently adopted a voluntary Code of Conduct on 0 Second-generation First-generation Fragile states Complementarity and Division of Labor in poverty reduction poverty reduction Development Policy to facilitate division of strategy countries strategy countries labor as a way to improve aid effectiveness. Total donors Smallest donors that together provide 10% of aid Among the 10 operational principles of the code of conduct for donors' actions are con- centration in a limited number of sectors in Source: OECD DCD 2007c. Note: Data are for country progammable aid (gross). a country based on a donor's comparative 104 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S C A L I N G U P A I D : O P P O R T U N I T I E S A N D C H A L L E N G E S I N A C H A N G I N G A I D A R C H I T E C T U R E advantage; enhancement of donor coordina- that of the $2.7 billion in general budget tion by supporting a lead donor arrangement support committed by donors for 2006, 92 in each priority sector; assurance of adequate percent was disbursed within the year, com- donor support in sectors that are relevant for pared with 85 percent in the 2006 survey and poverty reduction; and establishment of pri- below 70 percent in the 2003 survey (figure ority countries for EU donor engagement. 3.10). Within-year delays are less pronounced as well. The pattern of shortfall in disburse- Predictability. Aid predictability is an impor- ments in the first quarter and a surge in funds tantdimensionofaidquality.Inaid-dependent in the fourth quarter is less evident. countries, the variability and unpredictability In contrast, with respect to medium-term of donor funding undermine aid effectiveness predictability, the Strategic Partnership with by affecting short- and medium-term bud- Africa survey finds that the proportion of get planning and programming, disrupting current (2006) donor programs committing implementation of expenditure allocations, general budget support for future years falls complicating macroeconomic management, off dramatically in outer years, to 69 percent and deepening the challenge of building for 2008 and 35 percent for 2009. Medium- absorptive capacity. Donors and recipients term predictability has remained relatively have focused on both short- and medium- low in most cases, despite mechanisms such term predictability. While short-term aid as multidonor budget support, joint country predictability is improving, less progress has assistance strategies, and pooled financing been made in improving medium-term pre- through sectorwide approaches, and despite dictability. The 2007 budget support survey recipient countries taking steps to strengthen by the Strategic Partnership with Africa finds public financial management (box 3.1).41 FIGURE 3.10 In-year predictability is improving Disbursement rate of Over- and underdisbursement general budget support commitments of quarterly commitments Percent Percent 100 80 60 75 40 20 50 0 ­20 25 ­40 0 ­60 2003 survey 2006 survey 2007 survey First Second Third Fourth Disbursed in year Slipped to next year Quarter Undisbursed 2005 survey 2006 survey 2007 survey Source: Strategic Partnership with Africa 2008. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 105 C H A P T E R 3 BOX 3.1 Improving the predictability of aid: Ghana and Tanzania The experience of Ghana and Tanzania provides evidence of both continuing challenges and some progress in improving multiyear aid predictability. Ghana. Ghana has had some success in improving aid predictability, thanks to improved coor- dination through a multidonor budget support framework. Multidonor budget support (MDBS) partners disburse their budget support based on triggers defined two years in advance and assessed in the year prior to disbursement. This new schedule allows the MDBS partners to inform the government about their budget support before the government's budget proposal is submitted to Parliament. Better predictability was achieved even as donors were scaling up: MDBS disbursements rose throughout 2003­07.a The Ghana experience suggests that increasing predictability requires progress across three fronts: mechanisms to improve coordination, own- ership within government and among development agencies, and clearly defined measurement yardsticks. In an effort to enhance predictability, the government has involved all active budget support donors in the Ghana Joint Assistance Strategy process.b Tanzania. Total aid to Tanzania climbed from 6 percent of GDP in 2000 to over 12 percent in 2005/06, and accounts for 40 percent of public expenditure. Aid projections have been embed- ded in the annual budget process in recent years--the authorities ask each donor to provide three-year projections of disbursements as input to the annual budget guidelines and Medium- Term Expenditure Framework (MTEF) preparation. A review of these projections shows a sharp divergence between actual financing and projections; indeed, projections systematically under- predict actual flows (figure and table). The forecasting error is large as a percentage of GDP and larger than that of other components of revenue. In every year donors collectively increased total external financing but forecast significant reductions over the following three years. The substantial size of external financing means that the predictability of medium-term external financing is particularly important to strengthening the country's MTEF. Tanzania: Aid is not very predictable in the medium term % of GDP 12 10 8 6 4 2 0 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 Total external support, actual MTEF projection 2005 MTEF projection 2007 MTEF projection 2004 MTEF projection 2006 MTEF projection 2003 Source: Government of Tanzania et al. 2007. Note: MTEF stands for Medium-Term Expenditure Framework. 106 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S C A L I N G U P A I D : O P P O R T U N I T I E S A N D C H A L L E N G E S I N A C H A N G I N G A I D A R C H I T E C T U R E BOX 3.1 Improving the predictability of aid: Ghana and Tanzania (continued) Tanzania: Aid is less predictable than domestic revenue Average forecast error in % Average forecast error in % of GDP (2003/04­2005/06) (2003/04­2005/06) 1 year 2 years 3 years 1 year 2 years 3 years ahead ahead ahead ahead ahead ahead Domestic revenue 0.0 2.3 4.5 0.0 0.3 0.6 Budget support (+HIPC) 28.5 54.0 51.0 1.2 2.6 2.2 Project + basket support ­4.8 35.7 61.3 ­0.3 0.9 2.5 Total external support 10.0 43.2 61.9 0.9 3.6 4.6 Source: Moon 2007. a. Cavalcanti 2007. The one contribution that declined reflected disagreements about measurement of progress. b. IDA 2007. The potential costs of variability of aid An encouraging development is the Euro- can be large. One study finds that unfore- pean Commission's MDG contract, which seen variations in aid primarily impact provides a more predictable way of deliv- domestic investment expenditure.42 It also ering aid.44 It is not a new EC financial finds that periods of excess aid are seldom mechanism, but rather an enhanced form used to accelerate spending on this category of budget support for implementation under so as to catch up with previous shortfalls. the 10th European Development Fund (EDF Thus, aid volatility may have permanent 10), which will provide 22.7 billion over costs in terms of reduced investment and the period 2008­13. More than half of growth. A recent study attempts to mea- all EDF general budget support commit- sure the cost of volatile flows by applying ments would be disbursed through MDG the concept of "certainty equivalence" to contracts. About half of the African coun- the flows received by recipient countries.43 tries that are to receive general budget sup- On this basis, the study estimates the cost port would receive it in the form of MDG of volatility to be quite large at 22 per- contracts. The funds would be committed cent--that is, the value of aid flows may for the six years of EDF 10. A proportion be discounted by as much as 22 percent of funds committed to a country--80 per- on average to take into account the effect cent--would be virtually guaranteed except of volatility. The cost varies considerably when there is a clear failure to meet key cri- across countries; it is particularly large for teria. Under the MDG contract, monitoring countries such as Cambodia, the Demo- will be on an annual basis with a focus on cratic Republic of Congo, and Nigeria, results, especially in health and education, which have seen extreme movements in and performance assessment will be within their aid flows. a medium-term framework so as to foster G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 107 C H A P T E R 3 more comprehensive analysis and dialogue. opment goals--and advantages of greater The initial focus will be on countries with attributability provide strong incentives for a strong performance track record and the donor community to create new global multiyear monitoring framework. Among programs and vertical funds and to earmark other mechanisms that have the potential funds as part of their effort to scale up aid. to enhance predictability of aid are the U.S. Despite broad agreement on the importance Millennium Challenge Account and the of global programs, concerns abound on how International Health Partnership. to strengthen the broader development effec- On their part, aid recipients can take tiveness of these programs and improve the measures to mitigate the adverse effects of sustainability of the desired outcomes. Global aid variability.45 They can build up reserve programs illustrate the challenges of applying buffers that can be drawn down in the the Paris principles. An important issue that event of temporary aid shortfalls. Countries arises is that of alignment of these programs can identify priority spending programs with country strategies and complementarity and safeguard these from unexpected cuts with traditional, country-based aid. in aid. They can also build flexibility into Several recent discussions, supported by spending programs by designing programs analysis of country experiences, have focused that can respond quickly to aid volatility. By attention on improving the alignment of global regular stress testing of baseline projections, programs at the country level. A workshop for countries can assess the short-term financ- developing coutry policy makers organized by ing risks to the budget. the World Bank and the OECD DAC in Mau- ritius in June 2007 highlighted several chal- Selectivity. Donors' aid allocations indicate lenges on this front. For example, in cases of that aid is becoming more selective. Empirical weak country capacity and leadership, coun- estimates of the responsiveness of aid to policy try strategies and expenditure patterns can performance and the quality of institutions be highly influenced by external partners.47 (as measured by the World Bank's CPIA rat- Often there are differences in priorities of ings) show an improving trend. Overall, bilat- donors and development partners, and this eral donors are found to be less selective than can create imbalances and development gaps. multilateral donors, a trend that has persisted. There is also a tendency to neglect implica- There is also considerable variation among tions for accountability. The problem can be donors, which suggests that several criteria especially acute when global programs are the influence the allocation of aid. A recent study main contributors to a sector and particularly assesses how changes in the international aid when earmarking is at the level of a subsector architecture have affected the allocation of (such as HIV/AIDS). Country experiences--as bilateral aid over 1970­2004.46 The study in Benin, Madagascar, Malawi, and Sierra finds an improving trend in donor selectivity, Leone--indicate that global program sup- reinforcing the above results. Specifically, the port was often not integrated into the national study finds that countries that formulate pov- development or sector strategies. For example, erty reduction strategies see higher amounts the President's Emergency Plan for AIDS Relief of aid and that debt reduction has reduced (PEPFAR) and GFATM support operated in defensive lending by donors. parallel to government health sector policies and systems in Malawi and Benin. There are signs of progress, however, Aligning Global Funds as several countries have begun to better with Country Programs integrate global programs along with other Global programs have become an important donor support into sectorwide approaches part of the aid landscape. A desire to address (SWAps), as is now occuring in the health specific priorities--global challenges or devel- sector in Malawi. In the case of Mozam- 108 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S C A L I N G U P A I D : O P P O R T U N I T I E S A N D C H A L L E N G E S I N A C H A N G I N G A I D A R C H I T E C T U R E bique, GFATM support was integrated health more than doubled, from $6.8 billion into a SWAp and in 2006 into a common in 2000 to nearly $17 billion in 2006 (fig- fund for health (Presaude). This approach ure 3.11). The spurt in funding is the result allowed "virtual earmarking" of GFATM of new (bilateral) programs such as the U.S. resources and the use of national systems PEPFAR and increases in funding for health rather than separate financial management by bilateral donors, private foundations such and audit. It also reduced the proportion as the Gates Foundation, and global health of aid funds that are off budget.48 The key funds such as GFATM and GAVI. 50 lesson that emerges is that global programs External assistance from both traditional should be integrated and mainstreamed into and new sources accounts for 7 percent of national development strategies and pro- health sector spending in developing coun- grams and linked to related sector priorities tries. This figure masks large differences and systems. They should also be brought across countries and regions: In Africa this on budget, to reduce transaction costs and share is much larger at 15 percent. Fifteen of fragmentation of development approaches the 23 countries where external assistance and to enhance transparency and account- ability. Country experiences also suggest the FIGURE 3.11 Strong growth in assistance for importance of a strong monitoring and eval- health, 2000 and 2006 uation framework. The framework should be focused on results-based indicators rel- evant to the national development plan, and US$ billion not simply on global program indicators. 18 16.7 There is also a need to adapt donor proce- dures to local systems and place less reliance 15 on setting up parallel systems, which should help strengthen country processes. 12 Addressing the Challenge of Aid Effectiveness in Health 9 Aid for health is changing rapidly. New actors 6.8 such as private philanthropies have rapidly 6 expanded the funds available for investment in global health. In tandem with rising private 3 philanthropy, the channels through which bilateral, multilateral, and other donors are providing resources for health have grown. 0 The current health aid system encourages 2000 2006 innovation, flexibility, and speed.49 Yet, as Bilateral agencies indicated in the preceding section, its com- UN agencies plexity poses the challenge of ensuring coher- Development banks (concessional funding) ence and coordination and aligning global IDA programs with national priorities. Other multilaterals Scaling up of resources. The health sector has Private nonprofit organizations seen a rapid scaling up of both traditional and innovative aid flows. There are well over Source: Michaud 2008. 100 international entities involved in sup- Note: Concessional financing only. Other multilaterals include the European Commission, GAVI, and GFATM. Data for 2006 are porting health. Concessional financing for provisional. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 109 C H A P T E R 3 supports over 20 percent of all health spend- at the sector level is in Ethiopia, where the ing are in Africa.51 Seven African countries capital budget execution rate for exter- receive HIV/AIDS funding that is larger than nal assistance has been found to be low at 30 percent of their total public health bud- between 15 and 20 percent, compared with get; in some countries this funding exceeds 80 percent for domestic resources.54 But other public sector health spending.52 strengthening the absorptive capacity of the health systems usually receives less attention Effectiveness issues. While the focus on than direct funding for HIV/AIDS in donor health is bringing much-needed financing to commitments (figure 3.12). this sector, the narrow focus on a single issue A heavy reliance on aid to finance public or subsector can have unintended effects, par- expenditures, especially in health with a high ticularly in the short run. For one thing, the proportion of recurrent costs, raises issues of pattern of external funding can create imbal- sustainability of financing, and in turn of ser- ances in the health sector and undermine vice delivery gains, and has implications for attention to other local health priorities. For the ability of countries to budget and plan example, in Rwanda donor funding in health for the medium and long term. Most fund- was unevenly allocated, with $47 million for ing is short term--for example, in Ethiopia HIV/AIDS, $18 million for malaria (which is and Rwanda 55 percent of foreign-financed the leading cause of morbidity and mortal- projects are negotiated on an annual basis. ity in the country), and only $1 million for This short-term pattern of financing intro- management of childhood diseases.53 Like- duces uncertainty about aid amounts. Large wise, in Ghana malaria is the main cause of year-to-year variations in aid levels constrain sickness and mortality, but donor funding to long-term plans of building capacity in the fight malaria has recently been 60 percent of health sector--that is, hiring nurses and doc- the amount allocated for HIV/AIDS. tors and scaling up health services--espe- Sharp increases in vertical funds can also cially in the poorest and most aid-dependent strain absorptive capacity. Since earmarked countries. The challenges are even more funds typically pay less attention to invest- acute in fragile and conflict-affected situa- ment in health service delivery systems, tions, where aid is even more variable and is inadequate capacity can translate into low usually channeled through parallel systems efficiency and effectiveness of spending. An because of weak public financial systems. example of absorptive capacity constraints Amid the changing aid architecture and scaling up of financing for health, there is FIGURE 3.12 Ethiopia: Distribution of aid within the health sector much scope to improve the efficiency and effectiveness of aid delivery and utilization in the sector. Health has been selected as a spe- Maternal and cial focus sector (tracer sector) in applying the child health Paris principles at the sectoral level.55 There is growing awareness that health targets cannot be efficiently attained and sustained without appropriate health delivery systems. HIV Adequate investment in health systems is Health system therefore needed. To support effective scale- up of service delivery, donors will need to strengthen coordination and harmonization Malaria of aid, increase flexibility in funding, provide more predictable and sustainable assistance, and enhance alignment with country-owned Source: Government of Ethiopia, et al. 2007. and country-led health plans. 110 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S C A L I N G U P A I D : O P P O R T U N I T I E S A N D C H A L L E N G E S I N A C H A N G I N G A I D A R C H I T E C T U R E The need for more coherence in aid for debt relief to the five HIPCs in the Latin health is recognized by several new initiatives. America and the Caribbean region. Among these are the creation of the group of To date, 41 countries have been identi- eight heads of health agencies and the Inter- fied as eligible for, or have already received, national Health Partnership. The group of assistance under the HIPC Initiative. By the eight heads of health agencies--World Bank, end of March 2008, 33 HIPCs had reached World Health Organization, Joint United the HIPC Initiative decision point and were Nations Programme on HIV/AIDS, United receiving debt relief; of these, 23 had also Nations Children's Fund, United Nations reached the completion point--when credi- Population Fund, GFATM, GAVI Alliance, tors provide the full amount of debt relief and Gates Foundation--was formed by lead- committed at the decision point. The 23 ers of these institutions to strengthen collabo- post-completion-point HIPCs have also ben- ration to achieve better health outcomes. The efited from debt relief under the MDRI. International Health Partnership includes a The overall amount of debt relief to be number of bilateral donors, the group of eight delivered to the 33 post-decision-point HIPCs agencies, as well as several partner countries. under the HIPC Initiative and MDRI is cur- The main goals of the partnership are to rently estimated at $72 billion in end-2006 improve health systems, provide better coor- net present value terms. As a result, the debt dination among donors, and support coun- stock of the 33 post-decision-point HIPCs is tries in developing their own health plans.56 projected to decline by nearly 90 percent in present value terms (figure 3.13). Debt relief under the HIPC Initiative Debt Relief and MDRI has helped to expand the fiscal space for the 33 post-decision-point HIPCs Implementation of the HIPC Initiative for their poverty-reducing and other devel- and the MDRI opment expenditures. The debt service paid International debt relief efforts have con- by these countries has declined by about 2 tinued within the framework of the HIPC percentage points of GDP between 1999 and Initiative and the MDRI. The HIPC Initia- 2006, while their poverty-reducing expen- tive has remained the main framework for ditures have increased by about the same international coordination of debt relief to the poorest countries since its launch in FIGURE 3.13 Reduction of debt stock for the 33 post-decision-point 1996 by the International Monetary Fund HIPCs (IMF) and the World Bank. Its primary goals are twofold: to bring the debt of the poorest countries to levels deemed sustain- Before traditional 110 able so that these countries can pursue their debt relief developmental and poverty-reducing objec- After traditional 89 tives; and to help HIPCs implement a set of debt relief institutional and policy reforms designed to After HIPC initiative 41 prevent the reemergence of debt problems debt relief in the future. In 2005, the HIPC Initiative After additional 36 was supplemented with the MDRI, whereby bilateral debt relief IDA, the IMF, and the African Development After MDRI 12 Bank (AfDB) provide additional debt relief with the view to further freeing resources US$ billions, end-2006 net present value terms for poverty reduction and achievement of the MDGs. In 2007 the Inter-American Source: IMF­World Bank 2007; staff estimates. Development Bank also decided to provide Note: Based on decision-point debt stocks. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 111 C H A P T E R 3 magnitude. The HIPC Initiative and MDRI third of their expected share of debt relief relief is expected to reduce the debt service to post-completion-point HIPCs.57 The par- payments of post-decision-point HIPCs by ticipation of commercial creditors has been another 1 percentage point of GDP by 2009. even lower, with a few exceptions. More- Despite the significant progress achieved over, some of these creditors have resorted to date in the implementation of the HIPC to litigation against the HIPCs. The low par- Initiative and MDRI, important challenges ticipation of non­Paris Club and commercial remain. Some eligible HIPCs face difficulties creditors undermines the principle of "equal in qualifying for the HIPC Initiative debt burden sharing" that is at the heart of the relief. Before reaching the decision point, Initiative and presents a growing challenge they must exhibit a solid macroeconomic in light of the higher share of these credi- policy track record under an IMF-supported tors in the debt of the pre-completion-point program and develop a poverty reduction HIPCs.58 strategy. For the eight pre-decision-point Concerted action by the international HIPCs, progress in building a policy track community is required to encourage fuller record has often been hampered by inter- participation by all creditors and discourage nal conflicts, governance issues, substantial aggressive litigation against the HIPCs. To arrears to multilateral institutions (which that end, IMF and World Bank staffs have preclude these countries from engaging in an stepped up moral suasion, public dissemi- IMF-supported program), and more gener- nation of information on the HIPC Initia- ally, difficulties in formulating viable macro- tive, and provision of technical support. The economic and poverty reduction programs. World Bank's Debt Reduction Facility for Several of the ten interim HIPCs also face IDA-only countries can also help extinguish similar challenges on their way to the com- commercial debt of the HIPCs via debt buy- pletion point. These difficulties are reflected back operations at a deep discount.59 Debt in the long interim periods (between deci- buybacks under two recent operations sup- sion point and completion point) experi- ported by the facility--for Mozambique and enced by a number of recent and prospective Nicaragua--extinguished nearly US$1.5 completion-point countries. billion of commercial external debt on terms Additional donor resources are needed fully comparable with those provided by to cover the projected costs of debt relief to other creditors under the HIPC Initiative. countries with protracted arrears to multi- lateral financial institutions. The IMF, in Maintaining Long-Term Debt particular, will require substantial addi- Sustainability tional resources to provide debt relief to the remaining two protracted arrears cases Despite substantial debt relief, long-term (Somalia and Sudan). As of end-February sustainability remains a challenge for several 2008, the total arrears of these countries to post-completion-point HIPCs. For example, the IMF amounted to SDR 1.3 billion. As only nine of 23 post-completion-point HIPCs the costs for providing debt relief to these are now found at a low risk of debt distress, countries were not included in the original with the remainder being at either moderate financing framework of the HIPC Initiative or high risk according to their latest debt sus- and the MDRI, additional financing will tainability analyses (figure 3.14). The issue need to be mobilized. of sustainability often stems from underly- The participation of non­Paris Club ing vulnerabilities in these countries: vulner- official bilateral creditors and commercial ability to volatile terms-of-trade shocks and creditors in the HIPC Initiative remains low. susceptibility to climate-related shocks. Sus- Non­Paris Club official bilateral creditors tainability will require reforms (strengthen- have on average delivered only about one- ing of institutions and climate adaptation) to 112 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S C A L I N G U P A I D : O P P O R T U N I T I E S A N D C H A L L E N G E S I N A C H A N G I N G A I D A R C H I T E C T U R E FIGURE 3.14 Risk of debt distress in Other creditors are also encouraged to post-completion-point HIPCs take debt sustainability considerations into account in their lending decisions to help No. of countries HIPCs avoid reaccumulating unsustainable 12 HIPCs 12 debt burdens. The joint Bank-Fund Debt Sustainability Framework (DSF) provides a 10 9 HIPCs potential coordination point for creditors. 8 Debt sustainability analyses are, with the permission of governments, made public on 6 Bank and Fund Web sites60 and Bank and 4 Fund staff have conducted vigorous outreach 2 HIPCs efforts to all creditor classes. This has cul- 2 minated in several agreements with credi- 0 tors. Agreements have been signed with the Low risk Moderate risk High risk main regional development banks, defining modalities for their staff to contribute to Source: IMF­World Bank 2007; staff estimates. debt sustainability analyses; these institu- Note: Debt distress classification of post-completion-point HIPCs tions have in turn adopted similar financ- refers to the assessment made under the latest available joint IMF- WB debt sustainability analyses as of March 2008 and includes the ing approaches to that of IDA, adjusting effects of MDRI. their financial terms to mitigate debt distress risks. In addition, the export credit agencies of the OECD have adopted a set of sustain- build resilience to exogenous shocks, a sound able lending principles that are harmonized macro framework, and strong debt manage- with the Bank-Fund DSF. Activities with ment. Thus, post-debt-relief HIPCs should other creditor groups have raised awareness continue to borrow prudently, in line with of debt sustainability issues and the approach their debt repayment capacity. The IMF and followed by the World Bank and the IMF. World Bank are providing technical assis- Finally, the framework provides useful sig- tance to help HIPCs strengthen their debt nals to the market, helping commercial cred- management capacity and design sustainable itors identify default risks and thus reducing financing strategies (box 3.2). the likelihood of another debt crisis. BOX 3.2 Debt Management Performance Assessment Tool The World Bank, in collaboration with other stakeholders, has developed the government Debt Management Per- formance Assessment (DeMPA) Tool. Based on the public expenditure and financial accountability methodology for public financial management, and sound practices in government debt management, the DeMPA uses a set of 15 indicators that represent an internationally recognized and comprehensive methodology for assessing debt management performance. The DeMPA highlights strengths and weaknesses in government debt management practices in the respective country. The indicators are useful in guiding the design of reform programs, monitor- ing performance over time, and enhancing donor harmonization and capacity building. The indicators have been field-tested in five low-income countries--Albania, The Gambia, Guyana, Malawi, and Nicaragua. The table summarizes the results of the five field-test assessments. The shaded areas represent indicators where the minimum requirement for effective operation of the debt management system was not met. This signals a priority area for reform. The comprehensiveness of the assessment allows important linkages between indicators to be emphasized. Recently, this assessment framework has been used to guide the design of debt management reforms in Albania and Bangladesh. (continued on next page) G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 113 C H A P T E R 3 BOX 3.2 Debt Management Performance Assessment Tool (continued) Synthesis of field tests Evaluation Coordination Debt of debt Coordination with Legal Managerial management management with fiscal monetary Domestic framework structure strategy operations Audit policy policy borrowing 2007 DPI-1 DPI-2 DPI-3 DPI-4 DPI-5 DPI-6 DPI-7 DPI-8 Country 1 A A B+ B C+ B B B Country 2 C D D D D D+ C B Country 3 C+ C D D D C+ C+ C+ Country 4 C C D D D+ C D+ C+ Country 5 A D+ D D D B C C+ Segregation of duties, Cash flow staff Loan forecasting Debt capacity and guarantees, and cash administration business External onlending balance and data continuity Debt borrowing derivatives management security plans Debt records reporting 2007 DPI-9 DPI-10 DPI-11 DPI-12 DPI-13 DPI-14 DPI-15 Country 1 D C C+ B D+ D+ D+ Country 2 D D D+ B D+ C+ C+ Country 3 C D D+ B D+ C+ C+ Country 4 D C C+ D+ D+ B B Country 5 B+ C D B+ C+ A A Note: Indicator scores range from A to D where A indicates sound practice in the particular area, B is an in-between score, C indicates the minimum requirement for effective debt management, and D indicates below the minimum required for effective debt management. DPI = Debt management performance indicator. Notes 8. OECD DCD (2007a). As part of the DAC 2007 Survey of Aid Allocation Policies and Indica- 1. Preliminary estimate; see OECD 2008b. tive Spending Plans, a desk study was done on 2. Debt relief grants from DAC members donors' country allocation and budgetary processes. peaked at $25 billion in 2005 and were $18.9 bil- The study found that all DAC donors have annual lion in 2006. budgets, although budgetary planning is often mul- 3. Core development assistance also excludes tiyear. For example, in at least half of DAC member in-donor country refugee costs. Core development countries, the budget proposal includes indicative aid is similar to the concept of programmable spending plans three to four years forward. An ODA used by DAC, which also excludes imputed annual budget process means that funds can be dis- student costs. bursed only from approved annual budgets. Budget 4. Also see OECD (2008a and 2008b) and proposals outline the government's policy priorities Kharas (2007a). in terms of recipients, sectors, and themes. Multi- 5. World Bank (2007a) assessed in detail the scale- lateral donors work with multiyear budget frame- up opportunities for a wide range of countries. works with regard to core funding and policy and 6. Only net ODA (by DAC donors and mul- allocation priorities. For example, funding for IDA tilaterals) that is provided at the country level is and the African Development Fund is set during included in the calculations. the replenishment negotiations and covers three 7. Millennium Challenge Corporation, http:// years. DAC bilateral donors' forward planning is www.mcc.gov. generally limited to their priority partner countries. 114 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 S C A L I N G U P A I D : O P P O R T U N I T I E S A N D C H A L L E N G E S I N A C H A N G I N G A I D A R C H I T E C T U R E Thus, the results of the survey are incomplete in 28. Development Initiatives 2006; also see that sense. Multilateral donors' forward planning Stromberg 2007 for an analysis of the determi- covers all recipients of their aid. nants of donors' humanitarian assistance. 9. See OECD DCD 2007b. 29. Based on DAC members' humanitarian aid, 10. Global Fund 2007. In September 2007 EC humanitarian aid, multilateral contributions donors provided an initial $9.7 billion in pledges to the UN High Commissioner for Refugees, and for the second replenishment cycle covering the the United Nations Relief and Works Agency, and period 2008­10. Many donors cannot make com- a share of multilateral contributions to the UN mitments beyond a year, so there is an expectation World Food Programme. that commitments will increase over the cycle. 30. http://ec.europa.eu/echo/whatsnew/ 11. Manning 2006. consensus_en.htm. 12. Kharas 2007a. 31. UNDP 2007. 13. Hudson Institute 2007; Kharas 2007b. 32. Until recently, the main multilateral mech- 14. Kerlin and Thanasombat 2006. anism for adaptation funding is the GEF. In 2001 15. By one count, at least 18,000 NGOs are the GEF received a mandate to finance adapta- active, of which 4,100 are in the United States tion projects through three vehicles: the Least alone; see Center for the Study of Global Gover- Developed Country Fund, which has received nance 2004, p. 302. pledges of $170 million; the Special Climate 16. Gates Foundation 2007. Change Fund, with about $75 million in pledges; 17. They also present a risk of adverse global and the Strategic Priority on Adaptation, which and regional spillovers. has been allocated $50 million for pilot projects. 18. Collier, Hoeffler, and Soderbom 2006. Additional resources for adaptation will also 19. There is substantial evidence that UN peace- accrue to the GEF via the Adaptation Fund. The keeping operations can reduce the likelihood of GEF is currently undergoing a change that shifts renewed conflict by up to 50 percent in the imme- away from projects toward a more programmatic diate two to five years after the end of civil wars. approach. See Sambanis 2007. 33. The proposed portfolio of three funds 20. Fragile states comprise IDA-eligible coun- would provide concessional finance at significant tries with a country policy and institutional assess- scale in selected countries to encourage early ment (CPIA) score of 3.2 or below (or no CPIA action by both private and public sectors and score). Thirty-five countries were identified as market-based solutions to the climate change fragile in 2006. challenge. The funds would build upon and 21. Global Monitoring Report 2007 covered enhance the activities of other existing instru- aid to fragile states in more detail. ments, such as the GEF and financing products 22. This is certainly a reasonable test for peace- of the International Bank for Reconstruction and keeping assistance, where the effect on reducing Development, and International Finance Cor- conflict risk is direct and significant in most stud- poration. The suite of funds includes the Clean ies. More work is needed to evaluate the direct Technology Fund (target size around $5 bil- effects of aid on reducing conflict risk. lion­$10 billion), which is at the most advanced 23. Cliffe and Milante 2008. stage of design, to accelerate the deployment of 24. Gaps in funding may also arise because advanced technologies in developing countries; postcrisis financing tends to be fragmented, with the Forest Investment Fund (target size $300 mil- different funding sources, implementing agencies, lion­$500 million), which will focus on reducing and mandates. For example, early humanitarian deforestation and land degradation; and the Cli- and peacekeeping activities require international mate Resilience Pilot Program (target size around mandates, whereas recovery, reconstruction, and $200 million­$300 million), focusing on the most development require strong national ownership. vulnerable countries to mainstream climate resil- 25. Statement issued at a meeting of MDB ience in development planning and programs and heads held on October 20, 2007. demonstrate lessons for scaling up through IDA 26. Development Initiatives 2006. and the Adaptation Fund. 27. United Nations Financial Tracking Service 34. See IDA 2006 and Brook and Petrie 2007. (FTS) database. http://ocha.unog.ch/fts/reporting/ Also see Birdsall and others (2007) for a proposal reporting.asp. on progress-based aid, which focuses on results. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 115 C H A P T E R 3 35. http://www.gpoba.org/activities/index.asp. 48. See World Bank 2007c. The World Bank administers the Global Partner- 49. Cerrell 2007. ship on Output-Based Aid. 50. For a group of 81 developing countries, 36. These could be one-off subsidies typically Lane and Glassman (2007) find that health aid involving capital subsidies for access to water, elec- per capita is positively associated with aggregate tricity, and the like.; transitional subsidies, which disease burden as measured by DALYs (disability- are used temporarily to meet the gap between cost- adjusted life years). However, they also find that recovery amount and what the consumer can afford; health aid is more closely associated with certain and ongoing subsidies where this gap persists. See types of diseases--namely, HIV/AIDS and TB. GPOBA 2005. 51. See GPOBA 2005. 37. OECD 2008a. 52. Lewis 2005. 38. 2006 Survey on Monitoring the Paris Dec- 53. Republic of Rwanda 2006. laration: Overview of the Results. OECD 2007a. 54. Government of Ethiopia Irish Aid, UNICEF, 39. The results need to be interpreted carefully USAID, and World Bank 2007. because some donors' definitions of program- 55. Education and infrastructure are also begin- based approaches may vary. ning to receive special attention for the sectoral 40. Ashraf Ghani, former minister of finance in application of the Paris framework. Afghanistan, estimated that 60 percent of his time 56. See International Health Partnership 2007, was spent dealing with official aid donors. 2008. 41. These mechanisms are designed to address 57. IMF­World Bank 2007. coordination, harmonization, and alignment with 58. Equal burden sharing, which implies that country priorities. all creditors provide the same share of debt relief 42. Celasun and Walliser 2008. on their claims against the HIPCs, is one of the key 43. Kharas 2008. principles of the HIPC Initiative. The completion 44. European Commission 2007. point cannot be reached unless creditors holding 45. IMF 2007. at least 80 percent of HIPC-eligible debt agree to 46. Claessens, Cassimon, and van Campenhout participate in debt relief. 2007. 59. Since its inception in 1989, the Debt Reduc- 47. By contrast, when country leadership and tion Facility has implemented 24 operations in 21 capacity is strong, the authorities can take the IDA-only countries, extinguishing about US$9 bil- lead in defining priorities and in channeling donor lion of external commercial debt. support--whether general budget support, proj- 60. http://www.worldbank.org/debt; www.imf. ect aid, or earmarked aid--to these priorities. See org/dsa. World Bank 2007b. 116 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 4 Harnessing Trade for Inclusive and Sustainable Growth W orld trade has been expanding Access to export markets is important for rapidly, and trends in trade policy developing countries, but what matter most have continued to be in the direc- are the trade policies and complementary tion of fewer barriers to trade.1 Progress measures that countries themselves adopt. in the multilateral trade negotiations has A neutral and liberal trade regime, accom- proved to be elusive, however, reflecting in panied by policies and public investments large part the inability of World Trade Orga- that help communities and firms capture nization (WTO) members to agree on agri- trade opportunities, will largely determine cultural trade liberalization. Organisation the role that trade will play in achieving the for Economic Co-operation and Develop- Millennium Development Goal (MDG) pov- ment (OECD) countries continue to impose erty targets. "Behind the border" policies highly distorting agricultural support poli- are of particular importance in enhancing cies to the detriment of their consumers and competitiveness of firms, including policies producers in developing countries. Develop- that affect the quality and costs of services ing countries have higher average levels of inputs. Many countries are relatively open trade restrictiveness, but the policy of taxing to trade and investment in services, but agriculture in many developing countries has restrictions continue to affect the perfor- become much less prevalent. mance of many services sectors in numerous A successful Doha Round is important for countries. Countries that have undertaken inclusive and sustainable growth. The cur- unilateral policy reforms have an oppor- rent high prices for food provide a window tunity to lock these in via the WTO in the of opportunity that WTO members should context of the Doha Round. But there is also use to break the impasse on reforming agri- great scope to do more to use the WTO as cultural trade policies in high-income coun- a mechanism to commit to future liberaliza- tries. Doha also offers an opportunity to tion of trade in services. Not only will this developing countries to lock in the prevail- generate gains for the countries that do so, ing, relatively neutral cross-sectoral policy it may help move the overall Doha negotia- stance for trade in merchandise, and to reap tions forward. the efficiency gains of lowering further the Progress is being made on aid for trade, applied levels of protection. as illustrated by the initiative to enhance the G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 117 C H A P T E R 4 Integrated Framework for Trade-Related Turning to individual regions, higher Technical Assistance for Least Developed energy prices contributed to export growth Countries and the willingness of donors to of 10 percent in Middle Eastern and North make commitments to the associated trust African countries. Asian exports expanded fund to support its operations. The regional by 21 percent, with China and India and global WTO-facilitated meetings on aid accounting for the bulk of the increase, with for trade in 2007 have helped raise aware- a 27 percent and 18 percent increase in 2007, ness of the importance of complementing respectively. Buoyed by higher commodity trade policy reform with assistance to help prices and demand, exports from Sub-Saha- firms and farmers benefit more from trade ran Africa and Latin American and Carib- opportunities. What matters now is delivery. bean countries continued to benefit from the This should target competitiveness-related healthy global economy, both recording a 12 areas--such as trade logistics--as well as percent increase. Least-developed countries, help improve the ability of poor households as a group, experienced a remarkable 17 and disadvantaged communities in rural percent growth.2 areas to harness trade opportunities to raise their incomes. The Doha Round Negotiations Trade policy and aid for trade have a role to play in fighting and adjusting to global Central to the task of promoting inclusive warming by increasing incentives to use the globalization is bringing down barriers to most energy efficient environmental goods the products that poor people produce. A and services. Trade barriers confronting successful Doha Round is one of the most more climate-friendly technologies tend to important steps nations, acting collectively, be highest in low-income countries, parallel- could take to enhance inclusive and sustain- ing the overall pattern of trade restrictive- able growth. ness. Removing policies that restrain trade Considerable progress in the complex in energy-efficient environmental goods and WTO negotiations, especially in agricul- services--ensuring that production of inef- ture, has been made. While efforts continue ficient technologies is not supported and across the broad range of areas covered by assisting producers in developing countries the negotiations--including but not lim- to benefit rather than lose from initiatives ited to agriculture, non-agricultural market such as carbon labeling--can help both in access (NAMA), services, rules, regional harnessing the potential of trade to enhance trade arrangements, special and differential inclusive and sustainable growth and in treatment for developing countries, trade improving environmental outcomes. and environment, trade-related intellectual property rights, and trade facilitation--the Recent Developments gateway to completing the negotiations is in International Trade agreement on negotiating modalities in agri- culture and NAMA. Draft texts issued on World trade in 2007 continued its strong February 8, 2008, by the chairpersons of the growth trend of recent years. Worldwide agriculture and NAMA negotiating groups exports of merchandise reached $13.7 tril- as a basis for further discussion lay out the lion in 2007, growing 14 percent in value, most specific and comprehensive blueprint well above the average growth of 9 percent for global liberalization since the negotia- recorded in 1997­2006. At 17 percent, devel- tions began in 2001, albeit with bracketed oping-country export growth was down ranges for key numeric parameters. slightly from the 2006 rate of 22 percent but Agricultural modalities relate to the three continued to outpace industrial countries, core elements of the negotiation--market which grew 13 percent. access, domestic support, and export com- 118 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 H A R N E S S I N G T R A D E F O R I N C L U S I V E A N D S U S T A I N A B L E G R O W T H petition. Progress has been made in recent sions are continuing in relation to a number consultations on export competition, and of agreement-specific proposals for improved efforts are ongoing to obtain agreement on special and differential treatment provisions. market access and domestic support, includ- At the same time, work is proceeding on the ing the specific targets and approaches for establishment of a mechanism to monitor tariff cuts, permitted tariff rate quotas, the implementation of special and differ- overall domestic support levels, flexibilities ential treatment provisions in WTO agree- for "special" and "sensitive" products, and ments. On trade and environment, construc- a special safeguard mechanism. In the dis- tive engagement has been continuing on all cussions on NAMA modalities, progress has aspects of the mandate, although further been made on tabling ranges for the coeffi- discussion is required on the approach to cients to be applied in a nonlinear tariff-cut- environmental services and goods in terms ting formula, the extent of the application of the mandate. An aspect of this issue is the of the formula by different members, and degree of willingness among some members the nature of exceptions and flexibilities that to identify products qualifying as environ- will be permitted for certain members. As mental goods prior to the establishment of with agriculture, agreement is still elusive modalities in agriculture and NAMA. As and many details remain to be worked out. regards trade facilitation, consensus is being In services, a plurilateral request-and- pursued through a text-drafting exercise offer process has been under way for some and is far along. Progress has been made time, whereby subsets of members are work- in addressing special and differential treat- ing toward a set of scheduled market access ment, technical assistance, and capacity- and national treatment commitments. More building issues. recently, attention has also focused on the For the first time in the history of the mandate of the chairman of the negotiating trading system, a comprehensive set of bind- group to consult on a possible services text. ing disciplines on international trade in On the rule-making front--notably domes- agricultural products is within reach. Only tic regulation--discussions are proceeding a WTO agreement can address the global on the basis of a chairman's text issued in trade-distorting impacts of agricultural sub- April 2007. As with other areas, negotia- sidies, reduce peak tariffs on labor-intensive tions are influenced to a degree by what is goods that discriminate against the poor, happening in agriculture and NAMA. reduce barriers in key emerging markets to With respect to WTO rules, in early help stimulate South-South trade, and secure December the chairman of the negotiating the rules-based trading system. A failure to group issued a consolidated draft text on produce concrete results in the near future antidumping, subsidies (including fisher- will undermine certainty and predictabil- ies subsidies), and countervailing measures. ity in trade relations, thus diminishing the Implicit in this text is a range of trade-offs scope for trade to play its part in fostering that members are invited to consider. No economic progress and reducing poverty. member has rejected the text as a basis The cost of a deal not done would be paid for further discussion. A revised text will by those who can least afford it. Negotiators depend on how the negotiations proceed and do seem to agree on one issue: the window also on progress in other areas. The work in time for agreeing on modalities will not on regional trade arrangements has already stay open indefinitely. produced a concrete result in the form of the decision on a transparency mechanism for Preferential Trade Agreements the multilateral examination of agreements. In the area of special and differential Preferential trade agreements (PTAs) con- treatment for developing countries, discus- tinued to proliferate in 2007, both among G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 119 C H A P T E R 4 developing countries and between developed Negotiations were difficult and pro- and developing countries. Approximately gressed slowly. Only one full EPA--covering 194 still-active PTAs have been notified to goods, services, rules of origin, and devel- the WTO. However, given that many agree- opment support--was agreed upon before ments have not been notified, the actual the end-of-year deadline, with the cluster of number of agreements in effect is estimated Caribbean countries. Partial interim agree- at over 300. Despite the high number of ments were initialed with the East African agreements, the amount of trade that actu- Community and Southern Africa clusters, ally takes place under PTAs is often limited and individually with an additional 10 by the exclusion of sensitive products, com- countries--Botswana, Cameroon, Côte plicated and costly rules-of-origin require- d'Ivoire, Fiji, Ghana, Lesotho, Mozambique, ments (the cost of which can be as high as Namibia, Papua New Guinea, and Swazi- the equivalent of a 4 percent tariff),3 and land. Umbrella (framework) agreements on low preference margins. trade and development cooperation were Notable PTAs that came into effect in signed with the East African Community 2007 include the expansion of the European (EAC), the Common Market for Eastern Union to include Bulgaria and Romania; the and Southern Africa (COMESA), and the addition of Albania, Bosnia and Herzegov- Southern Africa Development Community ina, Croatia, Kosovo, the former Yugoslav (SADC). As of January 1, 2008, countries Republic of Macedonia, Moldova, Monte- with EPAs will have tariff- and quota-free negro, and Serbia to the Central European access to EU markets, with a short transition Free Trade Agreement (CEFTA); a free trade for sugar and rice. Liberalization in the ACP agreement between the Republic of Korea countries to EU exports varies by region and and the Association of Southeast Asian country but will be implemented gradually, Nations (ASEAN); and bilateral agreements with provisions to protect sensitive sectors. between the Syrian Arab Republic and Tur- Those countries that did not reach agreement key, Chile and China, and the United States on an EPA include 32 least-developed coun- and Peru. tries (LDCs), which will continue to have duty- and quota-free market access under the EU's "Everything But Arms" initiative EU ACP Economic for LDCs, and an additional 10 non-LDCs, Partnership Agreements which will revert to preferences under the Since 2000 the European Union (EU) has EU's Generalized System of Preferences.4 extended favorable preferential access to the exports of 78 African, Caribbean, and Developments in National Trade Pacific (ACP) developing countries under a Policies: Merchandise Trade system known as the Cotonou Agreement. Because the trade preferences were unilat- Governments use numerous instruments to eral (the EU received no reciprocal preferen- regulate trade, including import tariffs, spe- tial access), the Cotonou Agreement was not cific duties, quotas, technical product regu- compatible with WTO requirements for trade lations, antidumping duties, and discretion- agreements and operated under a temporary ary licensing. The commonly used indicators waiver with an expiration date of December of trade policy, such as average tariffs and 31, 2007. Anticipating this deadline, the EU frequency measures, only capture partially began in 2002 to negotiate Economic Part- the impact of trade policies on trade flows. It nership Agreements (EPAs) with six regional is preferable to use summary measures that clusters of countries with the goal of produc- take into account the effect of all policies ing WTO-compatible agreements. affecting trade. 120 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 H A R N E S S I N G T R A D E F O R I N C L U S I V E A N D S U S T A I N A B L E G R O W T H The OTRI captures all policies on which Measures of Trade Restrictiveness information is reported to and by Geneva- What follows uses two measures of the based organizations (the International Trade restrictiveness of trade policies affecting mer- Centre, the United Nations Conference on chandise trade: the Overall Trade Restric- Trade and Development [UNCTAD], and tiveness Index (OTRI) and the Tariff Trade WTO). These comprise ad valorem tar- Restrictiveness Index (TTRI).5 Both provide iffs, specific duties, and nontariff measures a measure of the uniform tariff equivalent (NTMs) such as price control measures, of observed policies on a country's imports: quantitative restrictions, monopolistic mea- they represent the "tariff" that would be sures, and technical regulations (box 4.1). needed to generate the observed level of The TTRI is narrower in scope; it takes into trade for a country. The level of restrictive- account only tariffs (both ad valorem and ness confronting exporters is captured by specific).7 two similarly constructed indicators: the As many NTMs are not necessarily pro- Market Access OTRI (MA-OTRI) and the tectionist in intent (or effect), the OTRI Market Access TTRI (MA-TTRI). reflects net (overall) restrictiveness; it is not a BOX 4.1 Trade data and trade restrictiveness indicators The accuracy of the summary measures of trade restrictiveness is largely a function of the underlying data. While the indicators used in this report are based on sound theoretical foundations and are an advance over standard summary indicators such as (weighted) average tariffs, their accuracy inevitably depends on the quality of infor- mation on prevailing policies. Prior to the calculation of these indicators, tariff and nontariff data are collected, validated, and standardized. Tariff data collection is undertaken by UNCTAD and the International Trade Centre (Geneva), working with the WTO. These trade and tariff data are published in a global database and software system (the World Integrated Trade Solution--WITS). In recent years the underlying data have been improved by incorporating more extensive informa- tion on tariff preferences and specific duties. Although ad valorem tariff data are generally comprehensive and up-to- date, the database may not have comprehensive coverage of so-called para-tariffs and surcharges, which are usually applied on a temporary basis, leading to underestimation of trade restrictiveness in a given year. Conversely, some measures may continue to be registered in the database even though they have subsequently been removed. Excise taxes may also affect estimates of the indexes. As long as excise taxes are imposed on both imports and domestic production, they should not be classified as a trade tax. However, some countries report excises in their tariff schedule (as they are collected on imports at the border), and these may therefore be included in the estimate of trade restrictiveness. Several instances where this was the case have been identified, and the underly- ing data corrected.6 Specific duties--taxes imposed on the basis of quantities imported rather than values--raise additional issues, as these taxes need to be converted into ad valorem tariff equivalents. Different methodologies can be used to do this. For the indexes of this report, the methodology used by UNCTAD has been used. The major factor affecting the accuracy of the indexes is the coverage of nontariff measures (NTMs). Com- prehensive data on such measures are unfortunately lacking. Resource constraints have impeded the collection of data on NTMs by the organization that historically has taken the lead in this area--UNCTAD. Existing data are therefore not necessarily up-to-date and may not be fully comparable across countries. Given the increasing importance of NTMs in global trade--in part as a result of the steady decline in tariffs in many countries--it is important that a concerted effort be made to mobilize the political attention and resources needed to improve information on NTMs, including to better distinguish between regulatory policies such as product standards and other policies that have as a primary motive the restriction of trade. The limitations of the data on NTMs are one reason for reporting both the OTRI and the TTRI in this report. Although a downward-biased measure of trade restrictiveness, the advantage of the TTRI is that it is more com- parable across countries, and more countries can be included in the calculation of the index. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 121 C H A P T E R 4 measure of the level of protection that a gov- important in the export basket of developing ernment seeks to provide domestic industry. countries). Trade restrictions on agriculture Some NTMs comprise border restrictions, are on average highest in high-income coun- such as quotas or bans, and are motivated tries. In general, the higher the level of devel- by protectionist objectives. Others, such opment of countries, the lower the overall as standards for mercury content or fecal trade restrictiveness, and the higher the level matter, are aimed at safeguarding human, of trade restrictiveness in agriculture. animal, or plant health. Unfortunately the The impact of NTMs on overall restric- measures do not permit us to distinguish tiveness can be assessed by the difference between objectives. Thus, protection is between the OTRI and the TTRI. Nontar- better measured by the TTRI, although, iff measures are an important component of because of its limited coverage of trade pol- overall trade restrictiveness, especially for icy instruments, it is best seen as providing agricultural products. Nontariff measures a lower-bound estimate of the extent of pro- tend to be more prevalent in high-income tection prevailing in a market. and upper-middle-income countries. For higher-income countries, NTMs account for about two-thirds of total restrictiveness. Levels of Trade Restrictiveness NTMs appear to play a less important role Although trade flows are now subject to in lower-middle-income and low-income lower barriers than was the case a decade countries. Although NTMs in agriculture ago, trade barriers still exert a large impact tend to be significant, agricultural prod- on world trade. Trade policies are generally ucts also confront much higher tariffs than more restrictive in developing countries than manufactures do. The TTRI of high-income in the high-income economies (table 4.1). countries is approximately 12.4 percent for This is due in part to lower tariffs in the agriculture compared to only 1.4 percent for latter but also to the higher percentage of manufactured products. trade in manufactured products in the trade Trade restrictiveness levels differ across of these countries (manufactures generally geographic regions. The level of trade face much lower trade restrictions than agri- restrictiveness on average is higher for coun- cultural products, which are relatively more tries in South Asia, the Middle East, and North Africa and lower for countries in East TABLE 4.1 OTRI and TTRI by income group, 2006 Asia, Eastern Europe, and Central Asia. percent Sub-Saharan Africa and Latin America have overall restrictiveness levels in between these two extremes (table 4.2). The EU, United Total trade Agriculture Manufacturing States, Japan, and China account for about 7.0 43.1 4.3 60 percent of world trade. All have policies High-income countries 2.1 12.4 1.4 that are more restrictive of trade in agri- 7.1 44.5 4.0 cultural products than manufactures (table QUAD 1.9 11.1 1.3 4.3), with Japan and the EU imposing signif- Upper-middle- 13.0 29.3 11.8 icantly higher restrictions. Manufacturing income countries 4.6 6.6 4.5 trade is relatively less restricted: the TTRI Lower-middle- 11.8 26.5 10.6 is less than 5 percent in China and around 1 income countries 6.5 11.5 6.0 percent in the EU, Japan, and United States. 17.7 26.6 16.7 Low-income countries 10.8 15.3 10.4 Changes in Trade Restrictiveness Source: World Bank staff estimates. Trade barriers have fallen in many coun- Note: TTRI in italics; OTRI in boldface. QUAD comprises Canada, the EU, Japan, and the United States. tries, resulting in lower trade restrictiveness. 122 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 H A R N E S S I N G T R A D E F O R I N C L U S I V E A N D S U S T A I N A B L E G R O W T H Reductions have mostly been the result of TABLE 4.2 OTRI and TTRI, by developing country region, 2006 unilateral reforms but are also the result of percent trade negotiations and agreements. Between 2000 and 2006 the OTRI declined in all Total trade Agriculture Manufacturing country and income groups (figure 4.1). Developing economies, especially middle- 11.3 26.6 10.4 East Asia & Pacific 5.0 8.7 4.8 income countries, saw the largest declines, 10.1 25.9 9.0 including in agriculture. By region, coun- Europe & Central Asia 4.5 10.3 4.0 tries in East Asia and Latin America reduced Latin America 15.0 28.1 13.8 overall trade restrictiveness the most dur- & the Caribbean 5.4 6.6 5.3 ing this period, while Sub-Saharan African Middle East 21.6 32.3 19.4 countries experienced the least reduction. & North Africa 11.9 12.1 11.8 However, it should be noted that Sub-Saha- 19.5 46.4 18.2 ran Africa's OTRI is below that of South South Asia 14.0 31.4 13.2 Asia and the Middle East and North Africa. 14.4 24.9 12.9 With the exception of South Asia and Sub- Sub-Saharan Africa 8.4 13.8 7.6 Saharan Africa, where policy reforms have mainly targeted trade in manufactures and Source: World Bank staff estimates. the overall level of agricultural trade restric- Note: TTRI in italics; OTRI in boldface font. tiveness increased slightly, trade restrictive- ness has fallen for both agriculture and TABLE 4.3 OTRI and TTRI for the four largest traders, 2006 manufacturing. percent New Estimates of Distortions All trade Agriculture Manufacturing to Agricultural Incentives 6.4 18.4 5.7 United States Trade restrictiveness across products and 1.6 3.8 1.5 countries tends to show a clear pattern: European 6.6 48.7 2.9 richer countries tend to have higher barri- Union 1.4 5.9 1.1 ers to trade in agricultural products. This is 11.4 55.8 5.7 Japan a phenomenon that initially emerged in the 4.5 31.1 1.1 late 19th century8 and has been a persistent 9.9 17.1 9.5 China feature of global trade policy ever since. For 5.1 8.8 4.9 20 years the OECD Secretariat has been pub- lishing annual estimates of producer support Source: World Bank staff estimates. to farmers in OECD member countries.9 Note: TTRI in italics; OTRI in boldface font. These Producer Support Estimates (PSEs) provide a transparent set of numbers that above for agriculture. As the membership allow monitoring over time of the extent to of the OECD is composed mostly of high- which farmers are being assisted by govern- income countries, the type of detailed data ments through myriad direct payments and used to calculate PSEs is not available for agricultural market price support policies. developing countries. As a result agriculture Although PSEs have fallen in some OECD OTRIs are less comparable across devel- countries since 1999­2001--for example, oped and developing countries. A recent in Japan and the United States--they have World Bank research project has sought to increased in the EU, the Republic of Korea, fill this gap by compiling annual time series and a number of other countries (figure 4.2). estimates of rates and values of assistance/ The policies included in the PSE are cap- taxation over the past half century for tured in the OTRIs and TTRIs reported around 75 countries that together account G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 123 C H A P T E R 4 FIGURE 4.1 Change in OTRI, 2000­06 Percent 50 40 30 20 10 0 High-income Upper-middle- Lower-middle- Low-income countries income countries income countries countries Percent 50 40 30 20 10 0 East Asia Europe & Latin America Middle East & South Asia Sub-Saharan & Pacific Central Asia & Caribbean North Africa Africa All trade 2000 All trade 2006 Agriculture 2000 Agriculture 2006 Manufacturing 2000 Manufacturing 2006 Source: World Bank staff estimates. for 90 percent of global population, GDP, Since then not only has it diminished but, on and agricultural production. For each coun- average, developing countries have moved try, nominal rates of assistance (NRAs)10 from taxing to subsidizing their agricultural are calculated for key products, which make sector. up an average of 70 percent of the value of Figure 4.4 shows the trends in NRAs by total farm production, and are estimated developing-country region. African coun- for the residual set of commodities.11 tries have shown the least tendency to reduce An aggregated summary of the NRAs the taxing of farmers--the average NRA is provided in figure 4.3. This reveals that has been negative in all five-year periods the growth of agricultural support in high- except in the mid-1980s, when international income countries began to reverse only in the prices of farm products reached an all-time 1990s. If farm income support that is said low in real terms. By contrast, for both Asia to be decoupled from production incentives and Latin America, NRAs crossed over is considered, there is very little decline in from negative to positive after the 1980s. In the rate of support. Figure 4.3 also supports European transition economies, in the ini- the widely held view that developing-country tial years of reform, nominal assistance to governments put in place agricultural poli- farmers was slightly negative, but thereafter cies that effectively taxed their farmers. The it has trended upward. As of 2004, however, extent of taxation was of the order of 20 per- it still averaged only about half the average cent from the mid-1950s to the mid-1980s. rate of Western Europe. 124 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 H A R N E S S I N G T R A D E F O R I N C L U S I V E A N D S U S T A I N A B L E G R O W T H The U.S. dollar values of the gross sub- FIGURE 4.2 Producer support estimates for OECD members, sidy equivalents of the NRAs (or taxation) 1999­2006 are shown in table 4.4. These estimates sug- gest that, from the mid-1950s through the US$ billions mid-1970s, assistance to farmers in high- 160 income countries almost exactly offset 140 taxation of farmers in developing countries. Until the late 1980s, farmers in developing 120 countries were at a double disadvantage in 100 terms of competitiveness: farmers in OECD 80 countries benefited from significant levels of support, whereas agricultural production 60 in developing countries tended to be taxed. 40 Since the early 1980s, the gradual decline in 20 taxation of farmers in developing countries 0 and the growth in assistance to high-income Yearly average 1999­2001 Yearly average 2004­06 country farmers have combined to see the European Union Japan United States Korea, Rep. of net global transfer to farmers increase to All others, OECD more than $250 billion per year (figure 4.5). Regionally, outside the high-income group, it is Asia where the payments are largest in Source: OECD (2007). aggregate. On a per farmer basis, however, payments are now largest in Europe's transi- tion economies. In Africa, meanwhile, farm- been virtually constant for the last 15 years ers still confront discrimination relative to and has been rising in developing countries, other forms of economic activity. perhaps in part as a response to the example The data on gross subsidy equivalents of set by high-income nations. The high level of support to farmers show that the overall level production support in high-income countries of assistance in high-income countries has distorts domestic and world market prices FIGURE 4.3 Nominal rate of assistance to farmers in high-income and developing countries, 1960 to 2004 Percent High-income countries 60 (including "decoupled" support) High-income countries 40 20 0 ­20 Developing countries ­40 1960­64 1965­69 1970­74 1975­79 1980­84 1985­89 1990­94 1995­99 2000­04 Source: Anderson (2008). Note: Averaged using weights based on the gross value of agricultural production at undistorted prices. High-income countries include the Republic of Korea and Taiwan, China. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 125 C H A P T E R 4 FIGURE 4.4 Nominal rate of assistance to farmers in developing countries, 1960 to 2004 Percent 30 Eastern Europe 20 10 Africa 0 ­10 ­20 Latin America Asia ­30 ­40 1960­64 1965­69 1970­74 1975­79 1980­84 1985­89 1990­94 1995­99 2000­04 Source: Anderson (2008). TABLE 4.4 Gross subsidy equivalents of assistance to farmers, by region, 1960 to 2004 current US$ billions per year 1960­64 1965­69 1970­74 1975­79 1980­84 1985­89 1990­94 1995­99 2000­04 High-income countriesa 30.3 43.1 49.0 96.4 133.0 174.1 216.3 200.2 190.9 Developing countries ­18.7 ­21.9 ­46.7 ­69.0 ­92.0 ­35.8 0.8 47.9 65.2 Africa ­0.6 ­1.3 ­3.3 ­5.9 ­4.0 1.5 ­6.3 ­6.0 ­7.9 Asia ­17.5 ­19.0 ­37.8 ­55.1 ­70.8 ­28.9 ­1.8 27.1 48.0 Latin America ­0.3 ­0.7 ­4.9 ­6.7 ­10.4 ­9.3 4.7 6.5 5.3 European transition ­0.2 ­0.9 ­0.6 ­1.3 ­6.8 0.8 4.2 20.3 19.7 economies Source: Anderson (2008). Note: These values have been scaled up to account for the fact that each region is less than fully covered, the assumption being that NRA in the nonstudied group of countries in each region was the same as the regional average for the studied countries. a. High-income countries are a subset of OECD countries (Western Europe, Japan, United States, Canada, Australia, New Zealand, the Republic of Korea, and Taiwan, China for the periods after 1995), which is why the numbers in this row for the last four columns are below the PSE estimates for the OECD as a whole (the latter includes the Czech Republic, Hungary, the Republic of Korea, Mexico, Poland, the Slovak Republic, and Turkey). and is detrimental to producers in developing OECD members by starting to subsidize countries and consumers in the high-income agriculture is not desirable. countries themselves. Historical policies in The trends in agricultural trade policies many developing countries of taxing agricul- illustrate the importance of using the oppor- ture have also been detrimental to farmers, tunity offered by the Doha Round to agree and the more recent trend toward a more to far-reaching reductions in overall produc- neutral policy stance for agriculture relative tion support to farmers in high-income coun- to other sectors of activity is to be welcomed. tries, and of complementing this by agreeing However, going beyond this and emulating to cap the extent of such support provided 126 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 H A R N E S S I N G T R A D E F O R I N C L U S I V E A N D S U S T A I N A B L E G R O W T H FIGURE 4.5 Gross subsidy equivalents of assistance to farmers in developing and high-income countries, 1960­2004 US$ billions 300 250 200 150 100 50 0 ­50 ­100 ­150 1960­64 1965­69 1970­74 1975­79 1980­84 1985­89 1990­94 1995­99 2000­04 Developing countries High-income countries Source: Anderson (2008). in developing countries and to lock in the just because trade policy distorts consump- relatively neutral sectoral trade policy stance tion and production decisions; it is also that now prevails in many developing econ- because the distributional consequences of omies. Current high global price levels for protecting agriculture may be harmful to food provide a window that may facilitate many poor households, especially those that agreement--lower tariffs will benefit poor are net consumers and do not derive income households by reducing domestic prices, from agriculture. Other policy instruments while farmers will be less affected given that are aimed at increasing productivity or robust global demand for food and biofuel linking rural communities to markets are feedstocks. An important challenge in this much superior to trade policy in helping the connection has been the recent recourse by poor benefit from trade opportunities. Liber- some major exporters to export taxes and alization therefore needs to be complemented other controls. These increase the instability by assistance to developing governments of world market prices, have adverse effects to help put in place such productivity and on the poor (including net sellers in poor income-enhancing policies--aid for trade. countries), and do systemic damage by erod- ing the confidence of importing countries in Market Access the reliability of world markets as a source of food supply. The effect of trade policies on exporters' The trend toward higher protection of access to markets is different across trad- agriculture is driven in part by equity objec- ing partners and geographic regions. This is tives as well as by a desire to shelter farm- due both to the discriminatory use of trade ers from competition from subsidized farm- policies (i.e., trade preferences) and to the ers in OECD countries. Trade policy is not composition of trade. Table 4.5 reports the the appropriate instrument to pursue equity MA-OTRI and MA-TTRI faced by export- objectives or to attain goals such as food ers in each geographic region and country security and rural development. This is not income group. The MA-OTRI measures the G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 127 C H A P T E R 4 TABLE 4.5 MA-OTRI and MA-TTRI by income group, 2006 Upper- Lower- High- middle middle Low- Europe & Latin Middle Sub- Importing income income income income East Asia Central America & East & South Saharan Countries countries countries countries countries & Pacific Asia Caribbean N. Africa Asia Africa High-income 6.3 5.7 7.9 9.1 8.3 5.1 7.0 4.3 10.4 4.4 countries 2.4 1.2 2.5 2.4 2.6 1.1 1.5 0.8 3.1 0.7 6.3 5.2 8.6 10.6 8.9 5.2 6.9 4.4 13.6 4.5 QUAD 2.1 0.9 2.5 2.5 2.7 0.8 1.2 0.5 3.3 0.5 Upper-middle- 15.6 11.8 15.8 14.7 19.2 10.2 13.6 6.0 14.3 5.9 income countries 5.6 3.8 5.6 5.7 7.2 4.4 2.6 2.5 6.6 3.5 Lower-middle- 12.4 11.1 12.9 9.4 13.6 11.2 12.6 6.7 9.9 4.0 income countries 7.1 4.8 6.7 5.1 6.6 6.2 5.1 2.8 6.2 2.7 Low-income 18.2 14.3 19.5 25.4 22.2 17.7 15.9 16.3 16.2 16.3 countries 10.9 8.1 12.2 12.9 13.8 6.2 9.0 10.0 10.4 12.2 Source: World Bank staff estimates. Note: MA-TTRI in italics; MA-OTRI in boldface font. overall restrictiveness (including nontariff oriented toward agriculture, which faces measures) faced by exports; the MA-TTRI more restrictive barriers and for which lib- measures restrictiveness faced by exports eralization has been more muted. due to tariffs alone. Sub-Saharan Africa countries benefit from Trade Policy, Growth, relatively liberal market access as a result of and Poverty: The Behind- preferential access to the major economies the-Border Agenda and because of the relatively larger share of exports of commodities for which tariffs are The relationship between trade expansion low. Conversely, Sub-Saharan Africa's mar- and economic growth is well documented. ket access to other low-income countries is Growth in turn is a primary driver for pov- restricted by relatively high tariffs. Among erty reduction. Developing countries that other regions, East European and Central have registered the largest declines in poverty Asian market access to high-income coun- are generally those that have also expanded tries is facilitated by preferences in the EU, their trade faster. Even in instances where while the low TTRI confronting the Middle economic growth may directly affect the East and North Africa is largely due to the poor only modestly, growth that increases composition of exports--oil products are the national wealth as a whole permits gov- generally subject to low import tariffs. ernment to allocate more resources to mea- sures aimed at alleviating poverty and other social programs. Changes in Market Access The level of trade restrictiveness across Market access has improved in recent countries is generally negatively correlated years, with high- and upper-middle-income with the level of development. High-income countries benefiting relatively more (figure countries tend to have less-restrictive trade 4.6). This is largely due to export compo- regimes than developing countries, and sition, as high-income countries' exports among developing countries, low-income consist mainly of manufactures, for which countries are generally more restrictive restrictiveness has declined relatively more. than middle-income countries. Figure 4.7 Exports of lower-income countries are more plots the correlation between changes in per 128 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 H A R N E S S I N G T R A D E F O R I N C L U S I V E A N D S U S T A I N A B L E G R O W T H FIGURE 4.6 Change in the average MA-OTRI for all exports, 2000­06 Percent 40 30 20 10 0 High-income Upper-middle- Lower-middle- Low-income countries income countries income countries countries Percent 40 30 20 10 0 East Asia Europe & Latin America Middle East & South Asia Sub-Saharan & Pacific Central Asia & Caribbean North Africa Africa All trade 2000 All trade 2006 Agriculture 2000 Agriculture 2006 Manufacturing 2000 Manufacturing 2006 Source: World Bank staff estimates. capita GDP with changes in the OTRI for over, the transitional adjustment costs are developing countries in the period 2000 to found to be generally small relative to the 2006. Countries for which per capita GDP overall benefits. Hertel and Winters12 for has grown more have tended to have liberal- example, collect a series of studies that esti- ized their trade more. mate that the effect of complete tariff lib- In principle, trade liberalization should eralization on poverty (as measured by the enhance national welfare, although there threshold of US$1 per day) in developing will always be some groups that lose, as the countries would be to reduce the poverty removal of trade policies generates redistribu- headcount index by 5.0 to 6.5 percentage tive effects. Trade policies have diverse effects points over a 10-year period. These studies across economic sectors and geographic also indicate that effects can be diverse across areas, and gains and losses depend on how countries, with poverty potentially increas- individuals are positioned relative to the pre- ing in some countries as a result of prefer- existing structure of protection. If the tran- ence erosion and trade diversion. Another set sitional costs of trade liberalization fall dis- of recent studies that focuses on a sample of proportionately on the poor, complementary small, low-income countries points to small reforms are needed to mitigate such costs. but generally positive effects of multilateral The existing literature is virtually unani- trade liberalization on poverty.13 The stud- mous in finding that trade reforms increase ies collected in Harrison14 also find positive the incomes of the poor as a group. More- effects of trade liberalization on poverty. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 129 C H A P T E R 4 FIGURE 4.7 Higher growth is associated with lower trade restrictiveness Change in GDP per capita, log 10 Trinidad &Tobago Russian Fed Croatia 8 China Azerbaijan Mauritius Bulgaria Botswana Ukraine Costa Rica Iran Chile Jordan Algeria Uruguay TurkeyArgentina India Colombia Lebanon Indonesia Brazil Bangladesh 6 Egypt GhanaPakistan GuyanaHonduras Senegal Nigeria Paraguay Zambia Burkina Faso Rwanda Guatemala Kenya Tanzania Nepal Burundi Niger Gabon Madagascar Papua New Guinea Togo 4 Central African Republic 2 ­0.2 ­0.1 0 0.1 0.2 Change in the OTRI, % Source: World Bank staff estimates. Besides pointing to a positive correlation Research in this area identifies in par- between trade liberalization and poverty ticular actions to move households out reduction, these studies highlight the impor- of subsistence production and to improve tance of complementary policies in realizing productivity. Given that poverty is concen- the full benefits of trade reforms for growth trated in rural areas that depend heavily on and poverty reduction. agriculture, trade opportunities can raise incomes, but only if products are produced for the market. This may require active Behind-the-Border Policies Matter intervention to help households make the The magnitude of the gains to poor coun- switch--through extension services, access tries from global trade reforms depends on to credit, and investments in infrastructure. actions to create new and more remunera- Poor roads and ports, poorly performing tive jobs and move producers out of subsis- customs, weaknesses in regulatory capacity, tence agriculture. Trade reform by itself will and limited access to finance and business not ensure these outcomes. Domestic supply services are all factors determining trade constraints are a major reason for the lack performance. of trade growth and diversification in many A major dimension of facilitating trade is of the poorest developing countries. Without action to reduce the burden of administra- action to improve supply capacity, reduce tive hurdles--such as customs and tax pro- transport costs for remote areas, increase cedures, clearance requirements, and cargo farm productivity, and improve the invest- inspections. Djankov, Freund, and Cong15 ment climate, trade opportunities cannot be conclude that each day of delay caused by fully exploited and the potential gains from such hurdles reduces export volumes by 1 trade will not be maximized. The reforms percent on average. A recent World Bank that may be called for span several areas, initiative provides comparable cross-country mostly "behind the border." data measuring the quality of logistics per- 130 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 H A R N E S S I N G T R A D E F O R I N C L U S I V E A N D S U S T A I N A B L E G R O W T H formance implied by such regulatory poli- Services Policies cies and related infrastructure in a country (box 4.2). A database compiled as a result Many of the behind-the-border policies of this initiative documents that good trade affecting the competitiveness of firms and logistics are critical for developing coun- farmers in a country are services-related. tries to improve their competitiveness, reap To be able to compete, firms in open econo- the benefits of globalization, and fight pov- mies need access to low-cost and high-qual- erty more effectively in an increasingly inte- ity producer services--telecommunications, grated world.16 Success in integrating into transport and distribution services, financial global supply chains starts with the ability intermediation, and so forth. Global out- of firms to connect to international markets sourcing, production sharing, and offshor- and to move goods across borders rapidly, ing depend on access to, and the cost and reliably, and cheaply. Countries with better quality of, services. performance on logistics experience higher Low-cost and high-quality telecommu- growth in their openness (trade-to-GDP nications will generate economy-wide ben- ratio; figure 4.8). efits, as the communications network is a BOX 4.2 The World Bank Logistics Performance Index Launched in November 2007, the Logistics Performance Index (LPI) is an interactive benchmarking tool created to help countries identify the challenges and opportunities they face in improving trade logistics. The LPI and its indicators provide the first in-depth assessment of the logistics gap among countries across several areas of performance. Based on a worldwide survey of global freight forwarders and express carriers, the LPI develops measures of the logistics friendliness of the countries surveyed. Feedback from the survey is supplemented with objective data on the performance of key components of the logistics chain. The LPI provides a comprehensive picture of coun- tries' supply chain performance. It is built on the following seven areas of performance: Efficiency of the clearance process by customs and other border agencies Quality of transport and information technology infrastructure for logistics Ease and affordability of arranging international shipments Competence of the local logistics industry Ability to track and trace international shipments Domestic logistics costs Timeliness of shipments in reaching destination The LPI and its indicators point to significant differences in logistics performance across countries and regions. Among developing countries, the best logistics performers are also those experiencing economic growth led by manufactured exports. A key insight from the survey of logistics professionals is that, while costs and timeliness are of paramount importance, traders are primarily concerned with the overall reliability of the supply chain. Costs related to hedging against uncertainty have become a significant part of logistics costs in many developing countries. Country performance can be greatly influenced by the weakest link in the supply chain: poor perfor- mance in just one or two areas can have serious repercussions on overall competitiveness. The LPI also suggests that policy makers should look beyond the traditional "trade facilitation" agenda that focuses on road infrastructure and information technology in customs to also focus on improving the operation of logistics services markets and the public agencies active in border control. This demands a more integrated, comprehensive approach to reforms all along the supply chain. International companies can bring global knowl- edge, but the support of local exporters, operators, and public agencies is crucial. Source: World Bank (2007a) and http://www.worldbank.org/lpi. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 131 C H A P T E R 4 FIGURE 4.8 Countries with better trade logistics have higher trade-to-GDP growth Change in trade/GDP, 2000­06 40 Liberia Chad Azerbaijan Jordan Iran Mauritania Vietnam China 20 Bolivia Cambodia Lithuania Argentina Thailand Ethiopia Gambia UzbekistanBurundi Latvia Sierra Leone TanzaniaNicaragua Côte D'IvoireParaguay Bulgaria India Sudan Albania Morocco Costa Rica Poland Peru Djibouti Guyana AlgeriaBhutan Chile Jamaica Nigeria Kenya 0 Guinea Panama Malaysia Mongolia Lesotho Colombia Brazil Romania Turkey Niger Kazakstan SenegalComorosEcuadorCroatia Mexico Gabon Nepal Lao PDR BeninGuatemalaPhilippines South Africa Armenia Mauritius Sri LankaBelarus Indonesia Mali Ukraine ­20 Ghana Hungary Dominican Republic Tajikistan Eritrea Angola ­40 2 2.5 3 3.5 Logistics performance score Source: World Bank staff estimates. transport mechanism for information ser- channel for technology diffusion as well as vices and other products that can be digi- a mechanism to reduce costs and/or raise tized. Telecommunications are crucial to the the quality of services. A research project by dissemination and diffusion of knowledge-- the World Bank is seeking to compile data the spread of the Internet and the dynamism on the extent to which policies discriminate it has lent to economies around the world against foreign services providers, thereby are telling testimony to the importance of providing a complement to the OTRI and telecommunications services. Similarly, related measures of trade restrictiveness per- transport services affect the cost of shipping taining to trade in goods. To date, surveys goods and movement of workers within and have been conducted in 32 developing coun- between countries. Business services such tries and comparable information obtained as accounting, engineering, consulting, for 24 OECD countries, covering five key and legal services reduce transaction costs sectors: financial services (banking and associated with the operation of financial insurance), telecommunications, retail dis- markets and the enforcement of contracts, tribution, transportation, and professional and are a channel through which business services.17 In each sector, the survey covered process innovations are transmitted across the most relevant modes of supplying that firms in an industry or across industries. service: cross-border trade in services (mode Retail and wholesale distribution services 1 in WTO parlance) in financial, transporta- are a vital link between producers and con- tion, and professional services; commercial sumers. Health and education services are presence or foreign direct investment (FDI; key inputs into--and determinants of--the mode 3) in each services sector; and the pres- stock and growth of human capital. ence of service-supplying individuals (mode Permitting foreign firms to compete in 4) in professional services. Survey results to services markets is a powerful potential date are summarized in figure 4.9.18 132 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 H A R N E S S I N G T R A D E F O R I N C L U S I V E A N D S U S T A I N A B L E G R O W T H The survey reveals that developing coun- FIGURE 4.9 Restrictiveness of services trade policies, 2007 tries have significantly liberalized a range of service sectors over the last couple of Index of restrictiveness decades, but in some areas protection per- 60 56.41 sists. In fact, the overall pattern of poli- cies across sectors is increasingly similar in 50 43.70 developing and industrial countries. In tele- 40 communications, public monopolies seem in 30 25.51 most countries a relic of history, with at least 20 17.20 some measure of competition introduced in 10 both mobile and fixed services. In bank- ing too, domination by state-owned banks 0 Low-income Lower-middle- Upper-middle- High-income has given way to increased openness to the countries income income countries presence of foreign and private banks. Very countries countries few countries restrict foreign investment in retail. However, even though the markets Source: World Bank staff estimates. for these services are now more competitive, they are in most countries some distance from being truly contestable. In telecom- FIGURE 4.10 Services trade restrictiveness indices, by sector munications, governments continue to limit the number of providers and, particularly Percent in Asia, the extent of foreign ownership. In 100 both banking and insurance, the allocation 90 of new licenses often remains opaque and 80 highly discretionary. In retail, a range of 70 domestic regulations, such as zoning laws, 60 frequently impedes entry in both developing 50 and industrial countries. 40 Transport and professional services 30 remain a bastion of protectionism in high- 20 income countries and are also subject to 10 high barriers in developing countries (figure 0 4.10). In maritime transport, even though Low-income Lower-middle- Upper-middle- High-income international shipping is today quite open, countries income income countries entry into cabotage and auxiliary services countries countries such as cargo handling is in many countries Financial services Telecommunications restricted. In air transport, restrictions on Retail Transport Professional foreign investment coexist with limitations on cabotage and cross-border trade--though Source: World Bank staff estimates. conditions for freight transport are much more liberal than those for passenger trans- port. In professional services, even though of domestic law. The restrictions on for- there is increased scope for international eign investment are far less stringent than trade through electronic means, in which the restrictions on the presence of foreign many developing countries are also begin- professionals. ning to participate, there remain restrictions The available evidence suggests that on foreign presence. In general, accounting increased openness in telecommunications, and the practice of international law tend to in combination with dramatic technological be more open than auditing and the practice progress, has led to striking improvements in G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 133 C H A P T E R 4 access, variety, and quality of services.19 In of international movement for individual retail distribution and transport too, liber- service providers in order to fulfill specific alization has generally produced significant services contracts. benefits for both upstream producers and downstream consumers. Outsourcing of pro- Aid for Trade fessional and other business services is pro- ducing significant cost savings for importing In the 2005 WTO Hong Kong ministerial countries and generating new employment declaration, trade ministers called on bilat- opportunities in exporting countries, though eral and multilateral donors to increase the the former must also contend with the costs resources for aid for trade, endorsed the of adjustment. In financial services, while enhancement of the Integrated Framework greater openness has eventually improved for LDCs, and established a Task Force on the efficiency of services, in some cases pre- Aid for Trade. The task force highlighted mature liberalization has had adverse eco- the centrality of recipient-country owner- nomic effects both on financial stability and ship and political leadership, with govern- on access to services for the poor and small ments incorporating trade more centrally enterprises.20 This points to the need for into their development and poverty reduc- liberalization to be accompanied by comple- tion strategies. It provided a definition of aid mentary reforms, ranging from improved for trade and recommended, among other prudential and pro-competitive regulation things, monitoring and evaluation to ensure to the implementation of policies to widen that pledges on aid for trade were fulfilled access to services along the lines of universal through a body in the WTO, which was to access mechanisms in telecommunications. undertake a periodic global review of aid- While most services liberalization has so for-trade delivery.21 far been undertaken unilaterally, services are Several regional meetings were held in also the subject of multilateral and regional the fall of 2007 to encourage informa- trade negotiations. These negotiations have tion exchange about best practices and to led to greater certainty of policy by induc- facilitate collective action to maximize the ing countries to begin to lock in unilateral benefits of aid for trade. The regional meet- liberalization, but the negotiations have so ings were followed by the first WTO global far produced little additional market open- aid-for-trade review in November 2007. ing. Bringing services on to center stage in This global review highlighted the need for the WTO's Doha negotiations could con- improvements in aid for trade and the impor- tribute to deeper reform. These negotiations tance of improving data on aid flows and offer WTO members a key opportunity to performance indicators (outcomes) for both secure access to foreign markets and to spur donors and recipients, as well as increasing domestic reforms. A negotiated outcome country, regional, and sector focus. Follow- that is balanced, is commercially relevant, up events planned for 2008/09 will shift and supports development would have four from awareness raising and mobilization to elements: a promise not to impose new monitoring of aid for trade and assessments restrictions on trade in services, thereby of progress in implementation. dispelling the specter of protectionism that Progress has been made in trade-related hangs over outsourcing of business services; technical assistance for the LDCs with the a commitment to eliminate barriers to FDI, establishment of the Enhanced Integrated either immediately or gradually where regu- Framework (EIF) in May 2007, with a new latory inadequacies need to be remedied; a executive secretariat to support its opera- credible promise of international assistance tions.22 Operational decisions are to be where needed for complementary reforms; made by a new EIF board, comprising vot- and an agreement to allow greater freedom ing representatives of three bilateral donors 134 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 H A R N E S S I N G T R A D E F O R I N C L U S I V E A N D S U S T A I N A B L E G R O W T H and three LDCs, with a view to making the some $2 billion in real terms during 2006, mechanism more country-driven. To date, or 10 percent relative to the baseline for over US$100 million has been pledged by 2002­05 established by the task force (table bilateral donors to the EIF trust fund. Sev- 4.6). Total aid for trade during the 2002­ eral challenges remain, including providing 06 period, on the basis of the OECD CRS adequate in-country support to the IF pro- definition, was roughly 33 percent of total cess, linking the WTO-based EIF secretariat sector-allocable ODA, below the 35 percent to in-country processes, selecting a manager registered in 2002. for the EIF trust fund, and establishing clear Japan and the United States dominated lines of responsibility for financial manage- global aid-for-trade delivery in terms of vol- ment, monitoring, and evaluation. ume with $4.9 billion and $4.4 billion in Global monitoring of donor pledges for 2006, respectively. In the case of the U.S. aid for trade in a consistent fashion has aid for trade, this represents a 25 percent proved a challenging exercise. First, donors increase over the 2002­05 average, much each use their own definitions of aid for of it devoted to the reconstruction efforts trade. For example, while EU pledges are in Iraq and Afghanistan. Other important limited to trade policy and regulations bilateral donors included France, Germany, and trade development, U.S. and Japanese the Netherlands, Spain, and the United pledges contain activities relating to infra- Kingdom. The European Communities was structure. Second, reporting total amounts the largest multilateral donor in 2006, hav- for economic infrastructure projects that ing increased its aid for trade to $3.1 billion serve both traded and nontraded sectors (15 percent of total aid for trade), up from presents a significant overestimation of the $2.5 billion on average during 2002­05. actual volume of aid for trade. The World Bank, through the International For consistency purposes, this section fol- Development Association (IDA), was the lows the WTO-OECD first Global Review fourth largest provider of concessional aid of Aid for Trade and reports aid-for-trade for trade in 2006, and the largest multi- commitments as defined in the existing cen- lateral provider of such assistance during tralized OECD Development Assistance the 2002­06 period--plus it was the larg- Committee (DAC) Creditor Reporting Sys- est overall donor to low-income countries, tem (CRS). The CRS categories capture only accounting for 24 percent of all aid for three of the six categories identified by the trade received by these countries. The Asian Task Force on Aid for Trade: trade policy Development Bank and the African Devel- and regulation, economic infrastructure opment Bank were also important providers (as a proxy for the category "trade-related of aid for trade in their respective regions infrastructure"), and productive capacity and were among the top 10 donors globally. building (which includes the category "trade The 10 largest bilateral donors and multi- development"). The reported amounts are, lateral agencies funded 90 percent of global therefore, an imperfect proxy and tend to aid for trade activities in 2006. In general, a overestimate total aid for trade-related infra- greater portion of multilateral aid for trade structure; at the same time budget support goes to low-income countries than bilateral associated with support for trade reforms aid for trade. has been excluded. The CRS is being fine- In terms of composition, aid to support the tuned to better reflect the trade component development of economic infrastructure and of aid and to include suitable proxies for the productive capacity building dominated over- categories "trade-related adjustment" and all volumes of aid for trade, at 55 percent and "other trade-related needs." 42 percent, respectively, during the 2002­06 Leaving aside the methodological limi- period. At 3.4 percent, aid for trade policy tations, aid-for-trade flows increased by and regulations, usually delivered through G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 135 C H A P T E R 4 TABLE 4.6 Aid for trade, 2006, and annual average, 2002­06 Official Development Assistance commitments of DAC donors and multilateral agencies US$ millions, 2005 constant prices Annual average, 2002­06 As a share of As a share of Trade Productive As a share of total aid for donor sector Economic policy and capacity Total aid for total aid for trade received allocable ODA infrastructure regulations building trade, 2006 trade (%) by LICs (%) (%) Top 10 bilateral donors in 2006 Denmark 160 0 182 229 1.6 2.7 36 France 424 3 341 909 3.3 3.2 22 Germany 608 14 694 1,845 6.0 4.1 29 Japan 3,738 64 1,007 4,883 22.4 21.3 61 Netherlands 85 26 422 842 2.7 1.1 22 Norway 90 10 150 300 1.2 1.2 19 Spain 295 1 142 660 2.0 0.5 36 Sweden 100 17 122 317 1.1 1.0 17 United Kingdom 281 37 410 612 3.3 3.3 21 United States 2,087 237 1,690 4,391 17.2 7.9 26 Main multilateral donors in 2006 European 1,365 217 1,003 3,133 11.9 12.0 36 Communities World Bank (IDA) 1,759 32 1,274 2,775 14.2 24.0 46 African Development 280 43 280 513 2.6 4.4 44 Bank Asian Development 274 31 332 373 3.0 5.4 45 Bank Total aid for trade, 12,035 717 9,106 23,005 100 100 33 all donors Source: OECD Creditor Reporting System. technical assistance, accounted for the small- ent countries in Asia, Africa lags behind: est share. the average Asian country receives more Iraq, India, Vietnam, Afghanistan, and than double the aid for trade of the aver- Indonesia were the top five recipients of aid age African country. Low-income coun- for trade in 2006, accounting for almost tries, including LDCs, received only about 30 percent of the total. Asian countries half of the total aid-for-trade commitments received almost half of all aid for trade in 2002­06, of which the LDCs received ($10.6 billion on average during 2002­06) slightly more than half. (figure 4.11).23 Africa followed with 30 percent ($6.5 billion). Ethiopia, with 2.4 Trade Policies, Climate Change, percent of total aid for trade, was the only and Sustainable Development country from Sub-Saharan Africa in the top 10 recipients of aid for trade. The predomi- International technology transfer can be a nance of Asia largely reflects the volume of significant and cost-effective component of aid received for economic infrastructure-- climate change mitigation and adaptation over two-thirds of total aid for trade in the efforts. There already exist a number of region. Even when excluding large recipi- low-carbon technologies to combat climate 136 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 H A R N E S S I N G T R A D E F O R I N C L U S I V E A N D S U S T A I N A B L E G R O W T H change. International trade can play a role FIGURE 4.11 Distribution of aid for trade by income group and in the reduction of greenhouse gases and the region, and by category, average 2002­06 use of more energy-efficient production tech- nologies by allowing firms to import envi- By region ronmentally friendly technology embodied in equipment, thus allowing more efficient Asia production and consumption. Trade can also help with adaptation, by enhancing access Africa to relevant technologies--such as geneti- cally modified seeds and efficient irrigation America methods--and by encouraging technology transfer and dissemination of knowledge Europe and know-how on available techniques. An important first step toward the adop- Oceania tion of more environmentally friendly tech- Global programs nologies would be to reduce trade restric- tions on imports of environmental goods and By income services. Many such products face relatively high levels of trade restrictiveness, especially Lower-middle- in developing countries (figure 4.12).24 income countries Least-developed In general, rates of trade restrictive- countries ness confronting such products are simi- Other low-income lar to those affecting other manufactured countries products. However, the negative spillovers Upper-middle- associated with policies that restrict trade income countries in such technologies increase their welfare Multicountry cost. Reducing barriers that have protection of domestic industry as their main objective 0 2 4 6 8 10 12 will help to encourage the adoption of more Constant 2005 US$ billions efficient technologies and more environmen- Productive capacity Economic infrastructure tally friendly forms of energy. Trade policy and regulations A recent study that analyzes global trade in four technology groups--high-efficiency and clean coal technologies, efficient light- Source: OECD Creditor Report System and OECD/WTO Trade Capacity Building Database Note: Asia includes East and South. ing, solar photovoltaics, and wind power-- finds that tariffs and NTMs are significant impediments to the diffusion of clean energy Streamlining of intellectual property rights, technologies in developing countries.25 It investment rules, and other domestic policies concludes that liberalizing trade in these will further aid in widespread assimilation clean energy technologies could result in of existing clean technologies and facilitate large increases in trade volumes, as illus- long-term investments in emerging technol- trated in table 4.7. Liberalization of key cli- ogy areas. Trade serves as a major channel for mate-friendly technologies could be taken up international technology transfer to develop- as part of the ongoing WTO Doha Round ing countries, but in many cases FDI may be negotiations on environmental goods and more important. Weak intellectual property services (box 4.3). rights in developing countries may inhibit Trade liberalization is just one aspect diffusion of specific technologies beyond the of enhancing access to cleaner technology project level, and FDI in general may be sub- by rapidly growing developing economies. ject to various restrictive regulations. Many G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 137 C H A P T E R 4 FIGURE 4.12 Environmental goods confront significant produce the feedstock, and the biofuel pro- trade restrictiveness duction process. Current first-generation biofuel technolo- Percent gies produce two types of fuel in significant 20 quantities: ethanol (either from starch crops such as maize, wheat, or cassava or from 15 sugar crops) and biodiesel (from vegetable oils or animal fats). There is a general consensus 10 that producing ethanol from maize results at best in only a small reduction in greenhouse 5 gas emissions and may not reduce such emis- sions at all, while production of ethanol from 0 High-income Upper-middle- Lower-middle- Low-income sugarcane juice or molasses will have a more countries income income countries beneficial impact on emissions. Production countries countries of certain biodiesels may increase emissions, TTRI (tariff only) OTRI (overall) with impacts a function of the feedstock used (e.g., palm oil produced on land that was pre- viously in tropical forests). Source: World Bank staff estimates. From the perspective of greenhouse gas emissions, trade policy should be targeting the TABLE 4.7 Increase in trade volumes from liberalizing clean use of the most efficient biofuels. However, energy technologies determining this is not that simple. In addition percent to the greenhouse gas emission impacts--on whichresearchcomestodifferentconclusions-- Eliminating tarrifs there are other costs to be considered. These Eliminating and nontariff include the loss of biodiversity when cropland Technology option tariffs only measures is expanded, the increased use of irrigation Clean coal technology 3.6 4.6 water, and the increased fertilizer runoff from Wind power generation 12.6 22.6 crop production. The overall environmental Solar power generation 6.4 13.5 benefit of biofuels needs to consider the full Efficient lighting technology 15.4 63.6 range of benefits and costs, and this has not All four technologies 7.2 13.5 yet been done. Such costs also include the negative impacts on the welfare of net food- Source: World Bank (2007b). importing countries, which can be important. New technologies that are currently being developing countries also have weak environ- developed are expected to be able to con- mental standards, low pollution charges, and vert cellulose into biofuels, resulting in net weak enforcement capacity. This reduces the reductions in greenhouse gas emissions that incentives to acquire and apply more sophis- approach those from the reduction in fos- ticated clean energy technologies. sil fuel use. While these technologies are not Determining the set of goods or tech- expected to be commercially available for at nologies that can help mitigate or adapt to least a decade, if they become available there climate change is complex. For example, is likely to be a major shift in the production in principle, the removal of trade taxes on of biofuels toward crops that produce large imports of biofuels can help improve sus- volumes of biomass, such as sugarcane, and tainability by reducing greenhouse gas emis- away from grain, fats, and oils. sions and pollutants from tailpipe emissions, Suggestions have been made in some but this depends very much on the feedstock quarters that tariff policy should be used to used, the alternative use of the land used to raise the cost of imported products that are 138 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 H A R N E S S I N G T R A D E F O R I N C L U S I V E A N D S U S T A I N A B L E G R O W T H BOX 4.3 WTO negotiations and climate change The 2001 Doha Ministerial Declaration (Paragraph 31 (iii)) called for negotiations on "the reduction or, as appropriate, elimination of tariff and non-tariff barriers to environmental goods and services," with a view to enhancing the mutual supportiveness of trade, environment, and development. All WTO members agree that environmental goods liberalization should be geared toward improving the environment. However, not much progress has been made on this front because of differing views on how to define environmental goods, a precon- dition for determining what goods to include for liberalization. Views also differ on how to approach liberaliza- tion in a manner that addresses the interests of both developed and developing countries. High-income countries interested in liberalizing environmental goods support a list approach: identifying and submitting specific lists of goods and then negotiating the elimination or reduction of bound tariffs (and nontariff measures) permanently and on a most-favored-nation (MFN) basis. Some developing countries prefer a "project" approach, under which liberalization would be bound temporally and only for the duration of environmental projects that would benefit from liberalized imports of goods and services on an MFN basis. Although a number of countries have submitted lists with products of interest, not much progress has been made to date. Building on the list approach, a recent U.S.-European Union proposal suggests that WTO members could first agree to eliminate tariffs and identified nontariff barriers to trade in specific climate-friendly products. The proposal provides for special and differential treatment for developing-country members, including longer phase- in periods. The objective is to have a zero-tariff world for climate-friendly goods in the near future and no later than 2013. But there are disagreements on what should be on the list. For example, the proposal was criticized by countries that believe that ethanol should be included in any list of climate-friendly technologies. A number of developing countries are also concerned about the impact of liberalization on existing domestic industries and in some cases on tariff revenue. deemed to have been produced with environ- and information on this may not be available. mentally inefficient technologies and encour- Border tax adjustments also give rise to risks age countries to participate in international of hiding tariffs or export subsidies and may agreements that they may otherwise abstain be inconsistent with WTO regulations. from.26 Trade policy has a role to play in Trade policy may sometimes have adverse instances where governments (or a group of consequences on the environment. For exam- signatories to an environmental agreement) ple, agricultural support programs have led impose carbon taxes or equivalent instru- to the use of production methods that are ments on domestic production to reduce excessively polluting; fish subsidies have greenhouse gas emissions. An equivalent tax helped lead to depletion of ocean fish stocks, on imports of the products that are subject and by restricting imports of the most envi- to the carbon tax regime will ensure that ronmentally efficient biofuels and subsidizing local output is treated the same as foreign consumption of less efficient local output, products. Such border tax adjustments can, consumers are prevented from switching to in principle, help mitigation efforts without less polluting types of energy that originate affecting international competitiveness while in parts of the world where the environmen- encouraging participation by others. How- tal costs of extraction are lower. ever, border tax adjustments by themselves Similar considerations apply to proposals are second-best instruments--the first-best to penalize or avoid consumption of lower- policy is to levy an environmental tax at the cost imported food products that can be pro- origin. Determining the appropriate (equiva- duced locally. Often this will not make any lent) tax for a given product is not straightfor- sense from an environmental perspective--in ward. Taxes should accurately reflect the pro- that even with the transport-related emissions duction process used by the exporting firm, and other costs, the net impact of imports G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 139 C H A P T E R 4 on the environment will likely be less than if sion of public goods delivering global ben- similar products are raised locally. As impor- efits, including improved information about tant, there is a significant danger that use of the climate system and access to more cli- trade policy for environmental reasons will mate-resilient crops and technologies. be captured by protectionist interests, result International trade in adaptation technol- in retaliation, and further weaken the rules- ogies has received far less attention than the based multilateral trading system. Proposals mitigation technologies discussed previously. to adopt labeling systems that provide con- A United Nations Framework Convention on sumers with information on the carbon foot- Climate Change subsidiary body for scien- print of a product may be better solutions tific and technological advice recently invited than the use of explicit trade sanctions, but submissions of adaptation technologies from they run the risk of arbitrariness, discrimi- national governments and other relevant orga- nation, and unintended consequences if not nizations. The objective was to compile a list designed carefully (box 4.4). of technologies for adaptation at the regional, national, and local levels in different sectors and to identify common needs, concerns, and Mitigation versus Adaptation barriers related to their dissemination and To date, the policy response to global warm- transfer. Over 170 technologies were identi- ing has focused mostly on the steps that fied as a part of this exercise, with the major- industrial and developing nations should take ity of the technologies being relevant to the to mitigate greenhouse gas emissions. Far agricultural sector, followed closely by those less attention has been paid to what develop- pertaining to the water resources sector.28 ing countries should do to adapt to the con- Other identifiable sectors were coastal zones, sequences of foreseeable climate change in health, biodiversity, and infrastructure. the coming decades. Developing countries, The technologies were classified as either particularly the poorest ones, will be most hard, such as drought-resistant crop varieties, vulnerable to climate change and increasing seawalls, and irrigation technologies, or soft, climate variability because they have the least such as crop rotation patterns. These broad capacity to adapt. Excessive floods, droughts, categories of hard and soft technologies were heat waves, and rising sea levels will amplify further subdivided into traditional, modern, the already existing challenges posed by trop- and high technology. Traditional (indig- ical or arid geography, a heavy dependence enous) technologies that have been applied on rain-fed agriculture, rapid population to adapt to weather hazards include methods growth, poverty, and a limited capacity to to build floating vegetable gardens and dikes. cope with an uncertain climate. Examples of modern technologies include According to the recent Stern Review, techniques to produce new chemical products "adaptation is the only response available such as fertilizers, pesticides, and solvents; for the impacts that will occur over the next improved designs (e.g., of sanitation systems, several decades before mitigation measures housing, and commercial buildings); and can have an effect."27 Unlike mitigation, technologies to produce new crop varieties adaptation will in most cases provide local (e.g., hybrid corn) and reduce water use (e.g., benefits, realized without long lead times. drip irrigation). High technology includes Therefore, some adaptation will occur some of the more recently developed tech- autonomously, as individuals respond to nologies resulting from scientific advances, market signals and environmental changes. including in information and communica- Some aspects of adaptation, such as major tions technology, earth observation systems, infrastructure decisions, will require greater and geographic information systems. foresight and planning. There are also some Many adaptation technologies are in aspects of adaptation that require the provi- the realm of services rather than goods. 140 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 H A R N E S S I N G T R A D E F O R I N C L U S I V E A N D S U S T A I N A B L E G R O W T H BOX 4.4 Will carbon labeling help or hinder developing-country trade? Carbon labeling is increasingly attracting popular attention. It offers consumers and companies the opportunity to participate in the fight against global warming by providing information on the total greenhouse gas emissions that a given product generates. While carbon labeling is mainly discussed in developed countries, it can have major impacts on developing countries. The choice of measurement methodologies and of control systems-- needed to convince consumers and companies that the measurements are unbiased--can have a major bearing on the competitiveness of developing-country producers. Some companies in high-income countries are already moving forward with carbon labeling. For example, the U.K. supermarket Tesco has announced that it will use carbon labeling on all its products. The idea is quickly spread- ing to continental Europe. In the United States, Wal-Mart, the world's biggest retailer, has announced that it is mea- suring the emissions of selected products. Eventually, its suppliers will be rated by the use of a carbon scorecard. Designing the appropriate scheme is no small challenge, as carbon labeling is highly technical and data- demanding. To be development-friendly, carbon labeling needs to accurately reflect developing countries' advan- tages in low carbon emissions wherever they exist. For example, developing-country workers may walk to work or use communal transport, while in developed countries people often drive in their cars. Such differences have potentially large implications on both global warming and developing countries' prospects, depending on whether or not these differences are accurately reflected in carbon labeling. Decisions about which activities in the pro- duction chain to include in the analysis are, therefore, crucial from both a scientific and a development perspec- tive. Schemes that concentrate on only specific parts of the production chain will generally be very misleading. Carbon labeling schemes may also have differential impacts, depending on the size of firms. The more complex the schemes, the greater the difficulty small and poor producers in developing countries are likely to encounter in selling their products and benefiting from market access opportunities. Emission efficiency will likely become a key parameter of competitiveness in a climate-constrained world. This will have differential impacts on countries, depending on their specific circumstances. In agriculture, for example, many developing countries use traditional technology and enjoy a warm climate and, therefore, use few modern inputs like nitrogen-based fertilizer (which cause emissions of one of the most harmful greenhouse gases) and little fuel (with associated emissions of carbon dioxide). However, these countries are often located far from major export markets and thus require more fuel-consuming transportation. Emission-efficient supply chains demand that the advantages of labor-intensive techniques and sunshine (as opposed to developed-country mechanization and heated greenhouses) outweigh the disadvantage of transport-related emissions. Analyses of greenhouse gas emission throughout the supply chain suggest that in many cases products coming from far away may cause lower emissions than products sourced locally. Source: Brenton, Edwards, and Jensen (2008). Notes Whether they concern services or goods, liberalization of trade may be complicated 1. WTO 2007. by non-environmental considerations and 2. LDC exports of oil grew by 20 percent; objectives. Examples are dual-use technolo- exports of other merchandise grew by 14 percent. gies, political sensitivities regarding agricul- 3. For example, Francois, Hoekman, and Man- tural liberalization, as well as differences in chin 2006. views regarding the risks associated with the 4. Nigeria, Republic of Congo, Gabon, Cook Islands, Federated States of Micronesia, Nauru, use of--and trade in--genetically modified Niue, Palau, Marshall Islands, and Tonga. organisms. However, many of these tech- 5. Policies affecting trade and investment in nologies are not affected by such consider- services are discussed in a subsequent section of ations and can be prioritized along with the this chapter. mitigation-related products and technologies 6. In practice, identification of such problems for liberalization. must be done by national administrations. World G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 141 C H A P T E R 4 Bank staff have interacted with several govern- 0.75). Sectoral results are aggregated across modes ments that classified excise taxes as import duties of supply using weights that reflect judgments of in national tariff schedules. As a result of such the relative importance of the different modes for a interactions, the data have been corrected. sector. For example, mode 4 (temporary movement 7. The OTRI and TTRI are calculated as of suppliers) is important for professional services a weighted sum of ad valorem tariffs and ad but not for telecommunications, whereas mode 3 is valorem equivalents of specific duties, and non- the dominant mode of contesting a market. Sectoral tariff measures (for the OTRI), where weights are restrictiveness indexes are aggregated using sectoral import volumes and import demand elasticities GDP shares as weights. The country income group (Kee, Nicita, and Olarreaga 2008a, 2008b). The indexes are derived using GDP weights for the OTRIs by country and the data used to calcu- countries in the sample. late the OTRI are posted on the DECRG Trade 19. Hoekman (2006) and Hoekman and Mat- Research Web site under "data and statistics"; see too (2008) survey the recent literature and empiri- http://go.worldbank.org/C5VQJIV3H0. cal evidence; the contributions to Mattoo, Stern, 8. See, for example, Findlay and O'Rourke and Zanini (2008) analyze the economics of trade 2007, 396ff. in the various services sectors from a development 9.Seehttp://www.oecd.org/document/0/0,3343, perspective. en_2649_33773_39508672_1_1_1_1,00.html. 20. World Bank 2008; Mattoo and Payton 10. The NRA is similar to the PSE in that it 2007. includes the effects of both farm output and 21.Thetaskforceidentifiedsixcategoriesforaid farm input price distortions, but it also includes for trade: (i) trade policy and regulations, (ii) trade exchange rate distortions, and it is expressed as development, (iii) trade-related infrastructure, (iv) a percentage of total farm production valued at building of productive capacity, (v) trade-related undistorted rather than distorted prices. adjustment, and (vi) other trade-related needs. The 11. The full set of results from this project will task force also proposed a 2002­05 baseline on the be published in the second half of 2008. A global basis of which to assess additionality and monitor overview volume (Anderson 2008) will be comple- the adequacy of provided funding. mentedbyfourregionalvolumes,oneeachforAfrica 22. The Integrated Framework is a multia- (Anderson and Masters 2008), Asia (Anderson and gency, multidonor program to assist the LDCs Martin 2008), Latin America and the Caribbean in addressing national competitiveness priorities. (Anderson and Valdés 2008) and Europe's transi- The enhancement of the IF was recommended by tion economies plus Turkey (Anderson and Swinnen a 2005 task force. 2008). Details of the research project methodology 23. In the OECD CRS database, Asia includes and its working papers are available at http://www. Middle East Asia, South and Central Asia, and Far worldbank.org/agdistortions. East Asia. 12. Hertel and Winters 2006. 24. Environmental goods are products that 13. Hoekman and Olarreaga 2007. result in less use of energy or generate energy in 14. Harrison 2006. more environmentally efficient ways. For the list 15. Djankov, Freund, and Cong 2006. of environmental products and technologies con- 16. World Bank 2007a. sidered in this chapter, see http://econ.worldbank. 17. The sectors are further disaggregated into org/programs/trade. banking (retail and merchant), insurance (life, 25. World Bank 2007b. nonlife, and reinsurance), road transport, railway 26. Draft climate change legislation in the shipping, maritime shipping and auxiliary services, EU includes proposals to impose restrictions on air transport (freight and passengers), accounting, imports unless an international agreement subject- auditing, and legal services. See Gootiz and Mat- ing all industrialized countries to similar climate too 2008. change mitigation measures is reached. According 18. Results of the survey are summarized in an to the proposal, such a "carbon equalization sys- index of restrictiveness. For each sector and mode of tem" could take the form of a requirement that supply the openness of policy toward foreign suppli- foreign companies doing business in Europe obtain ers is mapped on a 5-point scale ranging from 0 (for emissions permits alongside European competi- no restrictions) to 1 (highly restricted), with three tors. Similar proposals have also been tabled in the intermediate levels of restrictiveness (0.25. 0.50 and U.S. Congress (Brewer 2008). 142 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 5 Leveraging through the International Financial Institutions T he past year has seen a continuation Some large developing countries are now of a trend of diminishing importance global exporters of capital, technology, and of the international financial institu- entrepreneurial know-how. Yet, there are tions (IFIs) in terms of their net financial some 40 countries, with one-fifth of the devel- flows. The multilateral development banks oping world's population, with low incomes, (MDBs) now account for only 8 percent of slow growth, and poor progress on poverty net official development assistance (ODA). reduction. Some countries are seeing a boom But this does not necessarily imply declining based on natural resources or manufactured relevance. The true measure of the impact exports. Others are suffering from deteriorat- of IFIs in a rapidly changing global environ- ing terms of trade or are losing market share ment must consider the leverage--beyond in traditional exports. In this multipolar financing--in achieving collective action world, the IFIs face an array of clients with on development and implementing an ever- vastly different needs and aspirations. more-important global and regional public Nowhere is this change seen more clearly goods agenda. The IFIs should be assessed than in financial markets. Eighty-six devel- on results, on policy change at the country oping countries have ratings on their inter- level, on institutional learning, and on har- national bonds and have access to global monization and improved effectiveness of capital pools in rich and developing coun- the aid architecture. Through their coun- tries. Flows of capital, goods, and technology try operations, as well as their regional and to most developing countries are now domi- global-level work, the IFIs are supporting the nated by market forces rather than interme- MDGs, linking these with poverty reduction diated through official aid agencies. Many strategies, medium-term expenditure frame- multinational firms are displaying greater works, annual budgets, specific investments, social activism through their direct activities policies, and programs in each country. and through corporate philanthropy. With The IFIs are operating in a world of rapid thousands of international nongovernmental change. Developing countries generated 70 organizations (NGOs), tens of thousands of percent of global growth in 2007.1 Three- developing-country NGOs, and hundreds of fifths of the developing world's population is thousands of community-based organizations living in countries that are growing strongly in developing countries, the number of actors and where poverty is being reduced rapidly. in development has grown significantly. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 143 C H A P T E R 5 Many of these new organizations are negative. Additional financing was provided focused on specific issues of hunger, envi- by the leverage obtained through cofinanc- ronment, education, health, or children--the ing and guarantee operations, which have so-called vertical funds that have become been growing. important. These agencies can promote Replenishment of concessional windows efficiency by providing specialized exper- in 2007 constitutes a significant achieve- tise and focused results, but they can also ment. Growth in MDB nonsovereign, non- reduce effectiveness by complicating efforts guaranteed disbursements shows a shift to achieve policy coherence and by distort- toward greater support for the private sec- ing national priorities. tor. Africa, Asia, infrastructure, and higher There is broad recognition that the devel- education are areas seeing the most rapid opment architecture must change in response increase in financial support. International to these global trends. The year 2008 rep- Development Association (IDA) financing resents the midpoint for achievement of the for primary education fell. Evaluations sug- Millennium Development Goals (MDGs). gest that there has been a significant under- Ministers and senior officials from over 150 investment in regional projects. countries will meet in September this year, The IFIs are devoting large and grow- in Accra, Ghana, at the Third High-Level ing amounts of their own and trust-fund Forum on Aid Effectiveness to recommend resources to knowledge activities and are actions to ensure faster, broader, and deeper decentralizing operations to strengthen implementation of the Paris Declaration dissemination. But the practical experi- principles. They will also meet in Doha, ences--both successes and failures--of mid- Qatar, in December to follow up on the dle-income developing countries are only financing for development arrangements ini- just starting to be tapped. There appears tiated at Monterrey, Mexico, in 2002. These to be strong demand for IFI knowledge ser- two events are likely to highlight that greater vices from all types of clients, but the busi- urgency is needed to scale up financing for ness model for financing knowledge needs to development and improve aid effectiveness. evolve. IFI revenues traditionally are based In 2007 IFIs continued the process of on lending and may not easily be deployed shifting strategies in response to the changed in middle-income countries where lending global environment. They defined new pri- has declined or for regional and global pub- orities for differentiated clients, introduced lic knowledge goods. new lending and nonlending instruments, IFI results improved in 2007, in terms and added more emphasis to regional and of selectivity, harmonization, and manag- global public goods to complement their ing for results. But much remains to be country-based approaches. At the same time, done in terms of strengthening relevance the IFIs continue to play their traditional and enhancing support to meet the MDGs. roles in helping countries manage market Although there are multiple IFI assessments, turbulence and high and volatile commodity including self-assessments, these are non- prices, as they are currently experiencing, comparable and provide mixed results. and providing financing, knowledge, and In 2007 there is evident progress toward technical assistance to countries. strengthening developing-country platforms: MDB operations increased in volume in 13 percent of low-income countries are 2007, with a record $49 billion in gross dis- deemed to have fully developed operational bursements, reflecting higher concessional strategies, while another 67 percent have flows and nonconcessional, nonguaranteed taken action to develop such strategies. In the flows to the private sector. Total net non- former group of countries, a shift toward risk concessional flows turned slightly positive management approaches in delivery mecha- in 2007 after four years of being large and nisms rather than ex ante control mechanisms 144 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 L E V E R A G I N G T H R O U G H T H E I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S would permit greater use of country systems medium-term strategy, aimed at modernizing and speed disbursements without necessarily surveillance, strengthening crisis prevention sacrificing effectiveness. The issues are more in emerging market countries, and clarify- challenging in roughly 20 percent of coun- ing its role in low-income countries. Build- tries--including most fragile states--where ing on this initiative, the Fund is currently only rudimentary elements of operational refocusing its operations while maintain- development strategies exist. Fiduciary and ing its strong engagement with low-income effectiveness problems limit country capacity countries. The African Development Bank to absorb larger IFI resources. (AfDB) commissioned a high-level panel to The increased focus on regional and advise on a medium-term strategic plan.4 global public goods is welcome but requires The European Bank for Reconstruction and that IFIs adapt internal structures to comple- Development (EBRD) implemented its Capi- ment country-based approaches. New orga- tal Resources Review 3 (approved in 2006). nizational structures have been developed The Inter-American Development Bank in 2007, such as departments for regional (IDB) developed the Opportunities for the activities, dedicated climate change teams, Majority and other new strategic initiatives. and international partnerships for health Although each institution has tailored its and trade. Climate change and environ- new strategic direction to its own circum- mental management issues are being main- stances, there are some common themes. At streamed into country strategies. Effectively the heart of the new strategies is a sense of responding to the expanding global and rapid change in the world and of a shifting regional public goods agenda will require role of the IFIs to help countries manage continued adaptation and innovation. change. The EBRD board has been explicit in "acknowledg[ing] the need for a change New Strategic Frameworks in the business model of the Bank in order to accomplish these objectives,"5 but all IFIs Each of the IFIs is adapting its strategy in have introduced important shifts in strategy light of global trends and recognition that in the last year (table 5.1). more is needed to help many countries These shifts fall under three broad achieve the MDGs. Most countries face categories: broader options in their financing, but low- income countries still receive little private A shift in client and business focus capital (4 percent on average in 2000­05). to promote inclusive and sustainable Countries are also wrestling with issues of globalization how to manage globalization in an inclusive An orientation toward knowledge and and sustainable way, prompting them to learning services demand more knowledge services from the A greater emphasis on global and regional IFIs. Globally, public goods in health, trade, public goods financial stability, and the environment have taken on greater prominence, and the IFIs Inclusive and Sustainable Globalization are being called upon to respond. This year, the Asian Development Bank While many countries have benefited from (ADB) discussed a report of an "eminent globalization, the gains are uneven. The IFIs persons group" that laid out a long-term are adapting their strategies to the reality vision.2 The World Bank Group issued a that the benefits of globalization have been document describing its long-term strategic unevenly distributed both across countries challenges, and its new president outlined a and within countries. There is more that can vision for the institution.3 In 2006 the Inter- be done to connect the "bottom billion" to national Monetary Fund (IMF) released a the global economy. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 145 C H A P T E R 5 TABLE 5.1 Strategic shifts by IFIs Inclusive and sustainable Regional and global IFI globalization Knowledge and learning public goods International Macro management of scaled- Modernizing surveillance Financial stability Monetary up aid Multilateral and regional Sovereign Wealth Fund Economic recovery assistance consultations Funds program Assessing vulnerabilities to Emergency postconflict capital flows assistance Policy support instrument World Bank Africa Provide world-class knowledge Climate change Group Fragile states Knowledge sharing and Health Scaling-up aid delivery learning between clients Trade Middle-income countries Governance and anticorruption International financial Private sector development architecture African Infrastructure Governance Regional integration Development Private sector development Economic and financial reforms Environment and Bank Middle-income countries African experiences and climate change Postconflict and postcrisis perspectives countries Asian Infrastructure Regional knowledge hubs Regional integration Development Financial development Governance and anticorruption Regional financial Bank Capacity development markets Climate change Regional health programs European Bank Early and intermediate Life in transition survey Sustainable Energy for Reconstruction transition countries, the Initiative and Development Russian Federation Energy efficiency and climate change team Inter-American Opportunities for the Majority New evaluability instrument Sustainable Energy Development Initiative and Climate Change Bank Infrastructure Investment Fund Initiative Disaster Prevention Fund Water and Sanitation Initiative Each of the IFIs is emphasizing selectivity making. The IMF has also reviewed its engage- in choosing clients that are most in need of ment in postconflict and fragile states and has assistance. Both the IMF and the World Bank proposed a systematic medium-term approach Group are adapting their assistance to low- under an economic recovery assistance pro- income countries to take into account the new gram that would be more closely aligned with challenges faced by these countries; both IFIs specific country conditions and that would also have developed new forms of assistance to give greater emphasis to coordinated support fragile states. The IMF is using a new instru- for rebuilding capacity. The World Bank has ment--the Policy Support Instrument--for established a framework for sustained engage- supporting countries that have become mature ment in fragile states and an action plan for stabilizers; this new instrument provides assis- Africa. The AfDB is focusing on postconflict tance for the development of more advanced and postcrisis countries. The EBRD is shifting regimes and tools for macroeconomic policy its focus away from the EU-8 accession coun- 146 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 L E V E R A G I N G T H R O U G H T H E I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S tries to the east and south to early and inter- to strengthen country capacity to identify mediate transition economies and the Russian natural disaster risks, design prevention and Federation. The ADB and the World Bank mitigation investments in high-risk areas, Group have also reaffirmed the importance of and improve early warning systems. The continued assistance to middle-income coun- World Bank Group has established a new tries, which still have major concentrations Caribbean disaster insurance fund. of poor in their lagging regions. The IDB has introduced its Opportunities for the Majority Knowledge and Learning Initiative as a means to create strategic part- nerships among key actors to improve the lot All the IFIs have emphasized their knowl- of the poorest groups in its borrowing mem- edge and learning contributions to develop- ber countries. ment and their desire to shift toward more A private sector supply response is necessary knowledge-based institutions. But imple- for countries to reap the full benefits of global- mentation of some of the changes has been ization, and most of the MDBs are strengthen- controversial. The conventional wisdom ing their private sector development programs. about development effectiveness has been The EBRD has traditionally been strong in challenged both within and outside the IFIs. private sector operations. The International The IFIs are trying to diversify their instru- Finance Corporation (IFC) has launched a ments and approaches to reflect broader pilot program with IDA to promote small and experiences with both success and failure medium enterprises in Sub-Saharan Africa. in development, including lessons of experi- But private sector support can also require ence from today's middle-income and poor specific sectoral approaches. Several MDBs, countries and from the activities of other including the ADB, the World Bank Group, development actors like private foundations, the AfDB, and the IDB, have underscored the international NGOs, and non-DAC (Devel- priority that needs to be given to infrastruc- opment Assistance Committee) official ture. The IDB's Infrastructure Investment donors. Marrying global and local knowl- Fund and the World Bank's Infrastructure edge remains a challenge for the IFIs. Action Plan are examples of how these priori- Treatment of governance and corruption ties have been translated into concrete actions. has been a more controversial area of the new The private sector has also benefited from knowledge and learning strategies. The World the reduced macroeconomic uncertainties in Bank, ADB, and the AfDB have elevated poor countries resulting from the consistent these issues to the top of the development application of coherent and sustainable mac- discussion and are gaining experience with roeconomic policies and associated structural how to embed the lessons and research into reforms, debt relief under the Heavily Indebted operations, with country and sector selectiv- Poor Countries (HIPC) and the Multilateral ity and local capacity building. The World Debt Relief Initiatives (MDRI), and the appli- Bank has adopted an implementation plan on cation of the debt sustainability framework by governance and anticorruption that has three the IMF and the World Bank. objectives: promoting capable and account- Societies that successfully integrate glob- able states and institutions; providing public ally also develop social mechanisms for services; and combating corruption.6 It has taking care of the most vulnerable groups. also launched the Stolen Assets Recovery Ini- Recently, a rash of natural disasters has tiative (StAR). The ADB's second governance underscored the risks that are faced by many and anticorruption plan has completed its of the poorest. The MDBs have become first year of implementation, focusing on the more active in disaster response. In addi- assessment of public financial management, tion to humanitarian assistance, the IDB procurement, and corruption risks at the proj- has established a Disaster Prevention Fund ect, sector, and country levels. But the bal- G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 147 C H A P T E R 5 ance between fiduciary soundness and scaling findings but identifies scope for further prog- up financing remains hard to manage, and ress, including a more rigorous justification the burden of accountability on MDBs and for conditions and a better explanation in developing countries for maximizing develop- program documents of the link between a ment results by striking the correct balance program's goals and the conditions. is high. The World Bank's recent Detailed The IFIs are also putting greater focus on Implementation Review of five health projects evaluation as a tool for generating knowl- in India provided valuable insights into the edge. The IDB is developing a new evalua- risks of fraud and corruption in development tion instrument for its knowledge work. The operations, which would be important for all World Bank Group is implementing a devel- development partners. In their action plans opment impact monitoring and evaluation that respond to the review, the Government program to learn more rigorously from its of India and the World Bank have instituted project experiences. new procedures and systems to mitigate these Several IFIs have strengthened their risks. In the coming months, similar measures efforts to help countries generate transpar- will be agreed upon and rolled out as needed ent statistics on development results and to operations across the World Bank. address the perceived gap in the links among In the area of support for economic and inputs, outputs, and outcomes. The EBRD's financial reforms, the ADB and AfDB are Life in Transition Survey is a recent example building their capacities to advise countries. of new data collection. The IMF is leading The IMF has started to modernize surveil- the way with its Special Data Dissemina- lance and hold multilateral and regional con- tion Standards and new tools, such as the sultations. In June 2007 the Fund adopted a DataMapper, to make data more accessible new Decision on Bilateral Surveillance over and usable. The ADB's Fund for Statistical Members' Policies to upgrade the foundations Capacity Building in Asia Pacific (FASTCAP) of Fund bilateral surveillance. Under the new is assisting countries with weak capacity by decision, the concept of external stability providing long-term technical assistance. becomes an organizing principle for surveil- lance, bringing greater clarity and specificity Regional and Global Public Goods to the principles guiding members' exchange rate policies. The Fund is also strengthening The IFIs are intensifying their work on regional the analysis of linkages between macroeoco- and global public goods through direct inter- nomic developments and financial markets ventions and by creating an enabling environ- and multilateral perspectives in bilateral sur- ment to leverage private sector efforts. Climate veillance. The World Bank has done much to change and energy efficiency will receive reform the use of development policy lending greater priority from the World Bank Group, and to improve support for policy and insti- the IMF, ADB, and the AfDB. The EBRD has tutional reforms. Both the World Bank and established a sustainable energy initiative and the IMF have streamlined structural condi- is the first MDB to establish a specialized team tionality to reflect experiences with reform. to address such issues with its Energy Effi- The review of IMF conditionality conducted ciency and Climate Change Team. The IDB in 2005 showed that structural conditional- has also adopted a Sustainable Energy and ity in Fund-supported programs has become Climate Change Initiative to promote alterna- more focused on macrocritical issues, more tive energy sources and clean fuels. clearly formulated, and more closely linked More broadly, the ADB and AfDB have to the core mandate of the IMF. A recent underscored the importance of regional eco- report by the IMF's Independent Evalua- nomic integration across a number of sectors tion Office on structural conditionality in and given support to emerging regional insti- Fund-supported programs confirms these tutions. The ADB is paying special attention 148 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 L E V E R A G I N G T H R O U G H T H E I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S to regional financial market development, as saving and improving people's lives and while the AfDB has emphasized infrastruc- avoiding extreme financial hardship caused tural linkages, especially to give landlocked by ill health. The World Bank strategy asserts countries better access to international that "financing no longer drives the relation- transport routes. The ADB is also help- ship with client countries . . . it is the quality ing to strengthen regional collaboration to of the policy and technical dialogue which address common threats, such as HIV/AIDS will define the Bank's contribution. . . ." The and avian influenza. At the global level, the strategy repositions the World Bank to focus IMF continues to play its role in promoting on strengthening health systems, where financial stability with its Global Financial development assistance funds are relatively Stability Reports, bilateral and multilateral scarce. It embodies an approach that will be surveillance, and a strengthened analysis of long term, country driven, and focused on macrofinancial linkages. The IMF has also institutional change, rather than on specific stepped up its analysis of the macroeconomic investment projects and technical, medical effects of climate change and the contribu- support. There is a clear definition of com- tion fiscal policy can make in mitigation and parative advantage of the World Bank that adaptation to climate change. The World forms the basis for a more effective division Bank Group is active in global health and of labor among donors. trade issues as well. There is also considerable room for strengthening collaboration among IFIs. For instance, the main recommendations of the New Collaborative Approaches External Review Committee on IMF­World Cutting across these changes in strategic Bank Collaboration are to promote coopera- direction are new collaborative approaches tion in crisis management, to improve inte- being developed by all the IFIs to enhance gration and harmonization of work on fiscal cooperation with other donors. Many of and financial sector development issues, and the new players do not fit easily into exist- to better coordinate technical assistance ing modalities of donor coordination, which (box 5.1). are centered around country-executed plans and programs. New vertical funds have Operational Trends expanded rapidly, disbursing about $7 bil- and Harmonization lion over the last five years. These funds have a limited field presence, however, and IFIs provide resources for development, set priorities at headquarters. Given the nonlending activities, capacity building, very different business models of the verti- and research and evaluation. This section cal funds, the challenges of coherence have reviews operational trends in these areas grown. In response, the MDBs have boosted and IFI efforts to harmonize and align their efforts to improve developing-country capac- operations across agencies. ity to articulate national plans and poverty reduction strategies and to embed programs Financial Resources for Development funded by vertical funds into these plans. The complementarity of approaches can Demand for IFI financial services is mixed. be seen in the World Bank's health sector With a buoyant global environment, in strategy.7 That document points to the false which private flows to developing countries dichotomy between a focus on priority dis- may have approached $1 trillion in 2007, eases (the core objective of health-oriented there has been significant net repayment vertical funds) and a focus on strengthening of IFI loans in the last two years. In 2007 health systems. Both focuses are required to repayments to MDBs were almost the same achieve real health results, defined broadly size as nonconcessional gross flows. The G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 149 C H A P T E R 5 BOX 5.1 Bank-Fund Collaboration: Joint Management Action Plan The Malan report, or more formally the report of the External Review Committee on World Bank­IMF Collabo- ration, released in February 2007, found strong foundations for Bank-Fund collaboration but no room for com- placency. The report called for strengthening the culture of collaboration in the two institutions in several areas. Following informal board discussions in the Bank and the Fund, the Development Committee and the Interna- tional Monetary and Financial Committee (IMFC) communiqués in Spring 2007 welcomed the report and said that ministers looked forward to seeing how the two institutions would take the recommendations forward. In response, a Joint Management Action Plan (JMAP) has been developed, which draws on a staff survey, recommendations from six staff work streams, and a joint high-level staff retreat. The JMAP enumerated specific steps to strengthen collaboration, building on existing approaches rather than calling for dramatic changes or the addition of bureaucratic layers. The three steps were: Improve coordination on country issues through new procedures for country team coordination, including regular meetings on work programs, agreement on instruments and division of labor, and new systems for requesting and tracking inputs from the other institution Enhance communications through new electronic platforms for the sharing of focal point names, documents, mission schedules, and other information among staff in the two institutions working on country teams or on the financial sector, fiscal issues, and technical cooperation Reflect collaboration in staff and managerial performance reviews and replace the Joint Implementation Com- mittee with an information and monitoring clearinghouse function anchored in central departments. The JMAP aims to translate identified good-practice approaches to collaboration into standard practices. Of course, important differences will remain between the two institutions--from their distinctive cultures to more specific organizational and administrative differences--and successful implementation will depend on mutual understanding of and respect for these differences. The JMAP was endorsed by the two boards in October 2007 and welcomed by the IMFC and Development Committee at the Annual Meetings. Implementation of the JMAP has begun. The goal is for most new systems to be operational in time for the preparation of FY09 budgets. The first progress report for the two boards will be prepared in time for the 2009 Annual Meetings. Source: World Bank and IMF staffs. share of MDB concessional flows in total large fluctuations depending on individ- ODA has fallen to a low point--just 8 per- ual country circumstances. cent in 2007. Demand for nonconcessional loans and But net flows are not an adequate measure guarantees to nonsovereign entities, of demand for IFI financial services. Over- mainly to the private sector, by the EBRD, all, MDB gross disbursements in 2007--a the IFC, and regional development banks' proxy for new demand--reached a record (RDBs) private sector arms, has increased volume of almost $49 billion (figure 5.1). substantially. Of this, $37 billion was in nonconcessional Supply of concessional lending has resources, up from $25 billion in 2005. This regained momentum in 2007. Record is the first sustained increase in demand for donor pledges for IDA 15 and the African nonconcessional loans in the absence of a Development Fund (AfDF) XI and prom- financial crisis in two decades. ising replenishment discussions for the Four stylized facts have emerged from the Asian Development Fund (AsDF) X sug- analysis of recent MDB flows: gest this trend should continue over the next years. Demand for new nonconcessional sov- Resources are increasingly flowing to ereign loans remains generally flat, with Africa and Asia. 150 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 L E V E R A G I N G T H R O U G H T H E I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S FIGURE 5.1 MDBs' gross disbursements, by type of flow and region, 2000­07 US$ billions US$ billions 25 18 20 15 12 15 9 10 6 5 3 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2000 2001 2002 2003 2004 2005 2006 2007 Concessional flows Africa Asia Europe Latin America Nonconcessional flows to sovereign borrowers Nonconcessional flows to nonsovereign borrowers Source: Staff of the big five multilateral development banks Nonconcessional Sovereign Flows aims to help these countries adapt to high The IMF, as a provider of balance of pay- oil prices and improve energy efficiency. ments assistance for countries with exter- Low-income countries have used resources nal financing difficulties, is expected to be from development policy operations to fill affected most significantly by financial and remaining gaps. economic conditions, and a reduction in MDB gross nonconcessional disburse- its lending is a sign of developing-country ments to sovereign borrowers were roughly successes in macroeconomic management. flat in 2007, at a total of $23.4 billion, but Developing countries repaid the IMF over this tells only part of the story. The other $7 billion in 2007, for a total of about $135 part is the shifting regional and organiza- billion over the last five years. The IMF's tional distribution of such loans. Lending by outstanding financial support to developing the International Bank for Reconstruction countries declined to about $15 billion at and Development (IBRD), especially its loans the end of 2007, its lowest level in 25 years to Latin America, declined. But other regions and well below its all-time peak of $101 bil- and regional banks saw rising demand. lion in 2003 (box 5.2). Taken together, the regional development At the same time, even though about 15 banks for the first time ever disbursed more countries have seen major terms-of-trade than the IBRD in nonconcessional sover- deterioration from oil and other commod- eign loans. In the past year, the IBRD took ity price shocks, there has been no activity important steps to make the financial terms in the IMF's Exogenous Shocks Facility. of its products more competitive, flexible, Reasons why countries have not used the and transparent. Other enhancements have facility include access to private capital, use simplified and improved flexibility of prod- of reserves, and lower demand for oil in ucts for delivering customized financial and some countries as governments often passed risk management solutions to clients. through world market price increases to The MDBs also influence financial flows domestic prices. The World Bank has pro- by leveraging other resources: guarantees vided financing for longer-term restructur- bring in money from the private sector, and ing. Energy Development Policy Lending for cofinancing and parallel financing bring in Morocco and Senegal this year, for example, funds from other official lenders. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 151 C H A P T E R 5 BOX 5.2 Lending by the IMF The IMF's General Resources Account (GRA) provides nonconcessional financial support to member countries experiencing temporary balance of payments difficulties. The IMF also provides financial support through spe- cial GRA facilities, including emergency assistance for natural disasters and postconflict emergency assistance. The IMF provides concessional loans to low-income countries under the Poverty Reduction and Growth Facility (PRGF). At the end of 2007, 23 countries had a PRGF-supported arrangement under which they received subsi- dized balance of payments support from the IMF. In 2006 repayments of PRGF assistance were boosted by debt relief provided in the context of the MDRI. Net flows from the IMF to developing countries US$ millions Type of flow 2001 2002 2003 2004 2005 2006 2007 est. Net concessional flows (PRGF loans) 106 567 9 ­179 ­715 ­3,587 29 Disbursements 1,111 1,741 1,187 1,204 597 744 485 Repayments 1,005 1,174 1,178 1,383 1,312 4,332 457 Net nonconcessional flows (GRA) 19,031 13,109 2,002 ­14,314 ­39,802 ­27,382 ­5,131 Disbursements 30,249 32,678 28,429 6,181 3,381 3,486 1,463 Repayments 11,219 19,569 26,427 20,495 43,183 30,868 6,593 Total, net flows 19,137 13,676 2,010 ­14,493 ­40,517 ­30,970 ­5,102 Of which: Total net flows, Sub-Saharan Africa ­181 161 ­393 ­318 ­738 ­3,051 117 Gross emergency assistance n.a. 35 18 453 189 10 139 disbursements Source: IMF staff. n.a. = Not applicable. Guarantees. The World Bank Guarantee approved, for a total amount of financing of Program was mainstreamed in 1994 to help about US$27 billion, with an average lever- extend the reach of private financing to emerg- age ratio of almost 10 to 1.8 ing countries, mitigate risks that are beyond the control of the private sector, open new Cofinancing. Cofinancing is a mechanism markets, and improve project sustainability. through which additional financing can be The World Bank offers two basic types of raised to fill unfunded gaps in project or pro- guarantees: Partial Risk Guarantees cover grams and to better calibrate the degree of debt service defaults on a loan, normally for a concessionality to achieve maximum impact. private sector project, when such defaults are It covers joint and parallel financing. When it caused by a government's failure to meet its takes the form of joint financing, or collabora- contractual obligations related to the project. tion on development policy lending and sector- The IBRD (but not IDA) also offers Partial wide approaches (SWAPs), it also establishes Credit Guarantees, which cover debt service formal coordination between donors on coun- defaults on a specified portion of a loan, nor- try programs, policies, and priorities and pro- mally for a public sector project, principally vides a cost-effective means by which official to extend maturities and improve market agencies can tap into the lead agency's project terms. Since 1994, 34 guarantee operations management expertise. The World Bank has for 31 projects in 25 countries have been recently heightened attention on joint financing 152 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 L E V E R A G I N G T H R O U G H T H E I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S TABLE 5.2 IBRD cofinancing by types of cofinancier, 1998­2007 US$ millions Cofinancier 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Bilateral 2,436 3,514 1,086 1,514 932 557 2,552 2,415 1,217 2,953 Multilateral 4,925 4,441 5,084 4,042 3,371 2,453 8,845 6,147 3,619 3,931 Total cofinancing 7,361 7,954 6,169 5,556 4,304 3,010 11,398 8,561 4,836 6,884 Selected donors JBIC 580 1,746 100 533 359 0 0 0 61 110 DfID 33 12 78 73 91 100 613 609 421 952 KfW 76 66 58 259 85 37 40 59 75 150 EC 69 174 32 98 86 57 641 180 49 449 Source: World Bank staff. Figures for 2007 are estimates. Note: Total cofinancing includes all sources of cofinancing (concessional or nonconcessional) from bilateral and multilateral agencies. as an important country-based aid harmoni- the scope of clients beyond infrastructure, zation and partnership instrument, especially capital markets, and trade finance. Most with other multilateral agencies. On the bilat- nonsovereign business is in Europe (56 per- eral side, the U.K. Department for Interna- cent), but the highest growth rate has been tional Development (DfID) and the Japanese in Asia, which has surpassed Latin America Bank for International Cooperation (JBIC) for the third straight year. Encouragingly, have been very active in cofinancing with the nonsovereign flows to Africa have more than IBRD. JBIC's activities have declined signifi- doubled since 2000. cantly since 2002, but Japanese cofinancing The MDBs' ability to expand their non- with the Asian Development Bank looks set sovereign business with adequately diversi- to increase substantially under a partnership fied portfolios and acceptable rates of return agreement of May 2007--the Enhanced Sus- is a reflection of the better business climate tainable Development for Asia program. In and improved growth prospects in many fiscal 2007, World Bank projects were able to countries. But improving the business cli- leverage an incremental $6.8 billion in cofi- mate and growth prospects is also the devel- nancing (table 5.2). Almost half of this amount opment purpose of nonsovereign operations. ($3 billion) went for projects in Africa. That outcome, rather than the volume of lending, is a better measure of impact. Nonconcessional Flows to Nonsovereign Nonsovereign flows provide flexibility Borrowers in terms of eligible clientele and prices. The MDB nonsovereign flows (lending and equity MDBs' private sector instruments can price investments) have grown sharply in recent products differentially to allow for varying years, from $3.1 billion in 2000 to $13.3 degrees of country and project risk. In con- billion in 2007, of which half is accounted trast, in the case of sovereign loans, pricing for by the IFC and the other half by the is uniform to reflect the cooperative nature RDBs, mainly the EBRD. The Inter-Ameri- of the institutions. As a consequence, almost can Investment Cooperation (IIC) disburse- half of all business in investment-grade ments in 2007 were almost 10 times their countries of the World Bank Group now 2000 level while the EBRD quadrupled its consists of IFC and Multilateral Investment disbursements in U.S. dollar terms. For the Guarantee Agency (MIGA) activities. The IIC disbursements, restrictions on private IFC is now expanding aggressively into low- sector lending have been lifted to expand income and blend countries. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 153 C H A P T E R 5 Subnational lending. Subnational lending issues within the World Bank Group, proj- is another nonsovereign area with promise. ect flow is accelerating. A number of countries have asked for sup- Nonsovereign lending often requires local port, extending beyond finance to include currency financing, and innovative financial enhanced capital market access, especially instruments have been developed to meet in cases where administrative responsi- this market demand. The MDBs already bilities for basic infrastructure services offer swaps and interest and exchange rate have been devolved to local governments. hedging instruments. In October 2007 the The World Bank Group has integrated its World Bank Board endorsed a new IBRD- approach by offering financial and guaran- IFC initiative aimed at stimulating domestic tee products using the IFC balance sheet, bond markets. The Global Emerging Mar- but this mechanism has not yet seen sig- kets Local Currency Bond Fund is an exam- nificant growth and volumes are still mod- ple of market-based innovations customized est.9 Ten operations with a total exposure to fill specific market gaps (box 5.3). of $350 million have mobilized over $1 billion for subnational governments or Nonsovereign guarantees. MIGA offers risk public service providers in China, Guate- insurance for up to 20 years against losses mala, Hungary, Mexico, the Philippines, relating to currency transfer restrictions, the Russian Federation, and South Africa. expropriation, war and civil disturbance, With a joint IBRD-IFC team now in place and breach of contract. It covers a broad and with management addressing incentive range of sectors in 147 developing member BOX 5.3 Global Emerging Markets Local Currency Bond Initiative A new Global Emerging Markets Local Currency Bond Fund (GEMLOC), to be cobranded by IFC, IBRD, and a private partner, is expected to raise $5 billion by early 2008 for investment in up to 40 emerging bond markets. GEMLOC is a "systemic" solution to a market gap. While 70 percent of all emerging market debt is currently denominated in local currency, only 10 percent of the foreign money going into bonds issued by emerging markets is denominated in local cur- rency. Only 2 percent of emerging market local currency debt is benchmarked against existing indexes. There is strong demand among investors for a dedicated fund in emerging markets local currency debt that is broadly diversified. And while about a dozen emerging economies have already developed liquid local currency bond markets, many others would seek to improve liquidity, build market infrastructure, develop efficient tax regimes, and cut red tape. The World Bank is looking for a private fund manager for GEMLOC to raise the funds and to manage a portfolio of investments in local currency bonds across as many as 40 emerging markets. Up to 30 percent of assets could also be invested in subsovereign and corporate bonds. The fund is not a stand-alone, but a part of a three-part program that also includes an index-- the Global Emerging Markets Bond Index (GEMX)--weighted not just by size of market, but by "investability" as well, the latter adjusting for such variables as regulatory and tax regimes and market access rules. The IFC is not new to the business, having launched the first emerging markets equity index two decades ago. The third part of the program is technical assistance, to be provided by the Bank, to help countries develop more investable local bond markets. This technical assistance will be funded by a "development fee" from the fund manager. There is no capital commitment from either the IBRD or the IFC in the project overall; after 10 years the sunset provision kicks in, meaning the World Bank name will be removed and the private sector will take over. Source: World Bank staff. 154 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 L E V E R A G I N G T H R O U G H T H E I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S countries. Since its inception in 1988, MIGA Record levels of donor pledges and ongo- has issued 885 guarantees for projects in 96 ing discussions for replenishment of MDB developing countries, totaling $17.4 billion concessional windows should allow last year's in coverage. Two-fifths of MIGA's gross out- increase in concessional flows to be sustained. standing portfolio is in IDA-eligible coun- Donor funding commitments to the replen- tries. Through the first half of fiscal 2008, ishment cycles of IDA and other concessional MIGA has issued $1.2 billion in new cov- arms of the MDBs provide evidence of donor erage, bringing the total active portfolio to intentions to support the horizontal approach the highest level in the agency's history at provided by these institutions. IDA's 15th $5.9 billion. MIGA prices its guarantee pre- replenishment, concluded in December 2007, miums based on a calculation of both coun- resulted in a 30 percent increase over IDA14 try and project risk. Equity investments can (table 5.3). In total, IDA15 will allow for be covered up to 90 percent and debt up to $41.6 billion of new commitments during fis- 95 percent. MIGA may insure up to $200 cal 2009­11. New donor pledges will provide million, and more can be arranged through $25.1 billion, an increase of $7.4 billion com- syndication. pared with IDA14--the largest expansion in donor funding in IDA's history.10 Inter- Concessional Flows nal transfers from the World Bank Group In 2007 gross concessional flows from the ($3.9 billion), donor pledges for MDRI debt MDBs reached a record high, totaling over forgiveness ($6.3 billion) and credit reflows $12 billion, an increase of 11 percent after ($6.3 billion) make up the remainder of the two years of stagnation. IDA, which tradi- replenishment. The IDA15 agreement con- tionally accounts for 75­80 percent of total tained two other "firsts." China became a concessional flows, was responsible for all donor for the first time, along with five other of the increase in 2007. Concessional flows countries, bringing the number of non-DAC from regional development banks were flat. contributors to 23 countries. And the United While Asia continued to receive almost half Kingdom became the largest single contribu- of total concessional gross flows, the fastest tor for the first time. rate of increase has been in Africa. MDB sup- Regional banks could also see their con- port for Sub-Saharan Africa more than dou- cessional resources expand significantly. bled between 2000 and 2007. Africa receives At the AfDF-XI negotiations in December 45 percent of total MDB concessional flows 2007, donors agreed to a record $8.9 billion today, up from 37 percent in 2000. in support for 2008­10, an increase of 52 TABLE 5.3 Record expansion of IDA Special drawing rights US$ IDA 14 IDA 15 Percent IDA 14 IDA 15 Percent Sources of funds (billions) (billions) change (billions) (billions) change New donor pledges 12.1 16.5 17.7 25.1 Compensation for MDRI debt forgiveness 2.6 4.1 3.8 6.3 Credit reflows 6.1 4.1 9 6.3 Agreed IBRD-IFC transfers 1.1 2.6 1.6 3.9 IDA commitment authority 21.9 27.3 25 32.1 41.6 30 Additional IBRD-IFC transfers 0.3 0.4 Total actual IDA 14 22.2 32.5 Source: World Bank staff. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 155 C H A P T E R 5 percent over AfDF-X. Negotiations are also analysis for each country. Separately, the under way for the replenishment of the Asian IDB has created a grants facility for Haiti Development Fund for 2009­12 (AsDF X). to help it reach completion point and obtain The ADB is proposing a major increase as debt relief. IDB governors also agreed to con- this will be the last chance to meaningfully sider a replenishment for the FSO by 2013, contribute to the MDGs before 2015. given that the fund will be able to continue providing concessional credits to its clients MDRI. The MDRI provides additional debt only through 2015. relief from IDA, the AfDF, the IDB Fund for Special Operations, and the IMF for coun- Trust funds. Trust funds are perhaps the tries that have reached their HIPC comple- most rapidly growing business segment for tion points. At the end of 2007, 25 countries the MDBs. Donors have sought to use man- (including two non-HIPC countries) had agement and program services provided by benefited from MDRI relief provided by the the MDBs for an increased amount of bilat- IMF. For the MDBs, donors have promised to eral funds. Trust funds tend to focus on two replace the forgone credit reflows but cannot broad areas of donor interest. The first con- always provide legally binding commitments sists of programs at the country level to help so far into the future. IDA has received com- achieve the MDGs in low-income countries, mitments from 32 of the 34 countries that particularly in Sub-Saharan Africa. These participate in MDRI funding. IDA expects to programs also support health, natural disas- forgo credit reflows of special drawing rights ter relief, and postconflict recovery. The (SDR) 24.7 billion ($37.6 billion) between second broad area is global public goods, 2006 and 2044, as a result of the MDRI. especially for the environment. This area has By September 30, 2007, IDA had provided seen exponential growth of funds beyond the irrevocable debt reduction commitments to Global Environment Facility, including the 22 HIPC countries amounting to SDR 19.2 Ozone Phase-Out Fund and carbon funds. billion, but donors had provided unqualified Trust funds vary enormously in size and firm commitments of only SDR 2.9 billion complexity from multibillion dollar arrange- ($4.4 billion), and qualified commitments of ments to much smaller, simpler funds. In a further SDR 14.6 billion ($22.2 billion). 2007 the World Bank trust fund directory This still leaves a gap. listed 100 active arrangements. In 2006 The African Development Fund forgone trust fund disbursements by the World Bank credit reflows are estimated at Unit of Account had risen to $4.4 billion. The IDB disbursed (UA) 5.68 billion ($8.5 billion). Only 4.3 per- $215 million, while the AfDB and the ADB cent of the cost of the MDRI will occur before committed $85 million and $264 mil- 2011 and 15 percent of the cost before 2016. lion respectively. By the end of 2007 trust AfDF has already cancelled debt of UA 4.48 funds under MDB management reached billion for 18 countries, and received UA 4.36 over $20 billion, with the World Bank hav- billion ($6.5 billion) in commitments from ing the lion's share. Through trust fund donors, of which 15 percent are unqualified. arrangements, the MDBs are able to ensure The IDB has four client countries that that global initiatives and funds mobilized have already qualified for MDRI debt relief for specific purposes are integrated with of $4.4 billion. Unlike the other MDBs, IDB country-based development programs. will rely only on the internal resources of its Fund for Special Operations (FSO), which Nonlending Activities in Support has been redesigned to offer blends of highly of the Development Agenda concessional credits along with nonconces- sional loans, with the composition of the Knowledge services. Knowledge services--such blend depending on a debt sustainability ascountryanalyticalwork,technicalassistance, 156 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 L E V E R A G I N G T H R O U G H T H E I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S and global data and research--are a critical activities. The IFIs participate with 24 other pillar for supporting developing countries in contributors to the Country Analytical Work achieving the MDGs. Knowledge services have Web site (table 5.4), a shared portal where been growing more important over time as reports and best-practice examples are made focus on aid effectiveness intensifies. Aid effec- available to the development community. tiveness is about better development results. It There are now 3,722 posted reports, with relies on knowledge services to change behav- the World Bank providing about one-third. ior of recipient countries and donors alike, IFI reports cover a variety of themes. In to monitor and learn about what works, and addition to sectoral themes, there are coun- to provide the support that countries need to try strategies and procedures for effective aid enhance their own aid effectiveness. Attention management, including public financial man- increasingly should be paid to the lessons that agement, procurement, and governance and low income-countries (and the developmental anticorruption. These reports are critical to the community) can learn from the middle-income system strengthening that lies at the core of the countries' experience. Indeed, the knowledge IFI efforts to build and support country-based that some of the IFIs have vis-à-vis other donors platforms for aid delivery (box 5.4). Almost derives from their global experience. all poor countries are now covered by a series Knowledge is the glue that binds differ- of economic memoranda, public expenditure ent development partners together. Shared reviews, poverty assessments, and sector strat- knowledge on the development vision, poli- egies, although a number of African coun- cies, and expenditure frameworks to link tries still have not been able to conduct any programs with budget resources has become household surveys. Between 2003 and 2007, indispensable to effective aid, especially in IDA produced 150 poverty and social impact a more complex aid system and with more assessments, identifying the impact of policy domestic stakeholders--parliamentarians, recommendations and project interventions. civil society, and the private sector. As one Measuring the relationship among inputs, example, there are estimated to be 80­100 outputs, and outcomes is central to the global health partnerships. Countries with achievement of better development results, limited capacity to manage and spend aid but the statistical capabilities in countries effectively, dealing with the multiplicity of remain uneven. The IFIs have significant aid instruments and mechanisms on offer, programs for strengthening statistical sys- cannot absorb more money.11 Knowledge tems that can improve this situation. At the from the IFIs provides countries with the macroeconomic level, statistics are improv- analytic, diagnostic, and capacity-build- ing in depth and coverage (box 5.5), but at ing support required to use aid better, so the sectoral and microeconomic levels much knowledge services have grown alongside the growth in the volume of aid. For frag- ile states, where aid volumes tend to be low, TABLE 5.4 Reports posted by agency at Country Analytical Work Web site, 2007 knowledge services help create the institu- tional foundations for effective use of aid. Knowledge services have been steadily Agency Number of reports expanding and are increasingly done jointly World Bank 1,370 with partner countries or in a coordinated IMF 445 fashion with other donors, or both. The ADB 96 World Bank, as the largest of the IFIs, tends AfDB 48 to produce the greatest volume of knowledge EBRD 26 services, with 440 pieces of economic and IDB 20 sector work in fiscal 2007. But all IFIs are committed to enhancing their knowledge Source: www.countryanalyticwork.net. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 157 C H A P T E R 5 BOX 5.4 Supporting the preparation of poverty reduction strategies: The case of Mozambique The analytic products that IDA prepared with the government of Mozambique helped define the policy priorities and institutional systems that underpin the national poverty reduction strategy. The poverty assessment provided the analytic basis for the overall identification of priorities. The Country Economic Memorandum (prepared with the review of the donors of the G-17 coordination group) helped to focus the strategy on the links between key sectors and the over- all growth strategy, analyzing how Mozambique's natural resources--land, forests, fisheries, mines, and water--could be better managed to contribute more to overall growth. Reviews of the financial sector, investment climate, and legal and judicial sector contributed to improving the country's institutional foundations for shared growth and helped to form the basis for the strategy's structural reforms. Finally, reviews of public expenditures, financial accountability, and procurement helped form the basis for improving public financial management and the links between the strategy and national systems. Source: World Bank 2007d. remains to be done. The IFIs are playing a to almost $450 million in 2007 (figure 5.2). major role in implementation of the Mar- These inputs, however, do not capture implicit rakesh Action Plan for Statistical Capacity knowledge work through convening, coordi- Building, a program to support the compila- nating, and catalyzing activities in global pro- tion of data and statistical capacity needed to grams, partnerships, and trust fund­related underpin the MDGs. For instance, the World work. Nor do they capture knowledge embed- Bank is cofinancing the activities of PARIS21 ded in loans and project supervision. A more (Partnership in Statistics for Development in detailed breakdown, imputing knowledge the 21st Century), which is helping coun- services to these other functions, suggests that tries develop statistical improvement strate- knowledge inputs could be double the above gies that are aligned to the statistical needs amounts. Of course, measuring knowledge and priorities of Poverty Reduction Strategy through its inputs is unsatisfactory in think- Papers and other development priorities. ing about its impact. Knowledge is a global As leading global institutions, the IMF public good, so inputs on knowledge cannot and World Bank Group have a comparative be compared with inputs on other, excludable advantage in global learning, built on deriv- services like loans. A different measure looks ing cross-country lessons from country oper- at utilization of knowledge. Web-based dis- ations. Increasingly they have shifted their semination has become more important for approach from one of transferring knowledge the IFIs; the World Bank Web site now counts from rich countries and development agen- over 2 million visitors each month. But inter- cies to poor countries to one that emphasizes nal reviews of World Bank economic and sec- a process of sharing of experiences between tor work suggest that inadequate attention is developing countries (box 5.6). paid to dissemination, reducing the impact of Measuring knowledge generated by an the work. IFI is difficult as knowledge is embedded in The World Bank's Doing Business proj- a number of different services. The World ect is one of the best known free-standing Bank has several explicit knowledge-related knowledge services offered by the MDBs. A services, such as country analytical work guide for evaluating regulations on business and technical assistance, and budget expen- entry that directly affect economic growth, ditures on these activities show a steady rise Doing Business provides a compendium of 158 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 L E V E R A G I N G T H R O U G H T H E I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S BOX 5.5 The IMF's programs for improving statistical capacity The Special Data Dissemination Standard (SDDS) provides a common standard for international dissemination of economic and financial data. SDDS subscribers provide a National Summary Data Page consisting of a prescribed set of macroeconomic data (including real, fiscal, financial, and external sector data), with given minimum levels of coverage, periodicity, and timeliness. They also provide information about their data dissemination practices and compilation meth- odologies (metadata) for posting on the IMF's Web site. Regional representation in the GDDS and SDDS combined % of IMF member countries 100 90 80 70 60 50 40 30 20 10 0 1996 1998 2000 2002 2004 2006 2008 Africa Asia & Pacific Middle East & Central Asia Europe America The General Data Dissemination System (GDDS) is a framework to help participating countries improve their macroeconomic and sociodemographic statistics, including relevant MDG indica- tors. The GDDS facilitates the comparison of a country's current statistical practices with interna- tionally recognized good practices. It guides countries in their efforts to improve statistical systems and to produce and disseminate data in accordance with good-quality standards. The GDDS also promotes the application of established methodological principles, the adoption of sound compila- tion practices, and the observance of procedures that ensure professionalism and objectivity. There are currently 64 SDDS subscribers and 90 GDDS participants--a total of about 80 percent of Fund membership. Statistical capacity building, using the GDDS and the Data Quality Assessment Framework, covers both human and institutional elements through knowledge and skills transfers and through organizational and institutional advice. The GDDS, with its incor- poration at the center of the PARIS21 program of National Statistical Development Strategies, serves as an important vehicle for donor coordination and leverage of donor funds to bring about improvements in national statistical systems through coordinated technical assistance. Source: IMF staff. laws in different countries and cross-country 200 reforms in 98 countries that were intro- comparisons of these laws. It identifies and duced between April 2006 and June 2007. champions reformers in developing coun- Croatia, the Arab Republic of Egypt, Ghana, tries who are trying to improve the business Georgia, and Macedonia were identified as climate. Doing Business 2008 documented the top five reformers. For policy purposes, G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 159 C H A P T E R 5 BOX 5.6 Malaysia-Africa Knowledge Exchange Seminar: An example of South-South knowledge sharing The Malaysia-Africa Knowledge Exchange Seminar (MAKES) brought together 110 high-level officials from 24 African countries, including 17 ministers, in Kuala Lumpur and Putrajaya, on September 21­22, 2006. The seminar, jointly organized by the Malaysian Ministry of Finance and the World Bank, focused on four themes of relevance to African countries: managing natural resources for economic growth and poverty reduction; fostering export-led growth and a business-friendly investment climate; developing and implementing national plans; and defining the role of government-linked companies. Honorable Goodall E. Gondwe, the Minister of Finance of Malawi, speaking on behalf of the African minis- ters, set the tone of the seminar: "We are here not to learn development theory, but to listen to Malaysian officials and understand better how they achieved what is an impressive performance." Several Malaysian cabinet mem- bers and the deputy prime minister emphasized Malaysia's inclusiveness, political stability, good economic man- agement, and rapid human development as key factors behind 50 years of strong growth and poverty reduction. African ministers were particularly impressed by Malaysia's ability to avoid the "natural resource curse." At the center of this success is Petronas, a Fortune 500 oil company created in 1974 with freedom to be managed as a private sector company despite being fully government owned. Transparency seems to have been the decisive factor. The company books are on its Web site, its accounts are audited by certified accountants, and its contribu- tions to the budget are debated in Parliament. Many African ministers asked: Why not Africa? The discussion revolved around the issues of governance and the role of domestic and international actors. MAKES has started a process of knowledge sharing on national planning, monitoring and evaluation, education (especially higher education), oil resources management, public-private partnerships in infrastructure, management of state-owned enterprises, agriculture, and the investment climate. The Malaysian government has offered free tuition for up to 100 qualified African students a year to pursue graduate studies at three Malaysian universities. Source: World Bank staff. FIGURE 5.2 World Bank knowledge service inputs, by type, Doing Business has been complemented by a 2002­07 series of detailed firm-level Enterprise Sur- veys, supported by many MDBs, and these have become mainstreamed instruments US$ millions for measuring investment climate reform 500 priorities. 400 Partnerships. Nonlending services are of par- 300 ticular importance in forming partnerships with others in the development community 200 and in addressing global public goods. The 100 number of active partnerships has mush- roomed. The World Bank Group now par- 0 ticipates in 125 partnerships, mostly in 2002 2003 2004 2005 2006 2007 environment and human development areas. Economic & sector work Technical assistance The World Bank itself is the host institution Client training Knowledge management Provision of training Training received for fewer than half of these partnerships (fig- ure 5.3). The majority are hosted either by the partner or by an independent organization. Source: World Bank staff. Figures for 2007 are estimates. Note: Data include Bank budget, reimbursables, and Bank-executed trust funds. Over 90 percent of these programs describe themselves as contributing to the brokering of global knowledge. 160 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 L E V E R A G I N G T H R O U G H T H E I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S The MDBs have an important role to FIGURE 5.3 World Bank portfolio of global partnership funds play in bridging the gap between partner by theme and host institution country priorities and global or regional col- lective action, especially through country World Partner Indp. Total no. analytical work. Many global public goods Thematic network Bank org. org. of funds are narrowly focused, and the links with a Environment & 27 4 5 36 coherent national development strategy need sustainability to be elaborated. Poverty reduction strate- Human development 8 8 14 30 gies, country assistance strategies, and sec- Infrastructure 12 3 1 16 tor strategies can play this role. Sometimes, a regional platform can be useful in intermedi- Finance & economics 6 5 5 16 ating between country and global platforms Poverty reduction & 1 4 3 8 as well. The linkages provide a two-way economic management communication channel. Global public goods Other 4 5 10 19 goals are brought into the country dialogue, TOTAL 58 29 38 125 and, at the same time, the MDBs can be a 46% 23% 30% powerful voice for advocacy of developing- country viewpoints on global public goods at international forums, especially in areas Distribution of disbursements in 2006 where country capacity for participating in Other global negotiations is limited. Recent exam- 15% Environment & ples of MDB advocacy in trade, aid, and cli- Poverty reduction sustainability mate change underscore this point. 29% & economic 6% management Harmonization Finance & 13% The commitment of IFIs and the donor com- economics munity to harmonization of activities was formalized through their participation in the 13% 24% Paris Declaration, setting targets to improve Infrastructure Human aid effectiveness by 2010. A baseline survey development of MDB performance against the Paris targets was undertaken in 2006, with a follow-up Source: World Bank staff. survey scheduled for the spring of 2008. The baseline survey showed the MDBs to be ahead actions were being undertaken in a growing of many bilateral agencies, but with some number of countries. However, in half of the weaknesses. IDA, the ADB, and the AfDB surveyed countries, progress was limited, relied too heavily on parallel implementation and countries and development partners still units. Unpredictability of disbursements was had many opportunities to improve country- also an issue. The MDBs found the greater level effectiveness. Country-based platforms use of program approaches and joint missions were the core of the MDB harmonization hard to implement. On the positive side, use of efforts on strategies and programs, division country public financial management and pro- of labor between agencies, and managing for curement systems, and joint analytical work-- results. This partnership implies that MDB more than half for IDA, for example--were harmonization efforts are only as good as progressing well. MDB aid flows were gener- country efforts, and vice versa (box 5.7). ally aligned with national priorities.12 Experience to date suggests that harmoni- The 2006 monitoring of the Paris targets zation has real costs in time and resources. showed that alignment and harmonization With harmonization efforts being made at the G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 161 C H A P T E R 5 BOX 5.7 Coordination among donors in Bolivia The Grupo de Socios para el Desarrollo de Bolivia (referred to as GruS) was established to improve the communication between the government of Bolivia and aid donors. GruS's main objective is to help the government better coordinate the tasks of harmonization, development effectiveness, and alignment among aid donors under the framework of the Paris Declaration, the Millennium Development Goals, and Bolivia's National Plan of Development. A coordina- tion mechanism established five thematic areas for coordination (production, social services, democracy, macroeconomics, and harmonization) and calls for monthly meetings between gov- ernment representatives and donors. To participate in the GruS, donors must adhere to a few principles: the Bolivian government leads the tasks of harmonization and coordination under the principles of the Paris Declaration; donors will align to the implementation of the objectives of the National Development Plan; donors are represented through their official heads; and the participants in the GruS should sup- port the existing coordination mechanisms at the sector level in order to strengthen them. GruS terms of reference established that a coordination group consisting of three donors (two bilateral and one multilateral) will lead its activities for three semesters. The IDB will lead the coordination group during the first semester of 2008. Source: IDB staff. country level, MDBs have found it necessary cations that progress toward the Paris targets to pursue the decentralization of their opera- is likely to be mixed. The AfDB reports that tions to the field with concomitant expenses. its disbursement level might have reached This process has advanced quite far. IDA has only 60 percent of that scheduled in 2007, placed 55 percent of its high-level staff in and that it still has an average of 6.4 parallel the field, along with 30 of 40 country direc- implementation structures per country. IDA tors. Local recruits have risen to 23 percent has found it difficult to commit jointly to of the staff complement. Significant progress outcomes with other development partners has also been achieved on decentralization and still maintain clearly defined account- of procurement and financial management abilities for each partner. It has also found staff. The effect of these changes has been to that significant costs are entailed with donor increase the ability of donors to make prog- coordination around budget support and sec- ress with harmonization on a country-by- torwide approaches, with crafting and moni- country basis, where results are most clearly toring memoranda of understanding (MOUs) visible (box 5.8). with other agencies, and with synchronizing The Paris Declaration survey was impor- staff drafts and management reviews among tant in opening a productive dialogue within agencies. A new legal harmonization initia- countries on aid effectiveness. That conversa- tive among the MDBs, plus many bilateral tion clearly showed the need to tailor develop- donors, is developing specific understandings ment strategies to each country's priorities and about interagency MOUs. Incentives and circumstances. But it also pointed to a level of resources within agencies do not yet reflect concern in developing countries with the high these real aspects of harmonization. transaction costs of managing aid and the Country-based harmonization is neverthe- slow pace of donor reforms.13 The new sur- less making progress. As figure 5.4 shows, vey results will be a guide as to whether these 13 percent of countries have fully developed concerns are being adequately met. operational frameworks and another 67 per- While it is early to provide new results cent have taken action to develop such frame- from the 2008 survey, there are already indi- works. These figures are higher in countries 162 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 L E V E R A G I N G T H R O U G H T H E I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S BOX 5.8 Recent examples of country-level harmonization with regional development banks In February 2006 the heads of the seven MDBs set up a joint task force to develop a consistent and harmonized approach to anticorruption work. On the basis of the task force's recommenda- tions, the MDBs agreed to a common framework for fighting fraud and corruption. The joint actions include standardizing the definitions used in sanctioning firms involved in corrupt activi- ties, improving the consistency of investigative rules and procedures, and strengthening informa- tion sharing. MDBs will continue to work together to assist countries in strengthening gover- nance and combating corruption in cooperation with civil society, the private sector, the media, and the judiciary. MDBs have also focused attention on the special challenges posed by fragile states and are working on identifying opportunities for increased harmonization in approaches to fragile situations. One of the key recommendations is a proposal to adopt a common approach for identifying fragility, recognizing that it exists at both national and subnational levels, and to partner with the United Nations and other development partners in shared postconflict and postdisaster recovery planning. Most MDB harmonization activities take place at the country level, with joint country assis- tance strategies and joint activities. For example, IDA and the ADB have agreed to join efforts in Tajikistan through: Joint technical assistance to set up a monitoring system for the Paris Declaration Joint country economic, poverty reduction, and health analytical work Joint support to the health sector's management information system Upgrading the multifunctional role of the joint Development Information Center Adding a common public information window to a joint education portfolio review Joint databases. In The Gambia, where harmonization and alignment are relatively less advanced, IDA and the AfDB agreed to cooperate closely. Under this joint strategy, the institutions have developed shared objectives and a common platform including joint budget support, joint investments in growth and competitiveness, and joint analytic work in public finance, civil service reform, and governance. Source: World Bank 2007d. with stronger policies and institutions. The of aid and received higher IDA allocations. challenge of harmonization and alignment The causality could move in either direction. remains high in fragile states, where over half Countries with more aid flows might invest of all countries do not yet have sound opera- more in harmonization procedures to increase tional frameworks. This is not simply a reflec- aid effectiveness, or alternatively donors might tion of a legacy of poor policy in fragile states. allocate more aid to countries that have bet- Analysis suggests that the link between the ter procedures. The implication is the same. degree of implementation of Paris Declaration Harmonization does appear to be a critical targets and a country's overall policy and insti- element in scaling up and enhancing aid effec- tutional score is weak, especially for countries tiveness. IFI efforts to build country capacity with middle to poor country policy and insti- can therefore have significant payoffs. tutional assessment (CPIA) ratings.14 The same analysis shows a strong link between resource Tracking Results flows and harmonization and alignment. Those countries with advanced harmonization The IFIs have committed to the Managing for processes were able to support higher volumes Development Results Initiative (MfDR), an G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 163 C H A P T E R 5 FIGURE 5.4 Progress toward operational development strategies in of results orientation. In preparation for the low-income countries event, the AfDB has been active in planning consultative regional meetings and in the selection of case studies to inform progress. % of countries 100 The heart of the MDB systems lies at the 8% 13% 13% country level. The IDB has launched a new 90 19% project performance monitoring report for all sovereign guaranteed operations that pro- 80 40% 47% vides better information on output and out- 70 come indicators against specified targets and 56% baselines and on risks that may affect their 60 achievement. The ADB has been implement- 67% 64% 50 ing an MfDR Action Plan, 2006­08. It has 76% initiated development effectiveness coun- 40 try briefs. The AfDB has introduced a new 30 60% 47% results-oriented supervision report format. The World Bank Group and ADB have main- 20 36% streamed Results-Based Country Assistance 10 18% 23% Strategies. The World Bank's Africa Action 2% 5% 6% Plan is based on an outcome-oriented frame- 0 2005 2007 2005 2007 2005 2007 work to guide the work of the Bank's Africa All countries Stronger policy Fragile states region to promote country-led efforts in part- and institutions nership with other donors (box 5.9). Developed frameworks Action taken to develop frameworks A focus on results is translating into man- Elements exist Little action taken agement frameworks that are risk based rather than absolute. Operational manuals can pro- Source: World Bank 2007d. vide guidance to staff, but if recipient coun- Note: Selected categories are defined in terms of CPIA ratings. tries are responsible for program and project execution and the attainment of development effort to use practical tools for strategic plan- results, then the responsibility of partner agen- ning, risk management, progress monitoring, cies is to manage risks inherent in individual and outcome evaluation to direct resources to transactions and not to prescribe procedures. where the best results are attainable. A Source- Better country procurement and financial book on Emerging Good Practice, with sev- management systems are already apparent, eral country case studies, was finalized by the and the MDBs are active in building capacity MfDR secretariat in May 2007. This, along to improve these. That will permit more rapid with the Hanoi Roundtable discussion in adoption of risk-based procedures. February 2007, conveys a sense of urgency to improve development results. But that requires Selectivity of Financial Resources a significant upgrading in capacity in many countries. The results agenda is far behind the As part of the MfDR, the MDBs commit- reforms that have taken place in procurement ted themselves to using more transparent and and financial management systems. incentive-improving resource allocation sys- Managing for development results is one tems aimed at maximizing aid effectiveness of the themes of the Third High-Level Forum and encouraging stronger policies and insti- on Aid Effectiveness, to be held in Accra on tutions in recipient countries. At present, the September 2­4, 2008. In addition to owner- foundation of each of these systems is a for- ship, alignment, and harmonization issues, mula that calculates the share of the resources the event will give prominence to the theme that will be allocated to individual countries 164 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 L E V E R A G I N G T H R O U G H T H E I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S BOX 5.9 The Africa Action Plan: progress in implementation The World Bank launched an Africa Action Plan in 2005, and modified it in 2007, to sharpen the focus on results. The Bank believes that good progress is being made in the implementation of the plan. There has been a very encouraging pickup in growth in the region. Africa's growth is continuing to strengthen and could reach 6.3 percent in 2008, according to the World Economic Outlook of the IMF. About two-thirds of the region's popula- tion now lives in countries that in recent years have achieved average GDP growth of more than 5 percent. Gross primary school enrollment has risen to 96 percent, and gender imbalances in education have been substantially reduced. Thirty-three of 44 countries show a decline in maternal mortality rates. This broadly positive outlook is clouded by the enormous challenges still facing the region. Despite stronger growth, much of Africa will not meet the MDGs.a About 20 countries, many affected by conflict and accounting for about a third of the region's population, remain trapped in low growth. The 2015 target poverty headcount rate of 23 percent will be missed by a sizable degree, with current projections suggesting poverty is on track to decline to only 32 percent in 2015. Primary completion rates are low and child and maternal mortality rates are not coming down fast enough. And aid to Africa, outside debt relief and humanitarian assistance, has not increased at a pace commensurate with the Gleneagles promise. The Bank Group's contributions are broadly on track with what was expected. Private sector development, infrastructure, HIV/AIDS, and malaria programs are ahead of plan. MIGA and the IFC have made important contributions to private sector development, with the IFC opening a Private Enterprise Partnership for Africa, and raising $31 million in donor contributions. A partnership with Germany and the AfDB to make finance work for Africa was launched in October 2007. Progress is on track in regional integration, with the opening of a new World Bank department to focus on this and export development. But agricultural productivity and gender empowerment programs are behind schedule. African countries have done well in building state capacity, although they could have made faster progress if the World Bank's Capacity Development Management Action Plan had come onstream earlier. Harmonization activities are also well under way at the country level, with money from the Africa Catalytic Growth Fund, designed to crowd in donor resources, fully committed through fiscal 2008. The World Bank Group has drawn four key lessons from the initial experience with the Africa Action Plan: the country-based model works and should be strengthened; the plan needs to become more selective to be used as an effective management tool; demand from countries should guide selectivity; and accountability for monitor- ing and results should be strengthened. Source: World Bank 2007a. a. On current trends, 13 countries will meet only one MDG, and 23 will not meet any. on the basis of their financial need (proxied by and on CPIA scores in a regression model.15 population and income per capita) and policy These coefficients can be interpreted as the performance. Each MDB combines these fac- sensitivity of resource allocations to "need" tors somewhat differently in its performance and "policy." Put another way, the coeffi- allocation formula and uses different methods cients show the selectivity of each agency to to accommodate exceptional circumstances, these variables. Figure 5.5 shows that most such as fragile or small states. In the past, the MDBs are quite selective in terms of both MDBs have taken significant steps to harmo- policy and need and far more selective than nize the CPIA questionnaires that lie behind bilateral aid agencies. Poorer countries and their policy performance measures. This has countries with better policy scores receive led to more harmonization of performance- more aid funds. The figure also shows a based allocation systems along the two dimen- trend toward greater selectivity in IDA and sions of need and policy performance. AfDF. A recent study prepared for the dis- The weight ascribed by each MDB to need cussion of IDA15 replenishment finds that and policy can be implicitly derived by look- countries receiving more funds from IDA ing at the coefficients on per capita income are those experiencing better results.16 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 165 C H A P T E R 5 FIGURE 5.5 Policy and poverty selectivity of concessional assistance by the MDBs Policy selectivity index Poverty selectivity index 12 0 10 ­1 8 ­2 6 ­3 4 ­4 2 ­5 0 ­6 IDB FSO AsDF AfDF IDA Bilateral IDB FSO AsDF AfDF IDA Bilateral 2003 2004 2005 2006 Source: World Bank staff calculations, based on Dollar and Levin (2004). Note: FSO = Fund for Special Operations. The contrast between MDB and bilateral hand, the likelihood of successful develop- donor allocations in terms of their selectivity ment outcomes from any specific project along the two dimensions of need and pol- declines in a fragile state. On the other hand, icy is partly attributable to the importance fragile states have the highest incidence of placed by bilaterals on historical and cultural poverty and are furthest away from reaching ties. But it also reflects differing views on the the MDGs. The allocation formula provides combination of discretion and rules-based some flexibility to accommodate exceptional approaches, with bilaterals favoring greater circumstances of fragile states,17 but recently discretion. For example, the U.S. Millennium the share of fragile states in total ODA flows Challenge Corporation has moved furthest from the MDBs has been relatively stable, in trying to implement a transparent, per- despite a sizable increase in the absolute level formance-oriented system but retains man- of MDB lending (table 5.5). As fragile states agement discretion to deviate from a strict move from peace building to state build- application of its formula. The European ing, the MDB role is expected to become Commission has an alternative approach of larger. IDA has recently spelled out its new allocating base funding according to need and parameters for engagement and has system- performance but with flexibility to deviate if atically worked to reduce the performance country circumstances so warrant. Discretion gap between fragile and nonfragile states in in allocation can be used in a number of dif- project outcomes.18 ferent ways. It can be used to include politi- cal framework conditions, which the MDBs Sectoral issues. In line with their changing cannot do. But it can also permit greater flex- strategies, MDBs have adjusted the sectoral ibility in responding to turnaround situations composition of new commitments. The most and other special circumstances such as dis- striking recent trend is the reemergence of ease burden, landlockedness, or state fragility infrastructure as a major sector. The World that are hard to capture in a simple formula. Bank Group adopted an Infrastructure Action Greater flexibility to respond to some of these Plan in 2003. Since then it has scaled up finan- conditions may be desirable but comes at a cial support considerably, almost doubling its cost in the transparency of allocations. commitments from around $7 billion in fiscal Concessional flows to fragile states pose 2003 to around $12.5 billion in fiscal 2007. a special challenge for MDBs. On the one Figure 5.6 shows how disbursements in infra- 166 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 L E V E R A G I N G T H R O U G H T H E I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S TABLE 5.5 MDB gross disbursements to fragile states, 2002­07 US$millions Gross disbursement 2002 2003 2004 2005 2006 2007 World Bank 1,107.8 985.3 1,403.2 1,693.4 1,373.7 1,802.7 IDB 2.6 48.0 28.0 70.0 65.7 90.1 AfDB 123.1 216.0 231.5 162.7 165.6 216.9 ADB 318.4 267.8 299.8 330.7 325.6 275.3 Total 1,552.0 1,517.1 1,962.5 2,256.8 1,930.60 2,385.0 Memo items Number of countries 36 35 36 36 35 35 Disbursements per capita (in dollars) 2.92 3.05 3.81 4.49 3.94 4.90 Percent of total MDB disbursements 7.9 6.5 11.1 12.3 8.3 10.6 Source: MDB staff. Figures for 2007 are estimates. Note: Data include debt relief. Fragile states are defined as IDA-eligible countries with either a CPIA rating of 3.2 or below or without a CPIA rating. structure are already picking up volumes over into infrastructure operations and strengthen- the last three years. Along with more financ- ing governance and accountability.19 ing, and leveraging private funds through A second compositional trend seems less guarantees and innovative financing mecha- positive. IDA reported an increase in its nisms, the Bank has also made progress in commitments for education, and an increase integrating social and environmental concerns in education spending as a whole in recipient FIGURE 5.6 IBRD and IDA disbursements by sector and themes US$ billions 9 8 7 6 5 4 3 2 1 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Fiscal year Infrastructure Productive sector (agriculture, industry, and trade) Public administration, law Social sector/human development Private sector development and finance Source: World Bank staff. Figures for 2007 are estimates. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 167 C H A P T E R 5 countries, but a continued significant gap in refined. It uses a two-tiered system to link resources for primary education, despite the IDA's contribution to the MDG framework. Fast Track initiative. In fact, IDA's new com- The first tier looks at key development out- mitments for basic education have actually comes, while the second tier looks at interme- fallen by 13 percent in nominal terms in fis- diate outputs contributed by IDA. The first tier cal 2005­07 compared with fiscal 2002­04, monitors 14 indicators in IDA-recipient coun- while lending for other levels of education tries, grouped into four key areas: growth and rose by 25 percent. These trends hold even poverty reduction; public financial manage- for the poorest countries and for Sub-Saha- ment and investment climate; human devel- ran Africa.20 opment; and infrastructure. The second tier has indicators monitoring IDA performance at project, sector, and country levels. Review of Approaches to Assessing The AfDF's Results Measurement System IFI Performance is similar in methodology to that of IDA. Several approaches to measuring IFI results The assessment of AfDF performance under have emerged in recent years. The first is AfDF-XI will occur at the institutional and internal, developed by each IFI in respond- country levels through the use of operations ing to shareholder concerns. On a parallel quality indexes, changes in country-level indi- track, albeit more focused on performance cators based mostly on internationally avail- than results, some MDB shareholders are able statistics, and evaluation findings. The independently developing their own compar- AfDB has examined the outputs and short- ative frameworks for assessing multilateral term outcomes of more than 140 projects agencies, generally with a view to fine-tuning that exited the portfolio over the 2004­07 their financial support. Third, civil society period. The ADB has also set up a new inter- organizations are monitoring IFI perfor- nal results measurement system. mance in an increasingly systematic manner. The IDB is moving toward a culture of results and accountability by designing and MDB Internal Measurement Systems implementing various new tools. It is intro- IFIs are taking action to improve the result ducing a corporatewide performance frame- orientation of their own management prac- work, supported by steps to implement tices and programs. At the Third Roundta- a results-based budgeting system, a new ble on Managing for Development, held in version of the project performance moni- Hanoi in February 2007, donors recognized toring report for all sovereign guaranteed that managing for results should not be seen operations, and a new project evaluation mainly as a set of measuring and monitoring instrument. tools, although statistics and monitoring and The IMF also has various internal evaluation are essential components, but as mechanisms for tracking results, starting a management strategy to improve decision with regular review by staff and the Inde- making. Internal systems developed by the pendent Evaluation Office of the effective- MDBs to measure results and effectiveness ness of IMF-supported programs, program should be seen with this perspective in mind. conditionality, and surveillance. The Fund also regularly assesses the effectiveness of Results measurement systems. Efforts to mea- its advice in the context of surveillance and sure the results of concessional lending began technical assistance missions. with the adoption of the IDA13 Results Mea- surement System. Much debate, technical COMPAS. The common performance assess- analysis, and dialogue with donors and IDA- ment system, or COMPAS, was designed as a eligible countries went into the construction self-assessment to provide a common source of the initial approach, which has since been of information on the results orientation of 168 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 L E V E R A G I N G T H R O U G H T H E I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S the MDBs' internal practices and operational ings for development outcomes, based on relations with country and development part- independent evaluation; an increase in the ners. The focus is on identifying common EBRD disbursement ratio from 55 percent to issues, rather than on individual comparisons 60 percent; a 13 percent increase in the num- among institutions, in order to provide a basis ber of countries where IDB helped strengthen for information exchange and learning about results management capacity; a 27 percent performance and accountability. increase in the share of World Bank projects Although it is still too early to assess with baseline data, monitoring indicators, and trends, the 2007 COMPAS report attempts target outcomes; and a 41 percent increase in to identify the direction of movement since the share of World Bank projects receiving a 2006.21 Overall, the MDBs have improved satisfactory or better rating in independent ex on four of seven indicators, with the other post evaluations. The MDBs have formed an three remaining stable. The improvement Evaluation Cooperation Group (ECG), with resulted from better performance in assess- the goal of promoting good practices and a ing and strengthening the capacity of their focus on project implementation. borrowing member countries to manage for development results; strengthening the MBD Shareholder Comparative Assessments results orientation of their respective coun- Several MDB shareholders have set up inde- try strategies; strengthening their various pendent approaches to assess the results and processes related to project and program effectiveness of the MDBs. There are now design and implementation; and better five such systems: harmonizing their policies and procedures among themselves. Areas where no improve- Multilateral Organizations Performance ments occurred, but where MDB approaches Assessment Network (MOPAN) pro- nevertheless are considered to be in line with moted by nine donor countries (Austria, current best practices, include allocation of Canada, Denmark, Finland, the Nether- concessional resources, institutional learn- lands, Norway, Sweden, Switzerland, and ing from operational experience, and results the United Kingdom) focus in human resources management. Performance Management Framework COMPAS 2007 shows that MDB efforts of the Danish International Development toward strengthening their results orienta- Agency (DANIDA) tion are also reaching their private sector Multilateral Effectiveness and Relevance operations in three stages: strategy design Assessment of the Canadian International and project implementation; ex post evalu- Development Agency (CIDA) ation; and learning from operational expe- Multilateral Effectiveness Framework rience. A major limitation in private sector established by the U.K. Department for operations is that not all country strategies International Development include an explicit strategy to promote pri- Multilateral Monitoring Survey System vate sector development. developed by the Netherlands. Among the highlights of the COMPAS 2007 report are the findings of a 12 percent These systems differ in objectives, level of increase in the number of country strategies assessment focus, sources of data, and tools of the AfDB, independently evaluated ex and methodology (table 5.6). Some focus on post, that show satisfactory or better results; strengthening organizational accountability, an increase of 15 percent in the share of ADB others on helping guide bilateral financial projects that explicitly show baseline data, support. They are based on (nonrepresen- monitoring indicators, and target outcomes; tative) surveys, checklists, scorecards, or a 12 percent increase in the proportion of interviews, along with organizational per- ADB projects with satisfactory or better rat- formance measures. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 169 C H A P T E R 5 TABLE 5.6 A comparison of MDB assessment systems Multilateral Canadian Organizations Danish Multilateral British Dutch The Common Performance Performance Effectiveness Multilateral Multilateral Assessment Performance Assessment Management and Relevance Effectiveness Monitoring approach Assessment System Network Framework Assessment Framework Survey System Area of Self-assessment, Perception Quality Results and Organizational Perception focus harmonization of analysis assessment of management effectiveness of analysis practices MDBs assessment MDBs Objectives Gather information Better Enhance the Better Provide Giving an on how MDBs information quality of Danish information information insight into are contributing about and development for policy to strengthen the general to development understanding of cooperation and financial DFID's perception of a results MDBs, their roles through stronger allocation accountability given MDB Monitor and and performance focus on results decisions Provide inputs synthesize MBDs by stakeholders in Improve Improvement to DFID's progress; MOPAN member management of CIDA's institutional countries Contribute to and continuous accountability strategies for lessons learning, Better dialogue learning Better engagement accountability, and with the MDBs through better identification of with transparency. Engagement information and areas requiring multilaterals of MOPAN reporting advancement Provide inputs country offices Strengthen Multilateral to future in performance accountability effectiveness financing assessment through review as part decisions Improvement performance of the Agency of overall assessments and Aid Effectiveness performance of measurement agenda MDBs at country in the context of level an increasingly decentralized management structure Level of Country, Country level Corporate Country level. Organization, Country level assessment organization, and (DANIDA), Focused on country and focus global partnership organization, and three themes: partnership levels country levels relevance, levels effectiveness, and improvement measures in management The experimentation with assessment paid to the quality of monitoring and evalu- frameworks reflects the difficulties of attrib- ation practices. Reporting should reflect on uting results to individual agencies, more progress toward development results, nota- so as harmonization efforts gain strength. bly the MDGs--that is, real results on the Nevertheless, there is demand for a sys- ground--not just process measures. Mean- tem to help the MDBs improve their com- while, donors need to harmonize the current parative strengths and weaknesses through ad hoc MDB assessment to provide trans- learning. A few common threads appear. parent incentives for institutional change to The MDBs could increase the attention management. 170 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 L E V E R A G I N G T H R O U G H T H E I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S TABLE 5.6 A comparison of MDB assessment systems (continued) Multilateral Canadian Organizations Danish Multilateral British Dutch The Common Performance Performance Effectiveness Multilateral Multilateral Assessment Performance Assessment Management and Relevance Effectiveness Monitoring approach Assessment System Network Framework Assessment Framework Survey System Tools, COMPAS is a Annual survey: A combination A common set Focuses on Questionnaires methods self-assessment A questionnaire of qualitative of indicators, eight corporate answered exercise based on completed by and quantitative drawing from management by embassy, process and results participating methods, drawing multiple sources systems and permanent indicators. It uses MOPAN embassies on: of information: is based on representation eight categories of and country Organization Evaluations from three main of mission, and data: offices for each strategies the institutions assessment constituency Country- of the MDBs instruments: offices staff. Annual results themselves level capacity assessed contracts Multidonor Checklist with Performance development Country team nearly 72 assessment Consultations with evaluations Performance- discussions questions or for the most each multilateral Surveys of field based concessional Country reports indicators important UN organization staff undertaken financing summarizing Scorecard rating institutions and Performance by CIDA, MOPAN IFIs at country Country strategies the findings of data in the information country teams checklists level of the 36 Projects and Perception Dutch partner programs A synthesis report Summary report analyses countries. presenting the Human resources Evaluation of organizations' management multilateral main strengths Learning and organizations and weaknesses incentives Performance Interagency reporting systems harmonization Private sector operations Source: World Bank staff. Civil Society Monitoring Trade and economic management. While The third pillar of assessment is through civil society groups recognize that there can civil society. A number of civil society orga- be differences in views on economic manage- nizations and Web sites monitor programs ment with IFIs, they have organized strong conducted by IFIs. These organizations and advocacy efforts to push for change. One Web sites provide important feedback-- issue that is important to these groups is to typically quite critical--on IFI activities. understand better the poverty and social They have been strong advocates for more impact assessment of policy change, espe- rapid reform of IFIs, stemming from a sense cially with respect to trade and employment, of urgency that many countries are not on the role of safety nets, and trade in agricul- track to attain the MDGs. Currently, civil ture. IFIs have initiated some poverty and society is organizing to participate in the social impact assessments, but not to the sat- Accra and Doha conferences, with a focus isfaction of many critics. These assessments on five aspects of IFI operations: trade and have helped communicate development poli- economic management, conditionality, cies to stakeholders in recipient countries but debt and finance for development, aid, and are not mainstreamed into MDB activity. voice. Nor have they been shown so far to provide G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 171 C H A P T E R 5 benefits in terms of policy choices that out- lenders have been willing to enter this space. weigh the costs of additional studies and Debt issues, therefore, remain central to the time delays. agenda of financing for development. Conditionality. Conditionality is a major Aid. Civil society groups are actively moni- channel through which IFIs have encour- toring aid quantity and quality, along with aged recipient countries to pursue specific aid effectiveness and new sources of finance. economic policies, and one where civil soci- These groups have been strong advocates ety groups have long been critical of the IFIs. for more rapid scaling up of aid, as well as This issue is becoming more sensitive as the encouraging new thinking for making aid shift toward program aid, with its attendant more effective. conditions, and harmonized approaches gathers momentum. Eurodad, a consor- Voice and accountability. A growing number tium of European NGOs, issued a report of voices are being raised about the account- on World Bank conditionality in November ability of IFIs. While focused on the issues of 2007.22 That report concluded that although quotas, shares, and chairs in organizations the number of legal conditions in World such as the IMF, there is a broader critique Bank operations had declined, many con- of IFI accountability and an effort to have ditions involved multiple actions. Eurodad greater civil society oversight and influence claims that when conditions are unbundled on IFI activities. Civil society voices call for into their separate components, there has stronger focus of the IFIs on the impact of been no decline (and perhaps an increase in rich-country policies on development. number). Eurodad further claims that sensi- tive conditions--defined as those involving Learning from Evaluations privatization and liberalization--have gone Evaluations are a major element in the IFI up. At their extreme, civil society groups like results approach. Evaluation is the source Eurodad are advocates for dropping condi- of evidence-based learning to improve aid tionality on economic policies completely, effectiveness. Each of the IFIs has an active on the grounds that it promotes externally evaluation office, conducting annual reviews induced policies and undermines debate and of key programs. The COMPAS report indi- accountability for policy choice in recipient cates no major changes in learning proce- country political organizations. But in their dures but suggests that the MDB evaluation less extreme form, the critics question the offices play a greater role in the COMPAS development impact of IFI conditions. process next year. The evaluation offices of the IFIs have Debt. The process of debt cancellation under produced a number of reports in the past the HIPC and MDRI initiatives is one exam- year relevant to the themes of strategic repo- ple of the power of civil society activism and sitioning faced by the IFIs. awareness raising. But debt issues have not The Independent Evaluation Group of disappeared. In some instances, countries the World Bank issued a report on middle- find themselves again at some risk of debt income countries. This report found a gener- distress, even after receiving debt relief, ally positive view of World Bank engagement because of adverse terms-of-trade shocks, in middle-income countries but also found or because of still-outstanding debts held unmet demand from client countries to help by creditors who have not participated in them tackle the harder issues of inequal- debt cancellation schemes. A few countries ity, corruption, and environment. Much may be in the process of re-indebting them- work in middle-income countries is oriented selves, sometimes outside the framework of toward support of the private sector. The the IFIs' debt sustainability analysis. New IDB's Office of Evaluation and Oversight 172 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 L E V E R A G I N G T H R O U G H T H E I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S found that while most private sector proj- mentation of a variety of environmental ects achieved their development outcomes, products, including projects, policy guidance, they constituted a weaker performing sec- research, and training. The IFIs have played a tor in the IDB. The EBRD evaluation office pivotal role in engaging developing countries reported that EBRD operations in providing and international and local organizations finance for property development in transi- on various environmental matters, such as tion economies had been "partly successful," energy development and efficiency, the threat with poor performance in those economies to the ozone layer, greenhouse gas (GHG) where market-supporting institutions such emissions, loss of biodiversity, and ocean pol- as frameworks for property rights were not lution. Individually and collectively, IFIs are at an advanced stage. responding to the challenge of climate change Other studies looked more broadly at the by supporting the integration of climate con- relevance and impact of the IFIs. The IMF's cerns into development policy making and Independent Evaluation Office found that poverty reduction strategies. They have taken spillovers and the potential for concerted major new initiatives to help clients address multilateral action were not given sufficient climate change mitigation and adaptation. emphasis in the Fund's reviews of member countries exchange rate policies. The World Strategic Framework Bank's evaluators found that regional aid programs offered considerable promise but In promoting environmental sustainability, accounted for only 3 percent of total aid the IFIs focus attention on the nexus between and were weakly linked to country assis- environmental conditions, quality of life, tance strategies; the evaluators called for a and the sustainability of growth and there- strengthening of the broader aid architecture. fore closely align environmental sustainabil- The ADB found that its resident missions ity with the other MDGs. The World Bank's had "successfully" delivered on their prom- overarching vision for environmental sustain- ise to improve the efficiency and effectiveness ability is laid out in the 2001 Environment of operations in client countries but called Strategy, which outlines policies and actions for a systematic corporate decentralization to promote environmental improvements as strategy to respond to future challenges. In fundamental elements of development and another review, the ADB advocated a change poverty reduction strategies.23 Recognizing in its technical assistance strategy and man- the challenge of climate change that confronts agement to clarify strategic direction at the all countries and particularly the poorest, the country level. The AfDB is also conducting a World Bank is currently developing a strate- review of its development effectiveness. gic framework to scale up its work on climate These studies suggest that the IFIs have change mitigation and adaptation. the structures for institutional learning in Other IFIs are also paying increased atten- place. They also suggest, however, that the tion to environmental sustainability and the new strategic directions that the IFIs have threat of climate change. Environmental sus- outlined are moving the institutions into tainability is expected to receive increased unfamiliar territory where existing good emphasis in the ADB's Long-Term Strate- practices are still evolving. gic Framework, currently being developed. The ADB's Clean Energy and Environment Promoting Environmental Program, including the energy efficiency Sustainability initiative and carbon market initiatives, are focused on environmental sustainability in Over the years, the IFIs have vastly expanded the energy sector. Similarly, the IDB's strat- the level and scope of their environmental egy for sustainable economic growth outlines activities. This includes design and imple- actions to promote growth while preserving G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 173 C H A P T E R 5 the natural resource base as well as social on environmental components in economic and cultural features. The AfDB board and social sector operations. approved a new policy on the environment Both the ADB and the EBRD require that in 2004, which emphasizes environmentally a country environmental analysis (CEA) be sustainable development. The EBRD plans undertaken every time a country assistance to expand investments in energy efficiency, strategy is prepared or revised. This has renewable energy, and reduction of GHG become a principal mechanism for upstream- emissions within its mandate of promot- ing environmental considerations in the con- ing environmentally sound and sustainable text of the Banks' country programming. development in all its activities. The CEAs are designed to give an overview The IMF also is paying increased atten- of current environmental challenges and tion to environmental and climate change the governing legal and institutional frame- issues. The Fund stands ready to assist its work and to set out the priority investment members in analyzing macroeconomic needs for the country. While not a manda- effects and making the right fiscal policy tory requirement, the World Bank and the choices when dealing with environmental IDB also have prepared a number of CEAs issues. The Spring 2008 World Economic to inform country operations. These assess- Outlook examines the macroeconomic ments identify sectors and issues that are of implications for the global economy of the highest priority. However, not all CEAs pre- potential flows from payments for carbon pared by IFIs so far have achieved tangible credits, how countries may best use those outcomes. This could be attributed to a vari- revenues, and mitigation and adaptation ety of reasons including process of prepara- policy responses to climate change. The tion and lack of follow up after completion. IMF will also analyze the fiscal implications of climate change and alternative adaptation Compliance with Safeguard Policies mechanisms to deal with its effects. The IFIs have over the years developed policies and instruments for mitigation and Environmental Mainstreaming management of potentially negative environ- All IFIs have aimed at mainstreaming envi- mental impacts of their projects. This has ronmental issues in their country assistance been done through more effective upstream strategies, sectoral- and policy-lending oper- analytical work and dialogue, focused ations, and analytic activities. The recent project design and implementation, and review of the World Bank environment strengthened application of environmental strategy documents that mainstreaming of safeguards. The environment assessment pro- environment issues into the Bank's programs cess has been designed and refined over the and activities has increased, particularly years to better assess the economic, social, over the last five years.24 Similarly, environ- and environmental aspects of any proposed mental dimensions have been mainstreamed project. Also, in a number of cases an envi- into ADB operations (representing about ronmental management plan or mitigation 12 percent of ADB's annual investments). measures have been required to avoid, miti- The ADB has adopted sector-specific poli- gate, or compensate for a project's harmful cies or strategies on forestry (1995), fisher- effects. Most IFIs have been updating their ies (1997), energy (2000), and water (2001). environmental and social safeguard policies Environmental considerations also figure to ensure relevance to changing needs. prominently in key sector policies of the There has also been a growing empha- EBRD and the IDB. In addition to increasing sis on harmonization and alignment of investment in traditional environmental sec- safeguard policies and country systems. In tors, they are placing heightened emphasis 2005, as a part of the Paris Declaration on 174 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 L E V E R A G I N G T H R O U G H T H E I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S Aid Effectiveness, donors and partner coun- GHG emissions. In regions where the impact tries agreed to foster the better integration of of global warming is already apparent, the social and environmental considerations into IFIs are also increasingly helping countries country strategies and programs. The appli- to adapt to the new environment. cation of safeguard policies to new lending The World Bank's Clean Energy for Devel- instruments and approaches to development opment Investment Framework is designed assistance have resulted in several recent to accelerate investments to mitigate GHG safeguards initiatives. These include, for emissions by moving to a low-carbon econ- example, the adoption by the World Bank of omy. As a follow-up to this framework, the a new operational policy in 2005 on pilot- Bank is preparing a new strategy to better ing the use of borrower country systems to integrate climate change in the broader sus- address environmental and social issues in tainable development objectives.25 The Bank Bank-supported projects (box 5.10). intends to focus on providing innovative and concessional financing to facilitate both public and private sector investments in low- Climate Change Mitigation carbon and adaptation projects; pioneer- and Adaptation ing and advancing new market and trading IFIs are developing climate change strategies mechanisms (box 5.11); facilitating technol- and policies to help client countries mitigate ogy deployment and transfer to developing BOX 5.10 World Bank country systems pilot On March 18, 2005, World Bank Executive Directors approved the launch of a pilot program to explore using a country's own environmental and social safeguard systems as an alternative to Bank safeguard policies for selected investment projects. This approach aimed to address what many borrowers viewed as excessive and unnecessary transaction costs of doing business with the Bank, while increasing borrower ownership and facilitating donor harmonization of safeguard policies. The pilot program was adopted in support of the Paris Declaration on Aid Effectiveness, in which donors and borrowers agreed to promote greater use of country systems for financial management, procurement, and environmental and social safeguards. Key to this approach is an increased emphasis by the Bank on capacity building and human resource devel- opment. To govern the pilot program the Board approved a new operational policy--Piloting the Use of Borrower Systems to Address Environmental and Social Safeguard Issues in Bank-Sup- ported Projects. The rules define the approach and the criteria for assessing country systems and specify the respective roles of the borrower and the Bank. Following two years of implementation, the results of the pilot program were evaluated. The evaluation was based on pilots undertaken in Bhutan, the Arab Republic of Egypt, Ghana, Jamaica, Romania, and Tunisia (additional pilots are under way or have been identified in Bhu- tan, Ghana, India, Morocco, South Africa, Tunisia, and Uganda). Results indicate a substan- tial potential for use of borrower systems for environmental assessment given strong borrower ownership and capacity to undertake such assessments. For social safeguards, such as invol- untary resettlement, there are significant challenges to reconciling differences between Bank and borrower systems. Diligent application of a new analytical tool--the Safeguards Diagnostic Review--will help ensure that Bank safeguards are not diluted in the process of using country systems. Coordination among donors is necessary to mobilize the resources needed to attain and sustain the capacity of borrowers to implement their own systems. The evaluation also identified obstacles, at country level and internally, to more extensive application of the pilot program. As a result, the board in January 2008 approved a proposal to provide more incentives and support for use of country systems for environmental and social safeguards. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 175 C H A P T E R 5 BOX 5.11 Carbon Partnership Facility and Forest Carbon Partnership Facility Since the entry into force of the Kyoto Protocol in 2005, the World Bank has taken a lead role in ensuring that poor countries can benefit from international responses to climate change, includ- ing the emerging carbon market for greenhouse gas emission reductions. Significant progress has been made in the development of the carbon markets. The Umbrella Carbon Facility was fully funded in August 2006 with total capital of $1 billion. Two new carbon facilities--the Carbon Partnership Facility (CPF) and the Forest Carbon Partnership Facility (FCPF)--were launched in December 2007 to scale up carbon finance. The CPF is designed to scale up carbon finance through programmatic and sector-based approaches and support long-term, low-carbon investments by purchasing emission reductions beyond 2012. It is intended to use carbon markets to promote GHG mitigation, enhancing the value of carbon finance to leverage investment for clean energy and the use of lower-carbon technology. The FCPF has been developed in response to requests from developing and industrial countries to explore a framework for piloting activities that would improve livelihoods in for- ested areas while reducing emissions from deforestation and degradation. countries; creating an enabling environment The IDB's Sustainable Energy and Cli- to tap the private sector; and expanding mate Change Initiative, approved in March research on mitigation and adaptation. The 2007, is designed to expand the develop- Bank, in partnership with the governments ment and use of renewable energy sources, of the United Kingdom and the Netherlands, energy efficiency technologies and practices, is leading a global program of research on and carbon finance, as well as to promote the economics of adaptation in developing climate change adaptation to reduce the countries, which was launched at the UN region's vulnerability. The IDB has estab- Framework Convention on Climate Change lished a team to implement and coordinate meeting in Bali in December 2007. activities under this initiative. The AfDB is The regional banks' approaches reflect their currently working on a strategy for climate regional perspectives. The ADB is focusing risk management and adaptation as well as on both mitigation and adaptation, including developing renewable energy and energy infrastructure development and finance, espe- efficiency programs. Work in this area will cially in the energy, transport, agriculture, and include partnering with other bilateral and water sectors. The EBRD has placed its main multilateral agencies on climate change for emphasis on mitigation and is also develop- Africa within the "Nairobi Framework." ing an approach to adaptation. The EBRD's Related initiatives include ongoing discus- climate change initiatives include supporting sions on setting up a carbon financing facil- efforts to improve energy efficiency and develop ity and a biofuel support facility. renewable energy sources to reduce the region's dependence on fossil fuels. In May 2006 the Financing of Environmental Activities EBRD launched a specific initiative, the Sus- tainable Energy Initiative, to scale up climate Environment-related lending has been an change mitigation investment. The objective increasingly important component of World is to more than double EBRD investment in Bank operations. World Bank investment this area, to 1.5 billion over the period 2006­ lending for environment and natural 2008, with a total project value estimated at resources management between 2002 and 5 billion. By the end of 2007, investment by 2007 amounted to $10.2 billion. This the EBRD under the initiative had exceeded constituted about 10.4 percent of total Bank the three-year target of 1.5 billion. lending. In terms of thematic distribution, 176 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 L E V E R A G I N G T H R O U G H T H E I N T E R N A T I O N A L F I N A N C I A L I N S T I T U T I O N S pollution management and environmental FIGURE 5.7 Active World Bank environment and natural resource health activities make up the largest share of portfolio, by thematic distribution, as of June 30, 2007 the lending (35 percent), followed by water resource management activities (29 percent) Other environmental Biodiversity (figure 5.7). Besides investment projects, management 3% 3% Development Policy Lending is another Climate change instrument through which the Bank is sup- 8% Water resource Environment porting environmental policy and institu- management policy and tional reforms. This lending rose sharply, 29% 12% institutions from $59 million in 2004 to $264 million in 2006. 10% Land In addition to lending, the Bank management administers grant facilities to support the implementation of global environmental agreements and the mainstreaming of their 35% objectives into operations of the Global Pollution management Environment Facility (GEF). The active and environmental health portfolio of World Bank­implemented GEF projects at the end of fiscal 2007 included 219 projects, with total net GEF grant com- Source: World Bank. mitments of $1.6 billion. In terms of cumu- lative approvals since 1991, the climate FIGURE 5.8 ADB projects with environmental elements by theme, change focal area has received the largest 2006 funding ($1.5 billion) followed by biodiver- sity ($1.3 billion) and international waters ($0.5 billion). Policy, legislative, regulatory, Investments in environment-related proj- and technical assistance 2% ects have also been rising at the regional IFIs. In the past 10 years, the ADB sup- Natural resource ported 113 investment projects with envi- Urban management ronmental objectives or elements for a environmental 36% 45% cumulative value of $8.4 billion; these improvement investments averaged $720 million a year and represented about 12 percent of the ADB's overall annual investments. These investments reached a high of 21 percent of the total in 2006. Urban environmental 17% management and natural resources man- Cleaner production agement accounted for more than 80 per- or energy efficient technologies cent of these investments (figure 5.8). The EBRD's cumulative environmental invest- Source: Asian Development Bank. ments were $3.8 billion between 2002 and 2006 and included projects dealing with municipal environmental infrastructure, amounted to about 10 percent of total IDB energy efficiency, and cleanup operations. lending. In addition to these investments in Over the same period, the IDB approved 79 environmental sectors, the IDB, and other environmental loans, investing $2 billion. regional development banks have been The focus was primarily on water and sani- financing environmental components in tation (88 percent). Environmental lending economic and social sector loans. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 177 C H A P T E R 5 Notes 10. World Bank, 2007d, annex 1. 11. Dollar and Levin 2004. 1. IMF 2007 (revised with new purchasing 12. World Bank 2007h. power parity data, January 2008). 13. Both the AfDB and the World Bank, for 2. ADB 2007. instance, have developed an exceptional alloca- 3. World Bank 2007; Zoellick 2007. tion framework for postconflict countries to allow 4. AfDB 2008. countries to benefit from additional resources over 5. EBRD 2006, p. 4. and above their performance-based allocation for 6. World Bank 2007e. a limited period 7. World Bank 2007c. 14. IDA 2007b. 8. Financial closure and guarantee effectiveness 15. World Bank 2007f. for four operations are still pending. 16. IDA 2007a. 9. A municipal fund, which provides loans, 17. The COMPAS report was initiated in 2005, guarantees, and equity investments in support of with an initial set of indicators that are intended the infrastructure investments of municipalities to constitute the basis for tracking future trends in and other subnational entities without requiring their performance. The 2006 and 2007 COMPAS a sovereign guarantee, has been set up at the IFC. reports incorporate some revisions. These changes The Municipal Fund team also has developed a include slight modifications to a few indicators, the pipeline of more than 20 projects in all emerging inclusion of performance indicators for the private regions. sector operations of MDBs, the participation of the 10. A total of 45 countries made pledges to Islamic Development Bank for the first time, con- IDA15, the highest number of donors in IDA's his- tributions from a group more representative of the tory. Six countries--China, Cyprus, Arab Repub- bilateral donor community, and greater involve- lic of Egypt, Estonia, Latvia, and Lithuania, are ment of MDBs' independent evaluation offices to becoming new IDA donors. China and Egypt were enhance the objectivity and the credibility of data. once IDA borrowers and have joined the Republic 18. Eurodad 2007. of Korea and Turkey as current donors and prior 19. World Bank 2001. recipients of IDA's assistance. 20. World Bank 2007b. 7. IDA reports a correlation between country 21. Towards a Strategic Framework on Climate capacity to coordinate aid and total aid received. Change and Development for the World Bank 8. See detailed analysis in Global Monitoring Group. World Bank 2008. Report 2007. 9. OECD 2007b. 178 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 II Special Theme: Environmental Sustainability A Framework for Monitoring Environmental Sustainability MDG 7 is simply stated: ensure environmen- social welfare does not decline over time is tal sustainability. However, the idea of envi- at the core of environmental sustainability. ronmental sustainability goes beyond the A flow diagram to frame the relation- conservation of nature. Natural resources-- ship between the economy and the environ- and the environment in general--are differ- ment is presented in figure 1. On the right- ent from many other economic goods and hand side, production of man-made goods services in that they constitute simultane- and services takes place and contributes to ously an integral part of ecological cycles, household well-being. Wealth (the left-hand inputs to production processes, and a source side of the figure) sustains production and of enjoyment for households and individu- may also contribute directly to well-being. als. Environmental goods can be used up or Wealth in such a framework necessarily depleted to make space for produced goods goes beyond physical and monetary assets (such as transforming a wetland into an to include natural assets and intangibles urban area). Yet this economic process may such as human capital. Production processes entail a permanent loss of environmental may entail the depletion or depreciation of goods with a use or an intrinsic value for assets, as may the direct use of assets by which no substitute is available. The "art" households, whereas other uses of assets are of balancing nature and development so that nondepleting. Production and consumption G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 179 P A R T I I FIGURE 1 Framework for monitoring environmental sustainability Society's wealth Society's production and consumption Depletion Consumption and well-being Poverty reduction Nondepleting use Human development Gender Pollution Production Depletion Depreciation Produced capital Intangible capital Nondepleting use both lead to flows of pollution and waste, atmosphere--as well as stocks of natural which alter the quality of natural assets in capital--forests and fish populations--when particular. these stocks may be used inefficiently. Cor- Concerns about environmental sustain- recting the externalities associated with ability arise because, unlike labor and pro- environmental resources requires public duced capital, the environment is often an action. Monitoring environmental sustain- unpriced input into production. This is true ability also entails monitoring the ability of for much natural capital. Fisheries and for- local and national governments to allocate ests in many countries are open access nat- environmental resources efficiently and the ural resources, as is groundwater. Lack of ability of the nations of the world to use the property rights to these resources prevents global commons efficiently. them from being used sustainably. With- Chapter 6 of this report monitors envi- out appropriate institutions, an open-access ronmental sustainability at the local and fishery will be overharvested and habitat national levels. It examines environmen- for biodiversity will be destroyed. Users of tal pollution and the depletion of natural these resources will impose externalities on resources, including forests, water, and land. others. The same is true for air and water It also monitors the capacity of countries to as receptors of pollution. In the absence of deal with local and national environmen- appropriate institutions, a power plant will tal problems. Chapter 7 monitors the sus- impose external costs on households in the tainability of the global commons. Avoid- form of local air pollutants (such as particu- ing adverse changes to the earth's climate, late matter) and also on the earth's climate protecting biodiversity, and ensuring the in the form of carbon dioxide emissions. sustainability of marine fisheries are three Concern about the externalities associ- components of ensuring global environmen- ated with environmental resources leads to tal sustainability. Chapter 7 examines what the desire to monitor environmental exter- progress has been made in protecting these nalities--levels of local air pollutants and environmental public goods, with an empha- the stock of greenhouse gases in the earth's sis on climate change. 180 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 6 Ensuring Environmental Sustainability at the National Level A chieving environmental sustainabil- the environment, at the broader question of ity underpins progress on many of assessing progress toward sustainable devel- the Millenium Development Goals opment, and at the adequacy of policies and (MDGs). If forests are lost, soils degraded, institutions for environmental sustainabil- fisheries depleted, waters polluted, or the ity in developing countries. Given its global air unbreathable, then achievements in poverty reduction may not be sustainable. TABLE 6.1 The targets under MDG 7 The evidence in this chapter suggests that developing countries are highly dependent Sustainability outcomes Sustainability policies on natural resources and that the mineral and oil-based economies are, in many cases, Environment Target 7.A: Integrate consuming their national wealth. Defores- Target 7.A: [. . .] the principles Reverse the loss of sustainable tation is a fact in many low-income coun- of environmental development into tries, while middle-income countries, and resources country policies and several low-income economies, face high Target 7.B: Reduce programmes [. . .] levels of pollution. Water scarcity is a grow- biodiversity loss, ing problem in countries that are already achieving, by 2010, a water-stressed. These trends place a pre- significant reduction in the rate of loss mium on the ability of developing countries to manage their environment and natural Infrastructure resources. Target 7.C: Halve, by 2015, the proportion MDG 7--to ensure environmental sus- of people without tainability--includes four targets (table 6.1). sustainable access to The overarching target, 7.A, presents major safe drinking water challenges for global monitoring. In fact, and basic sanitation unlike most of the other MDG targets, its Target 7.D: By 2020, goal is neither quantitative nor time-bound. to have achieved This chapter takes up the challenge of moni- a significant improvement in the toring progress toward target 7.A, to reverse lives of at least 100 the loss of environmental resources, by million slum dwellers looking at specific indicators of pressure on G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 181 C H A P T E R 6 nature, the biodiversity target, 7.B, is dealt Income and poverty reduction. The environ- with in chapter 7. Water and sanitation tar- ment and natural resources constitute a major gets are addressed in chapter 2. source of income, especially in the poorest Achieving environmental sustainability countries: water resources sustain agriculture has both a national and a global character. and industry; forests provide construction Some actions, such as reducing particulate materials and energy; mineral exports can matter in urban areas, will have largely generate foreign exchange. In low-income local effects. Other actions, such as miti- countries natural resources can be an impor- gating greenhouse gas emissions, will affect tant driver of growth, which in turn can pro- global sustainability. Other activities, such vide the scope for poverty reduction. To make as reducing deforestation, can have impacts this possible, there is a need for institutions that are both local and global. This chap- that allow efficient use of public goods and ter focuses primarily on local, national-level that manage rents equitably. The environmen- actions, but there are inevitable overlaps tal contribution to income and poverty reduc- with chapter 7, which focuses on global tion can be assessed both at the macro and the environmental sustainability. micro level. The wealth estimates presented in chapter 1 are an example of the former. Sustainable Development Microlevel indicators include measures of and the MDGs household dependence on natural resources (the contribution of natural resource income Table 6.2 highlights the potential links to overall household income; see box 6.1). between actions on MDG 7 and other Natural resources can also serve as a buffer, selected MDGs. or insurance, during times of need. TABLE 6.2 Environmental links to the MDGs MDG Environmental action Policy input Eradicate extreme poverty and Improve natural resource management where Land titling hunger natural resources contribute a high share of Market creation household income Achieve universal primary Reduce education costs of malnutrition by Access to water and sanitation education improving environmental conditions Promote gender equality and Reduce time spent collecting water and biomass Access to water and sanitation empower women for cooking and heating Electrification Reduce female exposure to pollutants Involve women in environmental and natural resource management Reduce child mortality and Reduce environmental risk factors Access to water and sanitation improve maternal health Access to electricity Combat HIV/AIDS, malaria, and Reduce exposure to indoor air pollution other infectious diseases Water resource management in mosquito- infested areas Foster global partnerships Agree on a global plan of action to combat Targets for greenhouse gas emission reduction climate change Development and diffusion of new technologies Development of carbon markets 182 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 E N S U R I N G E N V I R O N M E N T A L S T A B I L I T Y A T T H E N A T I O N A L L E V E L BOX 6.1 The importance of environmental income to the poor Wild or uncultivated natural resources contribute to the welfare of the poor, in some cases sig- nificantly . While this finding cannot be generalized to all rural households (note the wide ranges in the table below) resource income can contribute over 40 percent of overall household income in some rural areas. This is particularly true for households living on the fringes of forests. Some case studies show that poor households are dependent on natural resources even in areas where those resources are more scarce or less accessible. Environmental income in resource-poor and resource-rich rural areas percentage of total incomes Resource-poor/ Resource-rich areas low-access areas Average Study Poor Rich Poor Rich Poor Rich Jodha 1986 9­26 1­4 Cavendish 2000 44 30 Vedeld and others 2004 32 17 Narain, vant Veld, and 41 23 18 18 Gupta 2005 Chettri-Khattri 2007 20 14 2 1 This high dependence on natural resources can exacerbate vulnerability to climate variability. For example, the Intergovernmental Panel on Climate Change estimates that climate change will increase the number of undernourished people in the world by between 40 million and 170 million by 2050. Climate change is likely to exacerbate food insecurity especially in the most malnourished world regions, such as Sub-Saharan Africa. Source: World Bank 2008b; IPCC 2007. Education. Educational attainment is lower Gender equality. The cost of obtaining clean where lack of water, sanitation, and hygiene water and energy in developing countries is is a major cause of malnutrition, as seen in borne mostly by women and young children. chapter 2. Many studies have documented The many hours devoted to these tasks mean the effect of early childhood malnutrition less opportunity for women to participate on cognitive function, school enrollment, in market-based activities (and thus to earn grade repetition, school dropout rates, grade income independently) and less time for chil- attainment, and test scores among school- dren to go to school. Women performing age children.1 A study for the World Bank household tasks are also more exposed to goes one step further and assesses the effect indoor smoke. of lack of water, sanitation, and hygiene on malnutrition and education performance.2 Health. Environmental health risks (e.g., In Ghana and Pakistan, the study finds that lack of water and sanitation and indoor air water-related infections cause an annual loss pollution) are the main cause of child mor- in education performance equivalent to 4.9 tality and a major risk factor for maternal and 4.2 percent of GDP, respectively. health. The World Health Organization G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 183 C H A P T E R 6 (WHO) shows that an estimated 24 percent try migration. Controlling greenhouse gas of the 2004 global burden of disease and emissions constitutes a major challenge for 23 percent of all deaths can be attributed international action and cooperation going to environmental factors; among children forward, as highlighted in chapter 7. 0-14 years of age, the proportion of deaths attributable to environmental risk factors Measuring Progress is 36 percent.3 The environmental link to on Outcomes infectious diseases is also an important one. HIV-infected people are particularly at risk The complete set of MDG 7 indicators from unsanitary environments. Malaria and is shown in box 6.2. The indicators are other vector-borne diseases can be prevented diverse, aiming to cover a range of pressures by controlling potential breeding grounds on the environment. Environmental issues such as irrigation systems, poor drainage, differ across countries, and their rank as and stagnant water. policy priorities may vary depending on spe- cific country circumstances. When it comes Global partnerships. Global action for devel- to monitoring environmental sustainability, opment cannot succeed without coordinated one size does not fit all. support for provision of global public goods, including environmental goods. Climate Measuring Progress in Natural change threatens to reverse many achieve- Resources Management ments in the fight against poverty. Increases in extreme climatic events such as droughts Forests. Forests are particularly important and floods in the poorest countries may natural assets, because they harbor biodi- also exacerbate conflicts and cross-coun- versity, provide environmental services, and BOX 6.2 MDG 7 indicators Target 7.A: Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources 7.1 Proportion of land area covered by forest 7.2 CO2 emissions, total, per capita and per $1 GDP (PPP), and consumption of ozone-deplet- ing substances 7.3 Proportion of fish stocks within safe biological limits 7.4 Proportion of total water resources used Target 7.B: Reduce biodiversity loss, achieving, by 2010, a significant reduction in the rate of loss 7.5 Proportion of terrestrial and marine areas protected 7.6 Proportion of species threatened with extinction Target 7.C: Halve, by 2015, the proportion of people without sustainable access to safe drinking water and basic sanitation 7.7 Proportion of population using an improved drinking water source 7.8 Proportion of population using an improved sanitation facility Target 7.D: By 2020, to have achieved a significant improvement in the lives of at least 100 mil- lion slum dwellers 7.9 Proportion of urban population living in slums Note: GDP (PPP) stands for purchasing power parity­adjusted GDP. 184 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 E N S U R I N G E N V I R O N M E N T A L S T A B I L I T Y A T T H E N A T I O N A L L E V E L sequester carbon dioxide (CO2). According Leone or Panama). Deforestation, mainly to the Food and Agriculture Organization from conversion into agricultural land, was (FAO), in 2005 the world average forest very high in low- and middle-income coun- endowment was 0.61 hectares of forest per tries, especially in Latin America and the capita, equivalent to the size of five Olympic- Caribbean and Sub-Saharan Africa (figure size swimming pools. Forest assets are not 6.1).4 At the other end of the spectrum is distributed evenly, however; two-thirds of East Asia and the Pacific, where forest area the global forest area is concentrated in 10 grew between 2000 and 2005 as the result countries, while nearly 140 countries together of a major afforestation program in China; have less than 5 percent of the world's forests. this growth masks the situation in Indo- On average, South Asia has less than 0.06 nesia, which continues to have one of the hectares of forest per capita while the Europe highest deforestation rates in the world (1.6 and Central Asia region has 1.94 hectares per percent a year between 2000 and 2005).5 capita. Forests are relatively more abundant per capita in richer countries: forest endow- Water resources. Monitoring water resources ments in high-income countries (0.93 hect- presents major challenges, particularly in the ares per capita) were three times greater than case of groundwater. Information sources are in low-income countries (0.29 hectares per numerous but seldom complete, and access to capita) in 2005. High deforestation rates and information on water resources is still some- population growth in the poorest countries times restricted for reasons related to politi- have widened this gap over time. cal sensitivities at the local or regional level. The net loss of forest area in the period Data are available from FAO's AQUASTAT 2000­05 is estimated at 73,000 square kilo- and several World Resources Institute (WRI) meters a year (an area about the size of Sierra compilations.6 Cross-country comparisons FIGURE 6.1 Annual deforestation by region and for top 10 countries, 2000­05 Sq km, thousands 90 Brazil 31.0 79 80 Indonesia 18.7 Sudan 5.9 70 Myanmar 4.7 60 Zambia 4.4 50 Tanzania 4.1 47 Nigeria 4.1 41 40 Congo, Dem. Rep. of 3.2 30 Zimbabwe 3.1 20 Venezuela, R. B. de 2.9 10 0 10 20 30 40 1 0 ­1 ­1 ­10 ­6 ­9 ­20 East Asia Europe & Middle East South Asia Sub-Saharan Latin America Low- and High-income & Pacific Central Asia & North Africa Africa & Caribbean middle- countries income countries Source: World Bank 2008c. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 185 C H A P T E R 6 of water resource data should be made with available. Underground abstraction in some caution, owing to differing measurement countries substantially exceeds the recharge methods and base years. level, particularly in the Arabian Penin- Water resources are abundant in Latin sula, which relies heavily on underground America and the Caribbean, Europe and water. Figure 6.5 shows that countries such Central Asia, and in certain areas of East as Kuwait, Qatar, Saudi Arabia, and the Asia and the Pacific and Sub-Saharan United Arab Emirates, as well as Libya in Africa. The Middle East and North Africa North Africa, consume more than five times and South Asia regions experience water the level of annual available resources.7 The stress and have a level of internal freshwater United Nations Environment Programme resources below 2,000 cubic meters per cap- predicts that the problem of allocating scarce ita (figure 6.2). The situation is particularly water resources among competing uses will critical in the Middle East and North Africa. worsen, despite progress in reforming agri- Under current projected population growth, cultural policies in some countries.8 Climate water resources per capita are expected to change is likely to contribute to water stress fall below 500 cubic meters per capita in the around the world (e.g., through impacts on Middle East by 2050 (figure 6.3). snowmelt in the Himalayas and the Andean Worldwide, total annual freshwater with- region, which may alter water availability drawals amount to about 9 percent of fresh- patterns significantly). Chapter 7 provides water resources available. Agriculture is the more details on the projected impacts of largest user of water, accounting worldwide global warming. for 70 percent of total withdrawals. This fig- ure rises to 78 percent in low- and middle- Energy and mineral resources. Oil, gas, income countries and falls to 43 percent in and coal constitute the dominant source of high-income countries (figure 6.4). While primary energy, and they are expected to most regions have high levels of freshwa- continue to dominate energy supply for the ter surplus, in the Middle East and North foreseeable future. The U.S. Energy Infor- Africa region freshwater withdrawals are mation Administration projects world pri- estimated to be above the level of resources mary energy demand to grow at an annual FIGURE 6.2 Internal freshwater resources per capita, by region and income group, 2005 Cubic meters 25,000 20,000 15,000 10,000 Water scarcity level 5,000 2,000 0 East Asia Europe & Latin Middle East South Asia Sub-Saharan Low- and High- & Pacific Central Asia America & North Africa middle- income & Caribbean Africa income countries countries Source: World Bank 2008c. 186 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 E N S U R I N G E N V I R O N M E N T A L S T A B I L I T Y A T T H E N A T I O N A L L E V E L FIGURE 6.3 Trends and projections in freshwater availability, West Asia Cubic meters per capita per year 3,000 2,750 2,500 2,250 2,000 1,750 1,500 1,250 1,000 750 500 250 0 1985 1990 1995 2000 2005 2025 2050 Middle East Mashriq Arabian Peninsula Source: UNESCWA 2003, UNDP 2005 (as reported in UNEP 2007). FIGURE 6.4 Annual freshwater withdrawals, by region and income group, 2002 Percent 100 80 60 40 20 0 ­20 East Asia Europe & Latin Middle East South Asia Sub-Saharan Low- and High- & Pacific Central Asia America & North Africa middle- income & Caribbean Africa income countries countries Annual withdrawals (agriculture) Annual withdrawals (other) Surplus/deficit Source: World Bank 2008c. rate of 1.8 percent a year over the next two needs will be increasingly met by coal. Coal decades.9 Most of the new demand will come demand is expected to increase by 73 per- from China and India, where consumption is cent between 2005 and 2030, while oil is expected to grow by 3.2 percent and 3.6 per- expected to increase by 37 percent and gas cent a year, respectively. These rising energy by 17­22 percent. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 187 C H A P T E R 6 FIGURE 6.5 Total water withdrawal relative to renewable water resources, selected countries Kuwait United Arab Emirates Saudi Arabia Libya Qatar Bahrain Yemen Oman Egypt Jordan Syria Tunisia Iraq Iran Morocco Algeria Lebanon Djibouti 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 2,200 Percentage of renewable water resources Source: World Bank 2007b. From the point of view of the resource- tainable path). This is true in low-income exporting country, depleting an exhaustible countries in Sub-Saharan Africa such as resource like crude petroleum is, in effect, Angola and Nigeria, as well as in middle- liquidating an asset, which means that the income countries such as the Syrian Arab sustainability of mineral- and energy-based Republic, the Islamic Republic of Iran, and economies is potentially at risk. Oil compa- the Russian Federation. On the other hand, nies and governments will aim to maximize Malaysia and Vietnam provide excellent the stream of rents from resource extrac- examples of extractive economies that are tion over time. What matters most from a on a sustainable path (that is, their net sav- sustainability point of view is whether these ings and investments in education more than resource rents are invested, rather than con- offset the value of natural resource depletion sumed, to sustain the income-generating and environmental degradation). capacity of the economy as nonrenewable resources are depleted. Measuring Progress The question of the sustainability of in Pollution Management mineral- and energy-based economies is highlighted in figure 6.6, which combines Pollution emissions are a by-product of data on mineral and energy depletion with economic activity, belonging to the class of figures on adjusted net savings (the measure problems that economists term externali- of sustainability introduced in chapter 1). ties to reflect the disconnect between the As seen at the top of the figure, the general interests of the emitter of the pollution, who tendency is for the big resource-extracting wishes to avoid costly pollution abatement economies to have negative adjusted net sav- expenditures, and the interests of the exter- ing rates (and therefore to be on an unsus- nal parties, who are affected by the pollu- 188 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 E N S U R I N G E N V I R O N M E N T A L S T A B I L I T Y A T T H E N A T I O N A L L E V E L tion through damage to their health or other FIGURE 6.6 Sustainability in energy- and mineral-rich economies assets. Current scientific evidence indicates that urban air pollution causes a wide array of Syrian Arab Rep. Angola health effects ranging from minor inconve- Nigeria nience to death.10 Major sources of urban Bolivia air pollution are emissions from traffic and Iran, Islamic Rep. of industrial sources. Nonanthropogenic sources Ecuador such as dusty winds may also contribute sig- Russian Federation Sudan nificantly to air pollution in certain cities. Zimbabwe The urban air pollutant with the greatest Venezuela, R. B. de Less impact on human health is particulate mat- Chile sustainable ter. Typically, this is measured as concentra- Zambia tions of fine, suspended particulates less than Egypt, Arab Rep. of Indonesia 10 microns (PM10) or 2.5 microns (PM2.5) Algeria in diameter (the latter are more damaging South Africa to health, but are not always monitored in Pakistan developing countries). These particles are Colombia More capable of penetrating the respiratory sys- Congo, Dem. Rep. of sustainable Mexico tem deep enough to cause health damages. Ukraine A World Bank study publishes time series of Argentina particulate matter concentrations that span Australia the period 1990­2005.11 The estimates Peru measure the mean annual exposure level Canada Brazil of the average urban resident to particu- Vietnam late matter outdoors. Concentrations have Tunisia been declining across the board since 1990, Malaysia with the steepest declines taking place in Norway India low-income countries, where concentration China dropped from 130 micrograms per cubic meter (µg/m3) to 77 µg/m3 (a 40 percent ­60 ­40 ­20 0 20 40 60 decline). This decline shows how countries % of GNI have, to varying degrees, internalized the Adjusted net savings Energy and mineral rents cost of urban air pollution through policy changes (such as emission standards and Source: World Bank 2008c. pollution taxes). However, concentrations of PM10 in low-income countries continue to be nearly three times higher than those in emission intensity, with 20 grams of emis- high-income countries (figure 6.7). sions per day per worker, similar to that of Turning to water pollution, table 6.3 Russia (21 grams per day per worker). shows the world's top 10 emitters of indus- trial water pollution (measured in terms of Energy Access, Health, biochemical oxygen demand, or BOD12). and the Environment The data come from an international study of industrial emissions.13 China heads the The environment-development trade-off is list by a wide margin, with 6 million kilo- nowhere more evident than in the case of grams of emissions a day, followed by the energy. Without reliable energy, hospitals United States, with less than 2 million kilo- and health care infrastructure cannot provide grams of daily emissions. India has a high dependable services, schools cannot run, and G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 189 C H A P T E R 6 FIGURE 6.7 Annual particulate matter (PM10) concentrations, can change entire ecosystems and facilitate 1990­2004 the spread of vector-borne disease. Chapter 2 has shown that indoor air pol- lution is a major cause of mortality in devel- Urban population­weighted micrograms per cubic meter, 1990­2004 oping countries. This is linked in particular 140 to the lack of energy access. About a quarter of the world population (1.6 billion people) 120 has no access to electricity (table 6.4).14 The 100 majority of these people live in South Asia, 80 Sub-Saharan Africa, and East Asia and the Pacific. Data at the national level highlight 60 some extreme cases: Afghanistan, Burkina 40 Faso, the Democratic Republic of Congo, 20 and Mozambique have the highest percent- 0 age of population without access to electric- Low-income Lower-middle- Upper-middle- High-income ity, at over 93 percent each. countries income income countries Lack of access to modern sources of countries countries energy is not only a health risk factor, it is a 1990 1995 2000 2004 major cause of deforestation as well. Most of the people without access to electricity (1.3 billion, or 81 percent of the total) live in rural Source: World Bank 2008c. Note: The dashed line denotes the former (pre-September 2006) EPA standard for annual areas.15 Urban-rural differences can be strik- PM10 concentrations. ing. In Malawi 35 percent of urban house- holds are connected compared with only 2 TABLE 6.3 Top 10 emitters of industrial water pollution, 2001 percent of rural households. In Lao People's Democratic Republic access is 44 percent in urban areas and 20 percent in rural areas. Organic water pollutant (BOD) emissions Livelihoods of the rural poor depend heavily Grams per day Rank Country Kilograms per day per worker on the capacity of the ecosystem to provide a sustained source of fuel, and in some regions 1 China 6,088,663 14 fuel wood crises loom in the next decade. 2 United States 1,897,480 13 The loss of forest resources has consequent 3 India 1,515,683 20 4 Russian Federation 1,398,496 21 impacts on biodiversity and the ability of 5 Japan 1,279,503 15 ecosystems to provide key services to the 6 Germany 982,313 13 economy, such as regulating water flow. 7 Indonesia 753,657 18 Progress in improving electricity access 8 France 616,092 16 in the last 15 years has been slow, with 9 United Kingdom 599,088 16 some exceptions. The fastest increase in 10 Italy 493,551 12 access rates has taken place in China, which reached almost universal access (99 percent) Source: World Bank 2008c. in 2005. Excluding China, the share of the developing world population without access households are forced to use more expensive to electricity has actually increased since and inefficient ways of lighting, cooking, and 1990. Population growth in particular has heating. But the generation, transmission, offset the modest increases in energy invest- and use of modern energy can have heavy ments. The International Energy Agency environmental costs. For example, thermal estimates that if no new policies are put in generation plants are major sources of air pol- place, in 2030 there will still be 1.4 billion lution and CO2 emissions, and hydropower people without access to electricity.16 190 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 E N S U R I N G E N V I R O N M E N T A L S T A B I L I T Y A T T H E N A T I O N A L L E V E L TABLE 6.4 Access to electricity, by region, 2005 Population without Electrification Urban electrification Rural electrification Population (millions) electricity (millions) rate (%) rate (%) rate (%) Africa 891 554 37.8 67.9 19.0 North Africa 153 7 95.4 98.7 91.8 Sub-Saharan Africa 738 547 25.9 58.3 8.0 Developing Asia 3418 930 72.8 86.4 65.1 China and East Asia 1951 224 88.5 94.9 84.0 South Asia 1467 706 51.9 69.7 44.7 Latin America 449 45 90.0 98.0 65.6 Middle East 186 41 78.0 86.7 61.8 Developing Countries 4,944 1,570 68.2 85.2 56.4 Transition economies 1,510 8 99.5 100.0 98.1 and OECD World 6,454 1,578 75.6 90.4 61.7 Source: IEA 2006. In addition to population growth, a way. Building upon the green national major bottleneck in the poorest countries is accounting literature, this section describes the infrastructure gap. Sub-Saharan Africa sustainability indicators that are based on a (excluding South Africa) has an installed key principle of sustainable development: to capacity of 28 gigawatts (GW).17 About sustain well-being it is necessary to ensure 25 GW of new generation capacity will be that the total value of assets does not decline needed in the region over the next decade to in real terms. make up the present shortfall in supply and to meet future demand growth. FIGURE 6.8 Use of biomass products and waste, by income, The data on the use of traditional biomass 1990­2004 products for energy (wood, dung, crop waste, and biogas) show very little progress in the % of total energy use past 10 years. In low-income countries, the 60 use of biomass products and waste as a per- cent of total energy use has dropped from 55 50 percent in 1990 to 48 percent in 2004 (fig- 40 ure 6.8). Dependence on biomass products for energy is especially high in Sub-Saharan 30 Africa. Nine of the top 10 biomass-dependent 20 countries are in this region (table 6.5). 10 Toward a Comprehensive 0 Low-income Lower-middle- Upper-middle- High-income Measure of Sustainability countries income income countries countries countries The sector-specific indicators presented 1990 2004 above are crucial for policy making. How- ever, none of them is able to measure envi- ronmental sustainability in a comprehensive Source: World Bank 2008c. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 191 C H A P T E R 6 TABLE 6.5 Top 10 users of biomass products and waste, 1990­2004 was broadly sustainable, with net savings percentage of total energy use and investments in human capital roughly equaling the depletion of natural resources (mostly natural gas); pollution damages turn 1990 2004 the adjusted net saving rate slightly negative. Congo, Dem. Rep. of 84.0 92.5 In 2005 high natural gas prices provided a Tanzania 91.0 91.6 windfall for the economy, but gross savings Ethiopia 92.8 90.4 did not adjust fully. The result was that net Nepal 93.4 86.8 wealth creation in 2005 turned sharply neg- Mozambique 94.4 84.1 ative--Bolivia was, in effect, consuming its Nigeria 79.8 80.2 natural wealth. Maintaining this policy mix Sudan 81.7 79.2 would place the economy on an unsustain- Zambia 73.4 79.1 Cameroon 75.9 77.8 able development path. Kenya 78.4 74.1 Figures 6.6 and 6.9 show that unsustain- able development paths are more than a theoretical possibility. As emphasized pre- Source: World Bank 2008c. viously, a negative saving rate in a country with abundant natural resources is an indi- The notion that wealth (including nat- cation of an opportunity not taken: natural ural wealth) is directly related to social resource rents represent a type of free devel- welfare is not new. In a seminal paper opment finance, and consuming these rents published in 1961, Samuelson pointed out is a process of consuming an inheritance.19 the inadequacy of income and consump- Adjusted net savings provides a useful tion measures as a proxy for social wel- indicator of sustainable development because fare. The paper argued that the choice of it measures changes in the economy's total a welfare measure has to be made "in the wealth. If population is growing, however, space of all present and future consump- then the relevant sustainability indicator tion. . . . [T]he only valid approximation is the change in wealth per capita. In fact, to a measure of welfare comes from com- even if total wealth is increasing, population puting wealth-like magnitudes, not income growth may outstrip the growth in total magnitudes."18 asset value. A World Bank study shows that A key sustainability indicator, adjusted many developing countries, particularly in net savings, was introduced in chapter 1 and Sub-Saharan Africa, have positive adjusted will be presented briefly below. The second net savings in total but declining wealth per indicator pertains to a particular compo- person.20 nent of wealth, the total value of natural resources. Measuring Natural Capital While adjusted net savings measures the Measuring Changes in Comprehensive change in total wealth in real terms, there are Wealth: Adjusted Net Savings good reasons to concentrate on the evolution The concept of adjusted net savings is built of natural wealth over time as well, particu- around the notion that depletion of natural larly if there are limits on the substitutability resources, damages to human health caused of produced capital for natural capital. This by pollution, and the resources invested in distinction is especially useful in light of the human capital are all components of national formulation of MDG target 7.A: "reversing savings. To illustrate this concept, figure 6.9 the loss of environmental resources." decomposes saving for Bolivia at two differ- A recent study by the World Bank disag- ent points in time. In 2002 the policy mix gregates natural assets into agricultural land 192 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 E N S U R I N G E N V I R O N M E N T A L S T A B I L I T Y A T T H E N A T I O N A L L E V E L FIGURE 6.9 Adjustments to the saving rate: The case of Bolivia in 2002 and 2005 minus % of GNI depreciation minus 25 minus of fixed plus natural capital education 20 depreciation minus resource of fixed plus natural expenses depletion 15 capital education resource expenses 10 depletion minus minus 5 pollution pollution damages damages 0 ­5 ­10 ­15 ­20 ­25 2002 2005 Breaking even Consuming rents Gross savings Net savings plus education expenses Net savings Adjusted net savings excluding pollution damages Adjusted net savings Source: World Bank 2008c. (crops and pastures), forests (timber and nologically advanced production methods nontimber forest resources), protected areas, allow higher yields per unit of land), partly and subsoil assets (oil, natural gas, coal, and a consequence of abundant subsoil assets in minerals).21 Natural capital constitutes a these countries, and partly a result of rela- major component of wealth in developing tive population sizes. countries, with the average citizen in low- While high-income countries have more income countries deriving 42 percent of his natural capital per person, less wealthy coun- or her total wealth from some form of natu- tries are more dependent on their endow- ral capital (see chapter 1 and figure 6.10a). ments of natural resources, particularly This pattern is common to most developing agricultural land (figure 6.10b), as a share regions, where, with the exception of Latin of total wealth. So, for example, a person America and the Caribbean, natural capi- from Sub-Saharan Africa has a total wealth tal accounts for more than a third of total of nearly US$10,000, of which US$2,000 is wealth. The share of natural capital is par- in the form of agricultural land. On average ticularly high in the Middle East and North in low-income countries, the sum of crop- Africa, where subsoil assets play a much land and pastureland accounts for nearly larger role than in other regions. As seen in 25 percent of total wealth and 60 percent of chapter 1, the value of natural capital per natural wealth. This heavy reliance on agri- capita rises with income level. This is partly cultural land falls as income rises, a natural a consequence of higher productivity of land resource analogue to Engel's Law. Subsoil in more developed countries (where tech- assets play a major role in natural wealth, G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 193 C H A P T E R 6 FIGURE 6.10 Relative importance and composition of natural capital, 2005 a. Natural capital as percent of total wealth b. Composition of natural capital Middle East & Middle East & North Africa North Africa Sub-Saharan Sub-Saharan Africa Africa East Asia East Asia & Pacific & Pacific South Asia South Asia Europe & Europe & Central Asia Central Asia Latin America Latin America & Caribbean & Caribbean Low-income Low-income countries countries Middle-income Middle-income countries countries High-income High-income countries countries 0 10 20 30 40 50 60 0 20 40 60 80 100 % total wealth % natural capital Agricultural land Forest resources Protected areas Subsoil assets Source: World Bank staff. particularly in Europe and Central Asia, the US$3,900 per capita). In South Asia, natu- Middle East and North Africa, and Latin ral wealth is US$2,600 per capita, with America and the Caribbean. most wealth in the form of agricultural land The region with the largest value of natu- (51 percent), subsoil assets (26 percent), and ral resources per capita is Latin America and forests (20 percent). the Caribbean (figure 6.11), with US$17,000 As seen in figure 6.12, the value of the per capita. Natural wealth in the region con- world's natural capital per capita (measured sists mostly of subsoil assets (50 percent) and in 2000 U.S. dollars and deflated using a agricultural land (30 percent). In the Middle GDP deflator) increased from 1995 to 2000, East and North Africa, natural resources largely because of the increase in real energy account for US$12,000 per capita, mostly prices, followed by a slight decline to 2005 in the form of oil. Subsoil assets are also (energy prices continued to rise over this very important in Europe and Central Asia, period but were more than offset by declines where they account for 68 percent of natural in food prices). In low-income countries, the wealth. In East Asia and the Pacific, natural value of natural capital fell from US$3,400 wealth per capita is US$5,600 with a distri- per capita in 1995 to US$3,100 per capita bution similar to the one in Latin America in 2005 (a 10 percent drop). The decline in and the Caribbean. Agricultural land is par- value resulted partly from population growth ticularly important in Sub-Saharan Africa and partly from falling agricultural yields (62 percent of the total natural wealth of and declining real crop prices. The per cap- 194 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 E N S U R I N G E N V I R O N M E N T A L S T A B I L I T Y A T T H E N A T I O N A L L E V E L FIGURE 6.11 Natural capital per capita across regions of the world, 2005 Europe & Central Asia US$11,412 20% 6% 6% 68% 1% 1% 17% Middle East & 42% North Africa 47% US$12,209 East Asia & Pacific US$5,577 81% 26% 4% 7% 4% 51% 19% 25% South Asia 5% 62% US$2,646 29% 8% Sub-Saharan 50% Africa Latin America US$3,883 & Caribbean 16% US$16,539 Agricultural land 5% Forests Protected areas Subsoil assets Source: World Bank staff. Note: The size of each "pie" is proportional to the value of natural wealth per capita. ita value of agricultural land in low-income been often argued that developing coun- countries fell 31 percent in real terms over the tries should "grow first and clean up later." same period. Agricultural land values in these This is the so-called Environmental Kuznets countries are also particularly vulnerable to Curve (EKC), where pollution emissions rise the potential impact of climate change.22 with income until a tipping point is reached, where countries are wealthy enough to wish Measuring Progress on Policies to invest in environmental quality. A major and Institutions assumption of the EKC literature is that strong environmental governance is simply Public policy is important for protecting not possible for poor countries. the environment and natural resources in It turns out that a good institutional most countries. This is because of the public framework for the environment is not only good nature of some assets (such as parks possible but may improve the quality of and protected areas) and the market failures growth. In empirical studies, the EKC dis- inherent in pollution emissions (no one owns appears after controlling for the quality of the atmosphere, and so everyone is free to environmental institutions and the inherent pollute it). For open access resources, such sensitivity of local environments to pollu- as forests and fisheries, governments need to tion: poor countries can have good policies define property rights regimes that will pre- and are not fated to be heavily polluted.23 vent the "tragedy of the commons." This is why indicators of environmental gov- But are good environmental policies some- ernance and institutions are becoming a very thing developing countries can afford? It has important item in the monitoring agenda. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 195 C H A P T E R 6 FIGURE 6.12 Evolution of the value of natural capital World Low-income countries US$ per capita (2000 US$) US$ per capita (2000 US$) 10,000 4,000 9,000 3,500 8,000 3,000 7,000 2,500 6,000 5,000 2,000 4,000 1,500 3,000 1,000 2,000 1,000 500 0 0 1995 2000 2005 1995 2000 2005 Agricultural land Timber and nontimber forest resources Protected areas Subsoil assets Source: World Bank staff. A number of measures of policy and insti- the EPI provides policy-relevant benchmarks tutional quality have been attempted in the for pollution control and natural resource recent years. These include: management. The issue-by-issue rankings facilitate cross-country comparisons both Policy outcome indexes (such as the Envi- globally and within relevant peer groups. ronmental Performance Index, or EPI), The EPI ranks 149 countries on these indi- which measure the results of government cators tracked across six policy categories: policy by looking at the distance of any environmental health, air pollution, water given indicator from a target or appropri- resources, biodiversity and habitat, produc- ately defined benchmark; and tive natural resources, and climate change.25 Policy input indexes (such as the World The EPI is divided into two major sub- Bank Country Policy and Institutional components: environmental health and Assessment, or CPIA), which track poli- ecosystem vitality, mirroring the priorities cies for environmental management and expressed by policy makers. Figure 6.13 assess the quality of institutions intended shows the results of the 2008 EPI. With to enforce them.24 some notable exceptions, countries in Sub- Saharan Africa, South Asia, and parts of East Asia and the Pacific have the lowest The Environmental Performance Index performance. Higher-income countries on The EPI is a measure of performance that average have higher environmental per- identifies broadly accepted targets for a set of formance scores than lower-income coun- 25 indicators and measures how close each tries. However, within each income group, country comes to meeting these goals. By including the high-income group, individual means of this distance-to-target approach, country environmental performance var- 196 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 E N S U R I N G E N V I R O N M E N T A L S T A B I L I T Y A T T H E N A T I O N A L L E V E L FIGURE 6.13 Environmental Performance Index, by income group and region, 2008 100 90 80 highest 70 score 60 median 50 40 lowest score 30 Low- Lower- Upper- High- East Asia Europe Latin Middle South Sub-Saharan income middle- middle- income & & America East & Asia Africa countries income income countries Pacific Central & North countries countries Asia Caribbean Africa Source: Environmental Performance Index (http://epi.yale.edu/Home). ies widely. An important factor underlying from an average score of 3.1 in 1999 to a the low environmental performance of poor score of 3.8 in 2006. countries is these countries' limited capac- The methodology for calculating the ity to invest in environmental infrastructure environment CPIA score was updated in (such as water and sanitation systems), pollu- 2003. The score is obtained by averaging tion control, and systematic natural resource performance in 2 major categories and 10 management. sub-categories: Assessment of the national institutional Country Policy and Institutional context Assessments Adequacy of prioritization The annual CPIA exercise at the World Bank Quality of environmental assessment measures the quality of a country's policy Cross-sectoral coordination and institutional framework against a set Public information and participation of 16 criteria, including "Policies and Insti- Assessment of specific sectors tutions for Environmental Sustainability." Air pollution Country policies are rated on a scale from Solid and hazardous waste 1 to 6 (higher is better); 3.5 is therefore a management neutral score representing policies and insti- Freshwater resources tutions that are neither particularly strong Marine and coastal resources nor weak. Figure 6.14 shows the evolution Ecosystems and biodiversity of the CPIA environment score since 1999. Commercial natural resources Excluding South Asia, all regional averages were below the 3.5 midpoint in 1999. In Each of the sectors in the second part of 2006 Europe and Central Asia, Latin Amer- the CPIA questionnaire is assessed for the ica and the Caribbean, and the Middle East appropriateness of the policy mix and the and North Africa had exceeded this thresh- quality of policy implementation. Figure old. The largest increment has taken place 6.15a presents Environment CPIA scores for in Europe and Central Asia, which moved regions for 2006. Sub-Saharan Africa scores G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 197 C H A P T E R 6 FIGURE 6.14 Evolution of the CPIA environment score, 1999­2006 Results on the overall institutional con- text CPIA subscores show that on average countries perform poorly in terms of public East Asia information and participation, particularly & Pacific in East Asia and the Pacific, and on cross- Europe & sectoral coordination, particularly in East Central Asia Asia and the Pacific and the Middle East Latin America and North Africa (figure 6.15b). In contrast, & Caribbean Middle East & countries are better at identifying priorities, North Africa with Europe and Central Asia being a top performer in this area. South Asia Looking at sector-specific policies and Sub-Saharan institutions, it is evident that upper-mid- Africa dle-income countries have a much stronger performance than low- and lower-middle- income countries (figure 6.15c). The dif- High-income ference is particularly marked in the waste countries management and water resources manage- Middle-income ment sectors. Low-income countries show a countries particularly weak performance in air qual- Low-income countries ity management and marine and coastal 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 resources management. Score An important distinction should be made between the policies that a country has and 1999 2006 its capacity to implement these policies. Fig- ure 6.15d makes this distinction clear, plot- Source: World Bank data. ting the scores on quality of the policy mix against implementation capacity. Countries score better on establishing standards, regu- lations, and incentives than on their capac- lowest (3.1), while Europe and Central Asia ity to actually implement and enforce the has the highest regional average (3.8). As policy framework. might be expected, scores vary widely within Government "policy failure" can be a regions. In Sub-Saharan Africa, scores range threat to environmental sustainability, and from a minimum of 1.1 to a maximum of subsidies are often the source of the prob- 4.5. There is also a wide disparity in the lem. Utility subsidies (for water or energy environment score between low-income services, for example, where prices may be countries (3.0) and upper-middle-income held artificially low) are often an impor- countries (4.1). As shown in Environment tant element of social programs in develop- Matters, resource-poor countries tend to ing countries. The result, however, is that perform better than their resource-rich water and electricity tariffs in developing peers; oil-rich countries, in particular, tend countries rarely cover the operational and to have lower performance on political sta- maintenance costs of utilities. Low tariffs bility and rule of law.26 Overall, there is a also promote inefficient use of resources. high correlation between the CPIA environ- Equally important, utility subsidies have ment score and the CPIA score for property also performed poorly in assisting the needy rights and rule-based governance. (box 6.3). 198 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 E N S U R I N G E N V I R O N M E N T A L S T A B I L I T Y A T T H E N A T I O N A L L E V E L FIGURE 6.15 CPIA environment score and its subcomponents, 2006 a. CPIA environment scores by region b. The overall institutional context by region Sample East Asia & Pacific East Asia Europe & & Pacific Central Asia Europe & Central Asia Latin America Latin America & Caribbean & Caribbean Middle East & Middle East & North Africa North Africa South Asia South Asia Sub-Saharan Sub-Saharan Africa Africa 1.0 2.0 3.0 4.0 5.0 6.0 2.5 3.0 3.5 4.0 4.5 Total score Score Mean Min Max Adequacy of prioritization Quality of environmental assessment Cross-sectoral coordination Public information and participation c. Sector policies and implementation capacity by income level d. Quality of the policy mix vs. implementation capacity Quality of policy mix Air 6 Waste 5 Water 4 Marine 3 Ecosystem 2 NRM 1 1 2 3 4 5 6 1 2 3 4 5 6 Score Implementation capacity Low-income countries Lower-middle-income countries Upper-middle-income countries High-income non-OECD countries Source: World Bank dataset. Note: NRM = natural resource management. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 199 C H A P T E R 6 BOX 6.3 Assessing the performance of subsidies From a monitoring point of view, it is important to know whether subsidies actually achieve their poverty targeting goals. The "benefit targeting performance indicator" tries to measure the extent to which energy subsidies effectively target the poor. It does so by measuring the ratio between the share of total subsidies that benefit the poor and the share of poor in total population __________________________________________ Subsidy that reaches the poor/Total subsidy = Population below poverty line/Total population Komives and others show that on a set of quantity-targeted utility subsidies (including water and electricity), the performance indicator is regularly less than 1. What this means is that the poor capture a smaller portion of the subsidy than they would capture if the government decided to distribute the subsidy randomly. That is because those without access to electricity (and hence to the subsidy) belong to the poorest sectors of society. In Sub-Saharan Africa, for example, elec- tricity increasing block tariffs exclude more than 70 percent of the poor. The performance of subsidies tends to increase with the connection rate. But even in situa- tions where there is universal coverage, subsidies reach at most the neutrality target ( = 1). This failure occurs because wealthier households consume considerably more electricity than poorer households, thus capturing a larger share of the subsidy. This is true for all utility subsidies, but it is particularly important in the case of electricity. All this is relevant for analyzing the trade-offs between environment and development. Subsidies place important burdens on the environment since they favor overconsumption, inefficient use of scarce resources, and increased pollution. Benefit-targeting performance of electricity subsidies in selected developing countries Benefit-targeting Country Type of subsidy performance indicator () Error of exclusion (%) Guatemala VDT 0.20 55.4 Honduras VDT 0.49 56.0 Peru IBT 0.82 59.9 Cape Verde IBT 0.48 75.6 São Tomé and Principe IBT 0.41 76.8 Hungary IBT 0.98 1.7 Rwanda IBT 0.35 87.2 India (average) IBT 0.70 21.0 Source: Komives and others 2005. Note: VDT = volume-differentiated tariffs; IBT = increasing block tariffs. Increasing block tariffs are a price structure in which a commodity is priced at a low initial rate up to a specified volume of use (block), then at a higher or several increasingly higher rates for additional blocks used. Although increasingly recognized as a low compared with fiscal reforms, macro- development issue for low-income countries, economic stability, and sectoral investments mainstreaming environmental management in education and health.27 into Poverty Reduction Strategy Papers and Poverty Reduction Support Credits is evolv- Making Progress on Monitoring ing slowly. The most recent review for 11 Sub-Saharan African countries shows that A good indicator should have the following attention to environmental priorities ranks characteristics: policy relevance, analytical 200 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 E N S U R I N G E N V I R O N M E N T A L S T A B I L I T Y A T T H E N A T I O N A L L E V E L soundness, and measurability.28 Policy rel- (which accounts for energy use in terms evance is key in the MDG 7 context. Recall of the land area that would be required to that figure 6.3 showed the trends in water produce the equivalent amount of energy availability per capita in the Middle East. from biofuels) While this is an important indicator of an Indicators based on economic accounts, impending problem, it is not particularly pol- which employ the national accounting icy relevant because it is primarily driven by framework to measure changes in well- an endowment, the quantity of water avail- being and the resources underpinning it able annually. An indicator that is relevant for over time (for example, the UN System of decisions about water policy would be some Environmental and Economic Accounts, measure of the efficiency with which water is adjusted net savings, the Genuine Prog- used. Such an indicator would be sensitive to ress Index, and the Index of Sustainable policy actions such as allocating water rights Economic Welfare). or establishing pricing for water abstraction. Aggregate indicators have advantages and In general a policy-relevant indicator should disadvantages for monitoring progress. When be easy to interpret, show a trend over time, it comes to measuring environmental sustain- be measurable against a target level, and be ability, the core of MDG 7, some degree of responsive to policy changes. aggregation is essential because collections In addition to these characteristics, a good of indicators, usually highly disparate, can- sustainability indicator, or set of indicators, not answer the question of whether social should combine different aspects of sustain- welfare (itself an aggregate concept) is likely able development, such as environmental to be increasing or decreasing in the future. quality, economic progress, and human and However, users of indicators are rightly social development. The sustainability indi- uneasy about aggregate indicators that are cators currently available in the literature effectively a "black box"--that is, if the meet this goal to varying degrees. They can weights on subaggregates are arbitrary, it is be mapped into the following categories: impossible to meaningfully compare aggre- Indexes and indicator sets gates across countries or changes in aggre- Weighted indexes, which combine gates across time. National accounts­based indicators with an explicit recognition indicators have the advantage of using money of the relationships between them and as a numeraire, having weights (in the form their relative importance, such as sum- of prices) that relate to social welfare, and ming emissions of different greenhouse using a conceptual framework that provides gases weighted by their individual a rigorous basis for aggregation.29 Adjusted global warming potentials net savings, introduced in chapter 1 and used Unweighted indexes, which combine in this chapter to measure the sustainability indicators without making explicit of mineral-based economies, is discussed in assumptions on their relative impor- more detail in box 6.4. tance, such as the Living Planet Index Indicator sets such as the MDG 7 indi- (see chapter 7) and the Environmental cators shown in box 6.2 play an important Performance Index role in the MDG process. These indicators Indicator sets, which present indica- attempt to span a range of issues--defor- tors separately or group them into logi- estation, extent of protected areas, energy cal categories, such as the UN Com- use, and carbon intensity--that are germane mission for Sustainable Development to the question of achieving environmen- indicator set tal sustainability. It is tempting to propose Indicators based on biophysical relation- additional indicators for the set; urban air ships, such as the Ecological Footprint pollution seems to be a particular gap. But G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 201 C H A P T E R 6 BOX 6.4 Adjusted net savings as a sustainability indicator Concerns about sustainable development are fundamentally concerns about the assets that underpin economic development.a The overall sustainability of any economy is tied to the management of the portfolio of assets on which the economy depends. Adjusted net (or "genuine") savings is simply the measure of the change in the real value of this portfolio from one year to the next, and economic theory tells us that this change is precisely equal to the change in social welfare.b The link between net savings and social welfare is strongest if the accounting of assets is comprehensive, embracing produced capital, natural capital, human capital, and other less tangible forms of wealth such as knowledge, social capital, and quality of institutions. A unique aspect of adjusted net savings is that it has been tested empirically using the 30+ year time series of esti- mates published by the World Bank. Ferreira and Vincent show that adjusted net savings is correlated with changes in social welfare for developing countries, but not for developed ones. This makes sense: accumulation of physical assets is an important part of the development process for poorer countries, whereas knowledge creation and innovation (not measured directly in adjusted net savings) are clearly the drivers of growth in rich countries.c Ferreira, Hamilton, and Vincent show that this result for developing countries is robust when population growth is taken into account.d Adjusted net savings also has clear links to policy. The policy levers to achieve positive net savings can be applied at the level of the different assets that constitute total national wealth--either the macro policies that influence saving effort, or individual sectoral policies on natural resource management, human resource develop- ment, and environmental protection. Because any measure of saving is likely to be incomplete, a positive adjusted net saving rate needs to be inter- preted with caution. Some important assets are omitted from adjusted net savings for methodological and empiri- cal reasons, which may mean that saving rates are only apparently positive. Challenges include lack of data (on subsoil water, land degradation, fish stocks, and diamonds, for example), methodological weaknesses (valuing biodiversity, for example), and measurement errors. Questions about the degree of substitutability of produced and natural assets can also limit confidence in the link between positive saving and sustainability. There is no technological substitute for the ozone layer as a whole, for example, although in this case it is possible to value marginal losses of ozone according to their incre- mental impacts on health. Finally, the step from saving to investment is an important one in the development process. If savings are not channeled to productive investments, then they will not be effective in promoting development. This is an impor- tant factor in many developing countries, where public sector investments have often been wasteful and where absorptive capacity may be a real constraint. a. See, for example, Pearce and Atkinson 1993. b. Hamilton and Clemens 1999. c. Ferreira and Vincent 2005. d. Ferreira, Hamilton, and Vincent forthcoming. when the issue is measuring sustainability, accounting framework. Investments in better these indicator sets have inherent limita- data and methodology can make it a stronger tions: each is measuring only a piece of the indicator of sustainable development. puzzle, and there is no aggregate measure of The question of potential limits in the progress toward sustainability. substitutability of produced capital for nat- This limitation of indicator sets is one ural capital deserves to be taken seriously. of the primary reasons for emphasizing This is an argument, first, for continuing to adjusted net savings in this report. As box track changes in the value of total natural 6.4 has suggested, adjusted net savings is by capital country by country and, second, for no means a perfect indicator. But it is derived measuring a range of biophysical indicators from what is arguably the only sound frame- pertaining to the quality or quantity of criti- work for measuring sustainability, an asset- cal natural capital. 202 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 E N S U R I N G E N V I R O N M E N T A L S T A B I L I T Y A T T H E N A T I O N A L L E V E L Conclusions air pollution (as measured by particulate matter concentrations), despite the prog- MDG 7 is arguably the most cross-cutting ress made in recent years. Owing to grow- of the MDGs. Given the high resource depen- ing rates of urbanization in developing dence of most developing countries, being countries, this situation could worsen. able to manage the environment and natural Progress in improving electricity access in resources is fundamental for the sustainability the last 15 years has been slow. In most of MDG outcomes--boosting consumption developing countries, population growth by mining soil nutrients is not a sustainable has offset the gains in energy investment. enterprise, to give just one example. More- As a consequence of low levels of access, over, sound environmental management can the consumption of biomass fuels is still have positive impacts on such key MDG goals very high in developing countries, with as poverty reduction, education, gender equal- continuing adverse conequences for for- ity, and health. ests and human health. The analysis in this chapter leads to the Progress in institutional and policy per- following findings: formance has been uneven across world regions. The Europe and Central Asia Natural capital constitutes a major com- region has been characterized by the ponent of wealth in developing countries. sharpest improvements, while South Asia The average citizens in low-income coun- and Sub-Saharan Africa have lagged tries derive over 40 percent of their wealth behind. Good performance in establish- from some form of natural capital. ing environment and natural resource Owing to falling relative prices, the value policies does not necessarily mean good of natural capital--including agricultural performance in enforcing them, as shown land, forests, and subsoil assets--has by the disaggregated CPIA scores. declined over the recent past in those coun- tries that most heavily rely on nature for The policy challenges raised by the environ- their well-being. Climate change is likely ment are as diverse as the endowments of to exacerbate this situation in the future. natural resources enjoyed by developing coun- An area of forest equivalent to the size of tries. Strengthening private or communal Sierra Leone is lost every year to land use property rights to local natural resources has changes, particularly in Latin America been shown to be an effective tool for many and the Caribbean and in Sub-Saharan resource management problems. Improving Africa. Most of the world's forest loss governance is key for many resources that are takes place in Brazil and Indonesia. effectively subject to open access, such as for- Population growth will cause per capita ests and fish. Explicit resource rent policies are water resources to fall below critical levels often needed; the chain from rent capture to in the very near future in the Middle East the management and use of resource rents can and North Africa and in South Asia. Under- determine whether rich resource stocks are a ground water abstraction is already unsus- source of development finance or a contributor tainable in many Middle Eastern countries, to the "resource curse." Water rights and more in parts of South Asia, and in Mexico. explicit treatment of water as an economic Countries rich in subsoil assets risk being good can help to manage water scarcity. Man- on an unsustainable development path if aging pollution starts from the recognition that they primarily consume the rents from nat- the marginal damages from pollution emissions ural resource extraction rather than invest- far exceed the marginal costs of abatement in ing them in other forms of capital. This rep- many industrializing countries; finding effi- resents lost opportunities for development. cient solutions to pollution problems is clearly a Low- and lower-middle-income countries priority, given competing demands for finance are characterized by high levels of urban in developing countries. Policies such as energy G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 203 C H A P T E R 6 subsidies, which encourage inefficient use, can 9. EIA 2007. exacerbate pollution problems while simulta- 10. Cohen and others 2005. neously straining fiscal resources. 11. World Bank 2008c. This chapter has emphasized one of the 12. Biochemical oxygen demand refers to the principal difficulties in meeting MDG 7, the amount of oxygen that bacteria in water will con- sume in breaking down waste. This indicator mea- challenge of building stronger institutions. sures pollution from organic matter and fertilizers The problem is not unique to the environ- (in general referred to as nutrients) thus excluding ment and natural resource sectors, of course, other important sources of pollution such as sedi- but policies and institutions in these sectors ment, acids and salts, heavy metals, toxic chemi- are particularly weak. The Global Monitor- cals and other pathogens. ing Report 2007 analyzed CPIA data for 13. Hettige and others 1998. 2005 to show that environment CPIA scores 14. The International Energy Agency (IEA) significantly lag overall CPIA scores.30 defines access to electricity as the number of people A key ingredient in resolving institutional (in households) who have some form of electricity weakness is better and more comprehensive at home, either commercially purchased or self- data. Public access to environmental data generated (when data is available through surveys by national administrators). It excludes unauthor- is essential to the process of building pub- ized connections. lic demand for environmental quality. And 15. IEA 2006. better data are needed to support policy 16. IEA 2006. decisions concerning environment and natu- 17. EIA 2007. ral resource management, as well as policy 18. Samuelson 1961, pp. 50­57. implementation. One of the strengths of the 19. In extreme circumstances, of course, con- MDG process is this emphasis on data and suming resource rents may the only alternative to indicators. This chapter highlights some of starvation. the strengths as well as the deficiencies in 20. World Bank 2006b. environment and natural resource data. 21. World Bank 2006b. 22. See chapter 7 for an analysis of climate Notes change impacts. 23. Dasgupta and others 2006. 1. See World Bank 2008a for a review. 24. A caveat about these measures is in order: 2. World Bank 2008a. because these are indexes consisting of arbitrarily 3. Prüss-Üstün and Corvalán 2006. weighted (and highly disparate) subcomponents, 4. Deforestation in LAC and SSA is highest the interpretation of the aggregate indexes can be also as a percent of total forest resources. Between problematic. There is no numeraire to weight the 1990 and 2005, the annual deforestation rate has contributions of different aspects of environmen- been 0.4 and 0.6 percent respectively. tal management to social welfare. These indicators 5. The forest cover indicator is not perfect. A are therefore best used to compare close peers at major problem with this indicator is that it does the level of individual subcomponents of environ- not distinguish between natural forests and plan- mental management. tations. This is particularly relevant for biodiver- 25. The EPI has been developed by the Center sity as well as other natural functions of forests. for Environmental Law and Policy at Yale Univer- 6. ACQUASTAT: (http://www.fao.org/nr/water/ sity and the Center for International Earth Science aquastat/dbase/index.stm);WRI(http://earthtrends. Information Network (CIESIN) at Columbia Uni- wri.org/searchable_db/index.php?theme=2). versity, in collaboration with the World Economic 7. World Bank 2007b. While the Middle East Forum and the Joint Research Centre of the Euro- and North African region features a critical situ- pean Commission. ation with respect to water, the problem is not 26. World Bank 2006a unique to the region. In China, for example, parts 27. Kishore 2007. of the North China Plain and the North East are 28. OECD 1994. highly water stressed. 29. Hamilton 2003. 8. UNEP 2007. 30. World Bank 2007a. 204 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 7 Global Environmental Sustainability: Protecting the Commons S ustainable management of global envi- chapter ends with a review of trends in biodi- ronmental resources--the earth's cli- versity and the health of marine fisheries.1 mate, ocean fisheries, and biodiversity-- is essential to achieving the Millennium Climate Change: The Impact of Development Goals (MDGs) and, indeed, to Human Activity on Climate ensuring continued economic progress over the next century. Failure to mitigate the impact Deforestation and the burning of fossil fuels of greenhouse gas (GHG) emissions on the produce greenhouse gases that trap incom- earth's climate may lead to disastrous changes ing solar radiation, leading to a rise in global in temperature and precipitation and to an average surface temperature. Measurements increase in extreme weather events. Pollution show that the average world temperature and overexploitation of marine fisheries can has increased since the start of the indus- damage or destroy fish populations. Habitat trial revolution in the mid-1800s; over the destruction may lead to species extinction. last hundred years, the average temperature All three global environmental problems, and has risen 0.74°C.2 Indeed, eleven of the last how the world deals with them, will affect twelve years rank among the warmest years the welfare of the developing world. on record since 1850. Rising sea levels are The goal of this chapter is to monitor consistent with warming. Since 1961 global recent progress in dealing with each of the sea levels have risen at an average rate of 1.8 three global environmental problems, with millimeters (mm) a year and since 1993 at an an emphasis on climate change. The chapter average rate of 3.1 mm a year.3 At the same begins by describing temperature trends; the time snow cover has decreased, and ice fields relationship between GHG concentrations in the Arctic and Antarctic have shrunk and climate; and projections, and effects, of drastically. Average temperatures in the future climate change in the absence of any Arctic are rising twice as fast as elsewhere mitigation efforts. The chapter then discusses in the world. The polar ice cap as a whole the sources of and trends in GHG emis- is shrinking: satellites show that the area of sions and the opportunities for adapting to permanent ice cover is contracting at a rate changes in climate. Progress in international of 9 percent each decade. If this melting con- efforts to develop institutions and policies to tinues, summers in the Arctic could become deal with climate change is reviewed, and the nearly ice-free by the end of the century. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 205 C H A P T E R 7 More important, scientific research sug- CO2e, which are consistent with some of the gests that human activities are contribut- nonmitigation scenarios in the IPCC (Inter- ing to the rise in global temperatures. The governmental Panel on Climate Change) concentration of carbon dioxide (CO2) Fourth Assessment Report, carry a signifi- in the atmosphere--the most important cant risk of an increase in mean global sur- GHG--has increased from approximately face temperature of 5°C.9 277 parts per million volume (ppm) in 1744 A mean increase in global surface tem- to 384 ppm in 2007.4 Models of the deter- perature of 5°C would result in disastrous minants of temperature change that take consequences: heat waves throughout the into account the addition of GHGs into the world, increases in heavy precipitation atmosphere from human activities provide in northern latitudes, and drought and much more accurate estimates of historical decreases in precipitation in most subtropi- trends in temperature than do models that cal regions. It would likely lead to the melt- ignore these emissions.5 ing of snowpack in the Himalayas and risk the total disappearance of the West Antarc- tic ice sheet, which could increase the global Relationship of GHG Concentrations sea level by six meters. It would also risk to Climate Change "tipping points"--positive feedbacks that The extent of future climate change depends would cause atmospheric GHG concentra- on future GHG emissions and on the rela- tions and temperature to rise rapidly. These tionship between climate and the stock of feedbacks include the release of methane GHGs in the atmosphere. Table 7.1 shows from permafrost as warming occurs, the the likelihood of various changes in mean release of carbon from deep oceans as cli- global surface temperature (relative to levels mate change affects deep-sea circulation, before the industrial revolution) correspond- and the increased absorption of solar radia- ing to various equilibrium concentrations tion as polar ice caps melt. Any of these of GHGs.6 In 2005 the concentration of all effects could lead to truly catastrophic cli- GHGs was approximately 375 ppm CO2e mate changes.10 (carbon dioxide equivalents).7 Stabilization at 450 ppm CO2e, as advocated by the UN's The Geographic and Temporal Human Development Report, would still Dimensions of Climate Change carry a risk of an increase in mean surface temperature of at least 3°C.8 Equilibrium How likely are GHG concentrations to GHG concentrations of 650 or 750 ppm reach 650 or 750 ppm, and how fast might this occur? The IPCC in its Fourth Assess- ment Report estimates the change in the TABLE 7.1 Likelihood of various CO2e concentrations exceeding stock of GHGs under various nonmitigation various increases in global mean surface temperature emissions scenarios, together with the cor- percent responding changes in temperature and sea level rise worldwide (table 7.2).11 Figure 7.1 shows the geographic distribu- Stabilization level (in ppm CO2e) 2°C 3°C 4°C 5°C 6°C 7°C tion of temperature changes for three non- mitigation scenarios: B1, a scenario that 450 78 18 3 1 0 0 500 96 44 11 3 1 0 results in an increase in mean global temper- 550 99 69 24 7 2 1 ature of 1.8°C in 2090 (relative to 1980­99 650 100 94 58 24 9 4 temperatures);12 A1B, a scenario that results 750 100 99 82 47 22 9 in an increase in mean global temperature of 3.3°C in 2090; and A2, which results in Source: Stern 2008. an increase in mean global temperature of 206 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 G L O B A L E N V I R O N M E N T A L S U S T A I N A B I L I T Y : P R O T E C T I N G T H E C O M M O N S TABLE 7.2 Changes in mean global temperature and sea level associated with various IPCC scenarios Temperature change Sea level rise (°C at 2090­99 relative to 1980­1999)a (meters at 2090­99 relative to 1980­99) Model-based range excluding future Caseb Best estimate Likely range rapid dynamic changes in ice flow Constant year 2000 concentrationsc 0.6 0.3­0.9 Not applicable B1 scenario 1.8 1.1­2.9 0.18­0.38 A1T scenario 2.4 1.4­3.8 0.20­0.45 B2 scenario 2.4 1.4­3.8 0.20­0.43 A1B scenario 2.8 1.7­4.4 0.21­0.48 A2 scenario 3.4 2.0­5.4 0.23­0.51 A1FI scenario 4.0 2.4­6.4 0.26­0.59 Source: Summary for Policy Makers, Fourth Assessment Report, IPCC 2007b. a. These estimates are assessed from a hierarchy of models that encompass a simple climate model, several earth system models of intermediate complexity, and a large number of atmosphere-ocean general circulation models (AOGCMs). b. The six main scenarios for the projections are described as follows: B1: Convergent world; low population growth; change toward a service and information economy, clean technologies. B2: Regional focus; intermediate population growth; development and technical change; environmental emphasis. A1: Convergent world; population peaks at mid-century; rapid growth and introduction of more efficient technologies that are sourced from either: A1T: Nonfossil energy sources A1B: A balance across all sources A1FI: Fossil-intensive A2: Heterogeneous world; high population growth; slower economic growth and technical change. c. Year 2000 constant composition is derived from AOGCMs only. 3.9°C in 2090. The global distribution of latitudes--in the South, rather than the temperature changes (figure 7.1) is roughly North--implying that developing countries the same for all three scenarios: tempera- will bear the brunt of these effects. ture increases are greatest in the northern Climate change is often viewed as a prob- latitudes, but in scenarios A1B and A2, they lem for the future, but figure 7.1 suggests rise above 4°C in parts of Latin American otherwise. As the first set of maps indicates, and Sub-Saharan Africa, as well as in India significant temperature changes in Africa and and the Middle East. Latin America are likely as early as 2020­29 Other effects are likely to accompany under the A1B nonmitigation scenario--a these temperature changes. Arid and semi- scenario of rapid economic and population arid regions will become drier, while areas growth in which the world relies on a com- in the mid-to-high latitudes will become bination of fossil fuels and renewable energy wetter. Heavy precipitation events are very sources. More important, avoiding the risk likely to occur in mid-to-high latitudes, of large temperature changes in 2090­99 while the likelihood of droughts will increase requires action now. As the IPCC noted, world in areas that are currently dry. Storm surges, GHG emissions would have to decline by 50 cyclones, and hurricanes are also likely to to 85 percent of their 2000 levels by 2050 to increase in frequency throughout the world. stabilize concentrations at 450 ppm, depend- Water supplies are likely to be affected: the ing on the mitigation path chosen.13 World melting of glaciers will lead to higher spring- GHG emissions would have to decrease by as time water flows and reduced summertime much as 30 percent from 2000 levels by 2050 flows. The majority of the negative effects of (depending on the mitigation path chosen) to climate change are likely to occur in lower stabilize concentrations at 550 ppm. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 207 C H A P T E R 7 FIGURE 7.1 Projections of surface temperatures for three IPCC scenarios Relative probability 2020­29 2090­99 2.5 2 2020­29 1.5 1 2090­99 0.5 B1 0 2.5 2 2020­29 1.5 1 2090­99 0.5 A1B 0 2.5 2 2020­29 1.5 1 2090­99 0.5 A2 0 ­1 0 1 2 3 4 5 6 7 8 Global average surface temperature change, °C 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 Degrees centigrade Source: IPCC 2007a. The Impacts of Climate Change same region. Efforts to adapt to climate and Opportunities for Adaptation change must therefore be tailored to specific country needs. What impacts would the temperature changes in figure 7.1 have on the econo- Impact on Agriculture mies of developing and developed countries? Table 7.3 describes in qualitative terms some There is wide recognition that developing of the likely impacts of climate change on countries in general stand to lose more from agriculture, forestry and ecosystems, water the effects of climate change on agriculture resources, human health, and human settle- than developed countries. Although fig- ments that are expected to occur under the ure 7.1 suggests that temperatures will rise nonmitigation scenarios in figure 7.1. The more in northern than in southern latitudes, magnitude of these effects depends on the temperatures in developing countries are extent to which countries adapt to them already close to thresholds beyond which and also on the extent to which mitigation further increases in temperature will lower efforts lower GHG emissions. The effects productivity. Developing countries are also of climate change vary greatly among devel- likely to have fewer opportunities for adap- oping countries--even for countries in the tation. Moreover, the losses in yields that 208 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 TABLE 7.3 Possible impacts of climate change in the mid-to-late-21st century Examples of major projected impacts by sector Phenomenona and Likelihood of Agriculture, forestry Industry, settlement, direction of trend future trendsb and ecosystems Water resources Human health and society Over most land Virtually Increased Effects on water Reduced human Reduced energy demand for areas, warmer certainc yields in colder resources relying mortality from heating; increased demand and fewer cold environments; on snow melt; decreased cold for cooling; declining air days and nights, decreased yields effects on some exposure quality in cities; reduced warmer and in warmer water supplies disruption to transport from more frequent environments; snow, ice; effects on winter hot days and increased insect tourism nights outbreaks Warm spells/ Very likely Reduced yields in Increased water Increased risk Reduction in quality of heat waves. warmer regions demand; water of heat-related life for people in warm Frequency from heat stress; quality problems, mortality, areas without appropriate increases over increased danger such as algal especially for the housing; impacts on the most land areas of wildfire blooms elderly, chronically elderly, very young, and sick, very young, poor and socially isolated Heavy Very likely Damage to crops; Adverse effects on Increased risk of Disruption of settlements, precipitation soil erosion, quality of surface deaths, injuries, commerce, transport, and events. inability to and groundwater; and infectious, societies from flooding; Frequency cultivate land contamination respiratory and pressures on urban and increases over because of of water supply; skin diseases rural infrastructures; loss of most areas waterlogged soils water scarcity may property be relieved Area affected Likely Land degradation; More widespread Increased risk Water shortages for by drought lower yields, crop water stress of food and settlements, industry, increases damage, and water shortages; and societies; reduced failure; increased increased risk hydropower generation livestock deaths; of malnutrition; potentials; potential for increased risk of increased risk of population migration wildfire water- and food- borne diseases Intense tropical Likely Damage to Power outages Increased risk of Disruption by flood and high cyclone activity crops; windthrow causing disruption deaths, injuries, winds; withdrawal of private increases (uprooting) of of public water water- and food- risk insurance coverage in trees; damage to supply borne diseases; vulnerable areas; potential coral reefs post-traumatic for population migrations; stress disorders loss of property Increased Likelye Salinization of Decreased Increased risk Costs of coastal protection incidence of irrigation water, freshwater of deaths and versus costs of land-use extreme high sea estuaries, and availability from injuries by relocation; potential for level (excludes freshwater saltwater intrusion drowning in movement of populations tsunamis)d systems floods; migration- and infrastructure; also see related health effects of tropical cyclones effects above Source: IPCC 2007b. a. See Working Group I Fourth Assessment table 3.7 for further details regarding definitions. b. Based on projections for 21st century using scenarios in table 7.2. c. Warming of the most extreme days and nights each year. d. Extreme high sea level depends on average sea level and on regional weather systems. It is defined as the highest 1 percent of hourly values of observed sea level at a station for a given reference period. e. In all scenarios, the projected global average sea level in 2100 is higher than in the reference period. The effect of changes in regional weather systems on sea level extremes has not been assessed. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 209 C H A P T E R 7 occur in developing countries are likely to Why do the estimated impacts differ affect a larger number of people--especially significantly across countries in Africa and the poor--because of the greater importance Latin America? The answer in part lies in of agriculture in the livelihoods of people in adaptation: yields on irrigated farmland developing countries.14 decrease less than on rain-fed land; in some Cline presents estimates of the impact on areas, yields increase. In Africa the value of agriculture of a 4.4°C increase in mean global output per hectare declines less for farmers temperature and a 2.9 percent mean increase who can substitute livestock for crops. Two in precipitation occurring during the period points about adaptation should be noted, 2070­99.15 His estimates combine results however. One is that the Ricardian approach, from the two main strands of the literature-- which allows farmers in different climatic cross-sectional studies of land values or net zones to adapt to climate, assumes that revenues (the Ricardian approach) and crop prices in the future will remain unchanged. models. The estimates of impacts on yields If water shortages increase the price of irri- shown in figure 7.2 incorporate carbon fer- gation, yields may fall more than indicated tilization effects--that is, they allow for the in figure 7.2. Second, it is the impact of cli- fact that increased carbon in the atmosphere mate change on net revenues that should be will increase yields by promoting photosyn- measured rather than the impact on yields. thesis and reducing plant water loss.16 As fig- Adaptation is costly, and the impact of cli- ure 7.2 clearly shows, the largest agricultural mate change should be measured as the sum losses will occur in parts of Africa, in South of damages after adaptation plus the costs of Asia, and in parts of Latin America. In con- adaptation. As Cline notes, output in south- trast, the United States and Canada, Europe, west India falls by approximately 37 percent and China will, in general, benefit under the under the nonmitigation climate scenario, nonmitigation climate scenario. but net revenues fall by 55 percent.17 FIGURE 7.2 Impacts of increases in temperature and precipitation on agricultural yields, 2079­99 Agricultural impact with carbon fertilization, % ­54.1 to ­38.9 ­38.9 to ­18.1 ­18.1 to ­1.9 ­1.9 to 12.5 12.5 to 28.1 No data Source: Cline 2007. 210 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 G L O B A L E N V I R O N M E N T A L S U S T A I N A B I L I T Y : P R O T E C T I N G T H E C O M M O N S malnutrition, diarrhea, and malaria, and Impacts on Health the largest effects geographically are felt in Climate change may affect human health Sub-Saharan Africa, South Asia, and the both directly and indirectly. Increased warm- Middle East. Simply put, the health burden ing in cold climates may reduce cardiovascu- of climate change is borne by the children of lar and respiratory deaths, but heat waves the developing world. Table 7.4 shows esti- in both warm and cold climates are likely mated disability-adjusted life years (DALYs) to increase cardiovascular deaths. Changes attributable to climate change in 2000; figure in temperature and precipitation also affect 7.3 shows the distribution of deaths. Climate diarrheal disease--the second-leading cause change in 2000 is associated, worldwide, of death among children between one and with 166,000 deaths--77,000 associated five years. Extreme weather events--hurri- with malnutrition, 47,000 with diarrhea, canes, floods, and tornadoes--are likely to and 27,000 with malaria. The highest num- raise accidental deaths and injuries. Equally ber of deaths (per 100,000 persons) occurs in important to the poor in developing coun- Africa, parts of South Asia (SEAR-D), and the tries are the indirect effects of climate change Middle East. The impact of climate change on health. As figure 7.2 suggests, climate on the United States, Canada, and Europe is change, through its impact on agricultural negligible, with cardiovascular deaths associ- yields, may lower food security and lead to ated with heat waves cancelling out the ben- malnutrition. Increased temperatures and efits of milder winter temperatures. precipitation in low latitudes may increase The future impacts of climate change are the incidence of malaria and other vector- more dramatic than those in 2000. In 2030, borne diseases. assuming that GHG emissions are stabilized The largest impacts of climate change at 750 ppm by 2210, the risk of malnutrition on mortality and morbidity occur through is predicted to be 11 percent higher in Latin TABLE 7.4 Estimated DALYs attributed to climate change in 2000, by cause and subregion thousands, unless otherwise indicated Cause of DALYs Total DALYs WHO subregion Malnutrition Diarrhea Malaria Floods All causes (per 1 million population) AFR-D 293 154 178 1 626 2,186 AFR-E 323 260 682 3 1,267 3,840 AMR-A 0 0 0 4 4 12 AMR-B 0 0 3 67 71 167 AMR-D 0 17 0 5 23 324 EMR-B 0 14 0 6 20 148 EMR-D 313 277 112 46 748 2,146 EUR-A 0 0 0 3 3 7 EUR-B 0 6 0 4 10 48 EUR-C 0 3 0 1 4 15 SEAR-B 0 28 0 6 34 117 SEAR-D 1,918 612 0 8 2,538 2,081 WPR-A 0 0 0 1 1 9 WPR-B 0 89 43 37 169 111 World 2,846 1,459 1,018 193 5,517 925 Source: McMichael and others 2004. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 211 C H A P T E R 7 FIGURE 7.3 Estimated death rate from climate change in 2000, by WHO subregion Mortality per 1 million people 0­2 2­4 4­70 70­120 No data Source: Map created by Center for Sustainability and the Global Environment, University of Wisconsin, using data from McMichael and others 2004. Note: Change in climate compared to baseline, 1961­90. America than it was in 1990, and 17 percent dynamic changes in ice flow. Velicogna and higher in South Asia (SEAR-D). The risk of Wahr have measured variations in the Ant- diarrhea is predicted to be 6 percent higher arctic ice sheet during 2002­05.18 Their in Sub-Saharan Africa and 7 percent higher results indicate that the mass of the West in South Asia (SEAR-D) than in 1990. It Antarctic ice sheet decreased significantly, should be emphasized that these increased at a rate several times greater than assumed risks apply to large exposed populations. by the IPCC in its Third Assessment Report. These calculations assume little adapta- Climate change could possibly cause the tion to climate change--for example, a pro- West Antarctic ice sheet to slide into the gram that eliminated the anopheles mosquito ocean, which would raise average sea level from Sub-Saharan Africa, or the develop- by approximately five to six meters, even if ment of an effective malaria vaccine, would the ice sheet did not melt. of course reduce malaria risks. A program Measuring the vulnerability of developing to improve food security in the region would countries to rising sea levels--given the cur- reduce deaths caused by malnutrition. rent location of settlements--provides a use- ful starting point for measuring the benefits of adaptation. Dasgupta and others estimate Sea Level Rise the impact of various possible increases in Although the mean increases in sea level sea level on 84 coastal developing coun- rise associated with the IPCC nonmitigation tries.19 Using Geographic Information Sys- scenarios are modest--ranging from 0.2 to tem techniques, they estimate the fraction 0.5 meters during this century (see table of land area, agricultural land, wetlands, 7.2)--these estimates exclude future rapid urban land area, population, and GDP that 212 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 G L O B A L E N V I R O N M E N T A L S U S T A I N A B I L I T Y : P R O T E C T I N G T H E C O M M O N S would be affected by increases in sea level index of population impact relative to popu- of one to five meters. These calculations lation size. pertain to current land uses and assume no Table 7.6 presents the index of vulnerabil- adaptation. ity to extreme weather events, showing the Figure 7.4 shows the share of various 10 most vulnerable countries in each World classes of land area, population, and GDP Bank region. Again, the differences across affected by sea level rise, by World Bank countries are striking: in per capita terms, region. The impacts of sea level rise are Bangladesh is affected more than three greatest--in virtually all dimensions--in times as much as India by extreme weather East Asia and the Pacific, followed by the events--on a par with Ethiopia. Countries in Middle East and North Africa. Effects, East Asia are--in per capita terms--affected however, vary significantly among countries much less than countries in South Asia or within each region. Table 7.5 shows the ten Africa, although total damages are high. countries most affected by an increase in sea level of one meter for four dimensions of Adaptation to Climate Change vulnerability. With no adaptation Vietnam would lose 10 percent of its GDP; the Arab Nobel laureate Tom Schelling has argued Republic of Egypt, over 6 percent. Egypt that the best way for developing countries would stand to lose 13 percent of its agricul- to adapt to climate change is to develop.21 tural land (not shown), and Vietnam 28 per- In many ways this prescription is correct. cent of its wetlands. Twelve percent of the Preventing the health impacts of climate Bahamas would be submerged. As table 7.5 change means making progress toward indicates, Vietnam ranks among the top five reducing malnutrition, eliminating diar- countries most affected by a one meter rise rhea as a leading cause of death among in sea level; the Bahamas, Egypt, and Suri- children under five years of age, and eradi- name also rank among the countries most cating malaria. Achieving MDGs 1, 4, and vulnerable to sea level rise. 6 would constitute effective adaptation to the most adverse health effects of climate change. Development also would reduce the Extreme Weather Events impacts of climate change by helping devel- Although regional forecasts of climate oping countries to diversify their economies. change are uncertain, it is likely that Agricultural economies are more vulnerable weather variability will increase, and with it, to the effects of climate change than econo- extreme weather events. To the extent that mies where employment is concentrated pri- future events follow historical patterns, the marily in manufacturing and services. The damages from past weather events--such yield impacts pictured in figure 7.2 would as droughts, heat waves, and floods--pro- be less serious in a world in which a smaller vide an additional index of vulnerability to share of employment and GDP in develop- climate change. Buys and others have com- ing countries depended on agriculture than piled a country vulnerability index based on is currently the case.22 droughts, heat waves, floods, wildfires, and Economic growth would also reduce the wind storms that occurred between 1960 damages associated with extreme weather and 2002.20 The index gives persons killed events.23 Yohe and Tol explain variation in these events a weight of 1,000, persons across countries in the fraction of the popu- rendered homeless a weight of 10, and per- lation affected by extreme weather events sons affected by each event a weight of 1. between 1990 and 2000.24 They find that This sum is divided by population for 1980 the fraction of the population affected by (the midpoint of the period) to develop an natural disasters decreases with increases in G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 213 C H A P T E R 7 FIGURE 7.4 Vulnerability to sea level rise Land area Population Percent Percent 8 30 6 20 4 10 2 0 0 Sub- Middle Latin South East Sub- Middle Latin South East Saharan East & America Asia Asia Saharan East & America Asia Asia Africa North & & Pacific Africa North & & Pacific Africa Caribbean Africa Caribbean GDP Urban areas Percent Percent 30 30 20 20 10 10 0 0 Sub- Middle Latin South East Sub- Middle Latin South East Saharan East & America Asia Asia Saharan East & America Asia Asia Africa North & & Pacific Africa North & & Pacific Africa Caribbean Africa Caribbean Agricultural land Wetlands Percent Percent 12 30 8 20 4 10 0 0 Sub- Middle Latin South East Sub- Middle Latin South East Saharan East & America Asia Asia Saharan East & America Asia Asia Africa North & & Pacific Africa North & & Pacific Africa Caribbean Africa Caribbean 1 meter 2 meters 3 meters 4 meters 5 meters Source: Dasgupta and others 2007. 214 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 G L O B A L E N V I R O N M E N T A L S U S T A I N A B I L I T Y : P R O T E C T I N G T H E C O M M O N S TABLE 7.5 Ten countries most affected by a one meter rise in sea level percentage affected Rank Population GDP Urban areas Wetlands 1 Vietnam Vietnam Vietnam Vietnam (10.79) (10.21) (10.74) (28.67) 2 Egypt, Arab Rep. of Mauritania Guyana Jamaica (9.28) (9.35) (10.02) (28.16) 3 Mauritania Egypt, Arab Rep. of French Guiana Belize (7.95) (6.44) (7.76) (27.76) 4 Suriname Suriname Mauritania Qatar (7.00) (6.35) (7.50) (21.75) 5 Guyana Benin Egypt, Arab Rep. of The Bahamas (6.30) (5.64) (5.52) (17.75) 6 French Guiana The Bahamas Libya Libya (5.42) (4.74) (5.39) (15.83) 7 Tunisia Guyana United Arab Emirates Uruguay (4.89) (4.64) (4.80) (15.14) 8 United Arab Emirates French Guiana Tunisia Mexico (4.59) (3.02) (4.50) (14.85) 9 The Bahamas Tunisia Suriname Benin (4.56) (2.93) (4.20) (13.78) 10 Benin Ecuador The Bahamas Taiwan, China (3.93) (2.66) (3.99) (11.70) Source: Dasgupta and others 2007. TABLE 7.6 Weather damage index (WDI), by country and region Sub-Saharan East Asia Latin America Middle East Africa WDI & Pacific WDI & the Caribbean WDI & North Africa WDI South Asia WDI Ethiopia 1809 Tonga 698 Honduras 819 Iran, Islamic Rep. of 183 Bangladesh 1940 Mozambique 1134 Samoa 589 Antigua Barbados 387 Jordan 32.9 India 566 Sudan 999 Laos PDR 573 Belize 385 Tunisia 29.3 Sri Lanka 318 Djibouti 586 Solomon Islands 416 Haiti 254 Yemen, Rep. of 27.5 Pakistan 172 Botswana 536 Philippines 392 Nicaragua 242 Syrian Arab Rep. 18.4 Maldives 151 Somalia 497 Vanuatu 340 Venezuela, R. B. de 215 Algeria 17.6 Nepal 84.4 Mauritania 433 Fiji 310 St. Lucia 212 Oman 14.5 Afghanistan 73.5 Malawi 411 Vietnam 235 Dominican Republic 191 Morocco 13.3 Bhutan 64.5 Zimbabwe 394 China 223 Dominica 182 Iraq 11.1 Swaziland 352 Cambodia 213 Bolivia 124 Lebanon 5.6 Source: Buys and others 2007. per capita income (elasticity = ­1); increases In addition to pursuing economic growth, with increases in income inequality (elastic- developing countries will also have to adapt ity = 2.2), and increases with increases in to climate change. People in developing coun- population density (elasticity = 0.24). tries are already adapting to annual variations G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 215 C H A P T E R 7 in temperature and precipitation, as well as collecting meteorological data, which can to droughts, floods, and cyclones. In agricul- be facilitated by donor contributions and ture adaptation to temperature is reflected in through transfer of technology for predict- crop choice. In Africa, for example, farmers ing weather events.28 select sorghum and maize-millet in cooler Defensive infrastructure includes sea regions; maize-beans, maize-groundnut, and walls to protect against storm surges and maize in moderately warm regions; and cow- irrigation systems that store monsoon rains. pea, cowpea-sorghum, and millet-groundnut The Stern Review reports that expenditures in hot regions. As precipitation increases or of $3.15 billion on flood control in China decreases, farmers shift toward water-loving between 1960 and 2000 avoided losses of or drought-tolerant crops.25 In the Indian $12 billion, while flood control projects in state of Orissa, champeswar rice--a flood- Rio de Janeiro yielded an internal rate of resistant strain--is grown to provide insur- return of over 50 percent. Climate-proof- ance against agricultural losses. Farmers ing of roads, dams, and other infrastructure in the Mekong Delta build dikes to control that may be affected by climate changes can flood waters.26 And community microin- also yield high returns. In dam construction surance schemes have been implemented in in Bangladesh and South Africa, benefit- India's Andra Pradesh to provide insurance cost analyses have determined that it pays against natural disasters.27 to increase the size of reservoirs to accom- Climate change means that the need for modate increased water runoff.29 Studies this sort of adaptation will become greater. by the World Bank and Asian Development Much adaptation to climate change is a Bank have helped to identify cost-effective private good. But government actions to measures to climate-proof infrastructure in strengthen private adaptation to climate small island states.30 change will be needed in four areas: to pro- Governments can also help promote vide those inputs to adaptation that are public efficient market responses to climate risks. goods--information about climate impacts, These include promoting insurance mar- early warning systems for heat waves and kets and making sure that credit is avail- floods, and construction of defensive public able, especially to the poor, to finance pri- infrastructure; to take climate impacts into vate adaptation. In high-income countries, account in designing roads, bridges, dams, one-third of losses associated with natural and other public infrastructure that may be disasters are insured, compared with only 3 affected by climate; to correct market fail- percent of losses in developing countries.31 ures that may impede adaptation; and to Governments can promote weather insur- provide social safety nets that will sustain ance when private markets fail. The develop- the poor through natural disasters. ment of weather-index insurance to reduce Information about expected precipita- farmers' vulnerability to weather shocks tion or early warnings about floods and is another example of the use of insurance heat waves can help people adjust to adverse markets to reduce climate risk (box 7.1). weather conditions. In Mali the national In addition, governments can build insti- meteorological service distributes informa- tutions to help with disaster relief and create tion about precipitation and soil moisture social programs to cushion households from through a network of farmers' organizations income shocks. The Maharashtra Employ- and local governments. This information is ment Guarantee Scheme, which was devel- transmitted throughout the growing season oped in the 1970s to help households cope to allow farmers to adjust production prac- with crop losses and other negative income tices. Obtaining information about weather shocks, is an excellent example of this, as are risks depends on having enough monitor- the employment creation programs adopted ing stations and an adequate budget for in Indonesia in 1997.32 216 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 G L O B A L E N V I R O N M E N T A L S U S T A I N A B I L I T Y : P R O T E C T I N G T H E C O M M O N S BOX 7.1 Weather-index insurance One of the biggest problems faced by farmers in developing countries is dealing with weather shocks and adverse weather conditions, a problem that will only be exacerbated by climate change. The problem is especially acute for small farmers who are the most vulnerable to the increased frequency and magnitude of droughts, cyclones, and floods. Public programs to deal with weather risk include crop insurance, which reimburses farmers for yield losses and, more recently, weather-index insurance (WII). Weather-index insurance differs from traditional crop insurance because it pays farmers based on realizations of an index that is highly correlated with farm-level yields and can be used as a proxy for production losses. The index is based on the objective measurement of weather variables, such as the deficit of precipitation at a weather sta- tion or the trajectory and wind speed of a tropical cyclone. Weather-index insurance has several advantages over traditional crop insurance: adverse selection and information asymmetries are reduced since both the insurer and the insured can observe the same weather index; farmers can- not influence the results of the index (as opposed to the yield in their fields), and index-based pay- outs reduce administrative costs since a field-based loss assessment is not required. The success of WII depends on the availability of sufficient meteorological stations, which may be a problem, especially in Sub-Saharan Africa. Weather index insurance has recently been researched or introduced in pilot projects in Ethio- pia, India, Kenya, Malawi, Mexico, Morocco, Nicaragua, Peru, Thailand, Tunisia, and Ukraine. The introduction in India of rainfall insurance by BASIX and ICICI Lombard in 2003 was the first index insurance initiative launched at the farmer level in the developing world, and this insurance is now expanding in the Indian private and public insurance sectors.a A World Bank initiative in Malawi has succeeded in reaching small-scale farmers of maize and groundnuts. Policies sold to farmers are based on a rainfall index calibrated to the rainfall needs of the crop. The Malawi WII has been bundled with credit to allow farmers to repay input loans in the face of severe drought. a. Manuamorn 2005. The extent to which these activities will Many studies are already under way. The be undertaken depends on institutional development of National Adaptation Pro- capacities in developing countries and on grammes of Action (NAPAs) by the United the availability of funding. Determining Nations Framework Convention on Climate what should be done requires planning. The Change (UNFCCC) is an attempt to help heterogeneity in climate impacts described developing countries cope with the adverse above and highlighted in box 7.2 suggests effects of climate change. Each NAPA takes the need for impact studies and benefit-cost into account existing coping strategies at analyses of specific adaptation strategies at the grassroots level and builds upon them the country level. Even though some of the to identify priority activities. Currently 46 most severe climate impacts may not occur countries are preparing (or have prepared) until the second half of the century, devel- NAPAs, with financial assistance from the oping countries are already vulnerable to UNFCCC's Least-Developed Countries variations in temperature and precipitation Fund (UNFCCC 2008). Multilateral devel- and extreme weather events. Projects that opment banks are also sponsoring studies: cushion these shocks are likely to have posi- adaptation strategies are currently being tive net benefits, although further studies prepared by the World Bank for each World are required. Bank region. The Asian Development Bank, G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 217 C H A P T E R 7 BOX 7.2 Adaptation to climate change The heterogeneity in climate change impacts across countries suggests that country-level studies are required to mea- sure climate effects and to assess the benefits and costs of various adaptation measures in each individual country. The three figures below depict the distribution of temperature and precipitation impacts in agriculture, the percent of population affected by a three meter rise in sea level, and the distribution of flood risk damages across countries. The distribution of agricultural productivity losses, which assume no carbon fertilization effect, suggests that 20 developing countries would suffer yield losses of 30 percent or more. Adaptive agriculture programs should be examined in countries facing large agricultural productivity losses, such as India, Mexico, Senegal, and Sudan. Broader micro-insurance coverage for the poor should also be part of these programs. The distribution of losses from sea level rise is highly skewed. Countries facing huge losses from rising sea levels, such as Egypt, Suriname, and Vietnam, will need to examine the net benefits of adaptive infrastructure and urbanization programs. The distribution of flood risks (shown on a per capita basis) is also highly skewed. Programs combining adap- tive infrastructure and micro-insurance should be the focus for countries facing high risk of flood disaster, such as Bangladesh, Benin, Cambodia, Honduras, Jamaica, and Mozambique. Distribution of climate change impacts in developing countries Projected agricultural productivity in 2080, assuming a 4.4°C temperature change Productivity loss, % 60 45 30 15 0 ­15 0 20 40 60 80 100 Country rank Population in inundation zone if sea level rises 3 meters % of population 35 30 25 20 15 10 China (51 million people) 5 0 0 10 20 30 40 50 60 70 80 90 Country rank Flood damage, 1960­2000 Flood Risk Damage Index: 1960­2000 1,000 800 600 400 200 0 0 20 40 60 80 100 Country rank Source: Wheeler 2007, based on Cline 2007, Dasgupta and others 2007, and Buys and others 2007. Note: The term "country rank" refers to the ranking of countries by size of damages, going from the country with the largest damages (first country) to the country with the smallest damages. In the top panel, the country with the largest agricultural losses (number 1) suffers yield declines of about 60 percent, while the country ranked 20th loses about 30 percent of its output. 218 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 G L O B A L E N V I R O N M E N T A L S U S T A I N A B I L I T Y : P R O T E C T I N G T H E C O M M O N S following its case studies of adaptation FIGURE 7.5 World GHG emissions, by sector, 2000 options in Micronesia and the Cook Islands has, with the World Bank, initiated a study Energy of climate change impacts in four Asian emissions coastal cities (Bangkok, Ho Chi Minh City, Industry Power Kolkata, Manila).33 This study is tied to the 14% 24% Other energy Southeast Asia "mini-Stern" review, one of related 5% several regional climate impact studies cur- rently in progress. 3% Waste Resources, beyond traditional develop- ment assistance, are available to help finance Transport 14% 14% Agriculture adaptation. The UNFCCC Special Climate Change Fund (SCCF) was established in 2001 to finance projects relating to adap- 8% Buildings 18% tation, technology transfer, and capacity Non-energy Land use building. The UNFCCC Adaptation Fund, emissions established in December 2007, will provide funds for adaptation by taxing emission Source: Stern and others 2006. reduction credits generated under the Clean Development Mechanism (box 7.3). These funds are small, however; currently the and nitrous oxide emissions.35 When GHG SCCF is approximately $60 million and the emissions from energy are broken down by Adaptation Fund, $45 million. sector, over one-third of energy emissions are from power generation, approximately Emission Trends and Progress 22 percent from industry, and 22 percent toward Mitigation from transportation.36 The source of GHGs by sector varies Although differences of opinion exist about widely across countries and regions (table stabilization targets and means of achieving 7.7). For the very poorest countries, most them, there is broad agreement that GHG GHG emissions come from agriculture and emissions must be reduced over the coming changes in land use. Indeed, for the Interna- decades to avoid serious alternation of the tional Development Association (IDA) coun- earth's climate. GHG emissions have contin- tries, only 29 percent of GHG emissions ued to increase since 1990, although the rate come from energy use.37 The ranking of the of increase in emissions has slowed for some world's largest emitters of CO2 depends on sectors. whether emissions from land use change are counted in the total. When they are not, the top 10 emitters account for 73 percent GHG Sources and Distribution of CO2 emissions, and China and India are Figure 7.5 and table 7.7 show the breakdown the only developing countries in the top of world GHG emissions in 2000 by sector.34 10. When emissions from land use change Approximately 65 percent of GHG emis- are included, the top 10 emitters account sions come from energy consumption and for two-thirds of CO2 emissions, and three industrial processes, 18 percent from land developing countries--Brazil, Indonesia, use change (deforestation), and the remain- and Malaysia--join China and India in the ing 17 percent from agriculture and waste. list of top 10 emitters.38 Deforestation and fossil fuel consumption The rank of emitters based on per capita primarily produce CO2, while agriculture emissions is quite different. In 2004 world and waste are the main source of methane emissions per capita were 4.5 tons of CO2 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 219 C H A P T E R 7 TABLE 7.7 GHG emissions, by sector and region, 2000 metric tons of CO2e Industrial Land use change Energy processes Agriculture and forestry Waste Total East Asia & Pacific 4,009 428 1,402 3,536 239 9,613 (42) (4) (15) (37) (2) (100) South Asia 1,206 65 550 145 151 2,117 (57) (3) (26) (7) (7) (100) Middle East & North Africa 868 49 78 22 42 1,059 (82) (5) (7) (2) (4) (100) Europe & Central Asia 3,504 101 354 86 146 4,190 (84) (2) (8) (2) (3) (100) Latin America & the Caribbean 1,361 82 1,009 2,357 134 4,943 (28) (2) (20) (48) (3) (100) Sub-Saharan Africa 553 23 294 1,379 59 2,307 (24) (1) (13) (60) (3) (100) High-Income countries 15,481 622 2,043 93 591 18,830 (82) (3) (11) (0) (3) (100) World 26,980 1,369 5,729 7,619 1,361 43,058 (63) (3) (13) (18) (3) Source: WRI. Note: The figures in parentheses are percentages of total emissions. per person from the burning of fossil fuel. countries). Table 7.8 shows complementary The average emissions were 13.3 tons per information for emissions of all GHGs in person in high-income countries, 4.0 in 2000, broken down by Annex I and non- middle-income countries, and only 0.9 tons Annex I countries. per person in low-income countries. The Carbon emissions by both high-income map in figure 7.6 illustrates the striking dis- (Annex I) and developing countries have parity in per capita CO2 emissions between continued to increase and are predicted to developing and developed countries, even increase--by over 60 percent by 2035 from when land use change is included as a 2004 levels under the A1FI scenario. More- source of emissions. over, developing countries' CO2 emissions How have emissions changed over time, from fossil fuel will soon equal those of and how are they likely to change if no high-income countries (figure 7.7). Indeed, steps are taken to reduce GHGs? Figures by 2035 developing countries will equal 7.7 and 7.8 show historic CO2 emissions high-income countries in their contribution from fossil fuel combustion and project to the stock of CO2 in the atmosphere if the them into the future under the IPCC A1FI world follows the A1FI trajectory (figure scenario, which assumes high reliance on 7.8). If all sources of GHGs are included, fossil fuels and rapid economic and popu- non-Annex I countries already emit more lation growth (see table 7.2). Emissions are GHGs than Annex I countries (table 7.8). broken down between those countries that This does not imply that the total emissions agreed to limit GHG emissions under the of developing countries should immediately UNFCCC--labeled Annex I countries-- be reduced, but it does indicate that their and the developing world (non-Annex I magnitude cannot be ignored. 220 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 G L O B A L E N V I R O N M E N T A L S U S T A I N A B I L I T Y : P R O T E C T I N G T H E C O M M O N S FIGURE 7.6 Per capita GHG emissions in 2000, including emissions from land use change Tons of CO2/per capita > 14.0 7.0 ­ 13.9 6.9 ­ 3.0 < 3.0 No data Source: Map created by Vinny Burgoo (http://commons.wikimedia.org/wiki/Image:GHG_per_capita_2000.svg) using CAIT 4.0 database of WRI. approximately 5,000 million metric tons Understanding Sources of Change between 1994 and 2004. This change can in CO2 Emissions from Fossil Fuel be decomposed into a per capita GDP effect To better understand sources of growth in equal to 5,735 metric tons, a population CO2 emissions, it is useful to decompose the effect of 2,665 tons, and a carbon intensity change in CO2 emissions into three compo- effect of ­3,400 tons. This implies that the nents: the change in CO2 per unit of GDP largest factor behind CO2 growth was the (carbon intensity of output); the change in growth in per capita incomes. The effect of per capita income; and the change in popu- population growth was about half as large. lation.39 For emissions to decline as popu- Improvements in carbon intensity, however, lation, per capita incomes, or both rise, the offset 40 percent (­3,400/8,400) of the CO2 intensity of output must decrease. A growth in CO2 from growth in population recent World Bank study decomposes the and per capita incomes. change in fossil fuel emissions for the 70 How did reductions in the carbon inten- largest emitters of CO2 from fossil fuel over sity of output vary across countries? Figure the period 1994­2004 to see which coun- 7.9 groups countries according to the per- tries were able to offset some of the growth centage of increase in CO2 emissions from in emissions that results from income (GDP) GDP growth (growth in GDP per capita plus growth by reducing the carbon intensity of growth in population) that was offset by a output.40 decline in the carbon intensity of output. In For the 70 countries as a whole, which 15 countries, shown in the right bar of the accounted for about 95 percent of global figure, the percentage decline in the carbon CO2 emissions from fossil fuel in 2004, intensity of output was greater than the per- CO2 emissions from fossil fuel increased by centage increase in GDP, implying that more G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 221 C H A P T E R 7 FIGURE 7.7 Annual CO2 emissions under the A1FI scenario, 1965­2035 Annual emissions (Gt) 45 40 35 30 Non-Annex I 25 countries 20 15 Annex I 10 countries 5 0 1965 1975 1985 1995 2005 2015 2025 2035 Source: Wheeler and Ummel 2007. FIGURE 7.8 Cumulative atmospheric CO2 under the A1FI scenario, 1965­2035 Cumulative CO2 (Gt) 800 700 Annex I 600 countries 500 400 Non-Annex I 300 countries 200 100 0 1965 1975 1985 1995 2005 2015 2025 2035 Source: Wheeler and Ummel 2007. than 100 percent of the increase in CO2 What figure 7.9 makes clear is that the emissions due to GDP growth was offset. declines in CO2 emissions by the countries In these countries, which include Denmark, in the right bar of the figure were swamped Germany, the Russian Federation, and Swe- by the increases in emissions of the other den, and some other countries that were part two groups. Countries in the middle group, of the former Soviet Union, CO2 emissions in spite of reductions in the carbon intensity actually declined between 1994 and 2004. of their output, increased carbon emissions Of the world's 10 top emitters of CO2, only substantially--by nearly 4 billion tons a 2 countries (Germany and the Russian Fed- year in the aggregate. Countries whose car- eration) were in this group. For 36 countries bon intensity increased caused world emis- (reflected in the middle bar of figure 7.9) sions to rise by 1.24 billion tons a year. In the carbon intensity of output declined, but contrast, countries in the right bar caused the percentage decrease in carbon intensity annual emissions to drop by only 200 mil- was smaller than the percentage increase lion tons a year. in GDP, implying offsetting between 0 and Although the carbon intensity of GDP 100 percent. For the remaining 19 coun- fell for 51 out of the 70 largest emitters of tries, the carbon intensity of output actually CO2 between 1994 and 2004, it must fall increased, implying no offsetting. even faster if world carbon emissions are to 222 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 G L O B A L E N V I R O N M E N T A L S U S T A I N A B I L I T Y : P R O T E C T I N G T H E C O M M O N S TABLE 7.8 Comparison of GHG emissions for Annex I and non-Annex I countries Category Measurement Annex I Non-Annex I GHG emissions in 2000: CO2, CH4, N2O, PFCs, Percent of total emissions 42.0 58.0 HFCs, SF6 (including land use change) Tons of CO2e per person 13.9 4.9 Cumulative CO2 emissions, 1950­2000 Percent of total emissions 52.5 47.5 (including land use change) Tons of CO2 per person 457 103 Carbon intensity of electricity production Grams of CO2/kilowatt hour 436 679 CO2 intensity of economy Tons of CO2/ million 491 569 (excluding land use change) $PPP GDP Source: WRI 2007. decrease. For developing countries, carbon FIGURE 7.9 Change in annual CO2 emissions by per unit of GDP must decrease even if their carbon intensity class, 1994­2004 total carbon emissions are allowed to increase. Suppose, for example, that the carbon emis- Percent sions of developing countries are allowed to 36 4500 double over the next 20 years, implying an countries 4000 annual growth rate in emissions of 3.5 per- 3500 cent. For carbon emissions to grow at a rate 3000 of 3.5 percent a year when GDP is growing at 2500 a rate of 10 percent a year--growth rates that 2000 19 India and China have recently experienced-- 1500 countries carbon per dollar of GDP must fall at a rate 1000 of 6.5 percent a year. 15 500 countries 0 Balancing Economic Growth and ­500 No Offsetting Offsetting Reductions in Carbon Intensity offsetting between 0% greater than and 100% 100% How can the carbon intensity of GDP be reduced as countries continue to grow? This must occur by reducing either the energy Source: Derived from Bacon and Bhattacharya 2007. intensity of GDP (the energy used per unit Note: Countries are categorized according to whether changes in carbon intensity of output offset growth in GDP. Offsetting greater of output), the fossil fuel intensity of energy than 100 percent indicates that reductions in carbon intensity of (the fossil fuel used per unit of energy), or the output more than offset emissions from GDP growth, resulting in a decline in total emissions; offsetting between 0 and 100 percent carbon intensity of fossil fuel (the amount of indicates that some fraction of emissions from GDP growth was carbon in a unit of fossil fuel), or by some offset by reductions in carbon intensity; and "no offsetting" indicates that carbon intensity of output increased, adding to the combination of the three. Between 1994 and increase in emissions from GDP growth. 2004 the reduction in the carbon intensity of GDP came almost entirely from reductions in the energy intensity of GDP. The carbon Improving energy efficiency. Figure 7.10 intensity of fossil fuel decreased slightly, shows the energy intensity of GDP for World reflecting a shift from coal to natural gas, Bank regions. Eastern Europe and Central but this reduction was offset by an increase Asia had the highest energy intensity in in the fossil fuel intensity of energy. 2004, largely because of the continued use G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 223 C H A P T E R 7 of old, inefficient production equipment for about a third of world energy consump- across various industries, dilapidated heating tion, and three industries--chemicals and systems in cities and towns, high transmis- petrochemicals, iron and steel, and non- sion and distribution losses, and inefficient metallic minerals--account for over half of stocks of household appliances. In China manufacturing energy use and over 70 per- the widespread use of inefficient, coal-based cent of CO2 emissions from manufacturing. power plants and small boilers for heating Table 7.9 compares the energy efficiency of has offset an increasing trend in efficiency three production processes in various coun- in other sectors. In both China and India a tries with each other and with best-available large proportion of small- and medium-scale technology. There is clear variation in energy industries continues to use old and inefficient efficiency across countries: China, the world's technologies that contribute to high energy- largest producer of cement, is less efficient intensity levels. Even though Sub-Saharan than India or Japan. However, the energy Africa's energy use is small on a global scale efficiency of cement production could be (it used only 4 percent of global energy sup- increased even in Europe and Japan. Similar ply in 2004), as the industrial sector in the gains in efficiency could be realized in steel region develops, the adoption of new tech- and ammonia production. Overall, the IEA nologies will be needed if energy intensity is study estimates that between 18 and 26 per- to improve. cent of world industrial energy use could be How great is the technical scope for reduced by using best-practice technologies. improving energy efficiency in developing This would reduce CO2 emissions by between countries? The International Energy Agency 1.9 billion and 3.2 billion tons a year. has recently completed a global analysis of Improving energy efficiency in power gen- energy efficiency in manufacturing.41 The eration will also reduce energy CO2 intensi- study found that manufacturing accounts ties, especially in countries such as India and FIGURE 7.10 Energy intensity by region, 2004 Energy intensity (kg of oil equivalent per constant 2000 US$) 1.4 Sub-Saharan Africa 1.2 1.0 Other East Asia & Pacific Europe & Other South Asia Central Asia 0.8 Middle East & North Africa India 0.6 China High-income countries 0.4 0.2 Latin America & the Caribbean 0 0 2,000 4,000 6,000 8,000 Cumulative GDP, US$ billions Source: World Bank 2007a. 224 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 G L O B A L E N V I R O N M E N T A L S U S T A I N A B I L I T Y : P R O T E C T I N G T H E C O M M O N S China that depend on coal for power gen- TABLE 7.9 Comparison of industrial energy efficiency eration. The average thermal efficiency (the across countries amount of power produced per unit of heat input) of power plants in India and China is Energy consumption per unit produced between 29 and 30 percent, compared with (100 = most efficient country) 36 percent in developed countries. Super- Steel Cement Ammonia critical plants can achieve efficiencies up to 45 percent. In China, installed capacity Japan 100 100 n.a. is expected to double--from 500 to 1,000 Europe 110 120 100 United States 120 145 105 gigawatts (GW) between 2007 and 2015. China 150 160 133 India is expected to add 100 GW of capac- India 150 135 120 ity over the same period.42 Installing ther- Best-available technology 75 90 60 mal power plants with an efficiency of 38 percent in China would reduce carbon emis- Source: Watson and others 2007. sions at a typical plant by 22 percent. Emis- n.a. = Not available. sion reductions of up to 92 percent could be achieved by building supercritical plants with carbon capture and storage.43 support, international financial institutions The adoption of some low-carbon options are attempting to fill this market void. Cur- will clearly require external financing and rently, the World Bank manages nine car- a positive shadow price for carbon. There bon funds totaling more than $2.5 billion. are, however, some "no regrets," win-win The International Finance Corporation and options for improving energy efficiency European Bank for Reconstruction and that would pay for themselves in fuel sav- Development manage three additional car- ings if subsidies to energy consumption and bon funds. These funds support more fuel- production were removed.44 These include efficient thermal power generation as well as reducing losses in the transmission and renewable energy sources.45 distribution of electricity, some improve- ments in power plant efficiency, insulation Reducing the carbon intensity of energy of buildings and improvements in appli- use. The carbon intensity of energy used by ance and vehicle efficiency. In many devel- the top 70 emitters of CO2 did not improve oping countries, demand-side incentives to over the 1994­2004 period--although the improve energy efficiency are weak because carbon intensity of fossil fuel decreased electricity is not priced to recover the costs slightly, the share of fossil fuel in energy of generation. Failure to reform the electric- increased. Substituting renewable energy ity sector may also hamper access to financ- sources for fossil fuels does, however, rep- ing more efficient power plants. resent another means of reducing the carbon Low-carbon investments that would not intensity of GDP. Although many sources of pay for themselves in fuel savings or ancil- renewable energy may not be cost-effective lary benefits could be financed by selling at current energy prices, the potential for the emission reduction credits in a world tapping these sources exists in many devel- in which long-term commitments to reduce oping countries. And, given a functioning CO2 emissions establish a price path for car- carbon market, these sources would likely bon. This is now possible under the Kyoto be exploited eventually. Protocol's Clean Development Mechanism A recent World Bank study has estimated (box 7.3); however, because the Kyoto Pro- the potential for developing five sources tocol ends in 2012, the Clean Development of renewable energy--solar power, wind Mechanism does not currently provide long- power, hydro power, geothermal energy, term financing opportunities. With donor and biofuels--in developing and developed G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 225 C H A P T E R 7 countries.46 In each case potential energy Reducing deforestation. Land use change supply is expressed as a fraction of current currently accounts for 18 percent of GHG energy consumption. Table 7.10 shows the emissions. As figure 7.11 shows, CO2 emis- availability of renewable energy sources, sions from changes in land use increased relative to current consumption, for devel- more or less steadily from 1850 until 2000. oping countries by World Bank region. Since the early 20th century emissions from The opportunities for renewable energy are land use change in developing countries have greatest in Sub-Saharan Africa and parts of dominated emissions from Annex I coun- Latin America. Of the top 35 countries in tries. In recent years two countries--Brazil the world with the most solar energy poten- and Indonesia--have produced over half of tial, 17 are in Sub-Saharan Africa and 7 in all world emissions from land use change. Latin America. Of the top 35 countries in In Brazil, forests in the Amazon have been the world with the most biofuel potential, cleared to make way for pasture and crop- 25 are in Sub-Saharan Africa. Note that land. The ultimate drivers of deforestation table 7.10 measures the technical potential in Brazil are the demand for beef, soybeans, for developing renewable energy sources. and lumber. Deforestation in Indonesia For such development to be economically has been driven by the demand for timber feasible, the world would have to make a sig- and pulp and for land for palm oil planta- nificant commitment to GHG reduction. In tions.48 In both countries, deforestation has the case of biofuels, the implications of their been undertaken by large corporate interests development on land use and food security as well as by small-holders. Although the must also be considered.47 data pictured in figure 7.11 stop in 2000, TABLE 7.10 Availability of renewable resources relative to current consumption, by World Bank region annual renewable energy potential in years of current energy consumption Sub-Saharan Africa East Asia and Pacific Latin America and the Caribbean South Asia Namibia 100.5 Mongolia 514.9 Bolivia 37.5 Nepal 2.8 Central African Republic 90.9 Papua New Guinea 12.6 Uruguay 31.7 Pakistan 1.9 Mauritania 86.2 Solomon Islands 9.3 Argentina 27.5 Sri Lanka 1.2 Chad 77.3 Lao PDR 8.8 Guyana 19.3 Bangladesh 1.1 Mali 58.4 Cambodia 4.9 Paraguay 19.1 India 0.9 Niger 50.4 Myanmar 3.9 Peru 6.7 Congo, Rep. of 43.6 Vanuatu 3.3 Brazil 6.4 Angola 27.9 Fiji 1.5 Chile 5.5 Sudan 27.6 China 1.2 Colombia 4.4 Zambia 25.2 Indonesia 0.8 Nicaragua 3.8 Congo, Dem. Rep. 24.7 Vietnam 0.7 Belize 3.8 Mozambique 23.4 Thailand 0.6 Venezuela. R. B. de 2.6 Botswana 22.4 Philippines 0.6 Ecuador 2.6 Gabon 20.3 Malaysia 0.6 Honduras 2.2 Burkina Faso 15.9 Panama 1.9 Madagascar 14.6 Costa Rica 1.8 Guinea-Bissau 14.2 Guatemala 1.3 Tanzania 14.1 Mexico 1.1 Cameroon 12.7 Senegal 12.5 Benin 12.5 Sierra Leone 10.1 Source: Buys and others 2007. 226 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 G L O B A L E N V I R O N M E N T A L S U S T A I N A B I L I T Y : P R O T E C T I N G T H E C O M M O N S annual hectares deforested in Indonesia to what would have occurred under busi- were approximately the same between 2000 ness as usual and can include reforestation and 2005 as between 1990 and 2000.49 In projects. The mechanism, however, does not Brazil hectares deforested actually increased allow developing countries to create emission from 2.7 million annually between 1990 reduction credits from avoided deforestation. and 2000 to 3.1 million annually between A new carbon credit program is currently 2000 and 2005. under negotiation within the UNFCCC that As many have observed, the continued would compensate countries with carbon conversion of the world's forests for agri- credits for avoided deforestation (see box culture would not be economical if there 7.3). This complements donor efforts to fund were a well-functioning carbon market.50 avoided deforestation, including the World The present value of a hectare of crop- or Bank's Forest Carbon Partnership Facility, pastureland in the Brazilian Amazon is which will help developing countries improve worth between $100 and $200.51 Clearing their estimates of forest carbon stocks and a hectare of dense rainforest could release fund pilot projects to reduce deforestation, 500 tons of CO2. At a carbon price of even and the Bank's BioCarbon Funds. $10 per ton of CO2, an asset worth $5,000 is being destroyed for a land use that is one- Progress on Institutions twentieth as valuable. and Policies to Deal Currently the carbon market does not with Climate Change extend to avoided deforestation. The Clean Development Mechanism allows parties Because the abatement of greenhouse gases to the Kyoto Protocol to purchase emission is a global public good, policies to reduce reduction credits from projects in develop- GHGs require international coordination. ing countries that reduce CO2 emissions (box Beginning with the formation of the IPCC in 7.3). These reductions must be additional 1988 and continuing with the establishment FIGURE 7.11 CO2 emissions from land use change, 1850­2000 Millions of metric tons of CO2 equivalent 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 ­1,000 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 Tropical Asia China Middle East & North Africa Tropical America Tropical Africa Annex I countries Source: CDIAC 2008. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 227 C H A P T E R 7 BOX 7.3 Sources of carbon finance under the UNFCCC Under the Clean Development Mechanism (CDM), parties to the Kyoto Protocol can meet their obligations to reduce GHG emissions by purchasing emission reduction credits (ERCs) from projects in developing countries. An ERC is generated if a project reduces its carbon emissions below what would have occurred without the CDM. The credits must be certified by the UNFCCC before they can be used to meet obligations under the Kyoto Protocol. The CDM market is growing rapidly. As of January 2008, the UNFCCC had registered 901 projects with ERCs totaling 1.15 billion tons of CO2 equivalent. Most of these projects have originated in Asia or Latin Amer- ica, with fewer than 3 percent originating in Africa. If projects are weighted by the number of ERCs delivered, China was the largest seller of ERCs in transactions that occurred between January 2005 and September 2006, accounting for 61 percent of credits sold.a Most transactions have involved energy and manufacturing projects. Under the Marrakesh accords, land use projects are limited to afforestatation and reforestation projects. A new carbon credit program is under negotiation within the UNFCCC--Reducing Emissions in Deforesta- tion and Forest Degradation (REDD)--that would compensate countries with carbon credits for their efforts in reducing CO2 emissions through forest conservation and by controlling forest degradation. A recent study by the Woods Hole Research Centerb develops a conceptual framework of the costs to tropical countries of implement- ing REDD programs. It estimates that, in the Brazilian Amazon, approximately 90 percent of the opportunity costs of maintaining existing forest could be compensated for $3 per ton of carbon (approximately $1 per ton of CO2). Under the program, forest families would double their incomes, fire-related damages would be avoided, and carbon emissions would be reduced over 30 years by 6.3 billion tons, equivalent to 23 billion tons of CO2. a. Lecocq and Ambrosi 2007. b. Woods Hole Research Center 2007. of the UNFCCC in 1992, the nations of the work for climate change policy consisting of world have taken steps to address the effects four elements: a long-term goal of stabilizing of human actions on the earth's climate. Prog- GHG concentrations in the atmosphere at a ress in establishing a link between human level that would prevent dangerous interfer- actions and climate change--and drawing ence with the climate system; a short-term public attention to this fact--is the first step goal for developed (Annex I) countries to in formulating effective public policies. The stabilize their emissions at 1990 levels by successful regulation of ozone-depleting sub- 2000; a principle of "common but differ- stances under the Montreal Protocol would entiated responsibilities," suggesting that never have occurred had scientists not dem- developing countries should not be expected onstrated that 40 percent of the stratospheric to undertake the same obligations as devel- ozone layer had disappeared between 1957 oped countries; and opportunities for real- and 1984 and linked pictures of the hole in izing more cost-effective reductions in GHG the ozone layer to emissions of chlorofluoro- emissions through joint implementation.52 carbons (CFCs) and other ozone-depleting Under joint implementation developed substances. countries were allowed to invest in emis- International policies to deal with cli- sion-reducing projects in developing coun- mate change have been organized under the tries to meet their 2000 emission reduction United Nations Framework Convention on goals. Although only a few Annex I coun- Climate Change, which was signed in Rio tries had met their emissions goals by 2000, de Janeiro in 1992, went into force in 1994, the Rio accords established important prin- and has been ratified by 190 countries. The ciples that continue to be reflected in policy UNFCCC created an international frame- discussions. 228 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 G L O B A L E N V I R O N M E N T A L S U S T A I N A B I L I T Y : P R O T E C T I N G T H E C O M M O N S decline in economic activity after 1990, The Kyoto Protocol while most developed-country parties to the The Kyoto Protocol, which came into force Protocol have thus far not met their targets in February 2005, committed most industrial (figure 7.12).53 countries and some transition economies (referred to as the Annex B countries) to spe- Beyond Kyoto cific GHG emissions targets. Over 2008­12, the total emissions of Annex B countries are International agreements to deal with cli- to be reduced 5 percent below 1990 levels. mate change in the future will have to deal Countries can either reduce GHG emissions with several issues. Progress toward global or enhance the amount of carbon captured in environmental sustainability will depend on "carbon sinks" (by sequestering GHG from how agreements measure up against the fol- the atmosphere) such as reforestation pro- lowing criteria.54 First, an agreement must grams. The protocol also allows countries achieve a desirable environmental outcome. to buy emission rights from other Annex B This could be stated as an emissions (or con- countries whose emissions are below their centration) target or as a temperature goal. limits and to assist non­Annex B countries Second, the agreement should be efficient-- to implement projects that reduce GHG it should achieve the environmental outcome emissions through the Clean Development at least cost, both in the timing of actions Mechanism (see box 7.3). and in minimizing the costs of abatement The Kyoto Protocol represents a major across countries. Third, the obligations and attempt by the international community to results of the policies should be viewed as come to grips with climate change. By signal- equitable, both across countries and, given ing the intention of many countries to reduce the long-term nature of climate change, GHG emissions, it may encourage investors across generations. Fourth, the policies to adopt more efficient, low-carbon technol- should be flexible--they should be able to ogies. Through provisions for carbon trading accommodate changes in information about and the Clean Development Mechanism, the climate science. And, finally, the agreement protocol helps to establish the principle that should encourage wide participation and emissions reductions should be achieved in a compliance among countries. cost-effective manner. It is also equitable, in Whatever form an international agree- the sense that it imposes no restrictions on ment takes, it will have to provide incentives the emissions of developing countries, which to reduce GHG emissions and an institution on a per capita basis have contributed less to to collect and verify information on GHG the existing stock of greenhouse gases than emissions so that progress toward mitiga- developed countries. tion goals can be monitored.55 The verifica- The Kyoto Protocol has nevertheless been tion and publicizing of GHG emissions at the subject to many criticisms. For one thing, it country level is necessary for the enforcement does not limit the emissions of three of the of an international agreement, will signal the world's five largest emitters of greenhouse willingness of countries to participate in the gases--the United States, China, and India. agreement, and will provide the means for The United States did not ratify the treaty, stakeholders to put pressure on major emit- and the Kyoto Protocol does not extend to ters.56 To provide an incentive to reduce developing countries. It is too early to judge GHG emissions, emissions must be priced, compliance (obligations to curtail are legally whether through a carbon tax, a permit mar- binding only for the 2008­12 period), but ket, or some combination of the two. The transition economies have more than satis- agreement will also have to make some provi- fied their Kyoto targets because of a major sions for the accelerated development of clean G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 229 C H A P T E R 7 FIGURE 7.12 Kyoto targets and changes in GHG emissions for Annex B countries Spain Australia Canada United States Italy Japan The Netherlands Belgium European Union France Denmark Sweden United Kingdom Poland Germany Russian Federation Ukraine ­60 ­40 ­20 0 20 40 60 Percent Kyoto Target: 2008­12 (% change from 1990 levels) Change in GHG emissions: 1990­2005 (% change from 1990 levels) Source: UNFCCC 2008, EEA. technologies, including clean energy technol- continued diversity of animal and plant spe- ogies, carbon capture and storage, and geo- cies is important to the world's economy, and engineering, and it will need to finance the especially to the lives of the poor in develop- diffusion of these technologies in developing ing countries. Ocean fisheries, in particular, countries. Finally, the agreement will need to constitute an important source of food, and support developing-country adaptation to the of livelihoods, for developing countries. impacts of unavoidable climate change. Biodiversity Recent Trends in Biodiversity and Marine Fisheries One of the targets of MDG 7 is to reduce biodiversity loss. The two indicators associ- The global commons includes the animal and ated with this target are the proportion of plant species that inhabit the planet, as well terrestrial and marine areas that are pro- as the earth's climate. Protecting the diver- tected, and the proportion of the earth's sity of animal and plant life is important for species that are threatened with extinction. both economic and noneconomic reasons: Figure 7.13 depicts trends in protected areas humans attach a value to the existence of from 1990 to 2005. As the figure shows, the diversity per se, quite apart from the role percent of area protected in all World Bank that biological organisms play in the produc- regions has increased since 1990. On aver- tion of goods and services. At the same time, age, approximately 15 of territorial area is 230 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 G L O B A L E N V I R O N M E N T A L S U S T A I N A B I L I T Y : P R O T E C T I N G T H E C O M M O N S FIGURE 7.13 Proportion of terrestrial and marine area protected Percent 20 18 16 14 12 10 8 6 4 2 0 East Asia Europe & Latin America Middle East & South Asia Sub-Saharan & Pacific Central Asia & Caribbean North Africa Africa 1990 1995 2000 2005 Source: http://millenniumindicators.un.org/unsd/mdg/Data.aspx. protected worldwide, although the percent The LPI (figure 7.14) decreased from a protected varies considerably across coun- value of 1.0 in 1970 to 0.71 in 2003, sug- tries and regions. gesting a downward trend in vertebrate Measuring the health of a wide variety populations overall. Each of the three com- of animal and plant species is inherently ponent indexes also declined by approxi- more difficult than measuring the fraction mately 30 percent. These aggregate trends, of land that is protected. Data on birds and however, mask important regional changes mammals come from sightings of individual in biodiversity (figure 7.15). The decline in members of populations in a limited num- the terrestrial index reflects a slight increase bers of locations. The size of fish popula- in the population of temperate species, but tions is often inferred from the ratio of har- vests to effort (such as number of boat days) FIGURE 7.14 Living Planet Index, 1970­2003 and is likewise subject to error, especially for individual species. Obtaining reliable data on the proportion of individual species Index (1970 = 1.0) threatened with extinction (indicator 7.6) is 1.2 therefore difficult. The World Wildlife Fund 1.0 (WWF) summarizes changes in populations of vertebrate species in its Living Planet 0.8 Index (LPI)--the index measures trends in 0.6 the planet's biodiversity by tracking over 0.4 3,600 populations of 1,313 vertebrate spe- cies.57 Separate indexes are computed for 0.2 terrestrial, marine, and freshwater organ- 0 1970 1980 1990 2000 2003 isms using data from a variety of sources. Indexes are also computed for different bio- geographic regions of the world. Source: WWF 2006. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 231 C H A P T E R 7 FIGURE 7.15 Living Planet Indexes for terrestrial, marine, and freshwater organisms Index (1970 = 1.0) Index (1970 = 1.0) 1.8 1.8 1.6 1.6 1.4 1.4 1.2 1.2 1.0 1.0 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 0.0 0.0 1970 1980 1990 2000 03 1970 1980 1990 2000 03 Terrestrial index Temperate Freshwater index Temperate Tropical Tropical Index (1970 = 1.0) Index (1970 = 1.0) 1.8 1.8 1.6 1.6 1.4 1.4 1.2 1.2 1.0 1.0 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 0.0 0.0 1970 1980 1990 2000 03 1970 1980 1990 2000 03 Marine index Arctic/Atlantic Oceans Marine index Pacific Ocean Southern Ocean Indian/Southeast Asian Ocean Source: WWF 2006. a 55 percent decrease in the populations of but trends in the four ocean basins var- tropical species. The rapid decline in the ter- ied greatly. Monitored populations in the restrial index in tropical regions reflects the Atlantic-Arctic oceans actually increased, conversion of natural habitat to cropland while populations in the Pacific were at or pasture. The most rapid conversion over approximately the same levels in 2003 as the past 20 years occurred in the forests of in 1970. In contrast, marine populations in Southeast Asia and in South America. the Indian Ocean declined by 55 percent, The marine subindex declined overall while populations in the Southern Ocean by 27 percent between 1970 and 2003, decreased by 30 percent. The relative stabil- 232 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 G L O B A L E N V I R O N M E N T A L S U S T A I N A B I L I T Y : P R O T E C T I N G T H E C O M M O N S ity of populations in the Pacific, the world's fisheries production comes from marine and largest commercial fishery, masks declines freshwater fish capture; the remainder comes in economically important species such as from aquaculture. Developing countries are cod and tuna as a result of overfishing. among the top 10 countries in fish capture: The freshwater index shows that species together China, Peru, Chile, Indonesia, and populations in this group declined by 30 per- India accounted for 45 percent of inland cent between 1970 and 2003. This represents and marine fish catches in 2004.60 While the a stable trend in bird populations, but a 50 number of fishers has been declining in most percent decline in fish species, attributable high-income countries, it has increased in to habitat destruction, overfishing, and pol- China, Peru, and Indonesia since 1990. lution. The damming of rivers for industrial Indicator 7.3 of MDG 7 calls for monitor- and domestic use is likely responsible for ing the proportion of fish populations within much of the habitat destruction. The altera- safe biological limits. The Food and Agricul- tion of natural river flows alters the migra- ture Organization (FAO) has monitored the tion and dispersal of fish. More than 70 world's marine stocks since 1974. As figure percent of large river systems (measured by 7.16 reveals, about half of all stocks are fully catchment area) in virtually all biomes have exploited, implying that production is close been disrupted, primarily for irrigation.58 to maximum sustained yield. The share of fish stocks that are moderately exploited or underexploited has fallen, from 40 percent Marine Fisheries in 1974 to 25 percent in 2006, while the The health of marine fisheries is especially share of overexploited fish populations has important to developing countries. Fish pro- increased, from 10 percent in 1974 to 25 vide 2.6 billion people with over 20 percent percent. The increase in the number of over- of their protein intake.59 Two-thirds of world exploited stocks occurred primarily during FIGURE 7.16 Global trends in the world's marine stocks since 1974 Percentage of stocks assessed 60 50 40 30 20 10 0 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Underexploited, moderately exploited Fully exploited Overexploited, depleted, recovering Source: FAO 2007. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 233 C H A P T E R 7 the 1970s and 1980s, however, and the share ern latitudes than in subtropical regions. overexploited has stabilized since 1990. But temperature increases in subtropi- The data in figure 7.16 are consistent cal regions will reach levels where agri- with trends in capture fisheries production. cultural productivity is likely to decline. Production from marine and inland fisher- Heat waves will be more likely in both ies increased rapidly from 1950 until 1970, southern and northern latitudes. Dry grew more slowly from 1970 until 1990, and areas are likely to become drier and wet has stabilized since then.61 Since the world's areas wetter. fishing fleet has also been approximately sta- Poor countries will suffer the most from, ble between 1990 and 2004, the stable catch and are able to adapt the least to, the is consistent with fish populations that are, effects of climate change. These include in the aggregate, stable. impacts on agriculture and human health This does not, however, mean that there and effects caused by rising sea levels is no cause for concern. The most com- and extreme weather events. However, mercially successful species are all fully vulnerability to climate impacts varies exploited or overexploited. Examples of the widely among developing countries, sug- latter include the blue whiting in the North- gesting that adaptation planning must be east Atlantic and the Chilean jack mackerel country-specific. and some anchoveta stocks in the Southeast For developing countries, the best way Pacific. The percent of stocks that are over- to adapt to climate change is to promote exploited varies by area. The areas with the inclusive development. This will help to highest proportion (46­60 percent) of over- reduce vulnerability to climate impacts exploited species are the Southeast Atlantic, through economic diversification and by the Southeast Pacific, the Northeast Atlan- providing the poor with the resources they tic, and the high seas. The FAO suggests need to adapt. Achieving MDGs 1, 4, and that deep water species in the high seas are 6 would constitute effective adaptation to at particular risk of exploitation because of the health effects of climate change. their slow growth rates and late age at first Although much adaptation is a private maturity.62 good, governments have a role to play in fostering adaptation: they can help pro- vide information, including weather fore- Conclusions casts; they can facilitate infrastructure Following are the key points summarizing investments; they can promote efficient the findings of this chapter: market responses to climate change-- such as weather-index and flood insur- The world has been warming since the ance; and they can build institutions to industrial revolution as a result of human help with disaster relief and set up social emissions of greenhouse gases. This effect programs to cushion households from has accelerated in the second half of the income shocks. 20th century and especially since 1990. Preventing dangerous changes in cli- If past trends in emissions continue, the mate will necessarily involve mitigation world could experience mean global tem- of GHGs. This includes CO2 from fossil perature increases of 2 to 6 degrees centi- fuel use, but also mitigation of CO2 from grade by the end of the century. deforestation and reduction of methane These temperature increases, and accom- and nitrous oxide from agriculture. Bet- panying changes in precipitation, sea level ter data are needed on GHG emissions rise, and extreme weather events will not from land use and agriculture, as these be evenly distributed across countries. sources currently account for one-third Temperatures will rise more in north- of GHG emissions. 234 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 G L O B A L E N V I R O N M E N T A L S U S T A I N A B I L I T Y : P R O T E C T I N G T H E C O M M O N S CO2 emissions from fossil fuel can be The formulation of an international archi- reduced by reducing the energy inten- tecture to deal with climate change is an sity of output and the carbon intensity of ongoing process. Despite its limitations, energy. Studies of the technical feasibility the Kyoto Protocol has helped establish of improving energy efficiency indicate a foundation for global collective action considerable scope for improving energy to build on. Future agreements will be efficiency and for replacing fossil fuels judged according to their ability to limit with renewable energy sources. GHG emissions significantly, to do so in The use of technologies that are more a cost-effective and equitable manner, energy efficient and the tapping of renew- and to ensure widespread compliance. able energy sources will depend in part on the world's making a commitment to reduce GHG emissions. If carbon is priced, Notes then the reductions in carbon emissions in 1. In this respect the chapter has a very dif- developing countries could be sold on the ferent objective from the UNDP's 2007 Human carbon market to finance low-carbon tech- Development Report, which discusses the impacts nologies. This approach, however, would of climate change and the costs of mitigation and require a long-term commitment since argues for specific emissions targets, and the Stern low-carbon capital investments will yield Review (Stern and others 2006), which presents carbon reductions over a long horizon. a detailed analysis of the economics of climate change. The International Monetary Fund (2008) International financial institutions may in chapter 4 of the April 2008 World Economic be able to bridge the gap between current Outlook discusses the macroeconomic implica- schemes (such as the Clean Development tions of climate change, including the costs of Mechanism) and those that will replace GHG mitigation and their fiscal implications. them in the longer term. 2. IPCC 2007b. Carbon finance can also help reduce emis- 3. IPCC 2007b. sions from deforestation. Using carbon 4. CDIAC 2008; NOAA 2008. Other GHGs finance to protect forests will require the include methane (CH4), nitrous oxide (N2O), development of institutions to monitor fluorocarbons (perfluorocarbon (PFC), hydro- and protect forests at the national level, fluorocarbon (HFC), and sulphur hexafluoride as well as funding from developed coun- (SF6). The concentrations of these GHGs in the tries, through a carbon market or other atmosphere are described in terms of CO2 equiva- forms of assistance. lents. Equivalent CO2 (CO2e) is the concentration of CO2 that would cause the same level of radia- The world has made progress in dealing tive forcing as a given type and concentration of with climate change in the past 20 years, greenhouse gas. most notably by establishing the IPCC and 5. IPCC 2007b, figure SPM.4. UNFCCC. The UNFCCC has established 6. A change of 2°C relative to pre-industrial important principles in dealing with cli- times represents a change of 1.5°C relative to mate change: that the world should stabilize 1980­99 levels. GHG concentrations in the atmosphere at 7. IPCC 2007b, figure SPM 6. The CO2 equiva- a level that would prevent dangerous inter- lent concentration of 375 ppm reflects the effects ference with the climate system; that this of aerosols as well as long-lived GHGs. 8. UNDP 2007. goal should be achieved through "common 9. IPCC 2007a. but differentiated responsibilities," sug- 10. Weitzman (2007) has recently emphasized gesting that developing countries should this point. not be expected to undertake the same 11. IPCC 2007b. obligations as industrialized countries; and 12. Or 2.3°C compared with pre-industrial that reductions in GHG emissions should levels. be achieved in a cost-effective manner. 13. 2007b, table SPM.6. G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 235 C H A P T E R 7 14. World Bank 2007d. attributed to end users (such as agriculture and the 15. Cline 2007. residential sector). 16. The carbon fertilization effect raises yields 37. World Bank 2007b. approximately 15 percent for crops such as rice, 38. WRI 2007. wheat, and soybeans. 39. Formally, emissions = carbon intensity 17. Cline 2007, table 6.2. It should be noted effect + per capita GDP effect + population effect. that Cline's analysis ignores the effects of yield The carbon intensity effect = emissions * [rate of changes on agricultural prices. growth carbon intensity/rate of growth in emis- 18. Velicogna and Wahr 2006. sions]. Other effects are defined similarly. 19. Dasgupta and others 2007. The impacts of 40. Note that CO2 intensity is calculated using sea level rise on GDP are calculated by attributing PPP (purchasing power parity) GDP; however, current GDP to each square mile of a country's using GDP at market exchange rates makes little surface area. The percent of GDP affected by sea difference in the rates of change computed in the level rise is calculated based on this attribution study (Bacon and Bhattacharya 2007). and ignores the macroeconomic impacts of sea 41. IEA 2007. level rise on GDP. 42. UNDP 2007. 20. Buys and others 2007. The data for the 43. Watson and others 2007. index come from the Emergency Disasters Data- 44. World Bank 2006. base (EM-DAT) at the Center for Research on the 45. For more on external financing of climate Epidemiology of Disasters, Université Catholique change mitigation and adaptation in developing de Louvain. countries, see chapter 3. 21. Schelling 1992. 46. Buys and others 2007. 22. In 2004, 55 percent of the labor force in 47. World Bank 2007d. South Asia, and 58 percent of the labor force in 48. Chomitz and others 2007. Sub-Saharan Africa and East Asia and the Pacific 49. FAO 2008. were employed in agriculture (World Bank 2007a). 50. Chomitz and others 2007; UNDP 2007. On average, the share of agriculture in GDP in 51. Chomitz and others 2007. 2004 was 22 percent in low-income countries and 52. Aldy and Stavins 2007. only 2 percent in high-income countries. 53. The penalties for noncompliance are not 23. Kahn 2005. likely to change behavior. Countries that fail 24. Yohe and Tol 2002. to meet their targets in 2008­12 must make up 25. Kurukulasuriya and Mendelsohn 2007. for this shortfall in the subsequent commitment 26. UNDP 2007. period, plus a 30 percent penalty. A country liable 27. Stern and others 2006. for the penalty could fail to ratify the extension or 28. UNDP 2007. insist on raising its emissions limit as a condition 29. Stern and others 2006. of participation. 30. Bettencourt and others 2006; ADB 2005. 54. Aldy and others 2003; Aldy and Stavins 31. Stern and others 2006. 2007. 32. Suryahadi, Sumarto, and Pritchett 2003. 55. Wheeler 2007 33. ADB 2005. 56. Currently the UNFCCC reviews the GHG 34. Information on CO2 emissions from land inventories of Annex I countries. For a descrip- use, based on Houghton (2003), have been pub- tion of the review process, see (http://unfccc. lished for 1850­2000. Data on non-CO2 gases are int/national_reports/annex_i_ghg_inventories/ available from the U.S. Environmental Protection review_process/items/2762.php). Agency for 1990, 1995, and 2000 (WRI 2007). 57. WWF 2006. 35. In terms of CO2 equivalents (see note 4), 58. WWF 2006. carbon dioxide accounts for approximately 78 59. FAO 2007. percent, methane for 14 percent, and nitrous oxide 60. FAO 2007. for 7 percent of GHG emissions. Fluorocarbons 61. The yearly variation in production between and sulphur hexafluoride account for the remain- 1990 and 2004 is due almost entirely to variation ing GHG emissions. in production from the Peruvian anchovy fishery 36. There are various possible sectoral break- and is associated with El Niño. downs, depending on whether or not electricity is 62. 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(1), 25-40. 250 G L O B A L M O N I T O R I N G R E P O R T 2 0 0 8 ANNEX Monitoring the MDGs: Selected Indicators 12 Goals and Targets from the Millennium Declaration GOAL 1 ERADICATE EXTREME POVERTY AND HUNGER TARGET 1.A Halve, between 1990 and 2015, the proportion of people whose income is less than $1 a day TARGET 1.B Achieve full and productive employment and decent work for all, including women and young people TARGET 1.C Halve, between 1990 and 2015, the proportion of people who suffer from hunger GOAL 2 ACHIEVE UNIVERSAL PRIMARY EDUCATION TARGET 2.A Ensure that by 2015, children everywhere, boys and girls alike, will be able to complete a full course of primary schooling GOAL 3 PROMOTE GENDER EQUALITY AND EMPOWER WOMEN TARGET 3.A Eliminate gender disparity in primary and secondary education, preferably by 2005, and at all levels of education no later than 2015 GOAL 4 REDUCE CHILD MORTALITY TARGET 4.A Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate GOAL 5 IMPROVE MATERNAL HEALTH TARGET 5.A Reduce by three-quarters, between 1990 and 2015, the maternal mortality ratio TARGET 5.B Achieve by 2015 universal access to reproductive health GOAL 6 COMBAT HIV/AIDS, MALARIA, AND OTHER DISEASES TARGET 6.A Have halted by 2015 and begun to reverse the spread of HIV/AIDS TARGET 6.B Achieve by 2010 universal access to treatment for HIV/AIDS for all those who need it TARGET 6.C Have halted by 2015 and begun to reverse the incidence of malaria and other major diseases GOAL 7 ENSURE ENVIRONMENTAL SUSTAINABILITY TARGET 7.A Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources TARGET 7.B Reduce biodiversity loss, achieving by 2010 a significant reduction in the rate of loss TARGET 7.C Halve by 2015 the proportion of people without sustainable access to safe drinking water and basic sanitation TARGET 7.D Have achieved a significant improvement by 2020 in the lives of at least 100 million slum dwellers GOAL 8 DEVELOP A GLOBAL PARTNERSHIP FOR DEVELOPMENT TARGET 8.A Develop further an open, rule-based, predictable, nondiscriminatory trading and financial system (including a commitment to good governance, development, and poverty reduction, nationally and internationally) TARGET 8.B Address the special needs of the least-developed countries (including tariff- and quota-free access for exports of the least-developed countries; enhanced debt relief for heavily indebted poor countries and cancellation of official bilateral debt; and more generous official development assistance for countries committed to reducing poverty) TARGET 8.C Address the special needs of landlocked countries and small island developing states (through the Programme of Action for the Sustainable Development of Small Island Developing States and the outcome of the 22nd special session of the General Assembly) TARGET 8.D Deal comprehensively with the debt problems of developing countries through national and international measures to make debt sustainable in the long term TARGET 8.E In cooperation with pharmaceutical companies, provide access to affordable, essential drugs in developing countries TARGET 8.F In cooperation with the private sector, make available the benefits of new technologies, especially information and communications Source: United Nations. 2008. Report of the Secretary-General on the indicators for monitoring the Millennium Development Goals. E/CN.3/2008/29. New York. Note: The Millennium Development Goals and targets come from the Millennium Declaration, signed by 189 countries, including 147 heads of State and Government, in September 2000 (http://www.un.org/millennium/declaration/ares552e.htm) and from further agreement by member states at the 2005 World Summit (Resolution adopted by the General Assembly - A/RES/60/1). The goals and targets are interrelated and should be seen as a whole. They represent a partnership between the developed countries and theGdeveloping countries "to create an environment ­ at the national and global levels alike ­ which is conducive to development and the eliminationLofOpoverty." B A L M O N I T O R I N G R E P O R T 2 0 0 7 251 M I L L E N N I U M D E V E L O P M E N T G O A L 1 Eradicate Extreme Poverty and Hunger Most recent global poverty projections anticipate oping countries but are not expected to change them that the proportion of people living in extreme significantly. Although extreme poverty has been poverty--on less than $1 a day--will fall from 29 reduced substantially since 1990, trends vary among percent in 1990 to 10 percent in 2015. Recently the regions, with Sub-Saharan Africa lagging far estimated purchasing parities for 2005 will inevi- behind the other regions in attaining MDG 1. tably affect calculation of poverty levels in devel- MDG 1 FIGURE 1 Share of people living on less than $1 or $2 a day in 2004, and projections for 2015 Sub-Saharan Africa East Asia & Pacific Europe & Central Asia % of population % of population % of population 50 50 50 41.1 40 46.7 40 40 31.4 29.8 30 23.4 30 30 20 20 14.9 20 9.0 9.8 10 10 10 2.8 4.3 3.4 0.5 0.9 0 0 0 0.2 0.3 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 South Asia Latin America & Caribbean Middle East & North Africa % of population % of population % of population 50 50 50 43.0 40 40 40 30.8 30 30 26.2 30 21.5 22.2 21.7 19.7 20 20 16.3 20 10.2 8.6 10.3 10 15.1 10 5.1 10 5.5 2.3 1.5 1.2 0 0 0 0.7 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Actual $1/day Projected $1/day 2015 target Path to goal Actual $2/day Projected $2/day Source: World Development Indicators. Extremepovertyisdefinedastheproportionofindividualsindevelopingcountrieswholiveonlessthan$1aday(basedonpurchasingpowerparity1993 constant prices). Poverty estimates are computed based on data covering 93 percent of developing countries' population. MDG 1 Figure 1 shows that all regions except Sub-Saharan Africa are on track to halve that proportion between 1990 and 2015. On current trends, this region will reduce poverty by only 33 percent between 1990 and 2015. In 1990 South Asia had the second-highest proportion of people living on less than $1 a day (43 percent) but has made substantial progress in reducing poverty and on current trends may surpass the target in 2015. Most of the progress in this region can be attributed to India's rapid growth over the past decade. MDG 1 FIGURE 2 Share of poorest and richest quintiles in national consumption Percent Consumption data reveal the 70 64.5 inequality that exists between the 60 57.1 richest and poorest population 49.8 51.1 50 48.5 quintiles in different regions. 41.1 41.7 Individual countries' income 40 distribution data is compiled together 30 to create regional income distribution 20 data, so both inter- and intracountry inequality can be assessed. The 10 8.7 2.9 3.6 5.1 5.2 6.6 4.0 data use purchasing power parities 0 based on 2005 prices and cover 93 Latin America Sub-Saharan Middle East East Asia Europe & South Fragile percent of developing countries' total & Caribbean Africa & North Africa & Pacific Central Asia Asia states population. Poorest quintile Richest quintile Source: World Bank staff estimates. M I L L E N N I U M D E V E L O P M E N T G O A L 1 TARGET 1.A Halve, between 1990 and 2015, the proportion of people whose income is less than $1 a day TARGET 1.B Achieve full and productive employment and decent work for all, including women and young people TARGET 1.C Halve, between 1990 and 2015, the proportion of people who suffer from hunger MDG 1 FIGURE 3 Proportion of countries on track to MDG 1 FIGURE 4 Annual changes in vulnerable achieve the poverty reduction target employment, 34 countries, 1990­2005 Paraguay Fragile states Bolivia Colombia Sub-Saharan Zambia Africa Romania Slovak Republic South Asia Russian Federation Venezuela, R. B. de Middle East & Dominican Republic North Africa El Salvador Hungary Latin America Chile & Caribbean Honduras Brazil Europe & Peru Central Asia Panama East Asia Ecuador & Pacific Egypt, Arab Rep. of Zimbabwe ­100 ­50 0 50 100 Costa Rica % of countries Botswana Argentina No data Seriously off track Off track On track Achieved Pakistan Latvia Source: World Development Indicators. Mexico Croatia Ofthe71countrieswithavailabledata(outof149),24havealreadyachieved Poland or are on track to meet the poverty reduction target, but 47 are either off track or Malaysia seriously off track. Fifteen of 18 countries in Europe and Central Asia, and 11 of Jamaica 20 countries in Latin America and the Caribbean, are seriously off track. Since the Cameroon 5 fragile states with available data are all seriously off track, there is no evidence Bangladesh to suggest that even 1 fragile state will meet MDG 1. Fragile states are low-income Vietnam countries or territories with no CPIA score or a CPIA score of 3.2 or less. Thailand Namibia MDG 1 FIGURE 5 Proportion of countries on track to ­3.0 ­2.0 ­1.0 0.0 1.0 2.0 3.0 reduce under-five malnutrition by half % annual change Fragile states Source: World Bank staff estimates. Sub-Saharan Vulnerableemploymentisthesumof contributingfamilyworkers Africa and own-account workers as a percentage of total employment. Data available at two points in time between 1990 and 2005 for 34 low- and middle-income countries highlight the diversity of patterns. Some countries South Asia witnessed a decline in vulnerable employment over time, while others experienced substantial increases. Countries that have faced severe shocks, Middle East & such as financial crises in East Asia and the Pacific or Latin America and North Africa the Caribbean, over the period can be found in both groups. Transition economies can also be found in both groups. Latin America & Caribbean Europe & Central Asia The prevalence of child malnutrition is measured by the percentage of East Asia children under the age of five whose weight-to-age ratio is more than two & Pacific standard deviations below the international median. Standards of child growth are currently being updated, but preliminary figures suggest that the ­100 ­50 0 50 100 global picture of malnutrition should not be significantly altered. The data % of countries covers 97 percent of developing countries' total population and suggests that many countries in Sub-Saharan Africa and the Middle East and North Africa No data Seriously off track Off track On track Achieved are seriously off track. However, most countries in South Asia are on track. Source: World Development Indicators. M I L L E N N I U M D E V E L O P M E N T G O A L 2 MILLENNIM DEVELOPMENT GOAL 1 Achieve Universal Primary Education On the primary school completion rate target, full primary completion. In East Asia and the Pacific, Sub-Saharan Africa is off track for both males and Europe and Central Asia, and Latin America and the females, while South Asia is on track for females but Caribbean, where primary school completion rates off track for males. Nevertheless, net enrollment rates are already close to 100 percent, literacy rates for for male and female children in both regions have youth ages 15 to 24 are also close to 100 percent. been steadily increasing since 1990. The other four Since 1990 significant progress has been observed regions are on track to achieve the primary school in literacy rates, along with enrollment and primary completion rate target for both males and females; school completion, in the Middle East and North 46 countries in these regions have already achieved Africa, Sub-Saharan Africa, and South Asia. MDG 2 FIGURE 1 Primary school completion rates Sub-Saharan Africa East Asia & Pacific Europe & Central Asia % of relevant age group % of relevant age group % of relevant age group 110 110 110 100 103 98 100 100 100 100 100 94 96 90 90 95 98 90 91 94 80 80 80 70 70 70 65 60 56 60 60 55 50 46 50 50 40 40 40 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 South Asia Latin America & Caribbean Middle East & North Africa % of relevant age group % of relevant age group % of relevant age group 110 100 110 110 100 100 100 100 100 98 100 93 90 83 90 83 90 83 80 75 80 80 88 82 70 77 70 70 71 60 52 60 60 50 50 50 40 40 40 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Actual male Goal male Actual female Goal female Source: World Development Indicators. Theprimaryschoolcompletionrateisthepercentageof childrencompletingthelastyearof primaryschooling.Itiscomputedbydividingthetotal number of students in the last grade of primary school, minus repeaters in that grade, by the total number of children of official completing age. Under certain circumstances, the computation can overestimate the actual proportion of a given cohort completing primary school and sometimes exceeds 100 percent. Country data used to compute regional primary completion rates cover 65 percent of total developing countries' population. M I L L E N N I U M D E V E L O P M E N T G O A L 2 TARGET 2.A Ensure that by 2015, children everywhere, boys and girls alike, will be able to complete a full course of primary schooling MDG 2 FIGURE 2 Proportion of countries on track to meet MDG 2 FIGURE 3 Net enrollment rates in primary the primary education target education Sub-Saharan Africa South Asia Fragile states Percent Percent 100 100 Sub-Saharan 90 90 Africa 80 80 South Asia 70 70 60 60 Middle East & 50 50 North Africa 2000 2002 2004 2000 2002 2004 Latin America East Asia & Pacific Europe & Central Asia & Caribbean Percent Percent Europe & 100 100 Central Asia 90 90 East Asia 80 80 & Pacific 70 70 ­100 ­50 0 50 100 60 60 50 % of countries 50 2000 2002 2004 2000 2002 2004 No data Seriously off track Off track Latin America & Caribbean Middle East & North Africa On track Achieved Percent Percent Source: World Development Indicators. 100 100 90 90 Twelveof 14countriesinEastAsiaandthePacific(forwhichdataexist) 80 80 have already achieved the target, but data are still missing for the other 10 countries. Sixteen of 25 countries in Latin America and the Caribbean and 70 70 16 of 21 countries in Europe and Central Asia (for which data exist) have 60 60 already met or are on track to meet the target. Conversely, most countries in 50 50 Sub-Saharan Africa and South Asia are off track. In the Middle East and North 2000 2002 2004 2000 2002 2004 Africa, 6 out of 10 countries (for which data exist) have already met or are on track to meet the target, but data are missing for the other 4 countries in this Female Male region. Fragile states and Sub-Saharan Africa record the largest proportions of Source: World Development Indicators. countries off track or without data. Primaryschoolnetenrollmentratesmeasuretheproportionof children of official school age who are enrolled in school, but the rates ignore effective attendance, repetitions, or the fact that children can start school above the official age as long as they enter school before the official age of completion. Net enrollment rates for male and female children have slightly decreased in East Asia and the Pacific but have remained stable or increased MDG 2 FIGURE 4 Literacy rates, ages 15­24 in the other regions since 2000. In South Asia and the Middle East and North Africa the gap between male and female net enrollment has narrowed, but % of youths 15­24 who are literate enrollment rates for females are still lower than for males. In Sub-Saharan Africa net enrollment rates have risen steadily since 1990, but the gap 100 between males and females has not significantly narrowed. 80 60 40 The youth literacy rate is the percentage of people ages 15­24 that can, with comprehension, 20 both read and write a short, simple statement about their everyday life. Literacy rates for 0 males and females have increased in all regions, East Asia Europe & Latin Middle East South Sub-Saharan especially in regions starting from lower levels. For & Pacific Central America & North Asia Africa females in South Asia, the literacy rate increased Asia & Caribbean Africa from 48 percent in 1990 to 65 percent in 2005, which complements the progress for this group in females 2005 males 2005 net enrollment and completion rates in primary females 1990 males 1990 education. Source: World Development Indicators. M I L L E N N I U M D E V E L O P M E N T G O A L 3 MILLENNIM DEVELOPMENT GOAL 1 Promote Gender Equality and Empower Women Significant progress has been achieved since 1990 regions remain off track. However, gender gaps in in reducing developing countries' gender disparity wages and labor participation rates remain substan- in primary and secondary education. All regions tial, and there is little statistical evidence to suggest except Sub-Saharan Africa are broadly on track to that these gaps are narrowing. meet MDG 3 by 2015, even if some countries in these MDG 3 FIGURE 1 Ratio of girls to boys enrolled in primary and secondary education Sub-Saharan Africa East Asia & Pacific Europe & Central Asia Percent Percent Percent 99 100 100 100 100 89 100 98 100 90 90 90 96 79 86 80 80 80 70 70 70 60 60 60 50 50 50 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 South Asia Latin America & Caribbean Middle East & North Africa Percent Percent Percent 100 100 100 100 94 100 90 99 101 100 90 90 90 82 80 80 80 70 70 70 70 60 60 60 50 50 50 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Actual Goal Source: World Development Indicators. Genderdisparityismeasuredbytheratioof girlstoboysenrolledinschools,whetherattheprimary,secondary,ortertiarylevels.Countrydatausedto compute regional rates cover 92 percent of developing countries' total population. The original target aimed to eliminate gender disparity in primary and secondary education by 2005, but this target was achieved only in Latin America and the Caribbean; East Asia and the Pacific came close to meeting that target. M I L L E N N I U M D E V E L O P M E N T G O A L 3 TARGET 3.A Eliminate gender disparity in primary and secondary education, preferably by 2005, and in all levels of education no later than 2015 MDG 3 FIGURE 2 Proportion of countries on track to MDG 3 FIGURE 3 Gender differences in hourly wages achieve gender parity in primary and secondary education Nepal 2003 Maldives 1998 Fragile states Egypt, Arab Rep. of 1998 Sub-Saharan Paraguay 2006 Africa Chile 2006 South Asia Turkey 2005 Albania 2005 Middle East & Mongolia 2002 North Africa Latin America Cambodia 2004 & Caribbean Chad 2002 Europe & Congo, Dem. Rep. of 2005 Central Asia Malawi 2005 East Asia & Pacific 0 0.5 1 1.5 Hourly earnings wage ratio ­100 ­50 0 50 100 Primary sector Secondary sector Tertiary sector % of countries Source: World Bank staff calculations based on national household surveys. No data Seriously off track Off track On track Achieved Womengenerallyreceivelowerwagesthantheirmalecounterparts in the primary (agriculture and mining), secondary (manufacturing and Source: World Development Indicators. construction), and tertiary (services) sectors of the economy. The wage ratio, used to analyze inequality in earnings, divides the female wage by the male All27countries(forwhichdataexist)inLatinAmericaandtheCaribbean wage. Chad's primary sector had a wage ratio of 0.11 in 2002, indicating that have achieved gender parity in primary and secondary education. For the men's hourly earnings were almost ten times higher than women's. In Albania countries with available data, 2 of 18 countries in East Asia and the Pacific men earned around double the hourly earnings of women in the primary and 3 of 21 countries in Europe and Central Asia are not on track to meet this sector. However, in some countries, such as the Arab Republic of Egypt, goal. Thirteen countries in these three regions still lack data. In Sub-Saharan Malawi, and the Maldives, the wage ratio was higher than 1.0, indicating that Africa, 18 of 37 countries (for which data exist) are not on track, and another women's hourly earnings were higher than men's. Overall, the data do not 11 countries lack data. Eleven of 23 fragile states (for which data exist) are off suggest strong patterns in terms of wage gaps by sectors. In some countries, track, while another 10 countries lack data for assessing progress. such as Albania, Cambodia, Democratic Republic of Congo, or Turkey, wage gaps have been more pronounced in the primary sector than in the other two sectors. In others, such as the Maldives or Paraguay, wage gaps have been more pronounced in the tertiary sector. MDG 3 FIGURE 4 Share of men and women participating in the labor force, 1990­2006 % of labor force participants The labor force participation rate measures the 100 proportion of the population between ages 15 and 90 Male 64 that is economically active, that is, employed or 80 actively seeking a job. Labor participation rates in all 70 regions are lower for females than for males. Gender 60 gaps in 2006 were the widest in the Middle East and 50 North Africa and South Asia (47 percent and 46 percent, 40 respectively). In all regions male labor participation 30 Female rates declined between 1990 and 2006, to some 20 extent because longer periods of education delayed 10 entry into the labor market. In four of the six regions 1990 2006 1990 2006 1990 2006 1990 2006 1990 2006 1990 2006 in the developing world, female labor participation East Asia Europe & Latin Middle East South Sub-Saharan rates declined in similar proportions, leaving gender gaps basically unchanged. In Latin America and the & Pacific Central Asia America & North Asia Africa Caribbean and the Middle East and North Africa, the & Caribbean Africa combination of decreasing male participation rates and 1990 2006 increasing female participation rates has narrowed the gender gap. Source: World Development Indicators. M I L L E N N I U M D E V E L O P M E N T G O A L 4 MILLENNIM DEVELOPMENT GOAL 1 Reduce Child Mortality Most child mortalities can be prevented through are in Sub-Saharan Africa, including Sierra Leone proper nutrition, care, and simple medical treat- (270) and Angola (260), and child mortality rates ment. In 1990, 13 million children in developing have increased, rather than decreased, in 12 coun- countries died before age five from diseases such as tries in the region since 1990. The spread of the HIV/ pneumonia, diarrhea, malaria, measles, and AIDS. AIDS epidemic has contributed to this phenomenon. By 2006 that number had dropped to 10 million, South Asia is also off track for reaching the MDG and under-five mortality rates had declined in all child mortality target. Even in the regions that are regions. Sub-Saharan Africa had the highest under- broadly on track to achieve the target, many coun- five mortality rate in 2006, at 158 per 1,000. Ten of tries remain off track. the 11 developing countries with rates above 200 MDG 4 FIGURE 1 Under-five mortality rate Sub-Saharan Africa East Asia & Pacific Europe & Central Asia Deaths per 1,000 live births Deaths per 1,000 live births Deaths per 1,000 live births 200 184 200 200 158 150 150 150 100 100 100 61 56 49 50 50 29 50 19 26 16 0 0 0 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 South Asia Latin America & Caribbean Middle East & North Africa Deaths per 1,000 live births Deaths per 1,000 live births Deaths per 1,000 live births 200 200 200 150 150 150 123 100 83 100 100 77 55 50 41 50 42 26 50 26 18 0 0 0 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Actual Goal Source: World Development Indicators. Acommonlyusedmeasureof childmortalityistheunder-fivemortalityrate,whichistheprobabilitythatanewbornwilldiebeforereachingagefive (expressed as a rate per 1,000). Regional estimates of child mortality are based on countries' data covering 99.9 percent of developing countries' total population. M I L L E N N I U M D E V E L O P M E N T G O A L 4 TARGET 4.A Reduce by two-thirds, between 1990 and 2015, the under-five mortality rate MDG 4 FIGURE 2 Proportion of countries on track to achieve the child mortality target Fragile states Sub-Saharan Africa South Asia Middle East & North Africa Latin America & Caribbean Europe & One hundred and seven out of 145 developing countries with available Central Asia data are either off track or seriously off track to reduce the under-five mortality rate by two thirds by 2015. In fact, a few on-track countries have a East Asia large influence on global and regional indicators. No country in Sub-Saharan & Pacific Africa is on track or has reached the target. Only 2 of the 33 fragile states have achieved or are on track to reduce by two-thirds the under-five mortality ­100 ­50 0 50 100 rate they recorded in 1990. % of countries No data Seriously off track Off track On track Achieved Source: World Development Indicators. MDG 4 FIGURE 3 Increase in measles vaccination coverage, 1992­2006 Sub-Saharan Although many countries are not on Africa track to reach the MDG child mortality target, inexpensive medical treatments have nonetheless South Asia helped reduce the number of child deaths. Oral rehydration tablets have mitigated dehydration from diarrhea, antibiotics have treated respiratory Middle East & infections, mosquito nets have helped to prevent North Africa malaria, and measles vaccinations have protected Latin America children from the disease. Since 1992 the coverage of measles vaccinations has increased in all six & Caribbean regions, with the greatest change occurring in Sub- Europe & Saharan Africa, which now has greater coverage Central Asia than South Asia. Measles vaccination coverage in Sub-Saharan Africa went from 50 percent in 1992 to East Asia 71 percent in 2006. Measles vaccination coverage & Pacific is defined as the percentage of children ages 12­23 months who received measles vaccinations before 0 20 40 60 80 100 12 months or at any time before the survey. Percent 1992 2006 Source: World Development Indicators. M I L L E N N I U M D E V E L O P M E N T G O A L 5 MILLENNIM DEVELOPMENT GOAL 1 Improve Maternal Health An estimated 536,000 maternal deaths occurred Although all regions have increased the percentage worldwide in 2005, over 99 percent of them in of births attended by skilled health staff, the statis- developing countries. Difficulties during pregnancy tics still remain low for South Asia (41 percent) and and childbirth are the primary cause of death for Sub-Saharan Africa (46 percent). Adult fertility rates women of childbearing age in these countries. Sub- have declined over the past 10 years in all regions, Saharan Africa is the region with the highest mater- and 87 percent of countries with available data have nal mortality rate--more than twenty times higher increased contraceptive prevalence rates. than the mortality rate for Europe and Central Asia. MDG 5 FIGURE 1 Maternal mortality rates Sub-Saharan Africa East Asia & Pacific Europe & Central Asia Deaths per 100,000 live births Deaths per 100,000 live births Deaths per 100,000 live births 1,000 920 900 1,000 1,000 900 900 900 800 800 800 700 700 700 600 600 600 500 500 500 400 400 400 300 230 300 220 300 200 200 150 55 200 100 100 100 58 43 15 0 0 0 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 South Asia Latin America & Caribbean Middle East & North Africa Deaths per 100,000 live births Deaths per 100,000 live births Deaths per 100,000 live births 1,000 1,000 1,000 900 900 900 800 800 800 700 650 700 700 600 500 600 600 500 500 500 400 400 400 300 300 250 163 180 300 200 200 200 130 200 100 100 45 63 100 0 0 0 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Actual Goal Source: World Development Indicators. Thematernalmortalityrateisthenumberof womenwhodieeitherduringpregnancyordeliveryduetopregnancy-relatedcomplications,per100,000 live births. Such statistics are very difficult to collect through surveys, and data reported here rely on modeling techniques developed by the World Health Organization, United Nations Children's Fund, and United Nations Population Fund. M I L L E N N I U M D E V E L O P M E N T G O A L 5 TARGET 5.A Reduce by three-quarters, between 1990 and 2015, the maternal mortality ratio TARGET 5.B Achieve by 2015 universal access to reproductive health MDG 5 FIGURE 2 Births attended by skilled personnel Percent The high maternal mortality rate in developing countries is correlated with poor 100 95 87 88 health care during pregnancy and childbirth. 80 77 Since 1990 the proportion of births attended by skilled health personnel has increased across 60 all regions, most noticeably in East Asia and the 41 45 Pacific, where it almost doubled from its 1992 40 level of 47 percent, to reach 87 percent in 2006. 20 Conversely, the proportion of attended births by skilled personnel increased only one percentage 0 point in Sub-Saharan Africa, where the maternal East Asia Europe & Latin America Middle East South Asia Sub-Saharan mortality rate remains the highest. Regional & Pacific Central Asia & Caribbean & North Africa Africa estimates reported here are based on country data covering 90 percent of developing countries' 1992 2006 total population. Source: World Development Indicators. MDG 5 FIGURE 3 Contraceptive prevalence: Annual change for 89 countries, various dates 1988­2006 Russian Federation The contraceptive prevalence rate is the percentage of married Congo, Dem. Rep. of women ages 15­49 who use, or whose sexual partners use, any form of contraception. In most of the 89 countries that have two data points between Iraq 1988 and 2006, contraceptive use increased. Bolivia Oman Morocco Guatemala MDG 5 FIGURE 4 Fertility rate for women ages 15­19, Vanuatu 1997­2008 Bangladesh Births per 1,000 women ages 15­19 Jordan 160 Yemen, Republic of Lesotho Sub-Saharan Africa 140 Tanzania Algeria 120 Botswana South Asia 100 Kenya West Bank & Gaza Latin America & Caribbean 80 Somalia Ethiopia 60 Indonesia Middle East & North Africa 40 Nigeria Europe & Central Asia Mexico 20 Dominican Republic East Asia & Pacific South Africa 0 1997 1999 2001 2003 2005 2007 Ghana Mauritius Source: World Development Indicators. Grenada Adolescentfertilityrates,orthenumberof birthsper1,000women Lebanon ages 15­19, have decreased in all regions since 1997, but the 2007 rate in St. Vincent Sub-Saharan Africa (119) is more than seven times greater than the rate in East Asia and the Pacific (16). Togo ­4.0 ­2.0 0.0 2.0 4.0 6.0 8.0 % annual change Source: World Development Indicators. M I L L E N N I U M D E V E L O P M E N T G O A L 6 MILLENNIM DEVELOPMENT GOAL 1 Combat HIV/AIDS, Malaria, and Other Diseases It is estimated that 99 percent of individuals who services. Prevalence rates have stabilized since 2001 die from AIDS, tuberculosis, and malaria reside in and have now started to decline, although moderately. the developing world. In 2007, 33 million individ- Progress is most pronounced in Sub-Saharan Africa, uals were living with HIV, 2.5 million were newly where the proportion of population living with HIV infected, and 2.1 million died from AIDS. As the esti- has declined by a full percentage point since 2000. mated number of people living with HIV increases However, other regions that had started from much each year, the AIDS epidemic has become one of lower levels conversely record increases in prevalence the greatest challenges to public health and requires rates, mostly within high-risk populations. improved access to HIV prevention and treatment MDG 6 FIGURE 1 Tuberculosis incidence and prevalence rates, 1990­2005 Sub-Saharan Africa East Asia & Pacific Europe & Central Asia Rate per 100,000 people Rate per 100,000 people Rate per 100,000 people 600 600 600 500 500 500 400 400 400 300 300 300 200 200 200 100 100 100 0 0 0 1990 1994 1998 2002 2006 1990 1994 1998 2002 2006 1990 1994 1998 2002 2006 South Asia Latin America & Caribbean Middle East & North Africa Rate per 100,000 people Rate per 100,000 people Rate per 100,000 people 600 600 600 500 500 500 400 400 400 300 300 300 200 200 200 100 100 100 0 0 0 1990 1994 1998 2002 2006 1990 1994 1998 2002 2006 1990 1994 1998 2002 2006 Incidence Prevalence Source: World Development Indicators. Tuberculosis(TB)incidenceratesmeasurethepercentageof thepopulationthatisnewlyinfectedwithTB(pulmonary,smearpositive,andextrapulmonary), while prevalence rates measure the percentage of individuals in a population who have TB. Both are measured per 100,000 people. Both the incidence and prevalence rates for TB have either remained level or declined from 1990 to 2005 in every region except Sub-Saharan Africa and Europe and Central Asia, where it has been leveling off since the early 2000s. Following earlier declines in prevalence rates for TB, the incidence rate for the different regions has now stabilized or has been decreasing, but population growth has been offsetting the slow fall in incidence rates. M I L L E N N I U M D E V E L O P M E N T G O A L 6 TARGET 6.A Have halted by 2015 and begun to reverse the spread of HIV/AIDS TARGET 6.B Achieve by 2010 universal access to treatment for HIV/AIDS for all those who need it TARGET 6.C Have halted by 2015 and begun to reverse the incidence of malaria and other major diseases MDG 6 FIGURE 2 Estimated HIV prevalence trends MDG 6 FIGURE 3 HIV prevalence rates, 2003­05 for ages 15­49 % HIV prevalence High-income countries 7 6 Sub-Saharan Africa 5 Sub-Saharan Africa 4 South Asia 3 2 Middle East & North Africa 1 Global 0 Latin America & Caribbean 1990 1994 1998 2002 2006 Europe & Central Asia Source: UNAIDS/WHO. East Asia & Pacific TheHIVprevalenceratemeasuresthepercentageof individualsina population who are infected with the HIV virus. The global prevalence rate 0.00 2.00 4.00 6.00 8.00 has remained level since 2001. In many Sub-Saharan African countries, the % of population ages 15­49 national prevalence rate has either leveled off or decreased. 2003 2005 MDG 6 FIGURE 4 Rates of condom use and HIV knowledge No. of countries in Sub-Saharan Africa 70 South Africa 60 Cameroon 50 Ghana Zambia 40 Burkina Faso 30 Uganda Mozambique 20 Tanzania 10 Benin Kenya 0 <­0.5 <­0.25 <0 <0.25 >0.25 Guinea % annual change Mali Nigeria Source: World Development Indicators. Rwanda Eritrea Sub-SaharanAfrica,theregionwiththehighestHIVprevalencerates, had a decrease from 6.36 in 2003 to 5.76 in 2005. In 2005 the prevalence Madagascar rates in other regions were much lower, ranging from 0.15 (in the Middle East Ethiopia and North Africa) to 0.71 (in South Asia). High-income countries recorded Zimbabwe a prevalence rate of 0.36 in both 2003 and 2005. From 2003 to 2005, 69 0 10 20 30 40 50 60 countries had positive annual changes in HIV prevalence rates, while 51 had annual decreases during that time. % condom use among females' partners 1999 2004 Rwanda Condom use and knowledge about HIV can help to decrease the number of individuals who become infected by HIV. The rate of condom use is Tanzania defined as the percentage of the population between the ages of 15 to 24 Kenya who use a condom (or in the case of females, whose partner uses a condom), Uganda and the rate of HIV knowledge is defined as the percentage of individuals Lesotho (in this case female) who have comprehensive, correct knowledge about HIV (ability to describe two ways to prevent infection and to reject three Cameroon misconceptions concerning HIV). Condom use for females' partners increased Senegal in all Sub-Saharan African countries with available data except Zimbabwe, Malawi where usage is estimated to have decreased from 11 to 10 percent between 1999 and 2004. Usage sharply increased in South Africa, from 25 percent in 0 10 20 30 40 50 60 1999 to 60 percent in 2004. Female HIV knowledge also increased in most % female HIV knowledge countries in Sub-Saharan Africa, most notably in Rwanda, where knowledge went from 26 to 48 percent between 1990 and 2004. But gains can also be 2000 2004 reversed, as observed in Malawi, where HIV knowledge receded. Source: World Development Indicators. M I L L E N N I U M D E V E L O P M E N T G O A L 7 MILLENNIM DEVELOPMENT GOAL 1 Ensure Environmental Sustainability Access to clean potable water and basic sanitation is 1.8 million deaths annually. In addition, deforestation one of the targets to ensuring environmental sustain- and greenhouse gas emissions, such as carbon dioxide, ability and a key indicator for human development. threaten biodiversity and drive climate change through Over 1 billion individuals lack access to safe drinking global warming. In most regions adjusted net savings water, and 2.6 billion individuals lack access to basic is negative or on the decline, indicating that countries sanitation. Improvements in these two areas could are not saving enough to offset resource depletion and help to reduce dramatically the burden of disease, par- environmental degradation, thus clouding prospects ticularly diarrhea, which contributes to approximately of sustainable development. MDG 7 FIGURE 1 Population without access to an improved water source or sanitation facilities Sub-Saharan Africa East Asia & Pacific Europe & Central Asia % of population % of population % of population 90 90 90 75 69 63 75 70 75 60 60 49 60 45 51 45 35 45 44 34 28 30 30 21 30 14 14 15 15 26 15 15 7 0 0 0 7 8 4 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 South Asia Latin America & Caribbean Middle East & North Africa % of population % of population % of population 90 83 90 90 75 75 75 63 60 60 60 45 41 45 45 29 33 30 30 30 23 30 24 17 15 16 12 15 15 15 15 16 11 9 0 0 9 0 6 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 Without water access actual Without water access goal Without sanitation access actual Without sanitation access goal Source: World Development Indicators. MDG 7 FIGURE 2 Regions' contributions to global deforestation, 1990­2005 Percent 60 50 40 Forests act as carbon sinks and absorb carbon dioxide in the atmosphere. Deforestation 30 thus hinders sustainable development because 20 it results in higher levels of greenhouse gas emissions as well as loss of biodiversity. Between 10 1990 and 2005 the global surface of forests 0 was reduced by 1.3 million square kilometers, ­10 or 3 percent of its total. Forty percent of the East Asia Europe & Latin Middle East South Asia Sub- High- world's forests are located in Latin America & Pacific Central Asia America & & North Saharan income and Sub-Saharan Africa, which were the two most important regional contributors to global Caribbean Africa Africa countries deforestation. Latin America and the Caribbean lost 7 percent of its forests in 15 years; Sub- Source: World Development Indicators. Saharan Africa, 9 percent. M I L L E N N I U M D E V E L O P M E N T G O A L 7 TARGET 7.A Integrate the principles of sustainable development into country policies and programs and reverse the loss of environmental resources TARGET 7.B Reduce biodiversity loss, achieving by 2010 a significant reduction in the rate of loss TARGET 7.C Halve by 2015 the proportion of people without sustainable access to safe drinking water and basic sanitation TARGET 7.D Have achieved a significant improvement by 2020 in the lives of at least 100 million slum dwellers Access to sanitation refers to the percentage MDG 7 FIGURE 3 CO2 emissions per capita, 1995­2004 of population with at least adequate access to excreta facilities (private or shared, but not public) High-income countries that can effectively prevent human, animal, and insect contact with excreta. Regional estimates are East Asia & Pacific computed using country data covering 99 percent Europe & Central Asia of developing countries' total population. Access to Latin America & Caribbean improved sources of water refers to the percentage of population with reasonable access to a permanent Middle East & North Africa source of safe water in their dwelling or within a South Asia reasonable distance from it. Regional estimates are computed using country data covering 98 percent of Sub-Saharan Africa developing countries' total population. Latin America World and the Caribbean and East Asia and the Pacific were broadly on track by 2004 to halve the proportion of 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 people without access to an improved source of water and sanitation facilities by 2015. South Asia was on Metric tons per capita track to meet the water access goal, but off track for reaching the sanitation access goal. The Middle East 1995 2004 and North Africa, Sub-Saharan Africa, and Europe Source: World Development Indicators. and Central Asia were off track on both goals; the transition economies record the lowest proportion of people lacking access to both water and sanitation. Carbondioxide(CO2)emissionsarederivedfromfossilenergyuseand cement manufacture, which tends to rise with incomes. Thus per capita CO2 emissions are greatest in high-income countries, which record levels more than five times those of developing countries. The Middle East and North Africa, East MDG 7 FIGURE 4 Adjusted net Asia and the Pacific, South Asia, and Sub-Saharan Africa have recorded increases. savings, 1995­2005 % of GNI MDG 7 FIGURE 5 Proportion of countries on track to achieve the targets for 30 access to improved water and sanitation 25 Water access Sanitation access East Asia & Pacific 20 South Asia Fragile states 15 Europe & Latin 10 Central Asia America & Sub-Saharan Caribbean Africa 5 Sub-Saharan Africa 0 South Asia ­5 Middle East & Middle East & ­10 North Africa North Africa ­15 Latin America 1995 2005 & Caribbean Source: World Development Indicators. Europe & Central Asia Adjustednetsavingsmeasuresthesaving rate in an economy after adjustments are made East Asia for educational expenditure, capital depreciation, & Pacific natural resource depletion, and carbon dioxide and particulate emissions damage. A negative ­50 0 50 100 ­50 0 50 100 saving rate indicates that an economy is on an % of countries % of countries unsustainable future path of economic growth. Europe and Central Asia, the Middle East and No data Seriously off track Off track On track Achieved North Africa, and Sub-Saharan Africa have all Source: World Development Indicators. exhibited a downward trend in adjusted net saving since 1995 and had negative adjusted net saving rates in 2005. Latin America and the Thirty-fivepercentof thedevelopingcountries(withavailabledata)haveachievedorareontrack Caribbean had a positive 2005 adjusted net to achieve the improved water target, while 24 percent have achieved or are on track to achieve the saving rate but also had declining adjusted net improved sanitation target. Fifty-seven percent of countries (with available data) in the Middle East and saving levels. In recent years, only the Asian North Africa and in Europe and Central Asia are seriously off track in improving access to safe drinking regions seem to have both an upward trend in water. Conditions are worse for the improved sanitation target, where 12 of 19 European and Central adjusted net savings and a positive saving rate. Asian countries and 36 of 45 Sub-Saharan African countries (with available data) are seriously off track. M I L L E N N I U M D E V E L O P M E N T G O A L 8 MILLENNIM DEVELOPMENT GOAL 1 Develop a Global Partnership for Development Official development assistance (ODA) from Devel- Aid from DAC countries, as measured by per capita opment Assistance Committee (DAC) countries income levels, still falls short of the United Nations of the Organisation for Economic Co-operation target of 0.7 percent of gross national income (GNI). and Development has increased steadily in the last Moreover, multilateral trade discussions have not yet decade, with a large jump in 2005, mostly attribut- delivered tangible results, even if market access for able to debt-relief initiatives. Aid today is more flex- developing countries' exports has slightly improved. ible and more aligned to national priorities. It is also With decreasing costs, information technologies are more selective, that is, more responsive to needs, as spreading very rapidly across the world, but the digi- well as to the quality of policies and institutions. tal divide still remains a concerning reality. MDG 8 FIGURE 1 Evolution of global aid in DAC countries, 1990­2006 Percent 2005 US$ billions 0.60 120 0.45 90 0.30 60 0.15 30 0.00 0 1990 1994 1998 2002 2006 Programmable aid as % of GNI Other ODA as % of GNI Total net ODA Source: OECD DAC database. Oneof theindicatorsforMDG8istheratioof totalnetODAtoDACdonors'GNI.TheODA-to-GNIratioforDACdonorsstoodat0.31percentin2006,below the level of the early 1990s. The level of programmable aid, which can be more rapidly and effectively aligned to national priorities, has increased since 1990, but the percentage of ODA considered programmable aid has fallen. Programmable aid is total ODA excluding bilateral humanitarian aid, debt relief, administration costs, in-donor country refugee costs, and imputed student costs. Non-DAC ODA, which is estimated to be growing rapidly, has not yet been monitored on a systematic basis. MDG 8 FIGURE 2 Evolution of global DAC aid by income category 2005 US$ billions The amount of ODA disbursed by DAC donors 40 to low-income countries grew by 124 percent from 2000 to 2006. Owing to debt-relief initiatives, ODA to lower-middle-income countries rose by 175 35 Lower-middle-income countries percent from 2002 to 2005 but sharply decreased, by 47 percent, in 2006. 30 25 20 Low-income countries 15 10 Fragile states 5 Upper-middle-income countries 0 1990 1994 1998 2002 2006 Source: OECD DAC database. M I L L E N N I U M D E V E L O P M E N T G O A L 8 TARGET 8.A Develop further an open, rule-based, predictable, nondiscriminatory trading and financial system TARGET 8.B Address the special needs of the least developed countries TARGET 8.C Address the special needs of landlocked developing countries and small island developing states TARGET 8.D Deal comprehensively with the debt problems of developing countries through national and international measures in order to make debt sustainable in the long term TARGET 8.E In cooperation with pharmaceutical companies, provide access to affordable essential drugs in developing countries TARGET 8.F In cooperation with the private sector, make available the benefits of new technologies, especially information and communications MDG 8 FIGURE 3 Trade restrictiveness and market access by income groups The Overall Trade Restrictiveness Index (OTRI) Percent measures the overall restrictiveness (including non- tariff measures) faced by imports while the Market 25 Access Overall Trade Restrictiveness Index (MA-OTRI) measures the overall restrictiveness (including non- 20 tariff measures) faced by exports. Despite limited 15 progress in the Doha round of multilateral trade negotiations, low- and middle-income countries 10 benefited from a slight improvement between 2000 and 2006 in market access for their products. 5 However, low-income countries, given their specialization in agriculture, still face the lowest 0 levels of access to exports markets. Symmetrically, MA-OTRI OTRI MA-OTRI OTRI MA-OTRI OTRI MA-OTRI OTRI low-income countries still impose larger restrictions High-income Upper-middle- Lower-middle- Low-income on imports than any other group of countries, despite countries income countries income countries countries significant progress between 2000 and 2006. Over the same period, trade liberalization in middle-income 2000 2006 countries was more pronounced. Source: World Bank Staff calculations. MDG 8 FIGURE 4 Debt sustainability 2006­08 MDG 8 FIGURE 5 Growth in Internet affordability and use No. of countries Cost, % GNI per capita Internet users, % of population 18 140 60 16 14 120 50 12 100 10 40 8 80 6 30 4 60 2 20 0 40 Low risk Moderate risk High risk Debt distress Low-income countries Lower-middle-income countries 20 10 Source: IMF. 0 0 2003 2005 2003 2005 2003 2005 Withtheadoptionof theMDGsandrecentmultilateraldebt-relief Low-income Middle-income High-income initiatives, the international community is committed to monitoring more closely external (and domestic) debt-sustainability indicators, primarily countries countries countries in low-income and lower-middle-income countries. A country is said to Cost Users experience debt-stress risk if its debt-burden indicator exceeds its indicative threshold over a 20-year projection period. Low risk indicates that all the Source: World Development Indicators. debt-burden indicators are far below the baseline scenario threshold; moderate risk indicates that debt-burden indicators currently below the Internetcostsaredroppingrapidlybutarestillveryexpensiveforusers threshold could increase from external shocks or unexpected macroeconomic in developing countries, low-income countries in particular, where a one-year policy changes; high risk indicates that at least one debt-burden indicator has subscription cost was equivalent to 62 percent of GNI per capita in 2005. The surpassed the threshold, and debt distress indicates that a country is already proportion of users doubled in low-income countries between 2003 and 2005 having repayment difficulties. For the 56 countries that have reliable data, but remains low, at 4 percent of the population. In contrast, the proportion eight low-income countries were in debt distress as of early 2008. of users in high-income countries increased from 46 to 56 percent over the same period. E C O - A U D I T Environmental Benefits Statement The World Bank is committed to Saved: preserving endangered forests and · 34 trees natural resources. The Office of · 24 million BTUs of the Publisher has chosen to print energy the Global Monitoring Report 2008 · 2,078 pounds of on recycled paper with 25 percent solid waste post-consumer waste, in accordance with the recommended standards · 12,560 gallons of for paper usage set by Green Press water Initiative--a nonprofit program · 3,831 pounds of supporting publishers in using fiber greenhouse gases that is not sourced from endangered forests. For more information, visit www.greenpressinitiative.org. Global Monitoring Report 2008, the fifth in an annual series, met at the global level, thanks to a remarkable surge in global is essential reading for those who wish to follow the global economic growth over the past decade. However, on current development agenda and debate in 2008. The year 2008 marks the trends, the human development MDGs are unlikely to be midpoint toward the 2015 deadline for achieving the Millennium met. Prospects are gravest for the goals of reducing child and Development Goals (MDGs). It is also an important year to work maternal mortality, but shortfalls are also likely to occur in the toward a consensus on how the world is going to respond to the primary school completion, nutrition, and sanitation MDGs. The challenge of climate change, building on the foundation laid potential effects of climate change compound the challenge of at the Bali climate change conference in December 2007. The achieving the development goals and sustaining progress. report spans this agenda. It provides a comprehensive assessment The report's messages are clear: urgent action is needed to help the of progress toward the MDGs and related policies and actions. world get back on track to achieve the MDGs; urgent action is also It addresses the challenge of climate change and environmental needed to combat climate change, which threatens the well-being sustainability and assesses its implications for development. of all countries but particularly of poor countries and poor people. The report's assessment of MDGs at midpoint presents a mixed The goals of development and environmental sustainability picture, one of both significant progress and formidable challenges. are closely related, and the paths to those goals have important The first MDG, reducing extreme poverty by half, is likely to be synergies. ISBN 978-0-8213-7384-2 SKU 17384