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IMPROVING WORLD BANK EFFECTIVENESS: AN INTERIM REPORT

INTRODUCTION

In June 1995, Mr. James Wolfensohn assumed the Presidency of the World Bank vowing to "break the armlock of bureaucracy" at the Bank. Mr. Wolfensohn had listened to the considerable amount of criticism leveled at the development effectiveness of World Bank policies over the years and decided that nothing short of a shift in the Bank's corporate culture would generate a new "results" orientation. Accordingly, increasing the "development effectiveness" of World Bank policies has become the Bank's number one priority and Mr. Wolfensohn has introduced a number of specific reforms to accomplish this goal.

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.

WHAT IS DEVELOPMENT EFFECTIVENESS?

"The ultimate goal of development is to reduce poverty and improve standards of living. For this to happen, sustainable economic growth and investment in people are necessary."(2) Therefore, development can be termed "effective" to the degree that these policy objectives are achieved. A number of secondary development objectives exist to support the primary development goals of alleviating poverty and improving living standards. These secondary goals include: the development of the private sector; the integration of women and development; the achievement of effective government and a strong civil society; the attainment of environmentally sustainable growth; investments in human capital and infrastructure; advancement of microfinance; and the minimization of the social impacts of adjustment.

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.

WORLD BANK LENDING UNDER A MICROSCOPE

The Bank has received its share of criticism of its lending practices over the years. During the 1960s and 1970s, the Bank lent money mainly to finance large-scale infrastructure projects, such as dams, roads and power plants. Critics argue that such projects have, on occasion, imposed inappropriate patterns of development on the recipient society and exerted negative effects on the local environment.

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.

RESPONDING TO THE EFFECTIVENESS CHALLENGE

A. Poverty Reduction

It is important that development assistance be made as effective and efficient as possible. Fortunately, the Bank has responded to some well-founded criticisms by modifying its policies. On the question of poverty reduction, the Bank adopted its current strategy in 1991. This strategy consists of fostering labour-intensive growth and using targeted interventions focused on social services, such as primary education, basic health care, family planning, and improved nutrition. The Bank is now also stressing social development as a prerequisite for economic development, with emphasis placed on investing in human capital through education. As much as 18% of the Bank's lending is currently being devoted to human resource development. Operationally, the poverty strategy encompasses two main elements. The first element is "poverty assessment", which determines the extent of the poverty problem and sets the basis on which Bank actions are formulated. Once the assessment is carried out, the Bank then devises country-specific strategies designed to complement developing countries' own efforts to alleviate poverty.

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.

B. Environmental Effects

Since 1987, World Bank lending policies have paid more attention to ecological concerns. "Justly criticized for being environmentally insensitive in the past, in recent years it has reformed its ways significantly. In fact it has become a leading advocate of environmentally sustainable development."(5). The World Bank's 1989 Environmental Assessment Operational Directive (EAOD) requires that all projects with significant potential environmental impacts must undergo environmental assessment, while all sectoral assessments are applied to sector investment programs. In 1993, the bank established the environmental sustainable development (esd) vice-presidency. In 1995, an environmental review of the bank's entire lending portfolio was undertaken. The Bank now tries to take environmental concerns into account in all its activities. Other significant changes include an increase in the number of environmental staff and the introduction of an annual report on the institution's environmental activities. A full one-quarter of the projects examined as part of the Bank's Operations Evaluation Department (OED) 1995 annual review of completed operations contained a built-in environmental focus.

C. Local Ownership

The Bank is now also emphasizing local "ownership" of projects. More stress is placed on achieving "results on the ground" through consultations with local citizens and NGOs in borrower nations. Mr. Wolfensohn explained to the Sub-Committee that, because the Bank has cut down on the number of levels of internal scrutiny associated with loan approvals, there is more time to undertake extensive consultations with various development actors without prolonging the project introduction and implementation period. Mr. Wolfensohn said that the Bank tries to balance the interests of NGOs, governments and others but that unanimity can never be achieved. As a result of these consultations, the Bank's country-assistance strategy, which forms the basis of the country's development program, focuses more clearly on clients' specific needs and ensures that the views of interest groups are reflected.

D. Private Sector Involvement

As noted earlier, private sector involvement in the developing world has increased markedly over the past decade as many countries have instituted important economic and democratic reforms. The Bank has responded by focusing more on the private sector based on the conviction that private firms are the main source of economic growth, income and employment. Mr. Wolfensohn acknowledged that, in general, the private sector does a better job in generating economic growth but private markets do not exist in some countries. Consequently, he said, there will continue to be a need for World Bank involvement.

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)

E. Improving Portfolio Performance

The "Next Steps" Program introduced in July 1993 was the World Bank's answer to its loan portfolio's declining quality, which was outlined in the 1992 Wapenhans Report. The "Next Steps" Program contained 87 specific actions to improve portfolio management. At the program's core was the introduction of a country-by-country approach for the management of the Bank's ongoing lending operations. The individual actions were grouped together into seven different major areas corresponding to priorities identified in the Wapenhans Report:

Progress reports on the Next Steps program have indicated that management is on its way to achieving an "implementation culture" at the Bank. The institution is also attempting to use lessons learned from the past (i.e. evaluation results) to improve the quality of new projects, a crucial determinant of whether or not a project will be successful. To reduce upfront risks even further, greater use could be made by the Bank of pilot lending prior to lending for full-scale projects. In order to be truly effective, the project delivery process needs to be made more transparent, with "value-for-money" being the prime consideration each step of the way. Creating more transparent delivery processes may also provide the most potent anti-corruption measure available.

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:

Effective project monitoring and evaluation are absolutely essential for achieving results on the ground. The challenge in the years to come is to ensure that participatory ownership of aid effectiveness is actually occurring. The real litmus test with respect to aid effectiveness should be the satisfaction of aid recipients. For this to occur, it is important that borrower participation in the monitoring and evaluation process be enhanced. Raising the capacity of borrowers to evaluate projects (i.e. training local individuals to undertake this work) is, therefore, essential. It is encouraging to discover that, according to information provided to the Committee, borrowers are provided an opportunity to participate in OED's independent evaluation process. Moreover, borrowers are being encouraged to involve local project beneficiaries in the evaluations. The Sub-Committee views this move to a more participatory form of evaluation as a welcome development.

F. Bank Restructuring

Mr. Wolfensohn assumed the Presidency of the Bank with the intention of restructuring the institution. One of the main elements of this restructuring includes the decentralization of the Bank and the creation of regional networks which will make the institution "more accountable to its clients and more flexible in the way it applies its multifaceted development expertise."(10) The Bank will assemble cross-cultural teams of technical experts to contract with the country teams working in the field. Plans unveiled in February 1997 at an Executive Directors meeting show that the Bank intends to increase the strength of the Bank's operational staff from 52% to 60% of total employment. The plan also involves laying off 500-700 staff and hiring new people with different skills. One potential problem is that the plan's implementation is expected to increase the Bank's administration budget, especially in the short term.

G. Institution Building

In recent years, "institution building" has been recognized by the World Bank as an important component of development. "Efforts to promote poverty reduction, private enterprise, and a better natural environment require more effective government and the emergence of a strong civil society.(11) Without the right public policy framework, it is difficult to achieve and sustain economic growth. This framework includes the rule of law, protection of legitimate economic activities and interests, accountability of government to its citizens, effective measures to curb corruption, a participatory approach to development, easy access to important information and services, and sound decision-making.

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."

H. Women in Development

It is estimated that 70% of the world's absolute poor are women. The World Bank has been criticized for the slowness with which it recognized the importance of women in development. However, since the mid-1980s it has taken these issues very seriously. Early work concentrated on investing in the areas of health, population, and education. More recently, the Bank has been involved in investing in women as workers. For example, the Bank has undertaken microfinancing projects whereby women are provided with modest loans to start their own businesses. Increasingly, the Bank is trying to increase the participation of women in individual projects and is seeking to mainstream attention to women by integrating their issues into all aspects of Bank operations.

I. Multilateral Cooperation

The Report of the Task Force on Multilateral Development Banks called for increased coordination and cooperation among the multilateral development banks and with the IMF in order to reduce duplication of activities and improve coordination in the field. The World Bank and the IMF announced in September 1995 an initiative to undertake joint expenditure reviews. In addition, as Mr. Wolfensohn told the Sub-Committee, he meets twice per month with IMF Managing Director, Michel Camdessus. He also receives a brief from the IMF whenever Mr. Camdessus travels.

THE NEED FOR FURTHER ACTION

OED's evaluation results for 1995, while registering a modest improvement over previous year's results, have not indicated any major deviation from the Bank's historical performance record. Of the 264 completed lending operations evaluated in 1995, a full 32% had unsatisfactory outcomes.(12) "The portfolio improvement program has made a start, but to achieve a dramatic improvement in performance would require even more change than is now underway. The Bank would need to become more selective in its lending, in line with borrowing countries' commitment to growth and poverty reduction and to sound implementation of development projects."(13)

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.

A. Towards More Targeted Lending

Arguably the most important factors in achieving higher growth rates, greater rates of poverty reduction and improved Bank lending performance are the macroeconomic conditions and policies in existence in the borrowing countries themselves. Recipient countries must be prepared to commit to economic development by implementing sound policies and by practicing good public sector management. While good Bank performance will lower the probability that projects will fail, the effort has to be extremely strong to overcome poor operating environments within developing countries.

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.

B. Ensuring Greater Accountability

To ensure that greater accountability of World Bank operations is achieved, the Sub-Committee is of the view that an annual Parliamentary Review of Bank projects, encompassing Parliamentarians from many countries and conducted in the field, should be considered. Such a review would, by gauging the local opinion of the merits of these projects, serve to shine a useful periodic spotlight on the Bank's activities. The Bank should make every effort to accommodate Parliamentarians in such an external evaluation of the effectiveness of its development assistance activities. The Sub-Committee recommends:

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.

C. Development Of Objective Effectiveness Indicators

The Sub-Committee views the development of high-quality, objective indicators of operational effectiveness as an important priority. Recognizing that measurement of the effectiveness of flows of the Bank's non-financial resources is rather difficult, considerably greater analytical rigour in appraising projects is required, especially in analyzing poverty-reduction impacts. Ideally, such indicators would measure changes in income, health, education, consumption, wealth and employment over finite periods of time (e.g. 5 years). The results of these measurements could be used to design higher quality projects, and generally to serve to keep institutions such as the World Bank more accountable.

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.

1Canada's total financial contribution over the years, exceeding $4 billion, has been quite substantial.

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

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