[stop-imf] The Implications of the IFIıs Debt
Sustainability (DS) Proposal - CNES draft
robert.weissman@essentialinformation.org
robert.weissman@essentialinformation.org
Wed, 02 Jun 2004 11:29:33 -0400
Triage of Low-Income Countries?
The Implications of the IFIıs Debt Sustainability (DS) Proposal
(Draft for Comment)
Nancy Alexander
Citizensı Network on Essential Services (CNES)
ncalexander@igc.org
www.servicesforall.org
May 28, 2004
Table of Contents
I. Introduction
A. What ever happened to Debt Relief?
B. Crooked Yardsticks for Measuring the Quality of Policies
C. Rationing Aid
II. Looming Cuts in Official Development Assistance (ODA) Levels
III. Impact of Policing Policy Performance? Nearly Eliminating
Policy Autonomy
A. Scope of the Country Policy and Institutional Assessment (CPIA)
B. Promoting One-Size-Fits-All policies
C. Undercutting the PRSP
D. Addressing Problems of the Past
E. Missing the point? The problem of competitiveness
F. Promoting flawed notions of causality: the case of trade
G. Promoting flawed notions of causality: the case of decentralization
H. Who are ³good² policies good for? Borrowers or Creditors
I. Expanding the policy cartel
J. The Graveyard of Failed States: The Program for ³Low-Income Countries
Under Stress²
IV. Unanswered Questions
A. Changing the role of the IMF: Meltzer Holds Sway
B. Providing resources to countries undergoing shocks
C. Establishing a Credit Buy-Down Mechanism (CBM)
D. Giving the ³Green Light² to Infrastructure Investors
E. Establishing a new Hierarchy among Donors and Creditors
V. Conclusion
Appendices:
A. 2003 CPIA Country Ratings
B. CPIA Rating Criteria
Boxes:
1. CPIA Policy Clusters
2. Differences in Rating Systems between the World Bank and two Regional
Banks
Key Points
>From debt relief to debt management. For years, there has been pressure on
the multilateral lenders and donor governments to relieve or cancel the
debts. If approved by the IMF and World Bank Governors at their annual
meeting in September, a new debt sustainability (DS) mechanism would focus
on helping governments manage their debt burdens at levels deemed
acceptable.
Rationing aid and credit. To this end, the multilateral institutions would
determine the debt threshold of each low-income country based upon three
factors: its debt burden, the quality of its policies and institutions, and
its vulnerability to shocks. The institutions would ration aid and credit,
based upon governmentsı standing relative to these factors.
A Crooked Yardstick: the CPIA. [1] <#_ftn1> IMF and World Bank officials
state that ³irrespective of what probability of debt distress is considered
tolerable, the empirical evidence suggests that debt thresholds should be
established in light of the quality of a countryıs policies and
institutions.²[2] <#_ftn2> In order to measure the quality of policies and
institutions, the World Bank uses a ³Country Policy and Institutional
Assessment²(CPIA) instrument that, among other things, has embedded policy
preferences: privatization and liberalization in the context of budget
discipline.
Incentives for Infrastructure Investment. The IMF proposes that ³excluding
the operations of public enterprises that are commercially run from fiscal
indicators and targets would allow a more appropriate assessment of a
countryıs fiscal stance, and would eliminate inappropriate constraints on
investment by these enterprises.² This change would open the door to
expanding efforts to commercialize water supply and sanitation projects
around the world.
Competition for Shrinking Resources. Since the DS proposal is likely to
shrink the amount of multilateral assistance to developing countries,
countries would (to a greater extent than is currently the case) compete
with one another to access the multilateral development banksı shrinking
pool of resources. Especially once a governmentıs access to loans is
barred, it will have an overwhelming incentive to fully comply with the
multilateral lenders prescribed policy reforms in order to get better a CPIA
score and, thereupon, possibly access more grant aid.
The IMFıs role in low-income countries will change; it will employ new norms
to determine eligibility to its resources.
Triaging Poor Countries. The DS mechanism (and the CPIA upon which it
relies) would provide a signal indicating whether each government is
eligible to receive assistance and, if so, the terms upon which it can
access grant aid or credit. Heretofore, policy prescriptions of the
multilateral lenders have been promoted through the policy conditions
attached to loans. The DS mechanism would significantly increase the
pressure on governments to conform to the CPIAıs policy preferences.
Implications. The likely cut in aid levels will jeopardize achievement of
poverty reduction goals. The emphasis on private sector development (PSD)
and the segregation of those countries ³deserving² or ³undeserving² of aid
will exacerbate inequality within and between countries. The loss of
governmentsı remaining policy autonomy and sovereignty may undercut their
capacity to respond to the democratic will of their citizens where that will
differs from the policy preferences of the multilateral lenders.
Triage of Low-Income Countries?
The Implications of the IFIıs Debt Sustainability (DS) Proposal
I. Introduction
An IFI proposal for a new Debt Sustainability (DS) regime will, if
implemented, emphasize debt sustainability, or the rights of creditors, over
all other development challenges, including achievement of the Millennium
Development Goals (MDGs). The proposal shifts the aid communityıs focus to
the question of how it should help countries maintain acceptable debt
burdens rather than how to achieve deep debt relief and cancellation. In
September 2004, the Development Committee of the IMF and World Bank will be
asked to approve the DSA proposal, which would assess a governmentıs
capacity to carry debt by measuring:
· debt burden thresholds given the quality of policies and
institutional environment; and
· how vulnerability to shocks (e.g., commodity price declines or
natural disaster) might affect the thresholds.
Using these factors, the IFIs would establish a country-specific debt
threshold (or cap) for each of about 81 low-income countries.[3] <#_ftn3>
According to the paper written as background for the Boards of the IMF and
World Bank, entitled ³Debt Sustainability in Low-Income Countries Proposal
for an Operational Framework and Policy Implications,² implementation of the
proposed DS mechanism could effectively reduce overall aid flows. Written
by Gobind Nankani and Mark Allen, senior officials of the World Bank and
IMF, this paper was released in February 2004 and appears on the websites of
the two institutions.[4] <#_ftn4>
Donors and creditors predict that the debt sustainability (DS) proposal will
significantly lower levels of aid flows to developing countries. This could
create sharp budgetary constraints and trade-offs that could smother
development activities and poverty reduction efforts. In addition, the DS
proposal would strengthen the capacity of a creditor ³cartel² to constrain
the policy autonomy of developing countries and, hence, their capacity to
respond to the expressed will of their citizens.
A. What ever happened to debt relief? The efforts of donors and creditors
to achieve deep debt relief or cancellation are limited to a small circle of
countries of strategic importance to the U.S. and other G-7 countries
e.g., Iraq and Poland. Meanwhile, they soft pedal the plight of other
countries mired in unpayable debt.
The Highly Indebted Poor Country (HIPC) Initiative has produced too little
debt relief too late for too few countries. The DS proposal seeks to use
questionable tactics to ensure that countries debt burdens are manageable.
The proposal would only apply to future borrowing and would not cancel any
existing debt. Rather it sets debt thresholds for each developing country
and, then, ensures that these thresholds are not exceeded.
The Highly Indebted Poor Country (HIPC) Initiative is a ³backward-looking²
instrument that links past government performance to decisions related to
debt relief. In contrast, the DSA proposal is ³forward-looking² in the
sense that it links grant and loan levels to expected performance based on
policies and institutional conditions. Donors and creditors currently assign
a single debt sustainability threshold a debt-to-export ratio of 150% or
greater -- to all 44 HIPC. (HIPC countries are a subset of low-income
countries.) The DS mechanism would customize the ratio for each country.
As noted by a Jubilee USA analysis, it is increasingly clear that the
primary purpose of the HIPC Initiative is not an ³exit² from the debt crisis
in low-income countries, but rather conformance with IMF and World Bank
policy prescriptions. As the Allen-Nankani paper says:
The HIPC Initiative facilitates (this) regime change by limiting its support
to those countries that are pursuing sound policies. (p. 10)
The Initiative is scheduled to expire at the end of 2004 and, while donors
and creditors pledge to extend the Initiative, it remains to be seen whether
they will ³put their money where their mouths are.² [5] <#_ftn5> The
European Union is lukewarm in their support of an extended HIPC. The IMF
may divert money from the HIPC Trust Fund to its Poverty Reduction and
Growth Facility (PRGF) when PRGF loan resources are running low. (See p.
12.)
>From ³drop the debt² to ³stop the debt.² Rather than ensure signifi=
cant new
debt relief, the proposed DS mechanism would ensure that future grant and
loan decisions of multilateral lending institutions are tailored to reflect
countriesı risk of debt distress. In the words of Jubilee USA, the proposal
seeks to ³stop² rather than ³drop the debt.² The donor countriesı weak
commitment to debt relief is regrettable, not only because so many
developing countries owe money for projects and policies that did not lead
to growth in the past, but also because there is compelling evidence that
eliminating debt is a more effective way to achieve future growth than
taking in more aid.[6] <#_ftn6> However, stopping the debt is only one
goal of the DS proposal. Other goals are discussed below.
B. A Crooked Yardstick for Measuring the Quality of Policies
Allen and Nankani, state that ³irrespective of what probability of debt
distress is considered tolerable, the empirical evidence suggests that debt
thresholds should be established in light of the quality of a countryıs
policies and institutions.² (p. 21). The proposed DS regime assumes that
governments with ³poor² policies (25th percentile of the CPIA have the same
risk of debt distress as governments with ³good² policies (75th percentile).
The primary instrument for measuring the quality of policies is the World
Bankıs rating instrument the ³Country Policy & Institutional Assessment²
(CPIA). Each year, the World Bank uses the CPIA to make a detailed
assessment of each of its 136 borrowing countryıs performance.
Among other things, the CPIA rates the quality of each borrowing
governmentıs policy and institutional reforms, including those that promote
privatization and liberalization in the context of budget austerity. The
World Bank uses its ratings of individual governments as diagnostic tools to
help: 1) determine the debt sustainability of each borrower; 2) allocate
loan and grant resources among borrowers, and 3) determine the policy thrust
of new operations.
As described on p. 7 ff, the CPIA is a highly subjective rating system that
is increasingly used in a mechanistic and non-transparent way. The CPIA is
like a ³black box,² in that most of the CPIA scores are secret and the
methodology suspect.[7] <#_ftn7>
As a group, ³good² performers that have historically adhered to neoliberal
policies have not prospered. Countries that adhere to IFI-prescribed
policies have significant increases in inequality and instability, while
economic growth often eludes them.[8] <#_ftn8> The 1990s were the heyday
of the Washington Consensus, but saw egregious increases in inequality. One
study of progress/regression relative to the Millennium Development Goals
(MDGs) compared the richest quintile to the poorest quintile of persons in
44 countries.[9] <#_ftn9> In 42 of 44 countries, there was a doubling,
tripling or quadrupling of inequality ratios relative to MDG goals (e.g.,
net school enrollment ratios; under 5 mortality rates). In the other two
countries, inequality remained unchanged. In sum, there were NO countries
in which inequality diminished.
C. Rationing Aid
Allen and Nankani describe the formula for rationing aid:
"i. New lending should be geared to a country's capacity to carry debt --
which in term, depends on its ability to use these resources effectively for
development and growth, and on its vulnerability to shocks.
ii. To the extent that additional resources, beyond a country's capacity to
carry debt may be employed productively to generate growth and achieve the
MDGs -- these resources should be provided in the form of grants rather than
loans." (p. 12)
This formula will create enormous pressures on countries to adhere to not
only to explicit policy recommendations made by the donors and creditors,
but also implicit or ³understood² policy preferences. The competition for
scarce resources will be unparalleled. Since low CPIA countries would not be
seen as using debt productively, they may receive more loans relative to
grants. However, when they arrive at their debt threshold, if grant
resources are no longer available they are likely to receive nothing.
Governments that rely on democratic processes and adopt policies that are
different than the policy preferences embedded in the CPIA may be punished
with a financial straightjacket from financiers. Donors/creditors may
relegate those countries that refuse to comply with their policy and
institutional prescriptions to the program for low-income countries under
stress (LICUS). (See p. 14 for a description of LICUS.)
Allen and Nankani imply this risk to ³poorly² performing countries in a
back-handed manner,
Provided a countryıs policies are considered appropriate, the legacy of a
high debt burden or vulnerability to shocks would not be a justification for
denying it resources. (p. 33)
II. Looming Cuts in official development aid (ODA) Levels
A major increase in the level of grants would be necessary for the DS
proposal to help achieve the MDGs. As stated by Allen and Nankani:
Creditors would need to review current lending policies to ensure that they
appropriately reflect countriesı risk of debt distress. The tailoring of new
lending decisions to the risk of debt distress would almost certainly
require an increase in the concessionality of financing to low-income
countries, and consequently, a higher volume of grants, to avoid a reduction
in net transfers. (p. 32)
If grant assistance does not rise as concessional lending is phased out,
there will be significant cuts in overall aid flows. Allen and Nankani say
that:
Ultimately, the extent to which countries will face dilemmas between
financing needs and long-term debt sustainability depends to a large extent
on the international communityıs willingness to provide additional grants.
Unless donors and creditors can significantly increase their pool of
resources, a higher share of grant funding to some countries would have to
come at the expense of reduced nominal transfers available to all.(p. 35)
Since competition for scarce funds would create pressure for all governments
to tighten compliance with IFI policy prescriptions, the countries with
³below-average² policies could be placed at a permanent disadvantage. This
is not a recipe for helping poor countries to achieve better outcomes,
economic development, or the poverty-reduction goals enshrined in the United
Nationsı Millennium Development Goals (MDGs).
Although the United Nations and all of the worldıs leading development
agencies have continually called on the worldıs richest countries to
increase their levels of annual foreign aid, there are few indications that
aid levels are expected to increase very much. According to Kapuscinski,
citizens in developed countries are indifferent to the needs of those
developing world. Although they may listen to ³ethnic music² and travel
abroad, they generally have little interest in the people. This apathy, plus
charges of corruption on the part of donors/creditors and recipient
governments, makes it almost impossible to increase levels of foreign aid.
Donors have continually failed to fulfill the UN aid target of 0.7% of GDP.
At the UNıs 2002 Conference on Financing for Development, the major donor
countries pledged to increase their levels of foreign aid by $16 billion
(31% in real terms), which is insufficient for achieving the MDGs. A paper
prepared by Bank staff for the Development Committee estimates that
developing countries may need an additional $14 billion per year. However,
this estimate does not include the costs of meeting MDGs in all countries,
nor the needs that are arising relative to infrastructure, HIV/AIDS or
environmental protection.
To date, most donors have ignored their pledges. In fact, aid has actually
fallen in real terms, remaining at about the same nominal level since 1991.
Overall, foreign aid has declined as a proportion of developed countriesı
GNP from .34% on average in 1990 to .23% in 2002. Indeed, the loan
resources of the IMFıs Facility for low-income countries the Poverty
Reduction and Growth Facility will be halved after 2006.
True, the U.S. has announced plans to increase bilateral grant aid through
its Millennium Challenge Account (MCA) and a few European governments have
modestly increased their aid levels. Moreover, IFI concessional loans are
gradually being converted to grants. Countries could receive the grant
element of a concessional loan as a grant, instead of the loan itself. For
typical highly-concessional lending, the grant element of a loan is
something like half the face value -- i.e. a $100m loan on highly
concessional terms is equivalent, in present value terms, to an up-front
grant of $50m. Viewed in these present value terms, a loan of $100m and a
grant of $50m represent exactly the same amount of aid to a country -- so in
this sense there is no reduction in aid flows by switching to grants in this
way. Of course, to maintain the same volume of funds going to the country,
a grant of $100m would be needed -- and this represents a doubling of aid in
present value terms.[10] <#_ftn10>
Nonetheless, the phasing out of concessional lending will require far
greater increases in grant assistance than those coming on line. At
present, donor governments provide 75% of grant assistance. However, 30% of
all grants are provided as technical co-operation, which enriches donor
countriesı own exporters, contractors, and consultants.
Grants provided by the World Bank are likely to focus significantly on the
private provision of essential services health care, education, water and
electricity in low-income countries, which almost by definition, have
little or no regulatory capacity. This focus is mandated by the
institutionıs 2002 Private Sector Development (PSD) Strategy, which declares
that PSD now the overarching purpose of the World Bank Group, not just
another sector strategy. Indeed, every sector strategy of the World Bank
must conform to the mandates of the PSD Strategy. Importantly, many World
Bank grants are dedicated to compensating corporate and NGO service
providers for extending services to poor people at prices that are
below-cost. Hence, a significant portion of grant flows may go into the
deep pockets of corporations and international NGOs.
III. Impact of Policing Policy Performance: Nearly Eliminating Policy
Autonomy
The IMF and World Bank have always rated the policy performance of borrowing
governments. The was created to address deep disillusionment with the aid
system since the end of the Cold War. Donor governments have felt that
foreign aid has generally failed to produce development results and, as a
result, created mounting indebtedness. The World Bank told them that, where
governments adopt ³good² policies, their investments would produce results
on the ground. Governments have some flexibility regarding whether or how
they adopt the ³good² policy conditions attached to loans many of which
are ardently opposed by their citizens and parliaments. But, under a CPIA
and DS regime, they lose a lot of that ³wriggle room.²
The Bankıs rating system, called the ³Country Policy and Institutional
Assessment² (CPIA) is a set of highly subjective ratings prepared annually
for its 136 borrowing countries.
The CPIA consists of 20 equally-weighted criteria (grouped in four
clusters).[11] <#_ftn11> The Bank rates each governmentıs policy and
institutional performance relative to:
· Economic management
· Structural reform
· Policies for social inclusion
· Public sector management and institutions
Then, to achieve an overall rating, the Bank also judges a governmentıs
portfolio performance and governance. (See Box 1.)
Box 1
CPIA Policy Clusters*
· Economic management, including management of inflation and current
account; fiscal policy; management of external debt; and management and
sustainability of the development program.
· Structural policies, including trade policy and foreign exchange
regime; financial stability and depth; banking sector efficiency and
resource mobilization; competitive environment for the private sector;
factor and product markets; and policies and institutions for environmental
sustainability.
· Policies for social inclusion, including gender equity and equality
of economic opportunity, equity of public resource use, building human
resources, safety nets; and poverty monitoring and analysis.
· Public sector management and institutions, including property rights
and rule-based governance; quality of budgetary and financial management;
efficiency of revenue mobilization; efficiency of public expenditures; and
transparency, accountability, and corruption in the public sector.
To its rating of a governmentıs performance relative to these four clusters,
the Bank applies ratings of two additional, heavily-weighted clusters:
· Portfolio performance (e.g., the efficiency with which a government
disburses external aid through procurement channels); and
· Governance, including an assessment of 1) the management and
sustainability of the development program; 2) property rights and rule-based
governance; 3) the quality of budgetary and financial management; 4) the
efficiency of revenue mobilization; 5) the quality of public administration;
and 6) transparency, accountability and corruption in the public sector. In
appendix B, these criteria (which are numbered 4, 16-20) are described in
some detail.
*See Appendix B for a description of each criterion.
The World Bank uses its ratings of individual governments as diagnostic
tools to help: 1) determine the debt sustainability of each borrower; 2)
allocate loan and grant resources among borrowers; and 3) determine the
policy thrust of new operations. For instance, if the World Bank gives a
government a low CPIA rating in the area of privatization of services, then,
the government would be required by future loan operations to remedy that
³defect.²
In some respects, the CPIA instrument is a more powerful determinant of
country policies than countriesı PRSPs. The World Bankıs ³Country Assistance
Strategies (CAS): Retrospective and Future Directions² (March 2003, p. 49)
states that the main policy prescriptions included in the CAS are
³increasingly focused on aspects of the CPIA that are shown to be weak. The
triggers can also include policy targets from PRSP, to the extent that they
are expected to strengthen policy and institutional performance.² This is a
sad commentary of the fate of the PRSP.
Loan conditionality will be a thing of the past in those countries where
multilateral lenders extend most or all of their assistance in the form of
grants. However, governments may come under even greater pressure to comply
with the policy preferences of the CPIA. Governments have little power over
the nature and timing of the policy conditions attached to loans. However,
they have no power relative to the CPIA process. The CPIA process does not
solicit any engagement in the rating process by the developing countries
being rated.
As described in part II, this ³report card² gives borrowing governments high
scores if they satisfactorily adopt prescribed policies. The World Bank
already uses each governmentıs CPIA scores, among other things, to determine
the extent to which each borrowing government can access its concessional
(low-interest) loans.[12] <#_ftn12>
Initially, the proposed DS process could raise levels of future lending to
governments deemed ³good² performers by the World Bankıs CPIA scores
(especially where debt sustainability analyses show that governments are
debt-distressed and undergoing shocks because of external world market
factors). However, unless these higher levels of future lending result in
fostering higher levels of exports and economic growth, the ³good²
performers may find themselves mired in much deeper debt.
The strength of any DS mechanism rests, in part, upon the legitimacy and
integrity of the CPIA instrument. Yet the CPIA is extremely controversial
among the IFIsı own Board members and management, although their public
documents reflect few uncertainties about the virtues of the CPIA. [13]
<#_ftn13> Some of the controversial issues follow:
A. Scope of the CPIA
There is too little debate about the legitimacy of a rating system that
encompasses such a broad range of political, social and economic performance
criteria. Nor is there much debate about the implications of the system for
the policy autonomy of borrowers - particularly low-income borrowers.
Instead of addressing such fundamental issues, donors and creditors are
competing over who has the best rating system.
The Bankıs Articles of Agreement require that the institution stay out of
the domestic affairs of its member countries.[14] <#_ftn14> However, the
Bankıs governance rating represents 67% of the overall CPIA score! Hence,
according to the Bank, a one-point drop (out of a possible 6 points) in just
one of the CPIAıs seven governance criteria results in a 7.5% drop in the
overall IDA allocation and, thus, a 15% drop in the countryıs allocation of
loan and grant resources. There is a high margin of error associated with
the governance indicator
B. Promoting One-Size-Fits-All policies
Development practitioners are critical of a system, such as the CPIAıs, that
approximates a ³one-size-fits-all² set of ³good² policies and ³good²
institutions. However, in many areas, there is little agreement about what
constitutes ³good² policy. For instance, there is a broad consensus that
large deficits are bad for development, but no consensus on what level of
deficit is too large. The U.S. Millennium Challenge Account suggests that
deficits should be below the debt to GDP ratio of 40%, whereas, the IMF
often requires cutting deficits ³to the bone² or even producing a budget
surplus. With respect to trade policy, even among neoliberal economists,
there are disagreements about the type, pace, sequence and implementation of
these policies, as well as their impacts, such as short-term distributional
effects. Nevertheless, the CPIA regime promotes nearly uniform solutions to
development challenges. Their description of these uniform solutions
appears in appendix B.
C. Undercutting the PRSP
Already, World Bank grant/loan operations may promote CPIA-derived policies
more than the policies contained in governmentsı Poverty Reduction Strategy
Paper (PRSP) or they may help influence debt-stressed governments to shape
the PRSP in a way that is compatible with those policies. This dynamic
restricts the capacity of governments to be accountable to their own
parliaments and citizens.
D. Addressing problems of the past
The CPIA is based on past performance and says nothing of the policy
trajectory of governments. In other words, the CPIA may rate countries on
policies and conditions that may no longer exist.[15] <#_ftn15>
E. Missing the point? The problem of competitiveness[16] <#_ftn16>
In today's world, many domestic policy decisions are strongly influenced by
external factors (e.g., exogenous shocks, such as drops in commodity prices;
natural disasters; erratic donor and other financial flows; and the CPIA
process, itself). Hence, the CPIA rating can punish governments for factors
that are beyond their power to control.
The main factors affecting export performance are policies/institutions and
shocks. But what about a more mundane factor: competitiveness. In the near
term, most exports will go to rich countries, and even if they increase
market access somewhat, there are economic and political limits to how much
can be imported. In other words, low-income countries will be required to
export more commodities at the risk of a possible glut in global markets and
a resulting depression in prices and compression of revenues.
This means that more competitive countries will export more, keeping their
export/debt ratios under control, while less competitive countries --
regardless of how good their policies are could suffer export/debt ratio
increases comparable to those occurring from terms of trade shocks. In blunt
terms, when it comes to exports, all countries can't be winners. On the
subject of exports, the IFI analyses lack any direct reference to China.
Even a small change in Chinese export performance could have massive impacts
on the potential for smaller countries, especially for non-agricultural
goods.
According to UNCTAD's Least Developed Countries Report 2004, persistent mass
poverty in the least developed countries (LDCs) is not due to lack of
integration into the global economy, nor to insufficient trade
liberalization, but is rather the consequence of underdevelopment. According
to the World Bankıs Development News service (5/28/04), making trade work
for poverty reduction in the LDCs requires national development with global
integration, not global integration without national development, according
to the report. Good trade performance does not necessarily reduce it. In
fact, countries that opened their economies moderately during the 1990s did
better than those that opened them the most. Five oil-exporting countries
(Angola, Equatorial Guinea Sudan, Chad, Yemen) received 63 percent of
FDI.
F. Promoting flawed notions of causality: the case of trade
Harvard University Professor Dani Rodrik points to the flawed causal
connections made with respect to trade liberalization...noting that
liberalization is more likely to be effective if it is implemented after
periods of protectionism (which is the path taken by developed countries).
G. Promoting flawed causality: the case of decentralization
The CPIA assumes that decentralization will expand growth and improve
service provision. However, there is little, if any, empirical evidence in
support of this theory. Indeed, the model for decentralization seems to be
the United States, where responsibility for services is devolved to state
and local governments, then transfers of resources to states are cut. In
many countries, subnational governments lack the capacity to not only fund,
but also to implement their service provision mandates or regulate private
providers.
H. Who are ³good² policies good for: Borrowers or Investors?
As noted, the World Bank presented a thesis to donors namely, that foreign
aid does produce results in countries with ³good² policies, as defined by
the CPIA. World Bank economists David Dollar wrote ³Assessing Aid² (1998)
to demonstrate this thesis. To prove the correlation between ³good²
policies and growth, the World Bank cites example, such as China and India.
Such evidence lacks credibility, since these countries have grown while
rejecting many neoliberal policies commonly imposed on or chosen by
governments of countries that have failed to grow.
Because almost all CPIA data is secret, independent economists have been
unable to replicate his findings. There is one exception: a former World
Bank economist, William Easterly, and his associates had privileged access
to the CPIA database and were therefore able to assess the Bankıs claim
that there is a correlation between ³good² policies and economic growth in
developing countries. However, when using an expanded CPIA data set,
Easterlyıs team could not replicate Dollarıs results, concluding instead,
³foreign aid does not raise growth in a good policy environment.²
K. Expanding the Policy Cartel?
Once a governmentıs access to loans is barred, it will have an overwhelming
incentive to fully comply with the multilateral lenders prescribed policy
reforms in order to get better a CPIA score, and therefore access to more
grant aid. Such intensified pressure to comply with neoliberal policy
reforms favored by the multilateral lenders would significantly eliminate
the freedom of national and local governments and parliaments to decide
their own domestic economic policies, thereby undermining national economic
sovereignty, and constituting an assault on democracy.
Ironically, the CPIA scores governments on the extent of their
accountability to citizens, something that the CPIA, itself, undercuts.
Many poor and/or heavily indebted governments see compliance with the CPIA
policy preferences as essential to maintaining their lifeline to external
aid, credit and debt relief. Already, the World Bankıs flawed CPIA rating
system is already being used to determine aid allocations for all 136
borrowing countries. If, as called for by the DS proposal, the multilateral
institutions rely more heavily on the flawed CPIA instrument to guide their
allocation of loans and grants, the creditors will act like a ³policy
cartel² to a greater extent than it does today. (Indeed, that is its intent
to mimic market forces in countries that are not creditworthy.) However,
the cartel will support the interests of creditors and investors over those
of borrowers and, hence, seldom support democratically developed policies.
The long-term public interests of development should dominate the short-term
private interests of global financial markets. However, the opposite is
currently the case.
In 2004, the U.S. announced that 16 countries can access $1 billion in grant
assistance from its new bilateral aid program, the Millennium Challenge
Account (MCA). The MCA uses a rating system that is different from the
Bankıs. Many of the MCA ³winners² get negative ratings from the Bank. The
Bankıs CPIA ratings appear in parentheses after the following MCA ³winners²:
Armenia (A), Benin (A), Bolivia (C), Cape Verde (A), Georgia (D), Ghana (A),
Honduras (B), Lesotho (C), Madagascar (A), Mali (B), Mongolia (C),
Mozambique (B), Nicaragua (B), Senegal (B), Sri Lanka (A) and Vanuatu (F).
Perhaps more worrisome is the fact that the CPIA gives very low portfolio
performance grades to many of these countries -- meaning that, among other
things, when these governments receive loan and grant aid, they do not
procure goods and services effectively or efficiently. For instance, the
World Bank gave ³Ds² to: Bolivia and Honduras and ³Fs² to Lesotho,
Nicaragua, Sri Lanka and Vanuatu. This is worrisome because the U.S.
intends to provide these governments with significant grant support. Yet,
by definition, governments that receive failing grades in portfolio
performance are incapable of processing external assistance well.
Currently, each donor government and creditor institution has its own
approach to rating country performance. For instance, the weightings of
clusters by the World Bank, Asian Development Bank and African Development
Bank appear below.
Box 2: Differences in Rating Systems between the World Bank and two Regional
Banks
World Bank Asian Development Bank African Development Bank
Macro/structural criteria 36% 25% 28%
Social Criteria 20% 30% 21%
Total: Non-governance criteria 56% 55%
49%
Governance Criteria 24%* 30% 21%
Portfolio Performance 20% 15% 30%
Total 100% 100% 100%
*including the Governance Factor, the effective weight is 67%.
It is likely that the rating approaches of the Inter-American Development
Bank, the Asian Development Bank, and the African Development Bank will be
harmonized with the CPIA. Hence, the proposed DSA regime would ration loans
and grants of most multilateral lenders depending upon whether countries
(debt burdens and shocks being equal) have already adopted the policy
preferences of donors/creditors. The shift means that policy conditions are
becoming aid eligibility criteria.
This move diminishes governmentsı policy autonomy by rewarding those that
have already conformed to Washingtonıs policy preferences, as embedded in
the CPIA, with higher loan and grant allocations.
One outcome of this practice of multiple scoring systems is real confusion
on the part of recipient governments. However, as the multilateral lenders
"harmonize" their rating systems, recipient governments will be faced with a
policy cartel leaving them with too little flexibility to respond to
citizens' policy preferences.
L. The Graveyard of Disobedient and Failed States: The Program for
Low-Income Country Under Stress (LICUS)
The approximately 30 governments that receive ³Ds² and ³Fs² on the Bankıs
CPIA are usually relegated to the program for Low-Income Countries Under
Stress (LICUS). Independent Service Authorities (ISAs) or their analog
(i.e., Community-Driven Development programs, including Social Funds) assume
the responsibilities of governments for provision of primary health,
nutrition, education, and related infrastructure services (water supply,
sanitation services, roads).
Although the Bank will not reveal the identity of LICUS countries, it
acknowledges that these countries flunked the Bankıs performance rating
system, which is called the ³Country Policy and Institutional Assessment²
(CPIA).
In 2003, countries with ³D² scores are: Georgia; Tajikistan; Burundi; Chad;
Democratic Republic of the Congo; Republic of the Congo; Cote dıIvoire;
Djibouti; Eritrea; Guinea; Niger; Sao Tome and Principe; Sierra Leone;
Kiribati; and Lao P.D.R.
Countries with ³F² scores are: Uzbekistan; Haiti; Angola; Central African
Rep.; Comoros; Guinea-Bissau; Nigeria; Sudan; Togo; Zimbabwe; Cambodia;
Papua New Guinea; Solomon Islands; Tonga; and Vanuatu.
Certainly, providing services to populations in failed states sounds like a
noble endeavor and, in many cases, it is. The Bank contends that the
creation of the ISA-like mechanisms allows time for governments to build
their capacity to deliver services. (This was reported to have occurred in
Zambia and Cambodia.) Critics say that the ISA-type mechanisms[17]
<#_ftn17>
However, such mechanisms can also undercut government functions and
authority, as well as its capacity to reassert its role relative to
essential services. Imposition of ISAs, such as Social Funds. can operate
in parallel to government or supplant government service provision in ways
that undercut national sovereignty. Perhaps most disturbingly, the Bank is
implementing ISA-like mechanisms in countries with functioning governments,
too, e.g., Burkina Faso.
III. Unanswered Questions
A. Changing the role of the IMF: Meltzer Holds Sway[18] <#_ftn18>
In testimony before the U.S. Congress on May 19, 2004, Alan Meltzer
describes how he recommends rationing aid. Meltzer, a professor at Carnegie
Mellon University chaired the U.S. Congressıs influential International
Financial Institutions Advisory Committee and made recommendations that the
U.S. Treasury is implementing at the multilateral lending institutions. In
his testimony, Meltzer said,
The IMF's Independent Evaluation Office found that countries achieved about
one-half of the proposed change in fiscal balance, on average. About 60
percent of the programs underperformed.
The IMF should establish a short list of policies or observable standards
that countries should adopt to be assured of assistance in a crisis. It
should use its surveillance to assure that a country meets the standards,
and publish the list of countries that do and do not get a guarantee of
crisis assistance. The IMF would not help countries that do not meet the
standard. To prevent crises from spreading, the IMF would assist countries
that are victims of crises.
We want to group countries into three groups: those that establish some
reasonable standards of prudent financial behavior and some other
conditions; second, those that do not (e.g., Argentina, Brazil, Ecuador and
Turkey); and third, those that are at risk because of the imprudent
countries or perhaps the prudent countries, but mainly the imprudent
countries (e.g., Uruguay). We want to help the first and the third group;
that is, we don't want international global instability. (Emphasis and
country examples added.)
This is the approach that is being taken with respect to the following
issue:
1. Shifting IMF functions
The IMF may gradually reduce its lending and focus more on assisting
countries that are vulnerable to, or experiencing, shocks. The institution
will shift more toward monitoring and surveillance of the policies of
low-income countries. The timing of the shift will depend on factors such
as the degree of a governmentıs:
· Macroeconomic stability over time and resilience to shocks;
· Institutional capacity to form and implement macroeconomic policies;
· Fiscal and debt sustainability;
· Reliance on official aid; and
· The strength of the private sector and domestic resource
mobilization.
The IMF will provide concessional support to governments in the ³Emergency
Post Conflict Assistance² (EPCA) program and, possibly, provide grant
assistance to governments with a low debt threshold and without an active
IMF lending program. For the latter purpose, the IMF is considering using
grant resources from its Poverty Reduction and Growth Facility (PRGF) Trust
Fund. Heretofore, the Trust Fund has been dedicated solely to providing
debt relief under the HIPC Initiative.
2. The Future of the Poverty Reduction and Growth Facility (PRGF)
The PRGF provides lending arrangements for low-income countries. It will
experience a shortfall in its resources from 2006-2010. The IMFıs governors
are considering several responses to this situation. It would taper off
access to PRGF resources by requiring eligible governments (especially those
experiencing shocks) to comply with specified ³norms.² Or, the PRGF could
continue to meet projected demands with the benefit of supplemental
resources provided by donor governments.
B. Providing resources to countries undergoing shocks. Multilateral
lenders will play a larger role in this area. Some of the proposals that
donors and creditors are considering for the IMF and IDA include:[19]
<#_ftn19>
· Indexing debt service to GDP growth or to variables associated with
volatile export earnings (e.g., drops in commodity prices or the real
exchange rate);
· Linking a countryıs debt service obligations either to GDP growth or
to local current units indexed to inflation. Low-income borrowers from the
World Bank cannot borrow in local currency, as middle-income borrowers can.
· Earmarking funds or frontloading resources (and/or backloading debt
service) to provide prompt counter-cyclical aid to countries in shock.
· Utilizing IDAıs grant facility for countries experiencing natural
disasters.
C. Establishing a Credit Buy-Down Mechanism (CBM). According to the
Allen-Nankani paper, ³instead of receiving principal and interest payments
from a borrower, the creditor would receive the present value of these flows
from a donor, effectively turning the loans into a grant for the borrower
country. The CMB uses donor resources to increase the grant element of, and
reduce the payments on, already contracted multilateral debt.²
D. Giving the Green Light for infrastructure investment
The Presidents of Brazil and Argentina Lula and Kirchner have banded
together with other leaders to urge the IMF to rewrite its rules of
engagement with developing countries. Roberto Bissio of Social Watch,
writing in the ³Update² of the Bretton Woods Project, says that this new
initiative could mark the biggest change in creditor-debtor relations in a
generation. (May 24, 2004) Bissio describes how, on March 16, 2004, Lula
and Kirchner signed a declaration for cooperation towards economic growth
with equity, also known as the ³Copacabana Act.² The leaders denounced a
³contradiction in the present international financial system between
sustainable development and financing.² To change the system, they agreed
³to negotiate with multilateral credit institutions in a way that does not
jeopardize growth and ensures debt sustainability, allowing for
infrastructure investment.²
For many reasons, the IMF and World Bank are, indeed, looking at paving the
way for massive levels of infrastructure investment in the developing world.
The IMFıs ³Public Investment and Fiscal Policy² (2004) suggests that
³excluding the operations of public enterprises that are commercially run
from fiscal indicators and targets would allow a more appropriate assessment
of a countryıs fiscal stance, and would eliminate inappropriate constraints
on investment by these enterprises.² Conversely, non-commercially run
public enterprises would be subject to fiscal constraints. These new rules
would allow significant expansion of infrastructure lending by the
multilateral lenders in countries where the DSA would curb new lending.
A March 12, 2004 IMF paper, "Public-Private Partnerships (PPPs)" correctly
states that virtually all empirical claims about the superiority of private
provision are related to improvements brought about through competition, and
then goes on to state that, for sectors where there is no competition --
natural monopolies like water, strong incentive regulation is needed to
ensure private sector performance. However, it also acknowledges the
difficulty in implementing incentive regulation in the real world.
The paper warns about the fiscal consequences of various contractual
features commonly used to facilitate PPPs, strongly affirms the importance
of good governance as well as full transparency of contracts. It discusses
the difficulty in assessing fiscal risk in highly complex PPP contracts,
stating:
First and foremost, the decision whether to undertake a project, and the
choice between traditional public investment and a PPP to implement it,
should be based on technically sound value-for-money comparisons. It is
particularly important to avoid a possible bias in favor of PPPs simply
because they involve private finance, and in some cases generate a revenue
stream for the government. (p. 18)
The IMF notes liabilities associated with PPPs:
the net present value of future contract payments under PPPs less any
contractual receipts from the private sector (e.g., concession fees) . . .
should be added to government debt when assessing debt sustainability. (p.
27)
In short, the IMF loves commercialized services because they generate
revenue streams, but hates off-budget liabilities. PPPs solve one problem
only by making the other much worse.
E. Establishing hierarchies among donors and creditors. The DSA proposal
assumes a level of coordination among the multilateral lenders that, at
present, does not exist. Many questions remain unanswered. Which
multilateral lender would administer the DSA system and calculate acceptable
debt thresholds for each country? Which lenders would limit their lending?
Which one would step forward with grant or loan assistance, where such
assistance was permissible? For instance, assume that a Latin American
government will reach its debt threshold after borrowing an additional $200
million. Which institution would extend the $200 million in loans? The
World Bank? The Inter-American Development Bank? The Andean Bank? What
these institutions compete with one another to provide the loan? Or, will
there be a particular ³pecking order²?
IV. Conclusion
The goal of fostering debt sustainability is a worthy and important one.
Debt overhangs jeopardize budgetary expenditures for poverty reduction
programs and cripple countriesı developmental potential. They can also lead
to spiraling new debt, as new loan resources are increasingly used to
service previous loans. However, profound disappointment with the HIPC
Initiative has led the donor and creditor community to focus more on
managing new flows of loans and grants than on financing deep debt relief.
In September 2004, the Development Committee of the IMF and World Bank will
be asked to approve a new proposal for fostering debt sustainability by
managing new aid flows to low-income countries. This paper argues that the
Debt Sustainability (DS) proposal threatens to undermine both poverty
reduction efforts, especially achievement of the Millennium Development
Goals, as well as national policy sovereignty and democratic processes.
To cut levels of poverty, low-income country governments need full debt
cancellation and grant support in the context of much greater ³policy
autonomy.² The CPIA and DS Proposal contribute to decisions about how much
grant aid, credit and debt relief countries should obtain and on what terms.
In some ways, these terms are more stringent than traditional structural
adjustment programs (SAPs). Contrary to conventional wisdom, CNES asserts
that the DS Proposal -- and the CPIA (on which the DS proposal is partially
based) -- shrink the policy autonomy and undercut the sovereignty of
developing countries.
Donors and creditors dominate the policy-making of low-income countries more
than ever before. The CPIA represents a policy straightjacket. The DS
Proposal tightens the straightjacket by capping the level of debt each
country can contract based upon the quality of its policies and
institutional performance (as judged by the CPIA) and its vulnerability to
shocks.
The policy prescriptions embedded in the CPIA are fairly uniform, or
one-size-fits-all. The emphasize the Washington Consensus privatization
and liberalization in the context of budget discipline. The CPIAıs
expansive scope and narrow definition of acceptable policies could rob
governments of enough policy flexibility to respond to the democratic will
of their citizens.
By implementing the DS proposal, creditors would effectively be making the
functioning of todayıs policy cartel broader, insofar as it would ration
nearly all multilateral grants and loans to developing countries in a
relatively predictable way. This would have a profound consequence for
democracy and development.
No matter what a country's own development strategy (or Poverty Reduction
Strategy Paper) says, a country will likely feel greater pressure to adhere
to CPIA-derived policy prescriptions if it expects to retain external
support. Governments are in a double bind if citizens and elected officials
choose a path other than that specified by CPIA-derived priorities. Because
of instruments like the CPIA, country ³ownership² of the development process
can be a mirage.[20] <#_ftn20>
Borrowers are straight-jacketed by the CPIA and the jacket will be tightened
if the DS proposal is implemented. These mechanisms are one indicator of
the increasingly ideological approach to policy-making. Harvard Professor
Dani Rodrik concludes that, ³The broader the sway of market discipline, the
narrower will be the space for democratic governance International economic
rules must incorporate ³opt-out² or exit clauses [that] allow democracies to
reassert their priorities when these priorities clash with obligations to
international economic institutions. These must be viewed not as
'derogations' or violations of the rules, but as a generic part of
sustainable international economic arrangements.²[21] <#_ftn21>
Occasionally, such exits from obligations are possible for large borrowers
from the IMF and World Bank, but the institutions discriminate against
low-income countries.
The Rodrik approach is minimalist insofar as it would allow governments to
opt out of commitments that they made, freely or under duress, to the IMF
and World Bank. However, the ideal - so often proclaimed and so little
practiced - would invite governments and their citizens to authorship as
well as ownership of their national strategies.
To put these heretical ideas into perspective, one might reasonably ask what
kind of CPIA rating or debt threshold industrialized country governments
might receive? Developing country governments aren't given the same
flexibility that their wealthier counterparts claim for themselves when
determining whether or when to liberalize, privatize or exercise greater or
lesser budgetary discipline. For instance, if the U.S. and the European
Union were subject to CPIA review, their current fiscal policies would
result in austerity measures that are politically unimaginable. As the
largest debtor in the world, the U.S. would be prohibited from further
borrowing. From blatant protectionism, to market distorting subsidies and
ballooning deficits, everyday policies of the governments that control the
IMF and World Bank reveal a shocking double standard that makes a mockery of
national sovereignty for most of the worldıs countries.
APPENDIX A
CPIA Country performance ratings for 2003
For each policy cluster in the Country Policy and Institutional Assessment
(CPIA), the Bank applies numerical performance ratings from 1 (low) to 6
(high). The charts in this paper convert these numbers to five ³letter²
grades. The reason for presenting the data this way is that the Bank itself
places each government in one of five quintiles, based upon the quality of
its performance in each area. Quintiles display the performance of
governments relative to one another, whereas the real, undisclosed data
present nominal scores. The following tables present the World Bankıs
aggregated performance ratings of low-income borrowing governments relative
to one another. (All ratings for other World Bankıs borrowers are secret.)
While the letter grades and the quintiles from which they are derived are
not exact representations of the numeric scores, they are still highly
indicative.
To produce each countryıs overall performance rating, the Bank applies a
heavily-weighted ³governance factor² to the weighted average of the CPIA
score (which counts for 80% of the overall rating) plus the governmentıs
portfolio performance score (which counts for 20%). In other words, in order
to obtain the IDA country rating, the Bank applies the (absolute) rating of
the ³governance factor² in column ³A² to the averaged (absolute) ratings in
columns ³B² and ³C.²[22] <#_ftn22>
Europe/Central Asia IDA Country Rating A Gover-nance B Overall CPIA Rating
1 Economic Manage-ment 2 Structural Policies 3 Social Inclusion 4 Public
Sector C Portfolio Performance
Albania C C C C B C D B
Armenia A B A A A B B A
Azerbaijan B B B A C D C A
Bosnia & Herzegovina B B B B B C C B
Georgia D D C D D B F C
Kyrgyzstan C C C C D B D C
Moldova C C C D C C D C
Serbia & Montenegro B B C C C A C D
Tajikistan D D D D F D F B
Uzbekistan F F F F F C F C
Latin America and the Caribbean IDA Country Rating A Gover-nance B Overall
CPIA Rating 1 Economic Manage-ment 2 Structural Policies 3 Social Inclusion
4 Public Sector C Portfolio Perfor-mance
Bolivia C D B C B B B D
Dominica B B C F A B B C
Grenada A A A B A A A C
Guyana B C C C C D C A
Haiti F F F F F F F N/R
Honduras B B A C A A B D
Nicaragua B B A C A A A F
St. Lucia A A A A A A A B
St. Vincent & the Grenadines A A A A A A A F
Africa
IDA Country Rating A Gover-nance B Overall CPIA Rating 1 Economic
Manage-ment 2 Structural Policies 3 Social Inclusion 4 Public Sector C
Portfolio Perfor-mance
Angola F F F F F F F C
Benin A A B B A F B A
Burkina Faso B B B A C B A D
Burundi D D F D F F F A
Cameroon C D C B B D D D
Cape Verde A A A B A A A A
Central African Republic F F F F D F F F
Chad D D D C D D D F
Comoros F F F F F F F D
Congo, Dem. Rep. D D D D F F F C
Congo, Rep. D D D D D F D C
Côte d'Ivoire D D D F C F C F
Djibouti D D D D C D D D
Eritrea D D D F F B C C
Ethiopia C B C C F C B C
Gambia C C D D C D D D
Ghana A A B C B B A D
Guinea D D D F D D D D
Guinea-Bissau F D F F F F F F
Kenya C C C C C C B F
Lesotho C C C B C D B F
Madagascar A A B B B B B A
Malawi B B C D C B B C
Mali B C B A C C B C
Mauritania A A A A B B A A
Mozambique B B C C D C C C
Niger D D D C D D D D
Nigeria F F F F F F F F
Rwanda B A B C B C B C
Sao Tome & Principe D C F F F F D B
Senegal B B A A A C B C
Sierra Leone D C D D D D D D
Sudan F F F F F F F N/R
Tanzania A A A A B A A C
Togo F F F F D F F F
Uganda A A A A A A B B
Zambia C C C D B C B C
Zimbabwe F F F F F F F F
South Asia/East Asia/the Pacific IDA Country Rating A Gover-nance B Overall
CPIA Rating 1 Economic Manage-ment 2 Structural Policies 3 Social Inclusion
4 Public Sector C Portfolio Perfor-mance
Bangladesh C D B A B B D F
Bhutan A A A A C A A A
Cambodia F F D C F D F F
India A A A A B B A C
Indonesia C D B B B B C D
Kiribati D C D B F F C N/R
Lao PDR D F F D F D F A
Maldives C C A B A B A F
Mongolia C C C C C C C C
Nepal B B B A B D B D
Pakistan B C B B A C A C
Papua New Guinea F F F F D F F N/R
Samoa A B A A A C A B
Sri Lanka A A A A A A A F
Solomon Islands F F F F F F F F
Tonga F F D D F C D C
Vanuatu F F D D F F C N/R
Vietnam C D A A D A C C
Middle East/North Africa IDA Country Rating A Gover-nance B Overall CPIA
Rating 1 Economic Manage-ment 2 Structural Policies 3 Social Inclusion 4
Public Sector C Portfolio
Perfor-mance
Yemen B C B A D C C C
APPENDIX B
Rating criteria[23] <#_ftn23>
The Bank rates each low-income country government on twenty criteria using a
numerical scale (from 1 to 6). The 2002 version of these criteria is
summarized as follows. Few changes have been made in the 2003 version.
A. Economic management
1. Management of inflation and current account. Countries with the
highest rating (6) have not needed a stabilization program for 3 years or
more. Countries with the lowest rating (1) have needed, but have not had, an
acceptable program for 3 years or more.
2. Fiscal Policy. Countries with high ratings have fiscal policies
consistent with overall macroeconomic conditions and generate a fiscal
balance that can be financed sustainably for the foreseeable future,
including by aid flows where applicable.
3. Management of external debt. Ratings take into account the existence
and amount of any arrears; whether and how long the country has been current
on debt service; the maturity structure of the debt; likelihood of
rescheduling, and future debt service obligations in relation to export
prospects and reserves.
4. Management and sustainability of the development program. Degree to
which the management of the economy and the development program reflect:
technical competence; sustained political commitment and public support and
participatory processes through which the public can influence decisions.
B. Structural policies
5. Trade policy and foreign exchange regime. How well the policy
framework fosters trade and capital movements. Countries with a high grade
have low (10% or less) average tariffs (weighted by global trade flows) with
low dispersion and insignificant or no quantitative restrictions or export
taxes. There are no trading monopolies. Indirect taxes (e.g. sales, excise
or surcharges) do not discriminate against imports. The customs
administration is efficient and rule-bound. There are few, if any, foreign
exchange restrictions on long-term investment capital inflows.
6. Financial stability and depth. This item assesses whether the
structure of the financial sector, and the policies and regulations that
affect it, support diversified financial services and present a minimal risk
of systemic failure. Countries with a low rating have high barriers to entry
and banksı total capital to assets ratio less than 8%. Countries with high
scores have diversified and competitive financial sectors that include
insurance, equity and debt finance and non-bank savings institutions. An
independent agency or agencies effectively regulate banks and non-banks on
the basis of prudential norms. Corporate governance laws ensure the
protection of minority shareholders.
7. Banking sector efficiency and resource mobilization. This item
assesses the extent to which the policies and regulations affecting
financial institutions help to mobilize savings and provide for efficient
financial intermediation. Countries with high scores have real,
market-determined interest rates on loans. Real interest rates on deposits
are significantly positive. The spread between deposit and lending rates is
reasonable. There is an insignificant share of directed credit in relation
to total credit. Credit flows to the private sector exceed credit flows to
the government.
8. Competitive environment for the private sector. This item assesses
whether the state inhibits a competitive private sector, either through
direct regulation or by reserving significant economic activities for
state-controlled entities. It does not assess the degree of state ownership
per se, but rather the degree to which it may restrict market competition.
Ideally, firms have equal access to entry and exit in all products and
sectors.
9. Factor and product markets. This item addresses the policies that
affect the efficiency of markets for land, labor and goods. Countries with
high scores limit any controls or subsidies on prices, wages, land or labor.
Remaining controls are consistently applied and explicitly justified on
welfare or efficiency grounds.
10. Policies and institutions for environmental sustainability. This item
assesses the extent to which economic and environmental policies foster the
protection and sustainable use of natural resources (soil, water, forests,
etc.), the control of pollution, and the capture and investment of resource
rents.
C. Policies for social inclusion and equity
11. Gender. This item assesses the extent to which the country has created
laws, policies, practices, and institutions that promote the equal access of
males and females to social, economic, and political resources and
opportunities.
12. Equity of public resource use. This item assesses the extent to which
the overall development strategy and the pattern of public expenditures and
revenues favor the poor.
13. Building human resources. This item assesses the policies and
institutions that affect access to and quality of education, training,
literacy, health, AIDS prevention, nutrition and related aspects of a
countryıs human resource development.
14. Social protection and labor. Government policies reduce the risk of
becoming poor and support the coping strategies of poor people. Safety nets
are needed to protect the chronically poor and the vulnerable. The needs of
both groups are important, but in countries where the chronically poor
remain inadequately protected, an unsatisfactory score (2 or 3) is
warranted.
15. Poverty monitoring and analysis. This item assesses both the quality of
poverty data and its use in formulating policies.
D.Public sector management and institutions
16. Property rights and rule-based governance. Countries with high scores
have a rule-based governance structure. Contracts are enforced. Laws and
regulations affecting businesses and individuals are consistently applied
and not subject to negotiation.
17. Quality of budgetary and financial management. This item assesses the
quality of processes used to shape the budget and account for public
expenditures. It also addresses the extent to which the public, through the
legislature, participates in the budget and audit processes. Ratings should
cover both national and subnational governments, appropriately weighted.
18. Efficiency of revenue mobilization. This item evaluates the overall
pattern of revenue mobilization, not only the tax structure as it exists on
paper, but revenues from all sources, as they are actually collected.
Countries with high scores generate the bulk of revenues from low-distortion
taxes such as sales/VAT, property, etc. Top corporate and personal tax rates
are in line with international levels. The base for major taxes is broad and
free of arbitrary exemptions. Tax administration is effective, cost
efficient and entirely rule-based.
19. Efficiency of public expenditures. This item assesses the extent to
which the desired results of public programs are clearly defined and the
available resources are used efficiently to achieve them. National and
sub-national governments should be appropriately weighted. Countries with
high scores specify the expected results of public programs. Performance is
reported and influences budget allocations. Public servants' compensation is
adequate (e.g. at least 75% of comparable private sector compensation) and
their hiring and promotion are competence-based. Line agencies have
flexibility to make operational decisions and are accountable for results
and adhering to budget.
20. Transparency. Accountability and corruption in the public sector. In
countries with high scores, the reasons for decisions, and their results and
costs, are clear and communicated to the general public. Accountability for
decisions is ensured through audits, inspections, etc. Conflict of interest
regulations for public servants are enforced. Authorities monitor the
prevalence of corruption and implement sanctions in a transparent manner.
[1] <#_ftnref1> For more information about the CPIA, see
http://www.servicesforall.org/html/otherpubs/judge_jury_scorecard.shtml_
[2] <#_ftnref2> Allen and Nankani, ³Debt Sustainability in Low-Income
Countries,² IMF and IDA, February 2004, p. 12.
[3] <#_ftnref3> Debt sustainability can be measured using different
indicators relating to debt service, debt stocks (as determined by the
present value of debt, rather than its face value), and debt in relation to
GDP, export earnings, and public debt in relation to GDP and fiscal
revenues. The indicators would be projected based upon the policy
environment and ³stress scenarios,² derived from judgments of vulnerability
to shocks.
[4] <#_ftnref4> ³When is Debt Sustainable?² Vikram Nehru and Aart Kraay,
World Bank, Draft: February 2004.
[5] <#_ftnref5> The Bank claims that the HIPC Initiative will remain
unchanged during the remainder of its life. However, it will be impossible
to continue implementation of the present initiative independent of a new
and different DSA that will dictate the future lending rules for each
country.
[6] <#_ftnref6> The DRI ³Strategies for Financing Development² Newsletter
(Issue 18, 2st quarter, 2004) points to the counter-cyclical ,
anti-inflationary, and pro-growth dynamics of debt relief as opposed to aid
as described in ³To Lend or To Grant? A critical view of the IMF and World
Bankıs proposed approach to debt sustainability analyses for low-income
countries,² CAFOD, TROCAIRE, OXFAM, ACTION AID INTıL UK, 1st Quarter, 2004.
See www.cafod.org.
[7] <#_ftnref7> See Barry Herman, ³How should Measurement of an Enabling
Environment for Development be Used,² Group of 24, March 2004 (www.g24.org
<http://www.g24.org/> ) and Nancy Alexander, ³Judge and Jury: The World
Bankıs Scorecard for Borrowing Governments,² April 2004
(www.servicesforall.org).
[8] <#_ftnref8> Generally, neoliberal policies have not fostered high
economic growth over the past 20 years because the main preoccupation with
keeping inflation low at all costs can actually undermine optimal levels of
growth. The countries that implemented neoliberal policies over the last 20
years have experienced far lower rates of economic growth than they did in
the prior 20-year period. (See www.cepr.net.)
[9] <#_ftnref9> Alberto Minujin and Enrique Delamonica, ³Equality Matters
for a World Fit for Children: Lessons from the 1990s,² Working Paper of the
Division of Policy and Planning, UNICEF, December 2003.
[10] <#_ftnref10> Personal correspondence with World Bank economist Aart
Kraay, 5/14/04.
[11] <#_ftnref11> Because there are a different number of criteria in each
cluster, the weights of each cluster in the overall rating differ.
[12] <#_ftnref12> The U.S. is persuading the governors of the World Bank to
convert an ever-higher percentage of loans to grants. At present, 20% of
the assistance provided by the Bankıs soft loan arm, IDA, is provided in the
form of grants. In the next funding cycle, or replenishment, of IDA, the
U.S. seeks to convert an additional 20% of loans to grants. The U.S. is
pursuing the same shift to grants by the concessional arms of the regional
development banks as well. The IFI Advisory Commission (i.e., the ³Meltzer
Commission²) established the blueprint for the process of establishing a
small grant-giving agency (the ³World Development Agency) in place of the
World Bank. The Commission stipulated that financial assistance should be
provided in only two forms: non-concessional loans and grants. Concessional
loans were deemed distortionary.
[13] <#_ftnref13> The external review panel was comprised of John
Williamson, Senior Fellow, Institute for International Economics; Isher J.
Ahluwalia, Visiting Professor, School of Public Affairs, University of
Maryland; Mario Blejer, Director of the Center for Central Banking Studies
and Adviser to the Governor of the Bank of England; Willem Buiter, Chief
Economist and Special Counselor to the President, European Bank for
Reconstruction and Development; Susan M. Collins, Senior Fellow, Economic
Studies, The Brookings Institution; Najib Harabi, Professor of Economics,
Solothurn University of Applied Sciences, Northwestern Switzerland; Jannes
Hutagalung, Deputy Minister for International Economic Cooperation,
Indonesia; Harris M. Mule, Executive Director, Tims Limited; Kerfalla
Yansane, Lead Consultant, African Peer Review Secretariat, NEPAD
Secretariat.
[14] <#_ftnref14> The CPIA rates a the quality of each countryıs governance
relative to the following criteria: 1) management and sustainability of the
development program; 2) property rights and rule-based governance; 3)
quality of budgetary and financial management; 4) efficiency of revenue
mobilization; 5) quality of public administration; 6) transparency,
accountability and corruption in the public sector; and 7) the efficiency of
a governmentıs procurement practices. The ratings of these 7 criteria are
taken into account in the arriving at each governmentıs CPIA rating. Then,
a ³governance factor,² which is a composite rating of the 7 criteria is
applied to arrive at each governmentıs final CPIA score. In other words,
governance is rated twice.
[15] <#_ftnref15> The bilateral program of the U.S. does take a
governmentıs policy trajectory into account. For instance, 20 countries met
the performance criteria of the U.S.ıs Millennium Challenge Account (MCA).
However, the U.S. selected only 16 countries as aid recipients; the other
four were ineligible because of their policy trajectory.
[16] <#_ftnref16> With appreciation for input provided by Henry Northover
(CAFOD) and Tim Kessler (CNES).
[17] <#_ftnref17> Other donor/creditor channels that bypass governments
include post-conflict funds, multidonor trust funds, UNDP area-based
schemes and independent revenue authorities. Independent revenue
authorities are responsible not only for the collection of new taxes, but
also the entire revenue system.
[18] <#_ftnref18> IMF, ³Role of the Fund in Low-Income Member Countries
over the Medium Term Issues Paper for Discussion,² July 21, 2003.
[19] <#_ftnref19> See Allen and Nankani, p. 45, Box 6: ³Ex-Post Mechanisms
for Mitigating Exogenous Shocks.²
[20] <#_ftnref20> The exceptions would be countries that are large or do
not depend heavily on external financing, and can take an independent stand.
Such countries, like China, often borrow significant sums from the IFIs but
lack crippling debt burdens.
[21] <#_ftnref21> Rodrik, Dani, ³Four Simple Principles for Democratic
Governance of Globalization². Harvard University, May 2001.
[22] <#_ftnref22> Some countries have not been rated and do not appear in
any of the tables below, e.g., Afghanistan, Liberia, Myanmar, Somalia,
Timor-Leste. An entry of ³N/R² indicates that the country was not rated in
that category.
[23] <#_ftnref23> Recent changes in the allocation system can be reviewed
at: www.worldbank.org/ida