Supporting Effective Aid: A Framework for Future Concessional Funding of Multilateral Development Banks

CIAO DATE: 9/99

Supporting Effective Aid:
A Framework for Future Concessional Funding of Multilateral Development Banks

The following is a summary of Supporting Effective Aid, ODC Policy Essay No. 23, which was released in February 1999 (ISBN: 1-56517-028-8, $13.95). To order a copy of this publication follow this link: http://www.odc.org/publications/pe23bib.html

Broad international agreement is needed on a new framework for future funding of multilateral development bank lending to the world’s poor countries. This framework must ensure that aid will be used more effectively, both to better assist developing countries and secure adequate levels of donor support in today’s rapidly changing world.

Over the past few decades, the multilateral development banks (MDBs)—including the World Bank Group and the regional development banks for Africa, Asia, and Latin America—have become the major source of development assistance for more than 80 low income countries. With monies given by donor countries and lent on highly concessional terms (including low rates of interest and long maturities), these institutions are now the most influential providers of development finance and policy advice, major sources of information and analysis, and, in many instances, lead coordinators of international assistance efforts. However, the MDBs have also been subject to strong criticism and funding delays and limitations.

In the first half of this decade, negotiations among donors for the multiyear replenishments of each of the MDBs’ concessional loan windows have been long drawn out affairs—at times appearing to threaten the whole system of international development cooperation. Indeed, as recently as the mid-1990s, MDB concessional aid seemed on the verge of collapse, due largely to accumulated U.S. arrears to the institutions and limited replenishment offers. For now, the impending crisis has eased. The United States is in the process of clearing its arrears, and current negotiations for a new round of replenishments offer an opportunity to set MDB concessional assistance on a smoother course. But aid levels, in general, have declined markedly since the early 1990s, and broad, sustained support for the concessional aid activities of the MDBs remains in serious question.

Forces for Change

Three forces for change underlie the intense debates over MDB aid roles and replenishments. First, changing global economic and political conditions—including, most prominently, the elimination of the Cold War rationale for aid and the “globalization” of the world economy—have raised major questions about the need and purpose of future aid.

The global economic trends have clearly provided developing countries with expanded opportunities for increased access to capital, technology, goods, and ideas—the very things whose absence 50 years ago was seen as the major constraint to development that aid was designed to ease. However, only a few, large, poor countries have yet to benefit substantially. For the rest, aid will remain essential for a good many years to come if rates of growth are to be achieved that will eradicate mass poverty in a reasonable period of time. Yet, global economic trends, together with the end of the Cold War, have lessened some donors’ sense of urgency in providing development aid.

At the same time, concerns have intensified, particularly among donor countries, over an array of “global” problems—ranging from ethnic and other internal conflicts (in countries loosed from the hold of Cold War politics) to the increased spread of communicable diseases, terrorism, and global warming. While the problems require increased cooperation between developed and developing countries, they also place new demands on scarce public resources in competition with poor countries’ continuing need for long- term development finance.

Second, there has been a marked shift from closed, state-dominated strategies of development to more open, largely market-based approaches. This shift, which began in the developing world and spread throughout most communist countries, has led to a major redirection in the role of the state, the traditional recipient of official development aid. Under the circumstances, the private business sector and organizations of civil society—two groups of actors not previously major foci of attention of aid programs and institutions—have moved more to the fore in development. Although the 1997-98 Asian financial crisis has provoked serious questioning of the open, market-based paradigm, it has not yet led, and is not likely to lead, to a wholesale reversal of development policy reforms. And, therefore, in response to the shift in development strategies and the effects of globalization, development aid agencies face both the opportunity and need to provide aid for new purposes and in new ways.

Third, this need for change in the provision of aid is reinforced by an accumulation of experience and much new analysis about the ineffectiveness of existing aid policies and practices.

Much has been learned over the years about development and about how aid works, and does not work, to help that process. After decades of debate, there is far more—though by no means complete—agreement on what is needed to achieve poverty-reducing, sustainable economic growth and social development that can significantly improve peoples’ lives in a reasonable period of time. But there is also compelling evidence of serious and persistent shortcomings in the provision of aid toward these ends.

What the evidence shows is that for aid to have a strong positive effect on development, good policies must be in place in recipient countries; that where good policies have been implemented and sustained, recipient country “ownership,” of the policies, not aid conditionality, has been key; but that numerous practices of aid agencies have undermined rather than enhanced recipient- country capacities to program and manage their aid. These lessons point to the need to alter both the allocation and the “delivery” of aid if greater development results are to be achieved.

Under these changing circumstances, a strong case exists for continued, even for a time increased, MDB aid. However, that case must now rest on assurances that the aid will be made to work more effectively in support of development than it has in the past. Without those assurances, poor countries’ needs will not be well served. Nor can or should adequate levels of donor country support be expected.

A Proposed Future Funding Framework

Against this background, this study proposes a set of measures aimed at achieving increased MDB aid effectiveness and, thereby, securing levels of donor support sufficient to enable the MDBs to play their appropriate roles in the decade ahead. No one of the measures is entirely new. Indeed, some are already being implemented, at least in part. But they need now to be strengthened and fully implemented by the MDB concessional windows (and preferably by other aid agencies) and supplemented by additional improvements. Moreover, it is recommended that these measures be treated as a single “package” that would constitute a new approach and framework to guide future funding decisions in support of MDB aid.

Elements of the Framework

The core elements of this framework include measures affecting both the allocation and the delivery of MDB aid, and arrangements among member governments regarding the financing and governance of the MDB concessional windows.

The first and most important measure is the adoption of a more rigorous and more transparent performance-based approach to the allocation of MDB concessional aid in support of country development efforts. Based on the adoption of uniform, internationally-agreed performance criteria across the institutions, this approach would result in greater differentiation in lending levels and forms of assistance among recipients in accordance with their actual policies, not promises of future policy changes, in three areas—macroeconomic stability, poverty reduction, and governance. This kind of an approach has begun to be put in place by the concessional windows of the World Bank and the African Development Bank; but if the promise of increased effectiveness is to be met, these efforts need to be expanded and deepened across the international development system and the whole process made far more transparent. How this might be accomplished is discussed in some detail in the main body of this study.

The second element of the framework, which would also affect resource allocations, calls for expanded use of MDB concessional assistance to address regional and global problems affecting the development, and requiring the participation of, poor countries. The MDBs have valuable but underutilized roles to play in the provision of international public goods on a regional and global scale—including for example support for the WHO-led malaria control program, control of illegal drug trafficking, and the preservation of the environment. Even where the MDBs may not take the lead, their financial, analytic, and policy support in such multicountry projects and programs could be of major importance and increasing use can and should be made of their concessional resources for these purposes. This would require that member governments reemphasize the mandates of the MDBs to engage in global and regional programs and projects; donors allocate specific amounts of funds out of future concessional aid replenishments for these purposes; funding in the form of grants be made available to poor countries for MDB regional and global projects where the quantifiable benefits of the projects are difficult to assign to specific countries; and the MDBs make organizational and incentive changes necessary to ensure that the traditional country-focused lending does not block a gradual increase in multicountry efforts.

Third, various improvements should be made in aid practices that have tended to impede the exercise of recipient country ownership and overall performance. These changes must include, among other things, improvements in aid coordination at the recipient-country level to eliminate excessively burdensome duplication of procedures and to make the whole of development more than the sum of its parts; member government authorization for the more flexible use of MDB aid instruments by management and staff in support of recipient-designed and -implemented policies; and vast improvements by the MDBs in the provision of technical assistance and institutional capacity-building. Some of the necessary changes are ones that can be effected by the management of the institutions with agreement of member governments; others require actions by the member governments themselves. And commitments to make these improvements ought to be built into replenishment agreements along with the now-traditional reforms demanded of the recipients and the institutions.

Finally, as part of the overall future funding framework, certain adjustments should be made in the financing and governance arrangements of the MDBs. With increasing levels of “reflows” back to institutions of previous loans made and with continued “graduation” of countries out of concessional aid and into regular MDB near-market-rate borrowing, demands for new donor contributions should wind down over the course of the next two decades—over different lengths of time in the different institutions. But in the meanwhile, as long as new replenishments of resources are needed, adjustments should be made that would better ensure timely provision of donor funds for MDB support of improved poor-country development efforts and their participation in international problem-solving. As the financing needs change, a comprehensive review of the MDBs’ governance arrangements should also be undertaken—aimed at ensuring continued member government high-level leadership, oversight, and support of the institutions; management accountability; and the transparency of institutional operations and policies sufficient for effective civil society participation in and monitoring of MDB activities. Several suggestions are made in the study of adjustments that might be considered in such a review.

The current replenishment agreements for the concessional windows of both the World Bank and the African Development Bank provide opportunities to advance this framework and to gain strong support for the MDBs based on the framework’s approach to more effective development cooperation. Indeed, the recently completed IDA-12 negotiation incorporates several of the improvements which this study (and the international consultations and meetings leading up to it) have recommended, including, among others: 1) new, explicit attention to governance as one of the main performance criteria; 2) greater differentiation in both levels and types of assistance for countries with strong policy performance, and others including those just emerging out of conflict; and 3) the requirement that World Bank country assistance strategies be made public as part of a broad new partnership approach to working with recipient countries. Consistent with other points raised in this study, the IDA agreement also reaffirms that transfers of net income from the Bank to IDA should remain substantial, and it instructs management to look anew at the existing policy for graduating countries out of IDA.

Further work is still needed through the period of the IDA-12 replenishment and in other institutions as well, e.g., in improving the country performance rating system and making that process more public, better tailoring the forms of assistance to country circumstances, and strengthening nonlending activities especially in the area of capacity building. But in the view of this study, the newly concluded replenishment agreement is a much welcomed outcome that warrants strong support in both donor and recipient countries.

As review of the whole MDB concessional aid system makes abundantly clear, what is required for enhanced effectiveness and the sustained aid support that it should elicit is not only “the reform of the institutions” as is so often advocated, but also, changes in the policies and practices of member governments—both donors and recipients—in open interaction with their publics. Only then will it be possible to realize the effective development partnership among countries that today’s rapidly integrating world requires in the interest of sustainable improvements in peoples’ lives on a global scale.