Submitted to Department of Finance and CIDA before World Bank discussions at Fall 2003 meetings on Enhancing Voice and Participation of Developing Countries.

The Case for a New and Improved International Development Association

This discussion paper proposes that the International Development Association of the World Bank be transformed into an independent Secretariat that would act as a mechanism for disbursing development financing to the poorest countries. IDA-eligible countries could approach the IDA Secretariat for programme/project grant financing, in cooperation, if they choose, with one or more implementing agencies. Implementing agencies could include UN agencies, civil society and the multilateral development banks, dependent on priorities.

The paper discusses the rationale for separating IDA from the World Bank Group, arguing that an autonomous IDA Secretariat would assist in addressing uneven power relations inherent in the current IDA, increase country ownership, improve development effectiveness and improve systemic coherence. A potential model for an IDA Secretariat is described, learning lessons from both the current IDA and the Global Environment Facility.

The paper concludes by addressing issues of political feasibility.

Overview of IDA

The International Development Association was formed in 1960 by attracting funds from bilateral donors. The IDA grew out of efforts by Third World countries within the UN General Assembly during the 1950s to win agreement on establishing a Special UN Fund for Economic Development. Sunfed, as it was known, was to have been controlled by the UN. Northern countries, led by the United States, resisted these efforts and eventually proposed a soft loan affiliate at the World Bank (IDA). As part of a compromise a smaller UN Special Fund was established to channel mainly technical assistance to the Third World. This Special Fund was later renamed the UN Development Program (UNDP). This capacity gave the Bank a dual personality as it became a multilateral aid agency as well as a bank.

IDA shares a Board of Directors, a President and staff with the International Bank for Reconstruction and Development. The World Bank Board of Directors formally manages IDA, approving IDA policies and projects. The Board of Directors of the World Bank Group is modeled after a private corporation, in that the voting weights of each director is based on the number of shares the director has. In the case of IDA, each board of director, in respect of its initial subscription, has 500 votes plus one additional vote for each $5,000 of its initial subscription. Donor countries have 62 per cent of decision-making power in the IDA, of which the G7 countries have 47.6 per cent.

IDA is also informally governed by IDA Deputies, an assembly of donors, with each donor having one deputy. IDA Deputies determine the financial size of IDA and also set broad spending priorities. An IDA Deputies meeting held in June 2001 was the first meeting at which borrowing countries were invited to participate. Six representatives from developing countries participated. There are currently around 40 IDA Deputies.

IDA makes loans to countries that have a per capita income in 1999 of less than $885 and lack the financial ability to borrow from the International Bank for Reconstruction and Development. IDA loans have maturities of 35 or 40 years with a 10-year grace period on repayment of principal. There is no interest charge, but credits do carry a small service charge, currently 0.75 percent on disbursed balances.

Its founders saw IDA as a way for the "haves" of the world to help the "have-nots." But they also wanted IDA to be imbued with the discipline of a bank. For this reason, US President Dwight D. Eisenhower proposed, and other countries agreed, that IDA should be part of the World Bank (World Bank website URL: http://www.worldbank.org/ida/idao.html).

Designed to have the discipline of a Bank, IDA loans have contributed to the on-going debt crisis of the poorest countries. The amount owed to IDA is more than 5 times that owed to IBRD.[1] Using even the very narrow criteria of the Highly Indebted and Poor Country (HIPC) Initiative, 41 IDA countries were identified as having debt burdens that compromise the country's capacity for development and growth. As well, structural adjustment conditions attached to IDA loans to ensure repayment have been criticized from all quarters for their negligible or negative development outcomes, including on economic growth[2]. The profound impacts of structural adjustment have led to a global call for the end of structural adjustment lending and cries for more world and less bank.

IDA continues to be a vehicle for structural adjustment lending. In FY00, total IDA adjustment lending was 16%, however, for Africa, 72% of funding went to adjustment lending.[3] The Bank argues that the nature of adjustment lending has shifted away from austerity policies, however the mainstays of adjustment lending -- export-orientation, liberalization of trade and financial sectors, reduction in public sector expenditures remain key to on-going IDA lending. An analysis of 4 completed Poverty Reduction Strategy Papers and twelve interim-PRSPs by World Development Movement, a British NGO concluded that "the policy content of these strategies does not constitute a major change from the past. This is particularly worrying given the substantial body of evidence showing that structural adjustment programmes did not reduce poverty."[4]

Although the PRSP process is discussed as a means to increase country ownership and aid coordination, the Bank has a significant role in the PRSP process vis-a-vis other donors, with the exception of the IMF. The Bank, together with the Fund, have made the PRSP process a qualification of receipt of Bank and Fund debt relief, have written the manual as to how to go about the PRSP process, have kicked off PRSP processes through a mission to the country, will analyse the PRSPs for any gaps in a joint-staff assessment (JSA) and the Board of the two institutions will endorse the PRSP and the JSA. Both documents- the PRSP and the JSA will be financed using IDA funds.[5]

The size of IDA alone has long placed the Bank as the cornerstone of financing relationships with the poorest countries. For example, for the financing period ending in 1996, IDA was US$20 billion as compared to the African Development Fund of $12.58 billion. The Bank chairs most consultative group meetings, meetings of donors to determine aid levels for a country. In the recent Operations and Evaluation Department report on IDA, it noted that some donors cautioned that IDA was sometimes too dominant, leaving insufficient room from government or other donors. In Uganda, some donors held that, IDA has its own agenda and therefore is not a neutral coordinator. Similarly, several donors in Bolivia argued that IDA was sometimes too much of a protagonist and maintained that they would be more ready to collaborate if the government, rather than the Bank, did the leading. They suggested that at times, aid coordination seems like an exercise in convincing donors to agree with IDA's point of view.[6]

In terms of development effectiveness, IDA was recently evaluated against its own objectives. The review found that IDA had sharpened its poverty focus, although much remains to be done. While assessments of IDA's poverty reduction impacts varied across countries, common emphases included that IDA projects had difficulty targeting and successfully reaching the poorest people [7] IDA had also made only limited progress in terms of integrating gender and environment into its country programs. Numerous respondents to OED consultations from government, NGOs and private sector across countries proposed that IDA did not adequately understand their country's complex social and political dynamics, which negatively affected the design of IDA-financed reform programs.[8]

The OED report recommends that IDA should concentrate more on its areas of comparative advantage, noted as macroeconomic reform, technical competence and policy advice and aid and sector coordination, among other things. It is unclear how comparative advantage was determined, whether through a comparison to other donors or through a comparison of the effectiveness of different Bank efforts in addressing poverty. However, the call for the Bank to focus its efforts is increasingly heard as the Bank is positioning itself at the center of development policy and dialogue on issues as diverse as HIV/AIDs and global public goods.

The mission creep of the Bank was raised in an internal leaked memo, cited in the US Meltzer Commission report. Bank staff charged that the Bank today has no focus and is driven by an ever growing list of mandates imposed on it through a variety of means ... Bank President's favoured subjects ... board sentiments ... public pressures, ideas generated by internal constituencies and even fads. No initiative that starts as a pilot is ever considered a failure because of a lack of any honest evaluation, noted the memo, which Bank officials brushed off as having emanated from a tiny, disgruntled section of the Bank staff.

2. Rationale for Transformation of IDA

Improved Governance

"IDA is under the control of the governments of developed countries due to the system of decision-making and governance. There has long been a perception that as a result of such dominance, the three institutions [World Bank, IMF, WTO] have tended to have policies or rules that are biased towards the interests of the developed countries, while developing countries have either benefited less or have also suffered from the wrong policies and biased rules. There is thus a need to reform the decision-making processes so as to give developing countries their right to adequate participation; and to review and where needed, to change the content of policies and rules so that they reflect the interests of developing countries that form the majority of membership."[9]

A multilateral mechanism providing development financing to the poorest countries must have, at minimum, equal participation of donor and recipient countries in decision-making. This would assist in addressing what the United Nations University called the 'democratic deficit' of the IFIs. [10]

Increased Development Effectiveness

Both the Bretton Woods institutions face a particular challenge in reconciling the concept of country ownership of policies and strategies, on the one hand, with that of lending only where the policy environment is favourable, on the other. Dialogue with the United Nations might be helpful in keeping the process from degenerating into one of simply lending to only those countries that claim to own policies the Bretton Woods institutions are known to favour.[11]

Country ownership of development programs is known to be essential to aid effectiveness. An independent, more democratic IDA would enhance country ownership as it would reduce the influence of donors over priority setting and program development. Similarly, an IDA controlled by the Bank cannot be all things to all countries. Under an independent IDA, a country could work with a range of actors to design and implement programs, not only the Bank. An independent IDA is therefore a logical extension in the trend towards programmatic lending and country ownership.

Increased Coherence and Cooperation

IDA comes with a particular perspective informed by its association with the Bank, IBRD and IDA are run on the same lines. They share the same staff, the same headquarters, report to the same president and use the same rigorous standards when evaluating projects. IDA simply takes its money out of a different "drawer." A country must be a member of IBRD before it can join IDA; 161 countries are IDA members�. (World Bank website URL www.worldbank.org/ida).

An independent IDA Secretariat could better enable coordination, as it would represent the interests of the whole rather than a particular institutional perspective. The powers of the Bank vis-�-vis the poorest countries would be checked as a neutral body would exist to extend development financing. As a range of implementing agencies would be able to assist in the implementation and monitoring of IDA funds, comparative advantages would be more effectively used and cooperation facilitated.

It would provide a neutral mechanism to administer new funds for the poorest countries, funds for health and education, for example, resulting in more effective donor coordination and pooling. It would be useful also to assist in coordination also among civil society. An IDA that is open to participation and implementation from civil society could facilitate this.

It is apparent that even concessional lending is proving to be too onerous for the poorest countries. Discussion is on-going in regards to IDA becoming a grant-making institution in part or whole. In terms of systemic coherence and development effectiveness, it does not make sense to make the Bank a grant-based development association, when the Bank is a bank and other multilateral grant-making organizations exist.

3. What a transformed IDA could look like

Lessons from the Global Environment Facility[12]

At a Development Committee meeting in September 1989, France and Germany proposed the creation of a Global Environment Facility. The proposed facility would coordinate donations by the industrialized world to global environmental projects in the developing countries. The World Bank was requested to assess requirements for additional funding and to explore the potential for donor support for addressing environmental concerns in developing countries.

A proposal was drafted in consultation with donor and recipient countries, UNEP and UNDP and was approved by the World Bank board of Directors in March 1991. Three implementing agencies, World Bank, UNEP, UNDP signed a tripartite agreement formally establishing the GEF Pilot Phase.

The World Bank was largely responsible for determining the four focal areas as global environmental problems. The agenda met considerable criticism as issues of concern only to the North, ignoring for example land degradation and poverty. In 1992, land degradation was subsequently accepted by the GEF participants as a potential cross-cutting area, however no land degradation projects were funded during the pilot phase, except for a few small grant projects.

In 1992 at the time of UNCED, the G-77, displeased with the organization and Northern control of the GEF, led resistance to endorsing the facility of the GEF as the financial mechanisms of the conventions. Instead, proposals came for a Green Fund, independent of donor and Bank control, based on the principle of democracy.[13] Donors opposed the creation. The resulting impasse was resolved only be making the GEF an interim financial mechanism contingent on the successful restructuring of the GEF.

The principles for the restructuring of the GEF were universal membership, greater transparency and accountability. GEF II, as it is called, is composed of a Participants Assembly, a Council, the Secretariat and the implementing agencies. Other issues, such as developing countries interest in a formula of mandatory funding went unaddressed.

The Participant's Assembly is made up of representatives of all participating countries. The Assembly meets every three years to initiative replenishment negotiations and is responsible for reviewing the general policies. (The Assembly resembles in purpose the IDA Deputies).

The Council is made up of 32 constituencies, representing all the participants. There are 16 seats for the developing countries (6 for Africa, 6 for Asia and 4 for Latin America and the Caribbean), 14 for donors and 2 for economies in transition. The donor constituencies are based on contributions, with the larger donors having their own seat. The recipient constituencies are based on the principles of equitable and balanced representation, common concerns, resource endowment as well as contributions.

Decisions at the Council are taken by consensus, but where there is disagreement, a "double majority" system is in place. The system is designed to balance the interests of the donors and recipients. The decision must have the support of 60% of the Participants (one country-one vote) as well as 60% of donor support (one dollar-one vote). G7 donors control over 60% of funding, however, developing countries make up the majority of the Participants.

The Secretariat services and reports to both the Council and the Assembly. Its duties include the implementation of decisions of the Assembly and the Council; its formulation, coordination, implementation and oversight of the work program; facilitate inter-agency coordination and ensure operational polices are implemented. The Secretariat is now functionally independent of the Bank, but us still supported administratively by the Bank.

Many observers continue to express concern about the degree of dependence on the World Bank. It is argued that the GEF adopted some of the administrative failings of the Bank. In particular, observers continue to be wary of the GEF's reliance on existing Bank policy and practice, noting that is does not reflect the interests of the GEF as a whole.

Bodies other than the three implementing agencies can also be executing agencies for GEF projects such as NGOs, UN agencies or bilateral development agencies. The principle underlying this approach is for the GEF to cast the net widely to use the comparative advantage of a diversity of organizations in efficient and cost-effective project execution.

A Small Grants Programme (SGP) exists to finance small-scale activities through NGOs and community groups. The SGP has been well received in developing countries, and is seen as an innovative programme.

NGO participation in Assembly and Council meetings has been increasing, and a voluntary fund was created to finance NGO consultations. NGO involvement in Council meetings has been heralded as a major breakthrough in public participation in a multilateral institution modeled after traditionally closed financial institutions.

Lessons to be drawn from the experience of the GEF II:

• Double majority voting system
• Assembly of all participants, donors and recipients
• Council of equal representation of North and South
• Independence from the Bank functionally and administratively
• Small grants programme
• Mandatory funding
• Full NGO participation
• Range of implementing agencies

Lessons from the World Bank's IDA

Although IDA receives its funding in grants, it uses these grants to leverage additional resources for IDA by lending IDA funding to the poorest. The current IDA has been financed by $11.6 billion from new donor funds, 0.9 billion from IBRD and $8.0 billion from repayments of past income and investment income.[14]

The issue of re-payment of principle has been a subject of debate since the inception of IDA, when many donors and recipients expressed a preference for an all-grant facility. The rationale for re-flows, however, has not been to repay a financial obligation (since the funds are made available through grants and not loans) but to exert a mild form of financial discipline on recipients in the hope that doing so would provide an incentive to invest the proceeds fruitfully. A growing stream of re-flows lets donors off the hook and transfers the responsibility for resource mobilization to the poor countries. This is surely a regressive state of affairs.[15]

Through lending of IDA funding, the Bank has contributed substantially to the debt crisis, being the largest donor in the poorest countries. Even after HIPC debt relief, the 22 countries that have qualified for the programme by the end of 2000 will still spend more on debt relief than healthcare.[16]

At a project or programme level, there is no evidence to indicate that projects or programmes are less successful if financed by grants than loans. Factors such as appropriateness of design, community participation and country ownership are more relevant for success than if repayment is required. As the debt crisis of the past two decades has proven, concessional financing to developing countries is contributing to underdevelopment.

Similarly, a lending culture, which is well documented at the Bank, results in conditionalties unrelated to poverty reduction or environmental protection and poor design.

The main lesson to be drawn from IDA:
loans to the poorest countries, however concessional, contribute to debt vulnerability.

An Independent International Development Association

Structure

All members, donor and recipient could make up the Assembly, currently restricted to donors. The Assembly could meet every three years and determine funding levels and broad spending priorities. Civil society would participate, following UN Summit procedures.

A council of equitable representation and shared decision-making would approve progammes and policies. A double majority voting system would be one negotiated position to share power between donors and recipients.

A Secretariat could be created and be based in a developing country. The Secretariat could manage IDA II and associated trust funds earmarked to the poorest countries.

Finances

IDA II financing could come from public and private donations. Donor contributions would need to increase by approximately $9 billion to meet IDA 12 funding levels. Outstanding IDA loans should be written off using future IBRD contributions to IDA, and Bank loan loss reserves and assets.

On June 5, 2001 the management of IBRD proposed that an additional provisioning charge of approximately $400 million be taken at the end of the fourth quarter of the fiscal year ending June 30, 2001. At the end of the third quarter of fiscal year 2001, the IBRD's accumulated provision for loan losses was $3.6 billion.

IBRD financing to IDA has been an average of around 300 million per year, since 1990.

Operations

Governments would be the primary recipients of IDA II financing. Governments could partner with implementing agencies. A small grants window could be created for NGOs and community-based organizations. The Assembly would determine the priorities and guidelines. National development plans would inform the focus on a country case basis.

5. Political Feasibility

Among donors, there is a recognition that structures of financing to poorest countries must change so as not to repeat the current debt crisis requiring cancellation. There is an acknowledgement that IDA, in part or in whole, must be grant based. The US, in particular, is in favour of a grant-based mechanism.

There is recognition among donors, and the OED, that core competencies should be maintained at the World Bank. The Bank is not the most appropriate existing mechanism for the multilateral disbursement of grants. The UN, however, is seen is ineffective and therefore an independent IDA is more politically feasible then moving IDA to UNDP, for example, which is the most logical home for a grant-giving IDA.

The G7 is actively discussing appropriate mechanisms for targeting development financing to the poorest as related to health and education. Discussing a mechanism for these trust funds must include questions over the role of the World Bank and the need for more inclusive and democratic mechanisms.

Donors are negotiating IDA 13 currently. Issues of governance and the role of the Bank must be placed on the table.
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[1] Roy Culpeper. Titans or Behemoths: Volume 5. North-South Institute, 1997, p. 146.

[2] CEPR "Growth May be Good for the Poor, but are IMF and World Bank Policies Good for Growth?" 2000.

[3] World Bank. IDA's Lending, Funding and Disbursements FY00. 2001, p.2

[4] World Development Movement "Roll Back the State." 2001 as reported in Brettonwoods Project Update, No. 23, p.2.

[5]World Bank. "Interim Guidelines for Poverty Reduction Support Credits (PRSC)" Discussion Draft, April 10, 2001.

[6] OED, World Bank. "IDA's Partnership for Poverty Reduction (FY94-00), An Independent Evaluation," May, 2001, pp 9 and 10.

[7] OED, World Bank. "OED IDA Review Report on Country Consultations," February 14, 2001. p. 11.

[8] OED, World Bank. "OED IDA Review Report on Country Consultations," February 14, 2001. p. 11.

[9] Martin Khor, "Globalization and the South: Some Critical Issues," UNCTAD No. 147, April 2000.

[10] United Nations University. New Roles for the UN and the Bretton Woods Institutions. May 2001.

[11] Technical Report of the High-Level Panel on Financing for Development, June 28, 2001, p. 58.

[12] This section is taken in whole from a paper written by Robin Round, Meeting Environmental Goals Through Lessons Learned, an analysis of the Multilateral Fund and the Global Environment, Draft, November 1995 for Environment Canada.

[13] UN Document A/Conf. 15, PC/86.15.8.91. WWF International, The Southern Green Fund. Reed.21, as quoted in Meeting Environmental Goals Through Lessons Learned, Robin Round and Susan Tanner, 1995.

[14] World Bank Annual Report 2000.

[15] Roy Culpeper. Titans or Behemoths: Volume 5. North-South Institute, 1997, p. 147.

[16] Drop the Debt. Reality Check, April 2001, p.4.