The House of Commons Sub-Committee On International Financial Institutions decided to undertake an examination of the development effectiveness issue in the hope of providing the existing management at the Bank with additional suggestions to support the reform efforts currently underway. The Sub-Committee's study was also driven by the need to ensure that Canada, as a major shareholder of the Bank, is receiving value for its investment in the institution.(1) If the World Bank is to maintain support in donor countries in a climate of fiscal restraint, it must be both effective and perceived to be effective by the taxpaying public. Achieving accountability for Canadian taxpayers, as well as for aid recipients themselves, continues to be an important preoccupation with Sub-Committee members.
As Mr. Wolfensohn told the Sub-Committee, evaluation of development effectiveness is an elusive task. To illustrate, he proffered the example of an agricultural project designed to produce corn. How do you evaluate the project's effectiveness? Apart from the corn's height, you must examine questions related to harvesting, transportation, distribution, the effect corn growing has on the environment and so on. He noted two other difficulties in evaluating development effectiveness: (a) the time period over which a project is evaluated; and (b) the criteria by which a project is judged "effective" keep changing over time.
Former World Bank President Robert McNamara told the Sub-Committee that it is extremely difficult to measure development effectiveness. First, he said, the concept "development" must be defined and then the causal factors must be separated out. For example, South Korea's development can be attributed mainly to the country's own policies; it is difficult to determine how much the World Bank contributed to the country's development.
In the late 1970s, Bank officials became concerned about the number of projects that were failing either because the macroeconomic environment was unstable or because of an inefficient microeconomic structure. In 1979, the Bank responded by introducing structural adjustment loans (SALs) designed to improve macroeconomic balances, such as government and foreign trade deficits. Sectoral adjustment loans (SECALs) were launched in an effort to reform conditions in sectors, such as agriculture and forestry.
Throughout the 1980s, the Bank (and the IMF) were criticized heavily for failing to take into account the impact on the poor of structural adjustment lending. Critics suggested that the government spending reductions typically required by SALs often resulted in cuts to subsidies and to public service ministries, such as health, education, and housing. Since the poor are the main beneficiaries of these programs, it was charged that SALs caused an increase in poverty. Charges that insufficient attention was being paid to the poor stung the Bank, which re-introduced an emphasis on poverty alleviation in 1991.
Another issue concerns local participation and ownership of projects. In the past, it was often the Bank alone which identified and oversaw development assistance projects, rather than involving borrowers from the outset. This topdown approach to project generation and implementation decreased development effectiveness. Ms. Nancy Alexander (Coordinator, Development Bank Watchers' Project) told the Sub-Committee that if "people on the ground" have not participated in the planning and implementation, a project is not likely to be effective. In fact, local ownership can be difficult to achieve unless the original project impetus is local. "Borrowers are not committed to project goals. Their "ownership" has been sought by making them responsible for preparation and implementation, instead of ensuring that the impetus for the project is local and that the process provides explicit opportunities for consensus building."(3)
Yet another complaint lodged against the Bank is that it has been slow to respond to two fundamental new developments of the 1990s: (1) the enhanced role of the private sector in the developing countries themselves; and (2) the phenomenal growth in private flows of capital to these countries. Some have argued that the Bank is not doing enough to encourage the private sector and, to this end, should ideally increase its lending through its private-sector arm, the International Finance Corporation (IFC). On the other hand, others have suggested that the Bank has not carefully monitored the financing provided by its private sector arms, the IFC and MIGA. Ms. Andrea Durbin (Director, International Projects, Friends of the Earth) told the Sub-Committee that the Bank was not applying the same across-the-board environmental criteria to IFC and MIGA lending as it applies to its other operations.
By the early 1990s, it became clear to the Bank's management that the institution's existing portfolio urgently required strengthening. The 1992 study by a former Bank vice president (Willi Wapenhans) found that a high proportion of Bank projects (37.5% in 1991) were routinely failing to satisfy minimum economic targets. In order for the Bank to be effective, it must achieve its development goals in an efficient and cost effective manner. Instead, a high percentage of loans were not meeting the Bank's own criteria, one of which included the need to meet a minimum economic rate of return (10%).(4) The Wapenhans Report focused on the decline in portfolio quality, the Bank's emphasis on a "loan approval culture", and insufficient attention to careful project implementation. The Bank's overwhelming priority of satisfying certain lending targets, combined with a staff incentive system geared to loan quantity, not quality, was keeping the institution from improving the long-term viability of its development projects.
That it took so long for the corporate emphasis on loan quantity to change was often blamed on the lack of transparency and accountability in the Bank's operations. Some people believed that the Bank should require that line managers be held more directly accountable for project performance and that there be systematic project reporting in order to effect ongoing project design changes. They said that the bloated bureaucracy and inappropriate corporate culture continued to represent a major stumbling block to change. Without strong leadership at the top, few among the Bank staff were willing to embrace radical changes that might put their own positions or status in jeopardy. The lack of transparency of Bank policies presented a problem in assessing many of the Bank's activities. Ms. Lisa Jordan (Secretary, The Bank Information Center) told the Sub-Committee that previously the Bank lacked adequate disclosure policies. Although the Bank now has information disclosure policies, the Bank Information Center remains concerned about the Bank's accountability.
Conditions in the world's poorest nations have been exacerbated by the unsustainable levels of debt accumulated by these countries during the 1980s. The World Bank is involved in a major initiative to reduce the debt owed to commercial, bilateral and multilateral creditors. Along with the IMF, the Paris Club and others, the Bank is arranging an overall debt plan for the highly-indebted poor countries, many of which are located in Sub-Saharan Africa.
Since the Bank is not permitted to lend directly to the private sector, except with a government guarantee, the involvement of private firms is being encouraged primarily through two of the World Bank Group's affiliates: the IFC and the Multilateral Guarantee Agency (MIGA). The mandate of the former is to promote the growth of productive and profitable private enterprises in developing country members, albeit with a relatively limited capital base. MIGA, on the other hand, provides investment insurance to guard against non-commercial risks in developing countries, such as nationalization or confiscation by governments. In fiscal 1996, the World Bank established a Private Sector Development Group, comprised of senior managers from the Bank, the IFC, and MIGA, to coordinate the Bank's overall private sector strategy. "Its role is to foster synergy among all private sector activities by coordinating country assistance strategies, facilitating private sector operations that involve two or more Bank Group institutions, developing partnerships with the private sector, and sharing expertise within the Bank Group."(6)
Mr. Jemal-Ud-Din Kassum (Vice President, Investment Operations, International Finance Corporation) told the Sub-Committee that the IFC's first duty is to lower the risk profile in developing countries. He said that the IFC encourages private sector involvement in developing countries through three types of activities: financing private sector projects, helping to mobilize foreign capital, and providing advice and technical assistance. In fiscal 1996, a record US$3.2 billion in financing was approved for the IFC's own account with another US$4.8 billion provided through syndications. In the last ten years, the IFC's total committed portfolio has risen from US$3.8 billion in fiscal 1987 to US$16.0 billion in fiscal 1996.
Some observers continue to criticize the World Bank for distorting international capital flows and developing country decision-making. However, a recent U.S. General Accounting Office (GAO) report found that nearly 90% of the private sector firms interviewed said that the World Bank Group enhances the environment for private investment in developing countries.(7) In general, "the IFC loans to private sector borrowers act as incentives for businesses to become involved in new projects or markets."(8) Displacement of private sector capital by the IFC occurred only in a few developing markets where private sector interest had become well established. In certain cases, IFC displaced private sector firms in particular projects. "IFC is working to address these concerns by reducing its presence in contested markets and has revised its guidelines to better clarify the importance of not competing with private investment."(9)
To inject more monitoring and evaluation of the Bank's operations, Mr. Wolfensohn established in fiscal 1996 the Quality Assurance Group, designed to provide line managers with independent assessments of their work. Evaluations of ongoing operations are also made available through the Annual Report on Portfolio Performance (ARPP), prepared by the Bank's operational staff. Moreover, the Bank instructs responsible staff to evaluate their own completed operations, and has charged the OED with the mandate of independently evaluating a representative sample of completed operations. There are four purposes to the OED evaluation process:
Mr. Wolfensohn has been emphatic about the need to fight corruption. Although the issue is not new to the Bank, Mr. Wolfensohn brought it to the forefront during his speech to the Board of Governors at the October 1996 Annual Meeting of the World Bank and the International Monetary Fund. "Let's not mince words: we need to deal with the cancer of corruption...In country after country, it is the people who are demanding action on this issue...Corruption is a major barrier to sound and equitable development."
The Sub-Committee finds merit in the adoption of such a focused lending approach. Other suggestions made in this section of the report deal with increased Parliamentary monitoring of Bank projects; the development of objective development effectiveness indicators; and the provision of financial incentives for managerial success in enhancing project performance.
In order to ensure that a high level of project performance is attained, it may be useful for the Bank to become more selective in its lending, entering into solid aid partnerships with only truly "recipient" countries. Under this scenario, only those developing countries committed to growth (through appropriate macroeconomic management) and to poverty reduction would be offered financial assistance. The Bank's Operations Evaluation Department has even considered the option of engaging in a widespread cancellation of current substandard projects, which together account for over 20% of the current loan portfolio.
There is also an urgent need for developing countries to display greater commitment to the operational goals of the Bank. This commitment can be achieved through host country (and within that country perhaps local) participation/"ownership" in project design and in the evaluation of aid effectiveness. Experience has shown that "home-grown" programs and projects are more effective in accounting for domestic institutional constraints and in satisfying the needs of the people directly affected by the proposed aid projects. In contrast, providing financing when ownership is weak tends to lead to a poor utilization of resources, in that the projects often end in failure or exert meager development impacts. The Sub-Committee is pleased to see that the Bank is now emphasizing local "ownership" of projects. However, NGOs remain critical of the lack of local participation in World Bank structural adjustment lending. Mr. Douglas Hellinger (The Development Group for Alternative Policies) told the Sub-Committee that the Bank needs to provide "a seat at the table" in designing structural adjustment policies.
In addition, developing countries need to ensure that there is put in place a minimum level of "good governance": to provide an efficient public sector with processes to guard against corruption; to limit military expenditures; to provide a sound legal system; to establish clear property rights to protect legitimate economic activities and interests; and to enhance accountability of the government to the population. Those countries that most require assistance are often the ones least able to absorb it, typically owing to weak capacity. Donors need to work with developing countries to strengthen this capacity. The Bank is attempting to promote effective government and a strong civil society, and deal with the issue of corruption.
The Sub-Committee is of the view that bad developing-country performers should not be rewarded. Large-scale aid resources should be provided only to those countries ready to significantly improve their government through political and economic liberalization. The Sub-Committee therefore recommends:
Recommendation No. 1:
That the federal government encourage the World Bank to focus its lending activity on those countries willing to commit to appropriate macroeconomic management and poverty reduction, and to sound implementation of development projects, taking into account respect for human rights and the level of military expenditures. In countries with a weak policy framework and poor project implementation capacity, the Bank should consider favouring advisory and capacity building services over lending.
Recommendation No. 2:
That the federal government undertake, at the multilateral level, to persuade World Bank shareholders to organize a detailed annual investigation of a representative sample of Bank development assistance projects. Such a review should be undertaken, in cooperation with local NGO representatives, by elected representatives from the sponsoring countries, including representatives from this Sub-Committee or similar committees of other parliaments, and should be focused on project effectiveness. A formal mechanism, involving an annual review by an international group of parliamentarians to review World Bank effectiveness, should be adopted.
In the interim, the Sub-Committee should engage in additional World Bank monitoring. It should move beyond the information provided by the World Bank, NGOs and the federal government, and assess for itself the effectiveness of World Bank activity. This goal can be achieved by visiting several countries where the Bank has been active. As part of this review, the Sub-Committee could also examine the Bank's own performance standards to assess their appropriateness.
The Committee on Development Effectiveness (CODE) has been urging the Bank's management to develop such indicators. The Sub-Committee believes, however, that objective, comprehensive and internationally recognized development effectiveness indicators should be designed outside of the World Bank, and applied against all forms of multilateral and perhaps even bilateral assistance projects. It therefore recommends:
Recommendation No. 3:
That the federal government urge the global community, through a multilateral forum, to establish a set of objective, high-quality, internationally recognized effectiveness indicators to accurately measure the impact of development assistance on aid-recipient countries.
2World Bank, Strengthening the Effectiveness of Aid -- Lessons for Donors, May, 1995, p. 1
3Robert Picciotto and Rachel Weaving, "A New Project Cycle for the World Bank?, Fi nance & Development, December 1994, p.43
4It is worth noting that a number of projects evaluated were found to have rates of return of close to the 10% threshold. Even though they failed to meet the Bank's efficiency test, it was thought by Bank management that they were still providing tangible institu tion-building and other benefits to client countries.
5Bretton Woods Commission, Bretton Woods: Looking to the Future, July 1994, p. A-7
6World Bank, "Increasing Development Effectiveness", World Bank News, September 26, 1996. p. 2
7GAO, World Bank: U.S. Interests Supported, but Oversight Needed to Help Ensure Im proved Performance, GAO/NSIAD-96-212, 26 September 1996
8Ibid. p. 8.
9Ibid.
10"A new World Bank order", The Banker, October 1996.
11Development Committee, Serving a Changing World, Report of the Task Force on Mul tilateral Development Banks, Washington, D.C 15 March 1996, p. 8
12World Bank, Operations Evaluation Department, "Evaluation Results for 1995", OED Précis, Number 131, December 1996, p. 2
13Ibid, p. 1