House of Commons - International Development

Select Committee on International Development Written Evidence

Memorandum submitted by Christian Aid

EXECUTIVE SUMMARY

Christian Aid works in nearly 50 countries worldwide, supporting local organisations to deliver urgently needed services directly to poor communities, and to scrutinise and hold their own governments and the international community to account. Through public campaigning and advocacy on debt and trade justice, Christian Aid has built an expertise on the work of the World Bank and the International Monetary Fund (IMF) in developing countries, and has established strong links with civil society organisations and policy institutions working on economic justice issues throughout the world.

It is vital to regularly evaluate the UK's relationship with major multinational institutions, especially as the twin drivers of increasing aid budget and a staffing cap mean increasing sums of UK tax payer money will go through these institutions. Christian Aid therefore welcomes the decision of the IDSC to launch the inquiry into the institutional relationship between the UK and the World Bank and looks forward to its report. This submission will focus on the contribution of the World Bank to economic growth, poverty reduction and country-owned policy making. It will then address the broader reform agenda for World Bank, finishing with some analysis and recommendations around UK influence within the institution.

OUR RECOMMENDATIONS FOR THE UK GOVERNMENT ARE AS FOLLOWS

1. Develop a position on substantial structural reform of the World Bank to inform UK negotiating positions as the World Bank's medium-term strategy is developed.

2. Link funding of the next replenishment of the International Development Association (IDA 15) funding to a phasing out of the use of World Bank economic policy conditions and funding for fossil fuel-emitting projects.

3. Put pressure on the World Bank to strengthen and implement the Good Practice Principles (GPP) on conditionality, including regular independent monitoring of the institution's performance.

4. Ensure the World Bank's policy advice assesses the potential impact of that advice on poor people and supports developing country governments to consider the range of policy options available.

5. Promote the removal of policy performance criteria in the aid-allocation framework and focus instead on minimum requirements in probity in public financial management.

6. Support developing countries to have much greater control over analytic and advisory work, and scale down the research funds going through the World Bank, with greater allocations to developing country research institutions.

7. Critically evaluate the institution's model of development and how far it is compatible with pro-poor growth in a climate-constrained world.

8. Support the World Bank to shift its focus on foreign direct investment, by supporting the development of the local private sector, particularly small- and medium-size enterprises.

INTRODUCTION

1. Last year our concerns about the World Bank's misuse of its policy influence compelled us to start campaigning for the UK government to shift funding away from the institution or make their financial contributions contingent on phasing out economic policy conditions. Our concerns are shared by charities and their supporters across the UK and Europe.[66]

2. We commend the UK government for the progress it secured in the last IDA funding round in improving World Bank conditionality. However, we find that the job is only partly finished. While practice at the institution remains only partially improved and continues to substantially differ from UK policy, it is vital for the UK government to continue to press this issue through linking its funding for the next funding round to a phasing out of economic policy conditions. In addition to which it must continue to closely monitor new mechanisms through which the World Bank promotes preferred policies.

3. Christian Aid's position is that as the UK's aid budget substantially increases, it must look to other multilateral sources to channel those funds. However, if the UK continues to channel substantial funds through the World Bank, it must prioritise a reform agenda that seeks substantial changes to the structure and ways of working at the institution, and allows it to play a more facilitative role for the home-grown development agendas of developing countries.

CRITICISMS OF THE WORLD BANK

4. The following sections summarise Christian Aid criticism about the World Bank's contribution to economic growth, poverty reduction and country-owned policy making.

Economic growth

5. The World Bank continues to promote a model of growth that relies substantially on the liberalisation of trade and finance, privatisation and deregulation. Their strategy has neither been good for growth nor for poverty reduction. Moreover, it has not addressed burgeoning inequality.

6. The institution has been relatively successful in rolling out this agenda, particularly trade liberalisation. Today African economies are among the most liberalised in the world.[67] However, this formula has not resulted in the growth gains predicted. Countries actually experienced faster growth between 1960 and 1980 than countries with similar starting points between 1980 and 2005, the era of structural economic reforms.[68]

7. Where countries have seen increases in growth, it is largely due to increased prices for primary commodities and a few large-scale investments, such an aluminium smelter in Mozambique, which has contributed to half of Mozambique's growth despite directly employing only 1,000 people.[69]

8. This uncomfortable fact has not escaped the World Bank themselves. Last year's report from the World Bank's Independent Evaluation Group (IEG) found that far from promoting growth, some trade reforms have led to de-industrialisation where "the speed of import liberalisation increased competitive pressures in countries that were unable to generate dynamic and sustained manufacturing growth".[70] Further internal evaluations have also admitted to an over-optimistic approach to privatisation, citing evidence that all but one of economically best-performing countries "have not implemented large-scale privatisations and have borrowed less than the other countries for privatisation".[71]

9. Perhaps now more than ever it is vital to radically reconsider the World Bank's growth formula, refocusing it directly towards building the potential of poor people to increase their incomes and access essential services. Such a formula must also address the need to promote low-carbon development while addressing the lack of energy in poor communities. This largely means promoting smaller-scale, renewable, off-grid technologies. Yet the main focus of the World Bank is on supporting large-scale power generation, largely to supply industry.[72]

Poverty reduction

10. Basic income indicators reveal that poverty in the developing world is falling; however take out India and China and those statistics look very different. It is important, however, to look beyond income poverty data. Comparing social indicators between countries with similar starting points from 1960 to 1980 and 1980 to 2005 reveals that in a variety of social indicators—including life expectancy, mortality rates, public spending on education, secondary school enrolment and primary school enrolment—the improvements in the second period were less than in the previous period.[73]

11. The blame for this decreasing rate of poverty reduction cannot be laid entirely at the door of the World Bank. Other factors—such as fluctuations in commodity prices, general aid volatility and conflict and natural disasters—also played a role. However, such evidence does undermine claims that the reforms favoured by these institutions have helped the international community achieve its commitments to poverty reduction. In addition to which, there are numerous cases where World Bank strategies have directly caused poverty.[74]

Box 1: Electricity privatisation in Nicaragua[75]

Nicaragua was required to privatise its electricity sector in 1998 as a condition of World Bank and IMF lending linked to both loans and debt relief. Today the ramifications of that decision are still being felt by Nicaraguans, according to research by Christian Aid and the Nicaraguan Consumer Defence Network.

Unio«n Fenosa, a Spanish firm, was the only bidder to run the distribution companies, so it bought an effective monopoly over electricity distribution. Most of the electricity generation firms were also privatised as a result of the conditions.

Despite the repeated promises that bringing in private companies to run the electricity sector would result in significant investment, this has not happened, a fact which the World Bank openly admits. Instead infrastructure remains poorly maintained and no technology upgrading has occurred. Investments to improve coverage of the national grid (particularly in rural areas) have come mainly from the state, at a cost of US$23 million in new loans.

Privatisation has also resulted in many adverse effects for Nicaraguan consumers. The quality of the service has worsened and severe power cuts have been more pronounced in the past two years. Rolling blackouts have created havoc for the private sector, with small businesses (who cannot afford to run their own generators) particularly feeling the brunt. Many small businesses have folded as a result of interruptions to their production and local business associations have reported multimillion dollar losses.

Spiralling costs have also adversely affected consumers who have had to pay much higher bills, even in the face of a deteriorating service. Significant increases in the electricity tariff have been compounded by arbitrary charging practices by the monopoly distribution company, resulting in customers being over-billed or paying for services—such as street lighting—that are not being provided.

As the blackouts have grown worse, there are serious grounds to suspect that the generators and the distributor have colluded to cause crisis-inducing power cuts to force the government to grant subsidies and to allow higher tariffs to be charged to consumers. In the end, passing on higher tariffs to consumers has taken the place of improvements in efficiency and investment, which would be needed from private companies to operate a good-quality—and more profitable—service.

Perhaps the key finding from Christian Aid's research in Nicaragua is that the electricity system cannot function on a commercial basis. Losses of electricity and theft from the poorly maintained, inefficient infrastructure, the spiralling costs of oil upon which much of the generation depends and the generous private sector margins which were written in to the privatisation contracts (in addition to the cost of all the investment which would be necessary to correct this situation), mean that paying consumers are very far from being able to afford to cover the full costs of the service.

The Nicaragua experience is not unique. Similar problems arose in the Dominican Republic after energy-sector privatisation in 1999, forcing the government to undertake a very costly re-nationalisation of the electricity distribution companies it had sold to Unio«n Fenosa in 2003. A forthcoming analysis of conditions in 16 countries since the World Bank agreed to reform its approach to conditionality, showed that one third of the countries had conditions in their loans related to the participation of private companies in electricity sectors[76] and most are likely to have similar issues to Nicaragua—such as extremely degraded infrastructure, high technical losses of electricity from their systems, limited grid coverage and a large number of poor customers with a limited capacity to respond if basic service's costs are pushed out of their reach.

Policy influence

12. The World Bank has pursued this agenda with vigour, largely through making requirements for certain economic reforms in return for grants and loans. Christian Aid has been pushing the institution to cease using policy conditions generally, but particularly those around liberalisation and privatisation.

13. The use of policy conditionality has been criticised for pushing countries to adopt inappropriate policy reforms as well as undermining:

— country ownership, which has been shown to be the main driver in successful development initiatives;

— accountability between states and their citizens, as states remain more accountable to their donors; and

— the effectiveness of aid because the suspension of aid linked to failure to meet conditions contributes to the substantial problem of aid volatility.

14. Under pressure from the UK government, the World Bank committed to first review and then reform its use of conditionality. It set five principles to guide its lending, including ownership; harmonisation; customisation; criticality; and transparency and predictability. These principles are not as comprehensive as many NGOs had hoped, but they nevertheless represent a step forward.

Changing practice?

15. Economic policy conditions are falling, according to the World Bank. However, a forthcoming Eurodad analysis of a sample of 16 countries who have received World Bank funding since the GPP were agreed found that 24 per cent of all conditions were economic policy conditions, an average of 11 per loan. Twelve per cent of those loans were to pave the way, implement or consolidate privatisation reforms.[77]

16. Most of the conditions reclassified as economic policy were defined by the World Bank as public sector governance. This supports criticisms that the Bank is not shifting from economic liberalisation to governance. Rather governance reforms accompany economic reforms or may themselves have substantial economic development implications.

17. Many of the countries in the Eurodad sample had conditions around public procurement, most of which were prior actions. Many developing countries urgently need to overhaul their procurement systems to make them more simple, transparent, and accountable. However World Bank analysis and support often directs recipient countries to open up their procurement markets to foreign firms, with whom local firms can struggle to compete.[78]

Beyond conditions

18. As well as attaching conditions to grants, loans and debt relief, the World Bank also exerts powerful policy influence through its analytical work and technical assistance. In addition to which, it is increasingly using ranking mechanisms to score countries against each other, rewarding with higher points countries that are implementing favoured policies.

19. The Country Policy and Institutional Assessment (CPIA) is a particularly controversial version of this system. The CPIA is used to guide aid allocation, not only for the World Bank but also for other donors, including DFID. It also influences strategy, for example CPIA indicators are used in DFID country governance assessments. Rankings such as the CPIA can have a clear impact on governments' policy space.

20. A similar approach guides the World Bank's Doing Business Indicators (DBI), which compile information about specific regulations[79] for all countries to produce "name and shame" rankings that are perceived as reflecting countries' attractiveness to foreign investors. This is a complement to Foreign Investment Advisory Service (FIAS) assessments, Investment Climate Surveys, and Investment Climate Assessments, which are used to identify policy reforms to promote foreign investment. The DBI rankings can have a significant influence on countries' policies; for example, Mauritius has set itself the goal of reaching the top 10 by 2009. The indicators are also used to set targets as conditions; for example Ghana is required to go from 102 to 94 under its current performance assessment framework for multi-donor budget support.

21. Christian Aid is particularly concerned about the policy advice related to investment promotion and how this is affecting the reform of often already highly regressive tax systems in developing countries. The importance of taxation and particularly the application of progressive, direct taxes on businesses, is not reflected anywhere in the investment advice and investment rankings given to developing countries. Instead the World Bank's Doing Business in 2007 report[80] makes clear that lowering taxes is one of the reforms which is most often promoted.

22. Taxes should not be viewed as a simple "cost of doing business". There is a difference between the positive tax contribution of businesses and the burden placed on businesses by complex, bureaucratic and inefficient regulation (which may merit reform). Taxes paid by businesses are essential contributions to finance public services, such as schools or roads, in developing countries, and also contribute directly to making businesses function better and be more productive. Ironically, most investment promotion literature identifies poor infrastructure and the lack of education and poor health of workers as some of the most important obstacles to investment.

23. The DBI is also based on questionable assumptions about what will attract foreign direct investment (FDI)—there is no strong evidence that tax breaks and investor protection rules, for example, are a strong draw. Rather FDI seems to follow key development factors such as market size, growth, levels of education and infrastructure development.[81]

24. UK NGOs, including Christian Aid, have called upon the UK government to reduce the use of policy performance criteria to minimum requirements of probity in public financial management and conduct an independent review of CPIA.[82]

25. On DBI, instead of promoting preferred reforms through its various tools, the Bank should work to provide impartial analysis and support national consultation mechanisms to identify infrastructure spending, regulatory reforms and policy that would support local private sector development, especially small- and medium-size enterprises, and assist developing countries to manage the impact of foreign direct investment.

26. The use of rankings like this undermines the pursuit of home-grown development policies. Instead the focus should be on supporting developing countries to analyse the pros and cons of different policy options through poverty and social impact analysis (PSIA). The UK government has done a valiant job trying to raise this up the World Bank's (and other donors') agenda; however a joint NGO research found that this agenda was being de-prioritised by the Bank. Continued pressure to address this is vital.[83]

STRUCTURAL PROBLEMS AT THE WORLD BANK

27. It is not just adherence to a different economic theory that leads the World Bank to use its leverage to coerce countries to adopt favoured policies. It stems also from the structure and mandate of the institution. The institution relies partly on the interest and capital repayments to keep the money flowing out. Not surprisingly then, the World Bank favours reforms that could free up budgetary resources for repayment through selling assets and reducing the states' involvement in areas that might leave their books unbalanced.

28. The asymmetry of power embedded in the institution also plays a key role. The most visible symbol of this has been the horse-trading in the past year between US and EU member states to put their favoured candidate into the leadership of the IMF and World Bank. Despite constant talk of reform, the status quo was upheld with the appointments of an American (Robert Zoellick) and a Frenchman (Dominique Strauss-Khan) to head up the World Bank and IMF respectively.

29. The World Bank has been increasingly set up as a "knowledge bank". There are mixed incentives at play, however, if the same institution that disburses a significant proportion of multilateral lending also has responsibility for defining and disseminating best practice in economic, social and political development. This was clearly seen in the highly critical evaluation of the World Bank research.[84] It stopped short of questioning whether the Bank should play this role, which is broadly upheld in official circles, but its criticisms of World Bank research—predominantly that research is used to support Bank policy rather than used to reflect and potentially challenge Bank policy—could well lead to that conclusion.

30. There is a substantial debate on the role of the state in development. There is a continuum between the state-led fully interventionist model on the one hand and the more liberal, non-interventionist state that looks to the market to stimulate development. The World Bank has made a normative judgement in placing itself on one side of this spectrum, which is largely what leads to claims of bias in its research agenda. As an institution with different components, including (International Development Association (IDA), International Bank for Reconstruction and Development (IBRD), International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), Bank for International Settlements (BIS)), some degree of coherence between the different elements is important. However, we are concerned that what is being cohered to is the above normative model. This is likely to increase if IDA is part-funded by IFC capital and interest payments as well as those of IBRD.

REFORM AGENDA

31. There is a role for a multilateral agency to provide development assistance to the world's poorest countries and concessional loans to fund the further development and anti-poverty programmes of emerging economies. We welcome the UK's commitment to multilateralism. However, we feel that substantial structural reforms are required if the World Bank is really to be "fit for purpose" in the changing global landscape.

32. Zoellick recently launched consultations to develop a new medium-term strategy at the World Bank, which provides the UK government with the opportunity to develop a vision of what the individual Bank components are doing and should be doing, as well as how they relate to one another.

33. In our 2006 report Challenging Conditions: A new strategy for reform at the IMF and World Bank[85] we called for the following reforms:

— The IDA should become an independent grant-giving agency, allocating funding without economic conditions. There should be a separate governance structure, giving a more equal weight to customers (low-income countries) and donors.

— The IBRD should remain a loan agency, allocating loans without economic policy conditionality. There should be a separate governance structure, giving a more equal weight to customers (middle-income countries) and donors.

— The World Bank should both separate the provision of grants and loans from technical assistance and policy advice, and DFID should break the Bank's monopoly on knowledge by supporting the consolidation of other organisations conducting research and providing advice to developing countries.

— Both institutions should undertake reforms to make their boards and management more accountable to recipient country citizens and parliaments, and to the governments and parliaments of all member countries.

DFID's Influencing Role at the World Bank

34. We welcome the fact that DFID considers it a priority to influence the World Bank. Normally this is carried out through negotiations at board and senior management levels and often in the countries where we work.

35. In Latin America, the DFID regional programme has placed influencing the World Bank as well as the Inter-American Development Bank at the heart of their programme. A recent evaluation has shown that this strategy is only partly successful, as it focuses on influencing at the level of its specific projects.[86] As DFID Latin America is channelling significant resources through the IFIs, we feel DFID cannot ignore the fundamentals of the World Bank and IADB agreements with Latin American countries, particularly when conditions are being imposed. Christian Aid has lobbied DFID to make these policy reforms central to their engagement with IFIs in Latin America. Unfortunately staff have repeatedly made clear it is neither within their mandate or power to influence loan conditions which are placed on countries in the region. Our engagement has therefore shown us the continued need for real change at headquarters level.

36. Because of the World Bank's multilateral nature it can take a long time for a progressive reform agenda to take place, which is not made easier by the numerous priorities DFID has at the World Bank. While we appreciate these constraints, in many of the countries where we work time is of the essence. It is not just the potentially devastating impacts of some of the reforms that will get agreed in this time, but the time it could take to rebuild those sectors and the time lost to supporting developing country governments to identify the best way to reform.

37. Linking the IDA 15 contribution to progress on conditionality played a key role in speeding up this process. It compelled the World Bank to review its conditionality and agree some progressive reforms. And when the World Bank failed to report comprehensively about implementation of those reforms, the threat of keeping back money was used well by Hilary Benn to give his negotiations extra clout. Without doubt the progress seen thus far would not have been seen if it had not been for this strategy.

38. The job, however, is only partly finished. As ever considerable effort needs to be made to shift from policy change to practice change. And while the practice of aid conditions remains only partially improved, and substantially differs from UK policy, it is vital that the UK shows its continuing commitment to this reform by linking its funding for the next funding round to a phasing out of economic policy conditions.

39. Christian Aid's position is that as the UK's aid budget substantially increases, it must look to other multilateral sources. However, the UK has made clear its continuing desire to work in close partnership with the World Bank. We therefore believe the UK must prioritise a reform agenda that seeks substantial changes to the structure and ways of working of the World Bank that allow it to play a more facilitative role for the home-grown development agendas of developing countries.

OUR RECOMMENDATIONS FOR THE UK GOVERNMENT ARE AS FOLLOWS

1. Develop a position on substantial structural reform of the World Bank to inform UK negotiating positions as the World Bank's medium-term strategy is developing.

3. Put pressure on the World Bank to strengthen and implement the Good Practice Principles (GPP) on conditionality, including regular independent monitoring of World Bank performance.

4. Ensure the World Bank's policy advice assesses the potential impact of that advice on poor people and supports developing country governments to consider the range of policy options available.

5. Promote the removal of policy performance criteria in the aid-allocation framework and focus instead on minimum requirements in probity in public financial management.

7. Critically evaluate the institution's model of development and how far it is compatible with pro-poor growth in a climate-constrained world.

8. Support the World Bank to shift its focus on foreign direct investment, by supporting the development of the local private sector, particularly small- and medium-size enterprises.

October 2007

66 See www.worldbankcampaigneurope.org Back

67 The Commission for Africa, Our Common Future: The Report of the Africa Commission 2005, p 21. Back

68 Mark Weisbrot, Dean Baker and David Rosnik, The Scorecard on Development: 25 Years of Diminished Progress, Centre for Economic and Policy Research, September 2005. Back

69 Carlos Nuno Castel-Branco and Nicole Goldin, Impacts of the Mozal Aluminium Smelter on the Mozambican Economy, September 2003, p 32. Back

70 Bretton Woods Project, Over-optimistic about Trade Liberalisation: World Bank Trade Evaluation, April 2006. Back

71 Bretton Woods Project, OED Slates Bank development Effectiveness, November 2005. Back

72 Bank Information Centre, Bretton Woods Project, Campagna per al Riforma della Banca Mondiala, CEE Bankwatch Network, Friends of the Earth International, Institute for Policy Studies, International Rivers Network, Oil Change International, Urgewald, How the World Bank's Energy Framework sells climate and poor people short: A civil society response to the World Bank's Investment Framework for Clean Energy and Investment, September 2006. Back

73 Mark Weisbrot, Dean Baker and David Rosnik, The Scorecard on Development: 25 Years of Diminished Progress, Centre for Economic and Policy Research, September 2005. Back

74 The trade evaluation found that in some places trade reforms had left people impoverished. See footnote 63. Back

75 Claire McGuian, The impact of World Bank and IMF conditionality: an investigation into electricity privatisation in Nicaragua, Christian Aid, May 2007. Back

76 Eurodad analysis of a sample of 16 countries from the World Bank conditionality database-forthcoming. Back